Exploring the opportunities and challenges brought by Restaking

Forward the Original Title‘流动性再质押代币（LRT）：探索 Restaking 带来的机遇与挑战’.

Recently, the market has seen a surge in Restaking activity, with many protocols launching staking campaigns. The Total Value Locked (TVL) of Liquid Restaked Tokens (LRT) has also shown significant growth, reaching a level of $1.5 billion. The relationship between LRT and Restaking, their advantages and risks, as well as the LRT protocols available in the market, are all topics worthy of in-depth exploration.

Data Source:DUNE

Background

Restaking refers to staking assets again after the initial staking. This strategy is primarily based on Ethereum’s security framework, aiming to enhance the efficiency of capital utilization in the entire cryptocurrency ecosystem. Through Restaking, stakers not only support the security of a network but also provide validation services for multiple networks simultaneously, thereby earning additional rewards, which is very beneficial for increasing asset returns. In short, Restaking opens up a new way for stakers to earn additional income while also strengthening the security and stability of multiple networks.

At the same time, one of the main issues facing Restaking is liquidity. Similar to PoS staking, after Restaking, assets are “locked” in nodes, thereby losing liquidity. To address this issue, Liquid Restaked Tokens (LRT) are introduced. LRT is a synthetic token issued for Restaked ETH, ETHx, or other LST. It not only solves the aforementioned problem but also allows easy access to Restaking and DeFi.

Compared to LST, LRT is more complex both technically and economically. For LST, all underlying tokens are staked for one purpose only, which is to ensure the security of the PoS chain. However, for LRT, there will be multiple AVS (Active Validation Services), i.e., applications and networks using Restaking to ensure security, which require selection for Restaking, leading to the allocation of various additional rewards of different types.

Therefore, the relationship between LRT and Restaking can be summarized as follows: LRT is a synthetic token designed to address the liquidity issue in Restaking, allowing staked assets to provide security support for multiple services while bringing additional rewards and returns to stakers.

Concept

Liquid Restaking Token (LRT) is a new liquidity primitive in the cryptocurrency market, aimed at improving the capital efficiency of assets. In traditional liquidity mining activities, users deposit their crypto assets into liquidity pools to earn rewards, but these assets are typically not further usable during the staking period. LRT enables users to restake assets that are already staked, thereby achieving higher capital efficiency and increasing the liquidity and flexibility of assets.

Advantages

1. Capital Efficiency Enhancement: Through the Restaking mechanism, users can further participate in other staking projects or lending activities without withdrawing their original staked assets. This allows users to establish security without directly using native tokens. The staked ETH can simultaneously ensure the security of the Ethereum network and Active Validation Services (AVS), thereby improving capital efficiency.
2. Maximizing Returns: LRT allows users to earn multiple returns from the same asset. Stakers can earn rewards from validation activities supporting multiple services without the need for additional funds. This not only improves their capital efficiency but also increases rewards related to validation services. Basic rewards include ETH staking rewards, AVS restaking rewards, and additional LRT utilization rewards.
3. Enhanced Liquidity: The LRT protocol solves liquidity challenges by restaking deposited ETH across various operators, standardizing reward and risk allocation, and providing tokenized representations of ETH and rewards representing their restaking. This allows users to further leverage these tokens in other DeFi protocols for additional benefits. The introduction of this mechanism helps increase market liquidity, making assets more active, and contributes to the prosperity of the entire cryptocurrency ecosystem.

Risks

1. Increased Complexity: Restaking introduces complexity that investors need to understand and manage. They need to grasp not only the basic staking and reward mechanisms but also how to effectively restake assets across multiple networks to maximize returns. This can be a challenge for novice investors. Additionally, the introduction of LRT involves the choice and evaluation of multiple different AVS, as well as how to allocate staked assets among them to achieve an optimized reward structure.
2. Smart Contract Risks: The implementation of LRT relies on the interaction of multiple layers of smart contracts. Each additional layer of smart contracts theoretically introduces new security vulnerabilities or flaws, which could lead to asset theft or loss. The complexity and interactivity of smart contracts make comprehensive auditing and verification more difficult, increasing the technical risks faced by investors.
3. Liquidity Risks: Although LRT aims to improve liquidity by providing representative tokens for restaked assets, the liquidity of these assets may still be severely affected under extreme market conditions such as drastic fluctuations or panic selling. Most LRT protocols are easy to enter but difficult to exit. In these situations, restaked assets may be difficult to convert into liquidity quickly, thereby increasing the risk of liquidation.
4. Governance Risks: Due to the technical and economic complexity of LRT protocols, their governance structures and decision-making processes are relatively complex. This complexity may lead to inefficient governance or enable minority interest groups to manipulate protocol decisions for personal gain, thereby harming the interests of the majority of holders. Furthermore, the need to choose restaking for multiple AVS further increases the complexity and difficulty of governance, potentially leading to opaque governance decisions and higher barriers to participation.

In conclusion, as a financial innovation, LRT brings higher capital efficiency and increased potential returns, but it also entails higher risks and management complexity. Before participating, investors need to carefully assess their risk tolerance and investment strategies to ensure they fully understand the relevant mechanisms and potential risks.

Project inventory:

1. Eigenlayer: A leading project built on Ethereum, introducing a new primitive in crypto-economic security called restaking. This primitive allows the reuse of ETH on the consensus layer. Users who have native staked ETH or use LST to stake ETH can choose to join the EigenLayer smart contract to restake their ETH or LST, extending crypto-economic security to other applications on the network to earn additional rewards.
2. Kelp DAO: A multi-chain liquidity staking platform initiated by former members of the Stader Labs team, currently focusing on building an LRT solution called rsETH on EigenLayer to provide liquidity for illiquid assets deposited on EigenLayer and other restaking platforms. Currently, Kelp DAO does not charge any fees for LST deposits. This means that users can freely deposit ETHx, sfrxETH, and stETH on the Kelp dApp without incurring any fees.
3. Restake Finance: The first protocol to launch modular liquidity staking on EigenLayer, proposing a decentralized yield re-staking method that allows users to earn Ethereum staking rewards and EigenLayer native rewards without locking assets or maintaining staking infrastructure. Restake Finance will be supported by the Restake Finance DAO, ensuring the project remains true to its decentralized nature and aligns with the interests of stakeholders. The DAO will be managed using the RSTK token, with the core goal of creating value for token holders through governance and revenue generation.
4. Renzo Protocol: The first native restaking protocol launched on the EigenLayer mainnet. It provides an interface for restaking on EigenLayer, eliminating technical barriers, resource allocation, and risk management. It also creates new primitives and design considerations for AVS applications, promoting open innovation and flexible construction of open distributed systems.
5. Puffer Finance: The first native liquidity staking protocol on Eigenlayer, making native restaking on EigenLayer more accessible. It allows anyone to run an Ethereum PoS validator while increasing their rewards. Stakers and node operators jointly create a flywheel effect, accelerating Puffer’s growth rate beyond traditional liquidity staking protocols. However, to ensure that Puffer never poses a threat to Ethereum’s trust neutrality, the Burst Threshold sets the upper limit of Puffer to 22% of the validator set.
6. etherFi: A decentralized, non-custodial delegation staking protocol with liquidity staking derivative tokens. A notable feature of ether.fi is that stakers control their private keys. The ether.fi mechanism also allows the creation of a node service market where stakers and node operators can register nodes to provide infrastructure services, with income from these services shared among stakers and node operators.
7. Swell Network: A non-custodial staking protocol that introduces rswETH. With Swell, users can earn passive income by staking or restaking ETH to receive blockchain rewards and regained AVS rewards. In return, users can receive profitable liquidity tokens (LST or LRT) to hold or participate in a wider DeFi ecosystem.
8. Stakestone: A full-chain LST protocol aimed at bringing native staking rewards and liquidity to L2 in a decentralized manner. With its highly scalable architecture, StakeStone not only supports leading staking pools but is also compatible with upcoming restaking. It also establishes a multi-chain liquidity market based on STONE. StakeStone pioneers the first decentralized liquid staking solution through an innovative mechanism called OPAP. Unlike traditional methods relying on MPC wallets, StakeStone offers fully transparent underlying assets and yields. Furthermore, OPAP allows for optimization of the underlying assets of STONE, ensuring STONE holders automatically and effortlessly obtain optimized staking rewards.
9. Babylon: The “Eigenlayer for the BTC ecosystem,” Babylon is fundamentally changing how we extend Bitcoin by extracting security from the Bitcoin chain and sharing it with various PoS chains. Babylon is developing a Bitcoin staking protocol that allows Bitcoin holders to stake their BTC on PoS chains and earn staking (and restaking) rewards to secure PoS chains, apps, and app chains. Unlike existing methods, Babylon’s innovative protocol eliminates the need for bridging, wrapping, hooking, or custody of staked Bitcoin.
10. Picasso: Aimed at introducing the Restaking concept to the Solana blockchain, Picasso allows stakers to reuse their assets for restaking on Solana and other networks through a liquidity restaking method similar to EigenLayer, to earn additional income. The protocol particularly emphasizes leveraging crypto-economic security to provide additional guarantees for various decentralized applications and services. In this way, Picasso not only increases asset liquidity but also promotes overall security and stability of the network through shared security mechanisms.

These projects showcase the diversity and innovation in the LRT field, while also pointing out the potential and development direction of the restaking market. When choosing to participate in these projects, it is advisable to conduct detailed research on their characteristics, risks, and potential returns to make informed investment decisions.

Conclusion

The introduction of LRT marks an innovative leap in the field of cryptocurrency staking. By unlocking the liquidity of staked assets, LRT allows these assets to be restaked across multiple networks and services to earn additional income, thereby enhancing capital efficiency and potential returns.

However, like all innovations, LRT also comes with risks, including increased technical complexity, potential security vulnerabilities in smart contracts, and the impact of market fluctuations. Before participating, investors need to thoroughly understand these risks and formulate corresponding risk management strategies to ensure effective control of potential losses while pursuing profits.

Disclaimer：

1. This article is reprinted from [Chainfeeds]. Forward the Original Title‘流动性再质押代币（LRT）：探索 Restaking 带来的机遇与挑战’.All copyrights belong to the original author [HAMSTER]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.