An Overview of Six Major Liquid Restaking Protocols

Restaking is poised to be a key narrative in this bull cycle, with dozens of liquid restaking protocols vying for a share of EigenLayer’s impressive over $11 billion in total value locked.

This article compares six major restaking protocols, offering readers an accessible way to grasp the subtle differences between various liquid restaking approaches. Given the myriad trade-offs in the design of different LRTs, investors should make their choices based on their specific priorities.

The TL,DR version of key characteristics of each liquid restaking protocol are:

1. Puffer Finance and Ether.fi are the two largest liquid restaking protocols by market capitalization of their liquid restaked tokens. Both focus on native restaking, resulting in fewer layers of risk compared to LST restaking. Additionally, both protocols promote the decentralization of Ethereum validators. Notably, Ether.fi has the highest number of DeFi integrations.
2. Kelp and Renzo Protocol support both native restaking and LST restaking. They accept major LSTs such as stETH, ETHx, and wBETH. Notably, Renzo extends its restaking services to Ethereum Layer 2, offering users the benefit of reduced gas costs.
3. Swell is a established liquid staking protocol with the LST token swETH. The protocol has substantial LST market capitalization of around $950M. It expands service to liquid restaking with the LRT token rswETH. It provides native restaking and its own LST- swETH restaking.
4. Eigenpie is a subDAO of Magpie focusing on LST restaking. It offers a isolated LST restaking model by accepting 12 different LSTs and issues corresponding 12 different LRTs.

Various Types of Restaking and Liquid Restaking Token

Two Types of Restaking on EigenLayer

There are two types of retaking, native restaking and LST (liquid staked token) restaking. For native restaking, validators natively restaked their $ETH on the Beacon Chain of Ethereum to EigenLayer. In contrast, LST restaking allows holders of liquid staked tokens, such as stETH, to restake their assets to EigenLayer smart contracts. Native restaking is more difficult to operate for retail users as it requires running Ethereum validator nodes.

The benefit of native restaking is its absence of restrictions; EigenLayer does not impose a cap, unlike LST restaking, which only accepts deposits up to a certain cap or within a specified timeframe. Native restaking also has the advantage in security as it does not involve risk from the LST protocols.

Despite these differences, both native restaking and LST restaking on EigenLayer require that the assets be deposited and locked, rendering them unavailable for other uses.

Liquid Restaking Protocol Release the Locked Liquidity

Liquid restaking tokens, akin to liquid staking tokens on Ethereum, are tokenized representations of assets deposited on EigenLayer, effectively unlocking the liquidity that is otherwise tied up.

Liquid restaking protocols offer both native restaking services and LST restaking by channeling received LSTs into EigenLayer. Most Liquid Restaking Protocol provides native restaking services to users and eliminates the need for users to run an Ethereum node. Users can simply deposit ETH into these protocols, which handle the complexities of Ethereum node operations behind the scenes.

The largest LST stETH is accepted by almost all LRT protocols, while several LRT protocols accept a wide variety of different LSTs for deposit.

It’s important to note that Puffer Finance is fundamentally a native restaking protocol. Currently, in the pre-mainnet phase, it accepts stETH deposits. Post-mainnet launch, the protocol plans to exchange all stETH for ETH and proceed with native restaking on EigenLayer. Similarly, Ether.fi operates as a native restaking protocol but currently accommodates several types of Liquid Staked Tokens (LSTs) during this stage.

Basket-Based or Isolated-based LRTs

Most liquid restaking protocols utilize a basket-based approach, allowing deposits of various Liquid Staked Tokens (LSTs) in exchange for a single type of Liquid Restaking Token (LRT). Eigenpie, on the other hand, employs a unique isolated liquid restaking token strategy. It accepts 12 different LSTs, issuing a distinct LRT for each one, resulting in 12 unique LRTs. While this approach mitigates the risks associated with pooling different LSTs, it may lead to fragmented liquidity for each individual LRT.

Restaking through Layer 2

Due to the current high gas cost on Ethereum mainnet, several LRT protocols have launched restaking via Ethereum Layer 2s to offer retail users lower-cost alternatives. Renzo Protocol has rolled out its restaking function on Arbitrum and the BNB chain. Similarly, Ether.fi is planning to launch its restaking services on Arbitrum.

The Risk and Reward of Using Liquid Restaking Protocol

Liquid restaking protocols deploy a set of smart contracts on top of the EigenLayer, facilitating users interaction to deposit/withdraw ETH/LSTs into and from EigenLayer, as well as to mint/burn liquid restaked tokens (LRTs). Consequently, engaging with LRT protocols entails assuming the risk of liquid restaking protocols.

The risk profile varies depending on whether the liquid restaking protocols offer LST restaking. In native restaking, funds are deposited into the Ethereum beacon chain. However, with LST restaking, funds are channeled into EigenLayer’s smart contract, thereby introducing smart contract risk from EigenLayer. Utilizing LSTs also involves the smart contract risk associated with the liquid staking protocols. As a result, users holding LRTs backed by LSTs are exposed to three types of smart contract risks, those pertaining to EigenLayer, the specific LSTs utilized, and the LRT protocol itself.

While native restaking faces fewer layers of smart contract risk, liquid restaking protocols that provide native restaking services need to engage in Ethereum staking. They could either partner with professional staking company, operate Ethereum nodes in-house, or support individual solo validators.

Utilizing established liquid staked tokens such as Lido’s stETH or Frax’s sfrxETH can offer reliable staking performance. These LST protocols have spent years refining their Ethereum staking services, proving their effectiveness in maximizing staking rewards and minimizing the risk of slashing.

Decentralization of Validators

When ETH/LSTs are deposited into EigenLayer, these assets are allocated to a restaking operator. This operator is responsible for performing validation services on Ethereum and on the actively validated services (AVSs) they choose to secure. Restakers receive rewards from these AVSs, in addition to the Ethereum staking rewards. If the operator violates the rules set by the AVSs, the restaked assets are at risk of being slashed.

A potential concern arises if the restaking market becomes dominated by a few large operators responsible for securing the majority of AVSs, leading to risks associated with centralization and collusion. These computationally-capable operators could dominate the restaking across numerous AVS networks, and collude to use the restaked ETH to exert influence or control ove these AVSs.

EigenLayer’s actively validated service (AVS) functionality has not yet been activated, and initially, only a limited number of AVSs will be available. Most liquid restaking protocols have not disclosed details on how they will select restaking operators and AVSs. At this stage, restakers primarily face the Ethereum-level slashing risk. For restaking through LSTs, this risk originates from the LST protocols themselves. Meanwhile, native liquid restaking protocols adopt various approaches to Ethereum staking. Some rely on large staking services like Figment and Allnodes, while others are developing infrastructure to facilitate solo validator operations.

DeFi Integration

The sole purpose of Liquid Restaking Tokens (LRTs) is to unlock liquidity for use in the DeFi. Every liquid restaking protocol is working on integrating various types of DeFi protocols. There are now three major categories of defi integrations, Yield protocols, DEX, and lending protocols.

Yield Protocols

Pendle Finance is the leading protocol in this vertical, which has launched LRT pools and allows users to speculate on EigenLayer yield and points. Most LRT protocols have integrated with Pendle.

DEX Liquidity

Most LRTs have liquidity pools on major DEX, such as Curve, Balancer, Maverick. We measured liquidity for each LRT by the slippage when trading 1K LRT to ETH on LlamaSwap. It is important to note, this is only a rough measurement as most LRTs are yield-bearing tokens whose values increase over time as yields accrue. Since many LRT protocols are still in their nascent stages, the yields accrued to date are relatively modest in comparison to the principal amounts.

Swell’s rswETH, Renzo’s ezETH, and Etherfi’s weETH all have sufficient liquidity on DEXs with little slippage when trading 1K LRT.

Eigenpie has taken a distinctive approach, issuing 12 unique liquid restaked tokens corresponding to the 12 supported LSTs. While this strategy effectively segregates the risks specific to any individual LST, it also leads to fragmented liquidity across the different tokens.

Lending Protocol

LRTs carry more layers of risk compared to other kinds of assets, As a result, lending protocols need to exercise caution when considering LRTs as collateral for loans. Currently, there is limited acceptance of LRTs in lending protocols. Etherfi’s weETH is accepted by several lending protocol due to its status as an existing LST that has pivoted to become an LRT.

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