Liquid Restaking is an innovative concept in Decentralized Finance (DeFi). It blends the perks of liquid staking with restaking, amplifying yield potential while maintaining asset fluidity for other DeFi opportunities. While it offers potentially high rewards, liquid restaking has complexities and inherent risks to consider before participating.
Today, we’ll go through the ins and outs of liquid restaking, examine how it works, highlight leading protocols, weigh its advantages and disadvantages, and answer common questions. Hopefully, this will equip you to decide if liquid restaking fits your investment goals and staking strategy.
What is Liquid Restaking?
To understand liquid restaking, we first need to get a handle on what traditional staking is, where you lock your cryptocurrency to support the network in exchange for rewards.
Liquid Staking
Liquid staking builds upon traditional staking by introducing flexibility. When you stake your assets, you receive liquid staking tokens (LSTs) that represent those staked assets. LSTs are liquid, meaning you can trade them on decentralized exchanges, lend them, or utilize them in other DeFi protocols without un-staking your initial position.
Enter Liquid Restaking
Liquid restaking builds upon this by allowing users to reinvest their LSTs to support different applications within the network. It's essentially maximizing earning potential by "double-dipping" your investment.
For instance, depositing LSTs into a liquid restaking protocol allows those tokens to be used as collateral or voting power for governance in another protocol. This way, you earn staking rewards on your initial stake and gain rewards for contributing to the other protocol, generating greater returns.
Benefits of Liquid Restaking
Enhanced ReturnsThe primary allure of liquid restaking is the potential for greater yields on your cryptocurrency holdings. Participating in restaking opportunities with your LSTs allows you to tap into new streams of passive income. This compounding effect can potentially lead to a much higher APY. However, evaluating individual platforms carefully is crucial, as risk varies, and higher rewards don't always mean a good investment.
Capital Efficiency
Liquid restaking boosts capital efficiency. You earn staking rewards while your LSTs are active in other DeFi protocols. For example, to become a validator in Ethereum and receive rewards, you need to hold 32 ETH. However, your ability to earn additional income on those ETH remains limited because you must retain them for validation. Liquid restaking addresses this, allowing you to explore various investment strategies with a single capital pool and extracting maximum value from your crypto assets.
Improved Liquidity
Traditional staking often involves locking assets for specific periods. Liquid restaking, however, preserves access to your liquidity. You can trade LSTs on decentralized exchanges or use them as collateral in lending protocols. This allows for portfolio rebalancing, reacting to market opportunities, or leveraging additional positions. Having LSTs provides flexibility and options.
Risks of Liquid Restaking
While liquid restaking offers exciting possibilities, let's weigh up the risks before participating.
Smart Contract Risks
Like most DeFi products, liquid restaking relies heavily on smart contracts. Vulnerabilities in these contracts can expose funds to hacks, exploits, or bugs, potentially draining the protocol's treasury. It is critical to use platforms that prioritize security audits, have battle-tested protocols, and have been thoroughly researched.
Rehypothecation Risk
Rehypothecation refers to using already pledged assets as collateral to secure further borrowing or investments. Liquid restaking introduces this concept, as staked tokens are used within other DeFi protocols. However, this only amplifies risk. Problems within those protocols or smart contract vulnerabilities could impact the entire system, including your original stake. It is essential to carefully analyze the protocols used within the liquid restaking platform. You should look for things like their smart contract audits, governance processes, and overall reputation.
Market Volatility Risk
Cryptocurrency market volatility presents another risk layer to liquid restaking. A sudden price crash of the underlying asset, LSTs, or LRTs could impact the profitability and overall health of your investments. Diversification and understanding your risk tolerance are crucial. Maintaining a healthy balance of assets and protocols, combined with research and due diligence, can help mitigate this volatility risk.
Leading Liquid Restaking Protocols
In 2024, several companies are shaping the liquid restaking protocols boom, with EigenLayer leading the charge. EigenLayer is a middleware protocol built upon Ethereum that plays a significant role in liquid restaking. EigenLayer enhances cryptoeconomic security through restaking, which expands on traditional Proof of Stake (PoS) networks.
With a protocol total value locked (TVL) surpassing an impressive $20 billion, users can leverage their ETH positions within a growing ecosystem by understanding EigenLayer and its interconnected protocols.
1. Ether.fi
Ether.fi is a pioneer in the liquid restaking space, recently supassing a record $6 billion in TVL. This platform allows users to stake ETH or Lido's stETH in exchange for Ether.fi’s LRT, eETH. eETH is a liquid token equivalent to ETH in value. The advantage is that it can be further deployed within the DeFi space.
The increasing amount of staked Ethereum makes EigenLayer's value proposition of enhanced security appealing for users. Couple this with the option for liquid restaking and the benefits are clear to see. Users can leverage their eETH through Ether.fi’s yield farming product known as Liquid. Liquid offers a competitive Annual Percentage Yield (APY) between 11% to 15%, which is compounded with restaking rewards of up to 4% annually.
2. Renzo Protocol
Renzo offers ezETH and functions as a strategy manager within the EigenLayer ecosystem. Its purpose is to simplify access to the network's restaking capabilities. With a TVL surpassing $3 billion in May 2024, and a successful seed funding round of $3.2 million, the project indicates a growing demand for accessible, high-yield staking alternatives on Ethereum.
Renzo wants to make ETH staking more user-friendly and collaborative. You can see this in its simple user interface. The protocol also broadens its appeal with deposit options beyond ETH, including WETH, stETH, and wBETH. All deposits are converted into Renzo's native ezETH token. Renzo is also looking beyond Ethereum and has integrated with six other chains: Arbitrum, Blast, Linea, BNB Chain, and Base.
Holding ezETH generates ezPoints, which accrue hourly and represent tradable value as rewards. To further incentivize users, REZ tokens boost yield based on the accumulated ezPoints before their token generation event.
3. Puffer Finance
Puffer Finance is a popular liquid restaking platform with a security-centric approach. They reached an impressive $1.7 billion TVL by mid-June 2024. Users who deposit ETH can participate in restaking through EigenLayer. In return, they receive pufETH.
PufETH allows participation within the DeFi realm while mitigating slashing risk thanks to Puffer Finance’s anti-slashing validator technology. One of Puffer's standout features is its Validator Tickets, which ensure pufETH holders receive consistent rewards even if a validator experiences downtime or performance issues.
4. Kelp DAO
Kelp DAO crossed $1 billion in TVL in under six months after its launch in January 2024. In May, the project successfully raised $9 million in private funding. This signifies strong investor confidence in the team's vision for their liquid restaking offering, rsETH, designed to streamline EigenLayer interaction.
Kelp DAO simplifies complex restaking for everyday users. Users can deposit ETH and various other popular liquid staking tokens, such as stETH, ETHx, and Frax's sfrxETH.
5. Mellow
Launched in June 2024, Mellow, backed by prominent staking platform Lido, is aiming to challenge the fast-growing EigenLayer dominance in restaking. They achieved a respectable TVL exceeding $116 million within days of launching.
With over $100 billion worth of staked ETH, there's growing demand for secure and liquid staking solutions. Mellow is looking to meet this need with their re-staking infrastructure called Symbiotic, designed for modular LRT creation.
Conclusion
Liquid Restaking presents a compelling value proposition for those looking to maximize their returns on staked assets. However, this new industry has risks, including security vulnerabilities, reliance on underlying protocols, and market fluctuations. Thoroughly researching and choosing established platforms with proven track records is vital.
Before entrusting any platform with your assets, remember to analyze their security measures, reputation, and community involvement.
FAQ
What is a liquid restaking token?
A liquid restaking token (LRT) represents a user's staked assets. Similar to an LST, an LRT can be traded or used in DeFi protocols. The main difference is that the underlying crypto asset continues to earn staking rewards.
What is liquid restaking?
Is restaking the same as liquid staking?
What is liquid staking?
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