The potential of restaking and liquid restaking in DeFi: An overview
The novel liquid restaking method in decentralized finance (DeFi) allows users to grow their potential to earn passive income. This happens when the yields from staked tokens are reused. Liquid staking and staking are technically lending protocols.
In January 2024, Liquid Restaking saw a massive surge of 400%, leading some to call it the start of DeFi summer. At the time of this writing in May 2024, the total value locked (TVL) for liquid restaking was a staggering USD 14.62 billion according to Defillama which is quite a promising figure for a method to achieve in a year. Meanwhile the Liquid Staking value deposited by users is US $50 billion as per Defillama. It is currently supported by 15 staking protocols of which most are Ethereum based.
E2igenLayer's innovative asset restaking model in DeFi
The method was first introduced by Eigenlayer Protocol in mid 2023 offering a new way to use assets for trading, supporting other networks, and participating in DeFi apps. It goes beyond Ethereum’s usual validation process, like liquid staking. The Eigenlayer model is composed of AVS (Actively Validated Services are protocols like bridges, rollups or oracles within the Eigenlayer ecosystem), restakers and stake operators.
As a progression of Liquid Staking Tokens (LSTs) the yields resulting in Liquid Restaking Tokens (LRTs), are simply a means of creating economic value like providing liquidity, validating other blockchain networks, and giving LRT returns to holders over time. Simply put, LRTs represent tokenized forms of originally staked tokens. In the case of Ethereum based LRTs they also validate oracles, bridges and rollups thereby adding a layer and securing other protocols and reduce costs. The idea is great because the networks that can not afford to have their native validator runners can then tap into Ethereum’s network’s restaked tokens to bootstrap and maintain their consensus mechanism. Holders of these restaked tokens can still choose to trade or lend them on DeFi protocols or liquidate them as they wish. Hence their funds are not locked. Another benefit of LRTs is that validators can also earn extra rewards which contributes to enhanced capital efficiency of the entire ecosystem.
There has not been much knowledge shared about Liquid Restaking in general and therefore it can sound a little complex to average holders. For experienced traders LRTs is appealing because they can diversity their investments and seek rewards beyond traditional staking.
Liquid Restaking vs. Liquid Staking: Understanding the Key Differences
PoS networks -> What is common between Liquid Staking and Liquid Restaking is that they are both built to operate on PoS networks rather than traditional mining methods to improve liquidity. Therefore validators with staked crypto help keep networks like Ethereum secure.
Network validation -> Where they differ is that Liquid Staking helps in maintaining secure and legitimate transactions on a single PoS blockchain whereas liquid staking can provide that security for additional rollups, Dapps and protocols outside of a PoS network as well.
Rewards -> While Liquid Staking earns its holders rewards from just staking on validators, Liquid Restaking can earn holders further yield because of its operations across Defi protocols and rollups. This means that Liquid Restaking can potentially benefit a holder's portfolio further. However, they can also pose risks to a portfolio due to the rehypothecation phenomenon which means that there is a systemic risk in a case where a potential breakdown of say a protocol’s collateral might obstruct the payout of deserved returns. Additionally, there is always the risk of slashing in Liquid Staking where a holder bears the risk of losing all of their funds if the validator of their choice fails.
Cost reduction associated with security bootstrapping
Liquid Restaking does address capital inefficiencies, one such case is when it reduces production costs associated with running numbers of validators. Stakers can choose to just pool their capital with one AVS of their choice and then put that to staking use across protocols or rollups even OUTSIDE of native Ethereum. As a result higher levels of security are achieved for AVSs with restaking than would be the case without it.
The main differences between Liquid Restaking (LST) and Liquid Restaking Tools (LRT) methods are in the rewards and the validation of the network. Liquid Restaking not only helps secure the Proof of Stake (PoS) blockchain Ethereum, but also supports other rollups, decentralized applications (Dapps), and protocols in the DeFi ecosystem. This may encourage investors to try restaking and see how it benefits them. Additionally, platforms like byzantine.fi are changing the game by providing infrastructure for large-scale restaking. They aim to make it easier for platforms, institutional services, and other businesses to create their own restaking investment strategies. By bridging the gap between users' wallets, exchanges, and Automated Valuation Systems (AVSs), Byzantine's smart contracts help diversify portfolios for institutional services in a way that aligns with their interests.
The potential for a variety of use cases to come out looks promising with oracles like Redstone that now provide LST & LRT price feeds of restaked ETH to EVM compatible Layer 1 and Layer 2 platforms. This can support potential use cases but also a lot of upcoming DeFi protocols, DEXs focussed on trading, insurance products, blockchain gaming looking for real-time price feeds of in-game items, NFTs, and prediction markets such as betting platforms among many other potential research purposes.
