Is restaking a major catalyst for DeFi sector growth?

As market sentiment turned increasingly positive in recent months, DeFi yields, trading volumes on decentralised exchanges and assets locked across various protocols have been on the rise, reaching a total value of USD 140 billion today. However, a significant portion of this growth can be credited to an emerging niche market segment known as restaking.

What is restaking?

Pioneered by EigenLayer back in 2022, restaking is a new mechanism on the Ethereum blockchain, allowing stakers to repurpose their staked Ether (ETH) to secure other protocols while earning extra rewards.

How is this done exactly? Through EigenLayer’s smart contracts, stakers can opt into validating new protocols, also known as actively validated services (AVS). By opting in, stakers agree to additional slashing conditions on their staked ETH, allowing EigenLayer to leverage the security guarantees of these assets (as they are already securing the Ethereum blockchain) to support the growth of other protocols. To make up for the additional slashing risks, restakers earn additional rewards.

While the opportunity to earn additional rewards is indeed the primary incentive for stakers to restake their assets, the main goal behind restaking is actually to bootstrap new protocols with Ethereum’s security infrastructure, saving them the enormous cost of creating their own validator networks from scratch.

In this regard, EigenLayer acts as an Ethereum-based security marketplace, with ETH stakers on one side and new protocols on the other. These protocols can include rollups, sidechains, bridges, data availability and oracle networks, among others. The first AVS to launch using EigenLayer restaking was EigenDA, a high-throughput data availability protocol developed by EigenLabs (the company behind EigenLayer).

Restaking offers several benefits:

  • Flexibility and multi-use: Restaking allows users to leverage their staked assets across multiple protocols without unstaking, providing more flexibility, utility and compounded yields.
  • Bootstrapping new protocols: By having immediate access to Ethereum’s network of validators, protocols can be secured right from the start.
  • Scalable security: Restaking allows protocols to adjust their security levels in a more cost-efficient way. They can add more validators when they to scale up and vice versa.
  • Transparent risks and rewards: Restaking is a transparent process, and the risks involved are clearly visible to users before deciding to secure one or many protocols.

The increasing demand for restaking is evident with EigenLayer quickly amassing over USD 14 billion worth of inflows since its official launch in June last year. Today, it now stands as the second largest DeFi protocol, surpassing DeFi stalwarts like Aave, Maker and Uniswap.

From liquid staking to liquid restaking

Even though staked assets are already locked on the Ethereum blockchain (making them inherently illiquid), users who decide to restake their staked assets through EigenLayer also face a seven-day withdrawal period. This is to ensure the protocol’s stability, but it also means users’ assets remain illiquid during this time. To bypass this constraint, a new breed of “liquid restaking protocols” has emerged.

Platforms like Ether.fi, Puffer Finance and Swell act as intermediaries, restaking user deposits with EigenLayer and issuing liquid restaking tokens (LRTs) in return. These derivative tokens represent the users’ deposit amount and allow these assets to be used across various DeFi protocols and applications to generate additional yield.

This concept is similar to liquid staking solutions such as Lido Finance and Rocket Pool. However, instead of receiving liquid staking tokens (LSTs) when staking through Lido Finance, restakers are provided with LRTs for using EigenLayer.

Percentage change in liquid staking vs. liquid restaking total value locked

Source: The Block

The excitement around liquid restaking has driven exponential growth to the restaking subsector, capturing significant DeFi market share and seeing the emergence of several new liquid restaking protocols; including Renzo Protocol, a strategy manager for EigenLayer, Restake Finance, a modular liquid staking protocol, and others such as Kelp DAO and EigenPie.

The restaking subsector has also extended to other blockchain networks, including Solana’s Picasso restaking protocol, and the newly announced BounceBit, which aims to bring a unique restaking infrastructure to the Bitcoin ecosystem.

Risks and limitations of liquid restaking

However, like any novel technology, offering higher rewards does not come without its risks, especially when it comes to experimental derivatives and synthetic financial assets such as liquid restaking tokens. Even Vitalik Buterin warned about the social risks of restaking protocols back in May 2023, highlighting that the failure of a big enough restaking Layer 2 protocol could trigger demands for a fork or “bailout” of the underlying system it depends on, and this could threaten Ethereum’s social consensus. Here’s a few other risks to consider:

  • Point system: Deposits on EigenLayer do not currently earn yields in tokens but are instead, incentivised through a restaking point system that will eventually convert to tokens (through an EigenLayer airdrop).
  • Additional slashing risks: Restaking imposes additional slashing risks, where either a validator misbehaves, a system bug is exploited, or if a validator’s node goes offline, which could result in users losing their stake.
  • Centralisation risks: Driven by higher yields, users might gravitate towards only a few restaking protocols, potentially reducing the number of independent stakers and increasing centralisation.
  • Convoluted nature of LRTs: A liquid restaking token is a token representing a staked token, which is itself a presentation of a staked token. This raises questions on exactly how LRT providers will distribute losses and gains, as noted by Ledger.

Concluding remarks 

The exciting pace of restaking is certainly a market segment to keep an eye on, bringing fresh demand to the DeFi sector with new opportunities for higher yields and shared security. However, the real challenge lies in these protocols establishing a sustainable yield-generating ecosystem without causing concentration risks and compromising the security of the underlying protocols they rely on – a challenge that could escalate as users tend to flock towards protocols offering the highest yields.

ENDS

Read next article

Contact Sygnum Singapore

I am a
Submit Mandatory fields

Local restrictions – Provision of cross-border services

It looks like you are using a computer with an IP address located outside of Switzerland.
If you are located in Switzerland, please click “Continue” to access the Sygnum Bank AG (Sygnum) website.

If you are not located in Switzerland, please read below.

This website and the information contained herein are addressed solely to persons residing or domiciled in Switzerland.

Sygnum is a regulated bank supervised by the Swiss Market Financial Authority (FINMA). The products and services on this website are authorised in Switzerland. Sygnum cannot promote its products and services in other countries where it is not authorised by the supervisory authority of that country to do so.

If you click on “Continue” to visit this website, you confirm that you have read and understood the above and you are visiting this website on your own initiative without any active promotion or solicitation from Sygnum.

Investor qualification

The following content is available to qualified investors. Please confirm your details below to visit this page, or please see our other digital asset updates here.

Security alert

Stay alert to fraudulent communications. Sygnum will never post messages on social media or private messaging applications regarding e-banking access or logins. If you have concerns, contact us.

Close