Liquid Restaking; Redefining DeFi and Crypto Investment Landscape

At the beginning of 2024, the total value locked (TVL) in one of the leading liquid restaking platforms, EigenLayer, had reached over $9 billion.  

Restaking, a concept that involves using a certain blockchain to secure other dApps, is quickly becoming the most popular new crypto investment method. Currently, new restaking companies are continuously being launched with active liquid restaking platforms.

Well, what is liquid restaking? What are the benefits of liquid restaking? Does liquid restaking have risks as an investment method? These are some of the questions we will answer in this article.

Let’s dive in!

Liquid Staking Explained

Decentralization is the core of cryptocurrencies and blockchain, where a network of validators operates to verify transactions stored in a chain of blocks. In blockchains such as the Bitcoin blockchain, these validators use proof-of-work.

In contrast, some blockchains such as Solana and Ethereum blockchain use the proof-of-stake consensus, where validators stake their crypto to enable the network to run. 

Staking requires a user to lock a certain portion of tokens in the blockchain network. The size of the stake determines the users that get chosen to be validators. Stakers are rewarded for this commitment; these rewards are often referred to as profits on staked assets. 

Also, the bigger the stake, the bigger the reward. The staked assets are considered collateral; in case a validator attempts to cheat in the blockchain, a portion of their staked assets is revoked.

With liquid staking, unlike normal staking, the staked assets are not locked. Liquid staking tokens (LSTs) are a tokenized version of a user's staked assets, used to offer flexibility and liquidity in DeFi activities without having to un-stake your original assets.

What is Liquid Restaking?

Liquid restaking is the process where users reinvest LSTs in DeFi to support other external systems, earning additional yields from staked assets. This means you can continuously earn extra interest alongside the benefits from the original investment from liquid staking.

Liquid restaking expands on the liquid staking model by introducing a mechanism that allows the liquid staking tokens to be utilized further in the DeFi spaces. 

LSTs represent staked assets but are liquid by design. Being liquid, the tokens can be traded or utilized across various platforms.

Therefore, liquid restaking involves reinvesting these liquid tokens into several other yield-generating platforms without affecting your original staking position; enhancing potential returns while providing liquidity within the ecosystem.

Liquid restaking steps can be summarized as:

• Staking: Involves locking proof-of-stake tokens in a blockchain network, for example, ethereum blockchain.

• Get an LST: LST is the coin representing the staked coins; it is liquid and can therefore be moved around the DeFi space.

• Restake: Using the LSTs join other earning opportunities in the DeFi space without pulling out your staked coins.

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Liquid restaking tokens (LRT) are the tokens that represent the reinvestment of liquid staking tokens (LST). It captures the concept of compounded investments and the possibilities of higher returns.

In summary, LSTs provide liquidity to staked coins, enabling investors to use staked assets in the DeFi space. LRTs, on the other hand, symbolize an additional investment layer enabled by the use of LSTs, potentially increasing yields.

Benefits of Liquid Restaking

Enhanced Flexibility: With liquid restaking, the liquidity of staked assets is boosted further, allowing for investors to engage in additional investment opportunities without unstaking. This flexibility allows investors to seek diverse earning opportunities.

Higher Returns: Compared to traditional staking, liquid restaking offers the potential for more yields through staking across several protocols; maximizing returns.

Supporting operations for new projects: the essence behind liquid restaking is to bolster the security of new emerging blockchain applications. Apart from contributing to robustness, the support contributes to the growth of these new projects.

Examples of protocols for Liquid Restaking

Etherfi

Currently, Etherfi is the liquid restaking protocol with the largest number of users. It has a TVL of about $2.9 billion as of the time of writing. 

Etherfi uses Ethereum's PoS blockchain to provide enhanced security in various protocols and networks. Through the platform, users can stake ETH coins and receive eETH, which is a liquid token.

eETH is the native liquid token used for restaking facilitating users' participation in a wide range of DeFi ecosystems to earn rewards from staking and restaking. 

Etherfi partnered with EigenLayer, a move that enabled users to participate in validation within diverse Ethereum-based projects, promoting security and true decentralization.

The Etherfi project was launched in March 2024, with an airdrop program that encourages crypto investors to stake ETH coins, get eETH, earn loyalty rewards, and restake in other DeFi protocols. As such, the Etherfi ecosystem maximizes its users' earning potential.

Etherfi's $23 million funding series was quite successful indicating the project's prominence. The enthusiastic participation of crypto users in this funding round led by CoinFund and Bullish Capital, indicated the general confidence in Etherfi's liquid restaking solution.

The successful funding was quickly followed by a massive growth in TVL; surging from about $100 million to over $1.7 billion. This further showed the crypto community’s confidence in the project and the fast adoption of its protocol.

Etherfi has demonstrated commitment to support and innovation within the DeFi industry, positioning itself as a key player in the dynamic evolution of the ethereum network and by extension the crypto space.

EigenLayer

EigenLayer is another protocol designed on the ethereum blockchain that facilitates restaking to enhance security in various crypto projects. It has a TVL of approximately $9 billion.

The platform enables ETH stakers to use their staked coins in the form of LSTs beyond the ethereum blockchain.  

Users achieve the additional investment through EigenLayer's smart contracts, which allows for the provision of pooled security to various projects simultaneously to earn more rewards.

Apart from increasing the security of the different services, the mechanism also increases the efficiency of stakers' capital, allowing the stakers to use the same capital to gain more rewards on multiple platforms.

This model works to solve security fragmentation across various DeFi services, offering a unified solution that solves security issues in decentralized services without bootstrapping an entire trust network.

The benefits that EigenLayer’s solution offers include bolstered security for various protocols, increased capital efficiency, and flexibility for developers. 

It enhances the security and trust of the protocols built on it by leveraging the ethereum blockchain's security layer.

As a result, developers’ innovation is not restricted by their project’s architecture, and stakers’ earning potential is not restricted by staking coins in a one network. Consequently, participation in the ethereum ecosystem increases.

However, liquid restaking with EigenLayer is not without risk. The risks include centralization, yield risk, and slashing. These risks affect individual stakers and the entire ethereum blockchain as well. 

Renzo

Renzo is a liquid restaking token in the growing DeFi space and is EigenLayer's strategy manager. The platform has over $1 billion in TVL and is designed to enhance the capabilities of the ethereum blockchain by increasing security in Actively Validated Services (AVSs).

In the EigenLayer, Renzo serves as an interface streamlining the restaking process, thereby promising ETH stakers higher yields for their staked assets.

It handles the complexities of restaking, enabling an easier collaboration between the EigenLayer node validators and the platform users.

Apart from facilitating permissionless innovation for ethereum blockchain developers, Renzo also offers pragmatic security and trust within the ethereum ecosystem. As such, Renzo is considered a key promoter of liquid restaking and EigenLayer adoption.

Similar to EigenLayer, Renzo was received with a high level of interest in the crypto space upon its launching. The project raised over $3.2 million during its seed funding stage to enhance the development of its restaking protocol on the EigenLayer.

By combining operator nodes and smart contracts, the protocol has created the capacity to offer automated and unique liquid restaking strategies. These strategies help by simplifying liquidity management, in turn, users seamlessly engage in ETH staking while exploring restaking opportunities with LSTs.

The future of Renzo includes the introduction of a decentralized autonomous organization (DAO) to oversee strategy building and overall operations. It will also introduce ezETH, a restaked ETH position token that will integrate into the DeFi space to earn rewards in different currencies.

Limitations of Liquid Restaking

Increased complexity: The concept of liquid restaking adds another level of complexity to traditional staking. It may be a challenging concept for crypto users and investors with average knowledge of the crypto space to engage with it effectively.

Systematic risks: assets are rehypothecated, increasing systematic risks. If a failure happens in one protocol, the effect might be replicated in other protocols that are supported by the same LSTs. 

Current situation and Possible evolutions

Liquid restaking emerges as one of the well-received innovations in the crypto and DeFi space. Building on staking and liquid staking, the concept of restaking is still in its early stages.

EigenLayer is establishing itself as the liquid restaking solutions leader; evidenced by its massive growth after launch. It is currently the second largest DeFi protocol; Lido takes the first position.

However, a dozen platforms are emerging in the liquid restaking landscaping, increasing diversity and looking to get a share of the market.

The much-awaited launch of Symbiotic, an emerging key player in the restaking market, is expected to intensify competition and possibly lead to aggressive innovation. 

Being the 5th largest section of DeFi, the restaking sector is set to grow significantly, evolving with increased potential risks that are yet to be explored or addressed. 

Are you interested in participating in liquid restaking and have no idea where to start as a new crypt investor? Well, you could invest in the $SOPHIE token whose underlying basket of tokens includes liquid restaking tokens such as etherfi tokens.