The concepts of restaking and liquid restaking have captured significant attention from users looking to maximize their ETH returns, especially in light of the positive momentum brought by ETH ETF developments. According to data from DeFi Llama, the Total Value Locked (TVL) in these two categories has seen remarkable growth, ranking fifth and sixth among all DeFi sectors. The restaking ecosystem is evolving rapidly, but before diving into the additional benefits, it's essential to understand the foundational principles of restaking and liquid restaking.
Background on Staking and Liquid Staking
Ethereum staking involves committing ETH to help secure the network and, in return, earning additional ETH as rewards. While staking generates returns, it comes with certain risks, including the potential for slashing penalties and reduced liquidity due to the unstaking period, which delays the ability to sell ETH immediately.
Becoming a validator requires a substantial upfront investment of 32 ETH, a barrier that is prohibitive for many individual stakers. To address this, validator service platforms like ConsenSys and Ledger offer pooled staking services, allowing multiple users to combine their ETH holdings to meet the minimum staking requirement.
Although these services permit staking any amount of ETH, the staked assets remain "locked" and inaccessible until the unstaking process is completed, which can take several days. Liquid staking emerged as an innovative solution, issuing a liquid token in exchange for a user's ETH deposit. This liquid token represents the staked ETH and accrues rewards over time. It can also be used in various DeFi activities to generate additional yield. Lido pioneered this approach, with others like Rocket Pool and Stader following suit. These solutions not only make staking more accessible but also enhance flexibility and potential returns for investors.
The Emergence of Restaking
Restaking, a concept first introduced by EigenLayer, involves using staked ETH to secure modules that cannot be deployed or validated directly on the Ethereum Virtual Machine (EVM), such as sidechains, oracle networks, and data availability layers. These modules often require Active Validation Services (AVS), which are typically secured by their own native tokens. This approach can present challenges, including the need to bootstrap a security network from scratch and lower trust models. Restaking addresses these issues by allowing security to be bootstrapped from Ethereum's large validator set, making it more costly to attack the pooled stake.
Although EigenLayer was the first restaking protocol, several others have emerged as competitors. While they all aim to use restaked assets to provide security, there are nuanced differences in their approaches, which we will explore in the following sections.
Overview of Restaking Protocols
Currently Supported Assets
The types of assets supported for deposit are crucial, as they determine a protocol's capacity to accommodate incoming deposits. Over time, protocols supporting a broader range of assets are more likely to attract larger flows. Currently, EigenLayer supports only ETH and ETH liquid staking tokens (LSTs), while Karak and Symbiotic support a wider array of assets. This diversity is a key differentiator among these three restaking protocols.
Karak accepts various assets, including LSTs, liquid restaking tokens (LRTs), Pendle LP tokens, and stablecoins. Symbiotic supports LSTs, Ethena's ENA, and sUSDE. Although they currently accept different asset types, both plan to expand their offerings. Karak can accept any asset for restaking, and Symbiotic allows any ERC-20 token to be used as collateral for restaking. EigenLayer's currently supported assets are more limited, but future plans include dual staking and LP restaking options.
Security Models
EigenLayer's current acceptance of only ETH and its variants, which are less volatile compared to smaller market-cap tokens, is critical for reducing the risk of significant price fluctuations that could compromise the network security of AVSs built on it. In contrast, protocols like Karak and Symbiotic offer a wider range of assets for restaking, providing more flexible security options for Distributed Security Services (DSS) on Karak and networks on Symbiotic.
Offering multiple assets for restaking enables customizable security, allowing services to determine the level of economic security they require. By accepting yield-generating tokens, services built on restaking protocols can reduce the additional yield needed to attract validators, making it more cost-effective to secure their operations. This customizable approach lets services decide on the type and level of security they need.
In terms of design, both EigenLayer and Karak feature upgradable core smart contracts managed by multi-signature wallets. They have three and two distinct multi-sigs, respectively, controlling different parts of the infrastructure, thereby dispersing control among various entities. Symbiotic, on the other hand, has immutable core contracts, which eliminate governance risks and single points of failure. While this addresses centralized governance concerns, any bugs or flaws in the contract code would require a complete redeployment.
Although restaking supports pooled security, there is a risk of operator collusion. For instance, if a network worth $2 million is secured by $10 million in restaked ETH, attacking it would be economically impractical, as the cost ($5 million) would exceed the gain ($2 million). However, if the same $10 million in restaked ETH also secures ten other $2 million networks, an attack becomes economically viable. To mitigate this, limits can be imposed on restaked assets from validators overly committed to other services, preventing over-concentration of restaked ETH.
Supported Chains and Partnerships
EigenLayer and Symbiotic primarily accept assets deposited on Ethereum, but Karak currently supports deposits from five different chains. Integrating more chains for restaking reduces the need for message bridges to access restaking infrastructure outside Ethereum. However, the vast majority of TVL is still held on Ethereum, and leveraging restaked assets on Ethereum offers the highest security.
Karak has also launched its Layer 2 network, K2, which serves as a sandbox environment for testing DSS before they go live on Ethereum. Neither EigenLayer nor Symbiotic offers a similar testing environment, but protocols can utilize different chains for testing purposes.
Despite their differences, these restaking protocols are likely to converge over time, offering similar services and supporting a variety of restaking assets. Their success will ultimately depend on the partnerships they establish to build services on their infrastructure.
As the pioneer in restaking, EigenLayer has the largest number of AVSs built on its platform. Notable AVSs on EigenLayer include EigenDA, AltLayer, and Hyperlane. Although Karak has announced only one DSS so far, it has successfully integrated with Wormhole to develop a decentralized validator network for its Native Token Transfer (NTT) and a decentralized relayer network. Despite being the newest, Symbiotic recently announced that Ethena will use its restaking framework with LayerZero's decentralized validator network (DVN) to secure cross-chain transfers of USDe and sUSDe assets.
Over time, more services are likely to leverage such restaking infrastructures for security. Platforms that consistently form partnerships with major players are poised to outperform others in the long run. Having explored the broader restaking landscape, it's crucial to delve into the next layer: liquid restaking protocols, to understand their nuances and how they add value to the ecosystem.
Liquid Restaking Explained
Types of Liquid Restaking Tokens
When you deposit assets into a liquid restaking protocol, you receive a liquid wrapper token in return. Depending on the protocol chosen, you may have several asset deposit options.
For example, besides native ETH and stETH, Renzo allows wBETH deposits, while Kelp accepts ETHx and sfrxETH. Regardless of which token you deposit into these protocols, you will receive their respective LRTs, such as ezETH or rsETH. These two LRTs are considered basket-based LRTs because the token represents a combination of underlying assets. Aggregating multiple LSTs into a single LRT can introduce complex management challenges and additional counterparty risks.
Other liquid restaking protocols offer native LRTs, where users can only deposit native ETH. For instance, Puffer currently accepts stETH but plans to convert it to native ETH for native restaking. Previously, this was an advantage because EigenLayer had deposit caps for LSTs but not for native ETH. However, since all deposit caps have been lifted, native LRTs eliminate the risk of having to balance the LRT token against underlying LST assets and reduce exposure to risks from other LST protocols.
Both Eigenpie and Mellow currently offer isolated LRTs, issuing specific LRT tokens for specific deposits and vaults. While this isolates the risk of each LRT token to its respective LST or vault, it also leads to further liquidity fragmentation, as there is little to no DEX pool liquidity available for quick swaps back to ETH or the underlying LST assets.
DeFi and Layer 2 Support
The value proposition of liquid restaking protocols is that they unlock capital efficiency, allowing users to earn compounded yields from both restaking and DeFi activities. Pendle is the most widely used and integrated platform for these protocols, as its yield-trading mechanism enables users to leverage farming points on liquid restaking protocols. Many depositors also provide liquidity on Pendle, as they can do so without impermanent loss if they hold their positions until maturity.
DeFi integrations have expanded to other areas and protocols. These LRTs are also used as liquidity for DEX swaps on platforms like Curve and Uniswap, providing an exit option for users who wish to withdraw early without waiting for the unstaking period. Vaults have emerged, offering various yield strategies for these LRTs through looping, options, and more. Some lending platforms, such as Juice and Radiant, now accept LRTs as collateral for loans.
To address high gas fees, these LRTs are also supported on various Layer 2 networks. Users can choose to restake assets directly on L2 or transfer restaked assets from Ethereum to L2 to reduce gas costs for DeFi activities. Although most TVL and trading volume remain on Ethereum, expanding LRT support to L2 could broaden their market share by attracting smaller participants deterred by high Ethereum gas fees.
Support for Restaking Protocols
Liquid restaking protocols were initially built on EigenLayer, as it was the first to offer restaking. With the launch of Karak, these protocols did not need to integrate separately, as users could deposit their LRTs directly into Karak after restaking their underlying assets via operators on EigenLayer. Consequently, most liquid restaking protocols are now integrated with both EigenLayer and Karak.
Symbiotic, launched in late June, differs from Karak in that it does not allow LRT deposits. Only LSTs can be deposited on Symbiotic for restaking. If liquid restaking protocols wish to offer LRTs for Symbiotic, they must set up a vault or operator to delegate user deposits for restaking on Symbiotic.
Given recent controversies surrounding EigenLayer's airdrop, with many users dissatisfied with the terms, some have initiated withdrawal requests. As users and yield farmers search for the next protocol to earn yields and farm airdrops, Symbiotic appears to be a logical choice. Although Symbiotic has set a deposit cap of around $200 million, it has been partnering with numerous protocols. Mellow was the first liquid restaking protocol built on Symbiotic, but many previously EigenLayer-based protocols are now collaborating with Symbiotic to maintain market share.
The Growth of Restaking
Restaking deposits have surged since late 2023. The liquid restaking ratio (TVL in liquid restaking divided by TVL in restaking) has exceeded 70%, growing by approximately 5-10% in recent months, indicating that most restaking liquidity flows through liquid restaking protocols. As the restaking category expands, liquid restaking protocols are expected to grow accordingly.
However, there are clear signs of outflows from EigenLayer and Pendle deposits, which declined by over 40% after June 27 expirations. Although expired deposits on Pendle can be rolled over, the outflows may be driven by token generation events (TGEs) and the distribution of tokens from major liquid restaking protocols in 2024.
Yield farmers will continue to seek new opportunities. Although EigenLayer's EIGEN airdrop has been launched, it remains non-tradable until the end of September 2024. As a result, farmers may withdraw their deposits to hunt for other airdrops. Over time, some of this liquidity is likely to flow to other protocols, namely Karak and Symbiotic.
Even for liquid restaking protocols that have already launched their tokens, they have subsequent airdrop seasons, and their LRTs can still be used on Karak while they work on integrating with Symbiotic. With future TGEs for Symbiotic and Karak and increases in their deposit caps, users are likely to continue farming on these protocols.
Frequently Asked Questions
What is the difference between staking and restaking?
Staking involves committing assets to secure a blockchain network and earn rewards. Restaking takes this a step further by allowing staked assets, like ETH, to be used to secure additional services or protocols beyond the base layer, thereby generating extra yield.
How does liquid restaking improve capital efficiency?
Liquid restaking protocols issue liquid tokens representing restaked assets. These tokens can be used in DeFi activities, such as providing liquidity or serving as collateral, allowing users to earn yields from multiple sources simultaneously.
What are the risks associated with restaking?
Key risks include slashing penalties for misbehavior, smart contract vulnerabilities, and the over-concentration of restaked assets securing multiple services, which could make attacks economically viable. It's essential to choose reputable protocols and understand their security models.
Can I withdraw my restaked assets at any time?
Withdrawal availability depends on the protocol. Some require an unstaking period, while others offer immediate liquidity through their liquid tokens. Always check the specific terms of the protocol you are using.
Which assets are supported for restaking?
Support varies by protocol. Some accept only ETH and LSTs, while others support a broader range, including LRTs, stablecoins, and LP tokens. Always verify the accepted assets before depositing.
How do I choose a restaking protocol?
Consider factors like supported assets, security model, partnerships, and integration with DeFi platforms. Diversifying across multiple protocols can also help mitigate risks.
Conclusion
As of July 1, 2024, nearly 33 million ETH were staked, with approximately 13.4 million ETH ($46 billion) staked through liquid staking platforms, accounting for 40.5% of all staked ETH. This ratio has recently declined due to increased native ETH deposits on EigenLayer and previously limited LST deposit caps.
With the activation of AVS rewards and penalties, new services on restaking protocols can distribute rewards via new tokens, similar to staking returns on Lido. While airdrop farmers may move liquidity after receiving airdropped rewards, yield seekers are likely to be attracted over time.
Currently, the ratio of restaking to liquid staking is about 35.6%, close to the ratio of liquid staked ETH to total staked ETH. As restaking platforms remove deposit caps and expand to other assets, including experimental efforts like restaking Milady, they have the potential to attract more inflows in the future. 👉 Explore advanced staking strategies to maximize your returns in this evolving landscape.