Liquid Restaking: Driving the Next Wave of Ethereum Innovation

This year there has been a remarkable surge in the adoption of liquid restaking protocols and LRTs, marking a significant milestone in the evolution of the EigenLayer ecosystem. At present, the total value locked (TVL) in Liquid Restaking stands at approximately $15 billion, according to data from DeFillama. 

Exhibit: State of TVL – Liquid Restaking Protocols 

Introduction to Restaking 

EigenLayer, a protocol on Ethereum, introduces restaking as a novel approach to security. This mechanism allows users to reutilize their staked ETH on the consensus layer by opting into EigenLayer smart contracts. Through restaking, users can extend security to additional applications on the Ethereum network. EigenLayer’s potential lies in aggregating and extending security through restaking, thereby facilitating the validation of new applications built on Ethereum.

Traditionally, when a new application is added to Ethereum, it requires its own set of assets to be staked for security purposes. This process can be inefficient and resource-intensive, as it involves locking up additional capital and establishing a separate trust network. EigenLayer addresses this challenge by enabling existing staked assets, ETH or Liquid Staking Tokens (LSTs), to be repurposed for securing applications.

By leveraging EigenLayer’s restaking mechanism, developers and users can tap into the existing pool of staked assets on Ethereum, rather than needing to stake new assets for each new application. This not only optimizes the use of staked capital but also fosters a more tightly integrated and secure Ethereum.

What are Liquid Restaking Tokens?

Restakers are users who pledge their staked ETH or ETH LSTs to the ecosystem, expecting rewards in return. Those with ETH staked directly on the beacon chain use EigenPods to participate, while users with ETH staked on liquid staking platforms can restake via EigenLayer directly or through liquid restaking protocols. Liquid restaking is the process of depositing liquid staking tokens (LSTs) and EIGEN tokens into the EigenLayer smart contracts.

Liquid Restaking Tokens (LRTs) are a key component of EigenLayer’s ecosystem. These tokens represent assets that have been restaked through EigenLayer’s protocol. LRTs offer users liquidity, meaning they can be freely traded or used in various DeFi applications, while still participating in the restaking process. This liquidity enables users to maintain flexibility with their assets while contributing to the security and scalability of the blockchain network through EigenLayer’s restaking mechanism.

Benefits of LRTs

• Liquidity: Unlock previously staked tokens for use across various DeFi platforms.

• Higher Yields: LRTs offer users the opportunity to amplify their returns by leveraging additional assets beyond their initial staking holdings.

• Simplified User Experience: LRT protocols simplify the process of running a validator node, enabling users to participate in restaking without requiring technical expertise.

• Lower Capital Requirements: Users can gain access to ETH restaking yield without needing 32 ETH to run their validator.
• Diversify and Reduce risk: If you restake on Eigenlayer you can only delegate to 1 Operator. LRTs allow to delegate to multiple different Operators, reducing the risk of 1 bad Operator

Top LRT Protocols on Eigenlayer 

Ether.Fi

Ether.fi has emerged as a leading protocol in the Liquid Restaking space, with a TVL of over $6Bn. Over the past 30 days, the protocol has witnessed an impressive 100% growth in TVL, solidifying its position as a top choice among users seeking to maximize their staking rewards and engage in DeFi activities.

Ether.fi stands out from other staking protocols due to its innovative features. Firstly, it enables users to maintain self-custody of their staking keys, a departure from traditional protocols where control is often surrendered to third parties during the staking process. Additionally, they have launched Ether.fan, a loyalty program utilizing the liquid staking token eETH. Users can stake their ETH, mint a fan NFT, and convert ETH into eETH wrapped within the NFT. This NFT accumulates rewards and loyalty points over time, with four membership tiers—bronze, silver, gold, and platinum—each offering different rewards. Designed for average users rather than institutions, the program encourages holding the NFT for greater rewards. Withdrawing ETH lowers membership status, and withdrawing over 50% of ETH burns the NFT. Additionally, the NFTs facilitate participation in Ether.fi governance without a native token. 

Renzo

Renzo is another player in the Liquid Restaking space boasting a TVL of $4Bn and is the second largest LRT protocol after Ether.fi. ezETH is the liquid restaking token provided by Renzo, representing a user’s restaked position. They announced an airdrop season towards April end, distributing 12% of token allocation in airdrops.  Renzo witnessed an impressive surge in TVL February 2024 to June 2024, boasting a remarkable growth rate of approximately 2400%, a noteworthy achievement indicative of its expanding user base and growing appeal.

Puffer Finance

Puffer is a decentralized native liquid restaking protocol that operates on Eigenlayer, offering an innovative solution to make native restaking more accessible and rewarding for Ethereum Proof of Stake validators. Puffer allows users to stake any amount of ETH, making staking accessible to all participants regardless of their holdings. Integration with Eigenlayer amplifies rewards for validators, maximizing their earnings potential. The TVL of Puffer Finance experienced a significant increase from $90.62 million on February 1st, 2024, to $1.816 billion currently. This significant growth is promising and indicates an increasing number of participants entering the LRT ecosystem through Puffer.

Staking vs. Liquid Staking vs. Liquid Restaking

The Risks and Challenges of Liquid Restaked Tokens (LRTs)

Implementing Liquid Restaked Tokens (LRTs) introduces several significant challenges and risks. 

• Leverage Upon Leverage: The use of LRTs involves layering additional financial leverage on top of existing leverage, akin to the early days of Decentralized Finance (DeFi). This stacking effect heightens the overall vulnerability of the system to market fluctuations and can amplify the impact of negative market movements.

• Mainnet Security Risks: Vitalik Buterin has pointed out that re-staking introduces complex scenarios that can compromise the security of the main Ethereum network. For example, slashing on third-party chains could have unintended consequences on the mainnet, posing significant security threats.

• Unnecessary Complexity: Over-complicating the staking process with additional layers can create vulnerabilities. EigenLayer’s co-founder has emphasized the importance of avoiding excessive complexity to prevent potential security breaches.

Future of LRTs 

Liquidity Staking Tokens have tackled liquidity issues for stakers, enabling DeFi participation while staking. LRTs take this further, providing increased yield opportunities and security enhancements within EigenLayer’s restaking system. 

The rising value locked in EigenLayer has spurred exponential growth in airdrop-driven economics. Various LRT protocols, such as Ether.fi and Puffer, introduce unique point systems, enticing users with allocations within EigenLayer. 

For EigenLayer, the challenge lies in transitioning beyond the airdrop frenzy towards a sustainable yield-generating ecosystem. Achieving this requires balancing supply and demand dynamics between ETH restakers and Actively Validated Services (AVSs). Interoperability across networks will be key in seamlessly integrating asset staking into broader DeFi ecosystems.