I. Background on Staking and Liquid Staking
Ethereum staking involves committing your Ether to the network to enhance its security and earn additional ETH rewards in return. This mechanism is designed to enhance Ethereum's network security, but it also has certain risks and limitations. First, staked ETH is locked up for a period of time and cannot be traded freely, which limits liquidity. Stakers are unable to withdraw or sell their ETH quickly, which may also lead to a shortage of asset liquidity. Second, stakers may face penalties from the network for improper validation activities. Moreover, becoming a validator on the Ethereum network has a high threshold, as individuals must stake a minimum of 32 ETH. This threshold can be a huge barrier for many ordinary investors.
To lower the barriers to entry in the staking market and mitigate risks related to limited liquidity, platforms such as ConsenSys and Ledger have started offering pooled staking services. These platforms enable users to combine their ETH to meet the minimum staking requirements, making it possible for ordinary investors to participate in staking. However, even with pooled staking, the staked ETH remains locked and cannot be withdrawn immediately, and the liquidity problem persists in this case.
To address this issue, liquid staking was introduced. Liquid staking allows users to stay active in market activities, such as DeFi, by minting liquid tokens as a substitute for their staked ETH. Lido is a pioneer in liquid staking, followed by platforms like Rocket and Stader that have launched similar services. These services not only lower the entry barriers for staking but also offer greater flexibility to stakers. With liquid tokens, investors can both earn staking rewards and use the tokens for other investment strategies, potentially achieving higher returns.
Difference Between Staking and Liquid Staking
In traditional staking, users cannot access their staked ETH until the lock-up period ends. Liquid staking, on the other hand, allows users to receive liquid tokens that represent their staked ETH. These tokens can be freely traded on the market. This innovation enhances fund liquidity and offers investors diversified income opportunities. With liquid staking, investors can earn staking rewards and also boost their returns by utilizing these tokens on DeFi platforms.
II. The Emergence of Restaking
Restaking, a novel concept introduced by EigenLayer, allows staked ETH to be used to secure other modules that are not directly tied to the Ethereum mainnet, such as sidechains, oracles, and data availability layers. These modules often require Active Verification Services (AVS), which rely on their own tokens and face high costs and trust issues in building a secure network independently. Restaking enhances the security of these modules by utilizing Ethereum's extensive validator network, thereby reducing the costs associated with building separate security networks.
The core advantage of restaking is its ability to channel the security provided by Ethereum's validators to other chains and applications, making it much more costly to attack these modules compared to the potential gains. As a result, this mechanism enables restaking networks to protect critical modules in other blockchain ecosystems by sharing Ethereum's security.
Although EigenLayer was the first protocol to introduce the concept of restaking, other protocols have emerged as the field evolves. These different restaking protocols differ in their implementation approaches and the types of assets they support, creating a competitive and diverse market landscape.
The EigenLayer whitepaper elaborates on the concept of "pooled security" in restaking. This approach means that when multiple validators participate in the same network through restaking, attackers must incur higher costs to compromise the network. While this design enhances module security, there is a risk of validator collusion. If multiple modules share the same staked assets, collusion among validators could lead to simultaneous threats to several networks. To mitigate this risk, EigenLayer proposes limiting the amount of assets each validator can restake.
III. Overview of Restaking Protocols
1. Supported Deposit Assets
One of the primary distinctions between restaking protocols lies in the types of deposit assets they support. Currently, EigenLayer exclusively supports ETH and ETH Liquid Staking Tokens (LSTs), while Karak and Symbiotic accommodate a broader range of assets. Karak accepts several asset types, including LRTs, Pendle LP tokens, and stablecoins. Symbiotic further includes asset types such as ENA and sUSDE.
This diversity of asset types is vital for the appeal and growth of restaking protocols. By supporting a wider array of asset types, these protocols can attract more liquidity and user participation, particularly in multi-chain ecosystems. EigenLayer also plans to expand its asset support in the future by introducing more dual-staking and LP restaking options.
2. Security Model
EigenLayer adopts a more conservative approach to security design, focusing primarily on ETH and its variants to maintain network security and economic stability. In contrast, Karak and Symbiotic provide a wider selection of restaking asset options, allowing for increased flexibility and customizable security solutions.
In designing the security model for a restaking protocol, it is crucial to balance flexibility and security. By centering on ETH and related assets, EigenLayer minimizes the volatility risks associated with lower market cap tokens. On the other hand, Karak and Symbiotic offer adjustable security features tailored to specific needs, that allow users to select their desired level of economic security.
Both EigenLayer and Karak employ upgradeable core smart contracts, with multi-signature management systems controlling different parts of the infrastructure, ensuring decentralized governance. Symbiotic, however, utilizes an immutable contract design that reduces governance risks but requires redeployment if vulnerabilities or errors in the contract code are discovered.
3. Supported Chains and Partnerships
The scope of chain support is a core competency of restaking protocols. EigenLayer and Symbiotic currently focus on the Ethereum ecosystem, while Karak has expanded its support to five blockchains. Despite most of the Total Value Locked (TVL) being concentrated on Ethereum, Karak's multi-chain support enables it to attract more assets from non-Ethereum chains to participate in restaking.
Additionally, Karak has launched a Layer 2 network, K2, which serves as a testing environment for its decentralized staking solution (DSS), enabling upgrades and tests before deployment on Ethereum. EigenLayer and Symbiotic lack similar test environments but allow for protocol testing through integration with other chains.
Ultimately, the success of a protocol depends on the partnerships it can establish. As a trailblazer in the restaking sector, EigenLayer has attracted the most AVS participation, boasting prominent partners like EigenDA, AltLayer, and Hyperlane. Meanwhile, Karak and Symbiotic have also gradually expanded their partnerships, integrating projects such as Wormhole and Ethena.
IV. Overview of Liquid Restaking
1. Types of Liquid Restaking Tokens (LRTs)
In liquid restaking protocols, users can deposit their staked assets to receive corresponding liquid restaking tokens (LRTs). LRTs enhance capital efficiency for stakers by providing higher capital utilization. This allows stakers to participate in more DeFi activities without having to unlock their staked assets. For example, the Renzo protocol supports wBETH deposits and issues corresponding ezETH tokens, while Kelp supports ETHx and sfrxETH deposits and issues rsETH tokens. Each of these tokens represents different types of staked assets and further optimizes capital efficiency within the DeFi ecosystem.
Some protocols aggregate multiple LSTs into a single LRT, providing greater flexibility. While this multi-asset-backed LRT enhances capital utilization, it also introduces increased management complexity and potential counterparty risk. For example, protocols like Puffer, which natively support stETH, ultimately convert it into native ETH for restaking, thus minimizing dependence on LST protocols and reducing risk exposure.
The variety of LRT tokens not only diversifies the options available to users but also complicates integration between protocols. Effective management and utilization of these tokens require a careful balance between security and flexibility.
2. Support for DeFi and Layer 2
A major advantage of liquid restaking protocols is their ability to enhance capital efficiency. These protocols allow staked assets to earn rewards through restaking and generate additional returns within the DeFi ecosystem. Platforms like Pendle feature yield trading mechanisms that enable users to leverage their staked assets and earn additional rewards in liquid staking. By providing liquidity to Pendle, stakers can earn rewards prior to maturity while mitigating the risk of impermanent loss.
Furthermore, liquid restaking protocols are deeply integrated with DEXs like Curve and Uniswap, ensuring liquidity for LRT tokens and enabling stakers to quickly exit their staked assets when necessary. Meanwhile, some protocols have designed vaults with various yield strategies, including cyclic restaking and options, further increasing stakers' returns.
With the rapid advancement of Layer 2 solutions, liquid restaking protocols are increasingly supporting Layer 2 networks, providing users with lower gas fees and faster transaction speeds. Although most liquidity and trading volume remain concentrated on the Ethereum mainnet, it is expected that more users will choose to stake and restake on Layer 2 in the future to achieve higher capital efficiency.
3. Support for Restaking Protocols
Liquid restaking protocols were initially built on EigenLayer, a pioneer in this sector and one of the first to offer restaking services. With the gradual introduction of Karak and Symbiotic, liquid restaking protocols have expanded to more platforms and integrated with multiple protocols. Karak enables users to deposit LRTs directly on its platform for restaking, while Symbiotic restricts the use of LRTs, requiring users to stake through alternative channels.
Eigenlayer's recent airdrop event has sparked controversy, as some users have expressed dissatisfaction with the airdrop rules. Consequently, these users have begun withdrawing their assets and turning to other protocols in search of better returns and airdrop opportunities. Symbiotic, thanks to its flexible restaking mechanism, has emerged as a strong alternative. Despite a deposit cap of $200 million, its collaborations with multiple protocols position it to attract more users in the future.
Overall, competition among liquid restaking protocols is expected to intensify over time. Protocols that offer higher capital efficiency and greater flexibility are likely to capture a larger share of the market.
V. Growth and Future Prospects of Restaking
Since the end of 2023, the growth rate of restaking deposits has accelerated significantly. Recent data shows that the ratio of liquid restaking (TVL in liquid restaking to TVL in restaking) has surpassed 70%, with a monthly growth of around 5% to 10% over the past few months. This indicates that a large portion of restaking liquidity is conducted through liquid restaking protocols, making liquid restaking a major growth engine in the restaking category.
However, despite the overall upward trend, recent withdrawal events at Eigenlayer and Pendle in late June 2024 have revealed market volatility. Following Eigenlayer's airdrop event, the outflow of deposits exceeded 40%. This suggests that, while airdrop incentives may attract short-term speculators, they can impact long-term capital retention. Therefore, protocols need to attract and retain users through long-term incentive mechanisms and stable yield models.
Looking ahead, the rise of emerging agreements such as Karak and Symbiotic could further intensify market competition. Karak has already attracted a portion of the market share with its support for multi-asset restaking, while Symbiotic, with its collaboration with other protocols and the use of decentralized validator networks (DVNs), has also provided users with new restaking options.
VI. Summary
As of July 2024, nearly 33 million ETH were staked, and approximately 13.4 million ETH (about $46 billion) were staked via liquid staking platforms, representing 40.5% of the total staked ETH. This proportion indicates that liquid staking has become a key component of the Ethereum staking ecosystem. However, due to Eigenlayer's increased support for native ETH deposits and the deposit caps on LSTs, this proportion has recently declined slightly.
In the future, as restaking platforms offer more deposit options, lift deposit caps, and expand into other asset classes, the restaking market is expected to grow further. In particular, liquid restaking protocols are expected to capture a larger market share. While the allure of airdrop rewards may cause some short-term liquidity to flow out, the restaking ecosystem is expected to thrive in the long run through collaborations with major DeFi protocols and platforms, thereby improving capital efficiency for users.
In the entire restaking industry, protocols such as Eigenlayer, Karak, and Symbiotic are leading the development of new security models and liquidity solutions. The rise of restaking not only bolsters the security of staking but also improves liquidity and capital efficiency across various assets in the decentralized finance ecosystem. As restaking protocols evolve, we have seen a series of new innovations and applications, which expand the functionality of the Ethereum ecosystem and present users with greater investment opportunities.
Restaking, as an innovative mechanism, effectively harnesses the security of the Ethereum network to bolster other blockchain modules and protocols. It fortifies network security and introduces new economic incentives. The successful implementation and widespread adoption of protocols such as Eigenlayer, Karak, and Symbiotic indicate that restaking will become an indispensable part of the blockchain ecosystem.
However, this field still faces challenges. For example, issues of security and compliance in restaking protocols, as well as the impact of market volatility on liquidity and capital efficiency, are critical aspects that require continuous monitoring. Looking ahead, as technology evolves and the market matures, it is expected that restaking protocols will further refine their models and address these challenges through more effective mechanisms.
1. Impact of Policies and Regulations
As the markets for restaking and liquid restaking grow, regulatory authorities may increase their scrutiny and regulation of these emerging sectors. A critical challenge for policymakers and regulators will be finding a balance between promoting innovation and ensuring market stability. Ensuring transparency, fairness, and protecting investor interests will be key to the industry's development.
2. User Education and Risk Management
In the realm of restaking, user education and risk management are equally important. Users need to understand how different protocols work, as well as the associated risks and benefits, to make informed investment decisions. In addition, how to effectively manage liquidity risk, market risk, and operational risk will directly affect users' returns and the long-term stability of the protocols.
VII. Conclusion
The rapid development of the restaking industry has brought new growth opportunities to the Ethereum ecosystem and the broader blockchain market. With the emergence of more restaking protocols and liquid restaking solutions, users will benefit from enhanced capital efficiency and flexibility, while also promoting the further development of DeFi. Despite facing challenges, innovation and the ongoing optimization of protocols will drive continuous progress in this sector.
Overall, restaking and liquid restaking, as new growth drivers in the Ethereum ecosystem, not only provide new earning opportunities for stakers but also drive the evolution of blockchain technology. As the market matures and technology advances, the restaking industry is expected to expand its applications and generate greater value in the future.
