What are Liquid staking tokens?
Liquid Restaking Token (LRT) is a token designed to generate additional profitability by re—restaking coins using the Proof-of-Stake algorithm.
LRT protocols use the security and profitability from the staking of the underlying asset, plus the possibility of additional income through DeFi or Actively Validated Services (AVS), including cross-chain bridges, oracles and sidechains.
The concept of LRT applications resembles joint PoW mining (as, for example, in the production of Dogecoin or Litecoin), when the same equipment is used to ensure security in two networks at once.
What are the advantages of LRT?
One of the main ways to create returns for ETH without reducing the liquidity of the underlying asset is to launch your own validator, and this is a rather complicated and expensive process.
The next stage in increasing the profit from staking was Liquid staking tokens (LST) of the stETH type from Lido Finance. But they are also limited by the profitability of validators. For example, the yield of the stETH token at the end of April 2024 was 3.2%. And further options for using LST are only on the market of DeFi applications.
LRT, in turn, allows you to further increase the profitability of the underlying asset, while maintaining its liquidity. For example, the EigenLayer protocol offers options for making a profit by choosing AVS for repeated restaking of LST. The user can block the conditional stETH again by receiving a restaking token to be exchanged for ETH in a ratio of 1 to 1.
As of April 2024, EigenLayer already has 9 active AVS offers, and more than 10 more are being tested on Holesky.
Data: EigenLayer's blog in X.This approach increases the security of the Ethereum blockchain through the use of embedded ETH in second-tier systems. For example, AltLayer's AVS solution allows you to use LRT to validate operations in second-level Optimism and Arbitrum networks.
The market for possible additional income mechanisms is still being formed. Commission payments can be formed in the underlying asset of the network, as is the case with LST, in the format of retrodrops for the provided liquidity, as well as in other tokens.
What are the risks of using LRT?
The increased profitability of liquid restaking tokens carries not only the possibility of additional earnings, new investment strategies, but also the risks associated with the development of such multi-level systems.
The complexity of such smart contracts and untested mechanics in extreme market conditions can lead to undetected or unaccounted for problems. Let's list the main possible ones:
liquidity. Synthetic assets, such as LRT, carry the risk of lack of liquidity at times of increased stress in the market. As an example, let's give the Renzo protocol, the token of which lost its binding to the ether after the disclosure of tokenomics. On Uniswap, the exchange rate at the moment fell by almost 80% relative to ETH;multiple points of failure. A multi-level ecosystem creates the risk of a cascade of problems due to "troubles" even at the same level or at the same intermediary service;development and management. The overall complexity of the architecture multiplies all the risks inherent in traditional DeFi applications: code errors, hacks, inefficiency of protocol management.How is the LRT market developing?
At the end of April 2024, according to DeFi Llama, the restaking sector has a TVL of more than $16 billion in the top with EigenLayer (~$15.7 billion).
This figure was achieved in just five months from December 2023, when the TVL of the sector was only $250 million.
In part, the rapid growth is due to the expectation of airdrop from the EigenLayer protocol, Glassnode analysts said. LRT protocols are also marked by CoinGecko as the main driver in ETH in the first quarter of 2024. Analysts have identified a list of the largest protocols that include Ether.fi, Renzo, Puffer, Kelp, Swell, Mantle.
It is worth noting Google's interest in the LRT market. In April 2024, the cloud divisions of Coinbase and Google Cloud joined EigenLayer as operators.
Experts also believe that the significant growth of EigenLayer may indicate a potential profitability crisis. According to experts, the project demonstrates too high growth rates relative to AVS. As a result, the proposed profitability of the protocol may decrease sharply, which will lead to an outflow of liquidity.