The recent surge in re-staking on Ethereum has been remarkable, with the total value locked soaring from $250 million in December 2023 to over $7.5 billion today. Currently, about 2.5 million ETH are engaged in re-staking, accounting for an impressive 2% of the entire Ethereum supply. The momentum behind this trend shows no signs of waning.
The concept was invented by Eigenlayer and allows Ethereum stakers to amplify their yields by simultaneously contributing to the security of other protocols. This model not only boosts the earning potential for stakers but also offers a cost-effective security solution for emerging projects, eliminating the need to establish independent validator sets.
The method enhances capital efficiency by allowing stakers to engage in multiple ecosystems with the same assets. Participants have the flexibility to restake directly with ether (ETH) or by utilizing Liquid Staking Tokens (LSTs) such as Lido’s stETH.
The rising popularity of EigenLayer has spurred the development of another layer of innovation, which is built on top of EigenLayer itself, leading to the emergence of liquid restaking protocols.
Liquid restaking protocols issue liquid tokens, which represent the underlying deposits into EigenLayer. This model allows users to benefit from restaking rewards while retaining liquidity through tradeable tokens. The idea is very similar to Lido’s stETH, but with the difference that tokens are deposited into EigenLayer.
Liquid restaking protocols, including notable names like Ether-fi, Puffer, Kelp, and Renzo, have quickly gained traction. For instance, Puffer recently made headlines by amassing over $1 billion in deposits within three weeks of its launch.
Platforms like Puffer have captivated investors by simplifying access to EigenLayer restaking and offering enticing incentives, enhancing user engagement. Moreover, the anticipation of token issuances by both EigenLayer and liquid restaking platforms in 2024 has further fueled interest, with users earning 'points' that could eventually be exchanged for tokens, adding a speculative element to the mix.
Despite the enthusiasm, there are cautionary voices from within the community. Concerns have been raised about the potential risks associated with restaking, particularly regarding its implications for Ethereum’s security. Vitalik Buterin, Ethereum's co-founder, has voiced concerns about the broadening scope of duties for Ethereum validators, now tasked with securing additional chains.
Further, the analogy drawn between liquid staking (or restaking) and leveraged investments underscores the high-risk aspect of this practice. When a single ETH is staked with Lido, it generates a derivative token known as stETH. This stETH is then utilized within DeFi platforms just like the original ETH. It, for example, can be used as collateral to borrow more ETH and then staked again.
However, should any issues arise at any point in this chain of staking/restaking, it could set off a domino effect, potentially leading to a significant collapse.
