The New Wave of DeFi Staking: Liquid Restaking Tokens and Explosion | Bing Ventures | Coins | February 2024
Written by Kyle Liu, Investment Manager, Bing Ventures
The emergence of Liquid Re-stake Token (LRT) and Layer 2 solution Blast is creating a new wave in DeFi staking. In this article, we will look at the background to these developments, what DeFi staking means, and the key trends in this space.
Liquid staking derivatives (LSD) have been one area of the Ethereum ecosystem that has shown exemplary innovation and adaptability, especially since the Shanghai upgrade. Lido Finance, a platform that played a key role in improving the Ethereum staking mechanism, was where it all started. Through its innovative solution, Lido has solved a major problem in the Ethereum staking mechanism by ensuring the liquidity of assets staked on Ethereum. Lido allows users to earn staking rewards on Ethereum without locking up their assets, which marks a significant change from the traditional strict staking paradigm.
Pendle Finance was the next company to break new ground in the field of LSD. Pioneered yield tokenization on Ethereum, allowing users to trade yields and earn a fixed rate of return on their assets. This new model opens up new approaches for yield optimization and risk management.
However, the quest for higher returns and fuller utilization of staked assets is endless. The Restake protocol Eigenlayer emerged as a more complex model. Eigenlayer allows stakers to reallocate their staked assets to unlock additional decentralized services on the Ethereum network. This not only increases the overall rewards for stakers, but also improves the cryptoeconomic security and resilience of the entire Ethereum network.
However, a major difficulty emerged. Restaked assets become fragmented and illiquid, hindering activity and composability in the DeFi space. This is where Liquid Restake Token (LRT) comes into play. This innovation further increases stakers’ rewards by unlocking the liquidity of re-staked assets and allowing stakers to participate in DeFi. Users can deposit LRT into the floating redeposit protocol for additional profits.
Through these developments, the LSD space has evolved from a single-layer staking starting point into a more complex and multifaceted ecosystem. Recent events, such as the emergence of Blast, reflect this trend. Blast is an EVM-compatible Ethereum Layer 2 network that offers native yield staking of ETH and stablecoins on-chain. This further democratizes staking rewards and streamlines the process, improving the overall user experience. Advances in the LSD space have demonstrated the dynamic environment and adaptability of the Ethereum ecosystem, where innovations are continuously created to navigate the complexities and risks of DeFi while meeting users’ demands for higher liquidity and returns.
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The emergence of liquid re-staking tokens in the DeFi space represents a significant revolution in the traditional staking paradigm. LRT represents a breakthrough by not only thinking outside the box of single-asset staking, but also introducing and promoting the development of multi-protocol staking. EigenLayer allows users to transcend the boundaries of a single protocol and diversify their rewards by staking ETH assets to applications and networks secured through Eigenlayer’s multiple Actively Validated Services (AVS), i.e. re-staking. This significantly improves network security, thereby injecting a more complex layer of security into the entire DeFi ecosystem.
The benefits that LRT brings are numerous. This means significant improvements in capital efficiency, enhanced network security, and significant cost savings for developers in resource allocation. However, we must remain vigilant about the risks that come with it, including potential penalty risks, concerns about protocol centralization, and revenue dilution due to fierce market competition.
Regarding the market outlook for LRT, we believe that the LRT protocol will have tremendous appeal for users with high revenue potential. The LRT protocol provides additional revenue streams for ETH stakers, including basic staking rewards as well as the potential benefits of EigenLayer rewards and token issuance. Additionally, LRT has the potential to drive overall DeFi growth by attracting a wider range of participants through incentive measures such as airdrops, creating a trend that could replicate or even surpass the heat of the DeFi summer of 2020.
The trend is worth noting. With LRT providing new momentum, the DeFi space is expected to see increased competition similar to previous “curve wars” and token economics may evolve into more complex veTokenomics models. In the meantime, as more AVSs are launched, the additional rewards offered to LRT holders could become a key driver of user acquisition in the LRT space.
In conclusion, LRT has proven its unique value in securing liquidity, improving returns, and optimizing governance and risk management. Therefore, LRT is not only a staking tool, but also an important catalyst for DeFi innovation and growth. Their development and application could bring significant changes to the DeFi ecosystem and open up new possibilities for users, developers, and the entire blockchain world.
Stader Labs recently launched RSETH, the first liquid re-staking token on the Ethereum mainnet, garnering widespread attention and emerging as a dark horse. rsETH allows users to “re-stake” liquid staking tokens on several different networks, such as Coinbase’s wrapped staking ETH (cbETH), Lido’s staking ETH (stETH), and Rocket Pool’s rETH. You can represent your shares by issuing . Contract renewal. This improves the liquidity and flexibility of staked assets. With the support of EigenLayer, rsETH has successfully achieved large-scale restaking of ETH by streamlining the process for users to enter the restaking ecosystem and further strengthening the decentralization of the Ethereum network.
But these innovations also come with risks. Vitalik Buterin, founder of Ethereum, and co-founder of EigenLayer both pointed out that re-staking could lead to complex scenarios and threaten the security of the main network. Additionally, excessive dispersion of industry funds and attention due to the proliferation of AVS and LRT may lead to market instability and weakened governance structures.
Blast, an emerging layer 2 network, brings the space to life with its unique automated compositing capabilities. The innovation lies in its design, which not only provides users with native staking yields using liquid staking protocols like Lido, but also allows users to earn additional yields on the automatic rebasing stablecoin USDB using protocols like MakerDAO. . Although these models are user-friendly and provide users with greater returns, their impact on TVL composition creates centralization issues and increases sensitivity to market risk.
How Blast’s strategy impacts the actual utilization of its assets and the dynamics of capital flows within the ecosystem will be key. Blast should aim to shift its TVL composition more from capital preservation to asset growth to ensure that dApps can maintain good network activity and sufficient liquidity. Only in this way can we truly achieve our goal of driving the growth of blockchain networks rather than simply acting as a deposit platform.
Overall, both Stader Labs and Blast represent innovation and advancement in staking models for the DeFi sector, but not without risks that we need to be vigilant about to ensure the safety and well-being of the Ethereum network in the long term. Going forward, there must be a robust and sustainable balance between these innovations and risk management.
We believe that dynamic staking strategies like LRT are having a significant impact on the Ethereum staking market. First, the automation and efficiency of these strategies lowers the investment threshold, allowing them to attract more individual investors. Second, as more funds flow in, market liquidity improves significantly, contributing to the stability of the entire DeFi ecosystem. Additionally, dynamic staking strategies that offer diverse and customized investment options are driving market innovation and development. However, implementing these strategies faces technical challenges, especially in building efficient and accurate algorithmic models and ensuring system security and resilience against network attacks.
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Meanwhile, other new paradigms of staking are also being researched. Let’s take a look.
In response to a mature market with diverse investor needs, a new model known as the Layered Staking System has emerged. The system spreads assets across different risk tiers, each with different return potential and risk mix. The low-risk tier offers relatively stable returns suitable for risk-averse investors, while the high-risk tier is suitable for investors with a higher risk tolerance. The flexibility of this system allows investors to allocate assets based on risk appetite and market expectations. Implementing a tiered staking system requires complex smart contracts and sophisticated risk management strategies to ensure liquidity and security between the various tiers. This introduction will provide investors with more choice and flexibility, pushing the Ethereum staking market to mature and diversify.
Contract-based automated staking strategies are also an interesting development. Automatically executes staking, unstaking, and asset reallocation to improve asset management effectiveness and efficiency. The risk management capabilities of automated staking strategies are enhanced through specific risk parameters set within the smart contract. When market conditions trigger these parameters, the smart contract automatically adjusts the staking position. Despite challenges such as ensuring the security and reliability of smart contracts, automated staking strategies are expected to have wider application as technological advancements enhance the security of smart contracts.
Additionally, the collective staking and profit sharing model allows multiple investors to collectively stake assets and share the profits generated proportionally. This model leverages smart contracts to automatically distribute profits, giving small investors the opportunity to grow their collective wealth. Smart contracts play a pivotal role in collective staking by executing profit distribution and ensuring fair returns to each participant. Collective staking improves inclusion within the DeFi ecosystem by providing small investors with the opportunity to reduce risk and costs.
Lastly, linking staked assets with real assets (RWA) is another innovative approach in the DeFi space. In this model, real-world assets, such as real estate or artwork, are tokenized on the blockchain and serve as the underlying asset for staked assets. This approach provides liquidity to typically illiquid assets and provides real asset owners with a new source of funding. While this model faces challenges including accurate valuation and tokenization of real-world assets, as well as handling regulatory and compliance issues associated with these assets, the future promises broader applications for linking staked assets with RWAs. . This could deepen the integration of cryptocurrency markets with traditional financial markets by providing new funding channels for traditional asset holders and new investment opportunities for cryptocurrency investors.
In conclusion, the future of DeFi staking promises to be even more advanced. This is an area worth paying attention to for investors and DeFi players alike.
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