The Liquid Restaking Landscape
Introduction
Restaking and liquid restaking have gained much attention amongst users who are looking to compound their returns on ETH on top of the bullish news spot ETH ETFs bring. According to DeFi Llama, the TVLs of these 2 categories have grown tremendously, reaching the 5th and 6th spot among all categories. The restaking ecosystem has grown tremendously recently, but let’s understand the fundamentals of staking and liquid staking before appreciating what added benefits restaking and liquid restaking bring to the table.
Background of Staking & Liquid Staking
Ethereum staking involves committing ETH to secure the network and earn additional ETH rewards in return. Although staking ETH generates rewards, it involves taking up risks of being slashed and illiquidity from not being able to sell ETH immediately due to the unstaking period.
To be a validator, solo stakers require a substantial upfront capital of 32 ETH which is a threshold that is out of reach for many. As such, validator-as-a-service platforms such as ConsenSys and Ledger offer pooled staking services allowing multiple users to combine their ETH holdings to meet the minimum staking requirement.
Although these services enable any amount of ETH to be staked, the staked ETH remains ‘locked’ and inaccessible until it is unstaked which takes a few days. Liquid staking emerged as an innovative alternative that mints a liquid token in exchange for users’ ETH deposits. The liquid token represents their staked ETH that accumulate rewards and can be used to participate in DeFi activities to compound their yield. Lido was the pioneer of liquid staking, and was later followed by others such as Rocket and Stader. These solutions not only made staking more accessible, but also enhanced the flexibility and potential returns for investors.
The Rise of Restaking
A concept first introduced by EigenLayer, it involves using staked ETH to secure modules such as sidechains, oracle networks, and data availability layers that cannot be deployed or proven on top of the EVM. These modules typically require Actively Validated Services (AVS) that are secured by their own token and run into issues such as bootstrapping their security network and having lower trust models. Restaking solves this, since security can be bootstrapped from Ethereum’s large validator set that requires a greater cost to attack its pooled stake.
While Eigenlayer was the first restaking protocol, a few others have emerged as competitors. Although they all aim to use restaked assets to provide security, there are minute differences which we will look at in the next section.
Restaking Protocols Overview
Current Supported Deposit Assets
The variety of deposit assets supported by each protocol is important as it determines their capacity to accommodate deposit flows. Protocols with broader asset support are more likely to attract larger flows over time. Presently, Eigenlayer exclusively supports ETH and ETH liquid staking tokens (LSTs), whereas Karak and Symbiotic have a wider asset range support. This diversity stands as the primary distinguishing factor among these three restaking protocols.
Karak accepts a wide array of assets including LSTs, liquid restaked tokens (LRTs), Pendle LP tokens, and stablecoins. Meanwhile, Symbiotic supports LSTs, Ethena’s ENA, and sUSDE. While they currently accept different asset types, both have plans to expand their offerings. Karak can accept any asset for restaking, while Symbiotic allows any ERC-20 token as collateral for restaking. EigenLayer’s current range of accepted assets is more limited but there are future plans to include dual staking and LP restaking options.
Security Model
Currently, Eigenlayer accepts only ETH and its variants which are less volatile compared to other smaller-cap tokens. This is crucial as it reduces the risk of significant fluctuations that could jeopardize network security for the Actively Validated Services (AVS) built on Eigenlayer. In contrast, protocols like Karak and Symbiotic offer a broader range of assets for restaking, providing more flexible security options for Distributed Secure Service (DSS) (on Karak) and networks (on Symbiotic) on their platforms.
Offering a variety of assets for restaking allows for customizable security, enabling services to determine the level of economic security they require. By accepting yield-bearing tokens, the services built on restaking protocols can reduce the additional yield required to attract validators which makes it more cost-effective to secure their service. This customizable approach can allow services to decide the type and level of security they require.
In terms of design, both Eigenlayer and Karak have upgradable core smart contracts that are governed by multisigs. They have 3 and 2 different multisigs respectively controlling different parts of the infrastructure, separating control across different users. On the other hand, Symbiotic has immutable core contracts that can remove governance risks and single points of failure. While this can eliminate centralized governance concerns, it will require redeployment if there are any bugs or flaws in the contract code.
Although restaking supports pooled security, there is a risk of operator collusion. For instance, if a network valued at $2 million is secured by $10 million of restaked ETH, it is not economically viable to attack the network since the cost of attack ($5 million) is more than the reward ($2 million). However, if the same $10 million of restaked ETH is also securing ten additional networks valued at $2 million each, attacks become economically viable. To mitigate this, limits can be imposed on restaked assets from validators that are excessively committed to other services to prevent over-concentration of restaked ETH.
Chains Supported & Partnerships
Eigenlayer and Symbiotic primarily only accept assets deposited on Ethereum, but Karak currently already supports deposits from 5 chains. Integrating more chains that accept restaking assets, reduces the need for message bridges to access restaking infrastructure beyond Ethereum. However, the vast majority of TVL is still held within Ethereum, and utilizing restaking assets on Ethereum can provide the highest security.
Karak also launched a Layer 2 network K2 that acts as a sandbox environment for DSS to do testing before launching their upgrades on Ethereum. Compared to Eigenlayer or Symbiotic, neither of these 2 networks offers a similar testing environment that Karak does but protocols can always utilize a different chain for testing as well.
Despite the differences in the mentioned restaking protocols, it seems as if they will eventually converge to provide a service that is similar to each other that encompasses different assets for restaking. As such, the success of each protocol ultimately depends on the partnerships they can form to build services on top of their infrastructure.
As Eigenlayer was the pioneer in restaking, it also has the most amount of AVSs built on its infrastructure. The more notable AVSs on Eigenlayer include EigenDA, AltLayer, and Hyperlane. Although Karak has only announced one DSS, they have managed to integrate Wormhole to develop a Decentralized Validator Network for their Native Token Transfers (NTT) and a decentralized relayer network. Despite being the latest to launch, Symbiotic recently announced that Ethena will be using their restaking framework with LayerZero’s Decentralized Verifier Network (DVN) to secure cross-chain transfers of USDe and sUSDe assets.
Over time, more services are likely going to tap into such restaking infrastructure for bootstrapping security. The platform that is able to consistently secure partnerships with large players will likely outperform the others in the long run. Having explored the restaking landscape, it’s essential to delve into the next layer, liquid restaking protocols, to understand the minute differences and how they add value to the entire ecosystem.
Liquid Restaking Overview
Type of LRT
Liquid restaking protocols provide you with their liquid wrapper token when you make a deposit into the protocol. Depending on which protocol you choose, you have a few asset deposit options to choose from.
For example, apart from native ETH and stETH, Renzo allows wBETH deposits while Kelp allows ETHx and sfrxETH deposits. Regardless of which token you deposit into these protocols, you receive their LRT, ezETH, and rsETH in return respectively. These 2 LRTs are considered a basket-based LRT, since the LRT token is represented by a combination of underlying assets. Aggregating multiple LSTs into the same LRT can introduce complex management challenges and an additional layer of counterparty risk.
The other liquid restaking protocols offer native LRTs, where users can only deposit native ETH. For Puffer, although it accepts stETH currently, it will eventually also convert the stETH into native ETH for native restaking. Previously, this was an advantage since Eigenlayer had deposit caps for LSTs and not for native ETH. However, they have since removed deposit caps for all asset types and native LRTs remove the risk of having to balance their LRT token with the underlying LST assets and their exposure to the other LST protocol risk.
Both Eigenpie and Mellow currently have isolated LRTs, which issue a specific LRT token in exchange for specific deposits and vaults respectively. Although this isolates the risk of the LRT token to its respective LST/vault, it has also led to more fragmentation of liquidity where there is little to no DEX pool liquidity available for quick swaps back to the underlying asset of ETH and its LSTs.
DeFi & Layer 2 Support
Liquid restaking protocol’s value proposition is that you can unlock capital efficiency to use your deposited assets to earn stacked yield from restaking and in DeFi. Pendle is the most widely used and integrated platform for these protocols, since its yield trading mechanism allowed users to farm points on liquid restaking protocols on leverage. Many depositors also provided liquidity on Pendle, since they can provide liquidity with no impermanent loss if they hold their position to maturity.
A number of DeFi integrations have expanded to other areas and protocols. These LRTs are also provided as liquidity for DEX swaps on platforms such as Curve and Uniswap for users who want to exit early without waiting for the withdrawal unrestaking period. Vaults also emerged and provided these LRTs with different yield strategies through looping, options, and more. Lending of LRTs as collateral is also now available on some lending platforms such as Juice and Radiant.
To combat lower gas fees, these LRTs are also being supported on various Layer 2s. Users can choose to directly restake their assets on L2s or they can bridge their restaked assets from Ethereum to L2s for lower gas fees on DeFi. Although the majority of TVL and volume is still on Ethereum, expanding these LRTs reach into L2s can also expand their market share for smaller players who are deterred by high Ethereum gas fees.
Support for Restaking Protocols
Liquid restaking protocols first emerged to build on top of Eigenlayer since it was the first protocol that offered restaking. Subsequently, Karak launched but did not require these liquid restaking protocols to separately integrate with it since users can deposit their LRTs into Karak directly after their underlying asset is restaked through the liquid restaking protocol’s operators on Eigenlayer. As such, most liquid restaking protocols live now are already integrated with Eigenlayer and Karak.
On the other hand, Symbiotic launched in late June and does not allow LRTs to be deposited into their platform, unlike Karak. This made it such that only LSTs can be deposited for restaking on Symbiotic. If liquid restaking protocols want to offer a LRT for Symbiotic, they have to set up a vault or operator to allow users’ deposits to be delegated to them for restaking on Symbiotic.
Given the recent controversy over Eigenlayer’s airdrop, many users were unsatisfied with the terms of the airdrop and some started to initiate their withdrawal request on the platform. As users and farmers look for the next protocol to earn yield and farm airdrops, Symbiotic seems to be the next logical play. Although Symbiotic has capped its deposits at ~$200 million, it has been working with many other protocols as well. Mellow is the first liquid restaking protocol built on top of Symbiotic, but many others that were previously built on Eigenlayer are now also partnering with Symbiotic to maintain market share as well.
The Growth of Restaking
Restaking deposits have surged since late 2023. The liquid restaking ratio (TVL in liquid restaking / TVL in restaking) has hit over 70%, growing consistently by about 5–10% in recent months which indicates the majority of liquidity going into restaking is funneled through liquid restaking protocols. As the restaking category expands, liquid restaking protocols are expected to expand with it.
However, there are notable signs of outflows from withdrawals on Eigenlayer and Pendle deposits falling over 40% following the June 27 maturity. Although deposits expiring on Pendle could be rolled over, the outflow is likely caused by the TGE and distribution of tokens by most major liquid restaking protocols in 2024.
Farmers will continue being farmers. Although Eigenlayer’s airdrop EIGEN has been launched, it is still not tradable until the end of September 2024. As such, farmers might remove their deposits in search of other airdrops to farm. Some of this liquidity will likely flow to other protocols, namely Karak and Symbiotic over time.
Even for liquid restaking protocols that have already launched their token, they have subsequent seasons of airdrops and their LRTs can still be used within Karak while working to integrate with Symbiotic. With the future TGE of Symbiotic and Karak together with their deposit caps raised, it is likely that users will continue farming on these protocols.
Concluding Thoughts
As of 1st July 2024, nearly 33 million ETH is staked across balances with ~13.4 million ETH ($46 billion) staked through liquid staking platforms, representing 40.5% of all staked ETH. This ratio has recently declined due to increased native ETH deposits on Eigenlayer with limited caps on LST deposits.
With the activation of AVS rewards and slashing, new services on restaking protocols can distribute rewards through new tokens, similar to staking returns on Lido. While airdrop farmers may remove liquidity from distributed airdrop rewards, yield seekers might be drawn in over time instead.
Currently, the restaking to liquid staking ratio is around 35.6%, close to the ratio of liquid staked ETH to total staked ETH. As restaking platforms eventually remove deposit caps and expand to other assets including the attempted restaking of a Milady, it will potentially attract more inflows moving forward.
About DFG
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