Author: DFG Official Source: medium Translation: Shan Ouba, Golden Finance

Introduction

Re-staking and liquidity re-staking have attracted widespread attention among users who want to increase their ETH returns on top of the good news brought by the ETH ETF. According to DeFi Llama, these two categories have seen amazing growth in TVL, ranking fifth and sixth among all categories respectively. The re-staking ecosystem has grown rapidly recently, but before understanding the additional benefits of re-staking and liquidity re-staking, let's first understand the basic principles of staking and liquidity staking.

Background on Staking and Liquid Staking

Ethereum staking involves staking ETH to secure the network and earn additional ETH rewards. While staking ETH generates returns, it involves taking on the risk of being slashed and the risk of insufficient liquidity due to not being able to sell ETH immediately due to the unstaking period.

To become a validator, individual stakers need a large amount of upfront capital, i.e. 32 ETH, which is an unaffordable threshold for many people. Therefore, validator-as-a-service platforms such as ConsenSys and Ledger provide pooled staking services that allow multiple users to merge their ETH holdings to meet the minimum staking requirements.

While these services allow any amount of ETH to be staked, the staked ETH remains “locked” and inaccessible until it is unstaked (which takes a few days). Liquidity staking has emerged as an innovative alternative that mints a liquidity token in exchange for a user’s ETH deposit. The liquidity token represents their staked ETH, which accumulates rewards and can be used to participate in DeFi activities to increase returns. Lido was a pioneer in liquidity staking, followed by companies such as Rocket and Stader. These solutions not only make staking more accessible, but also increase flexibility and potential returns for investors.

The Rise of Re-Staking

A concept first proposed by EigenLayer, it involves using staked ETH to secure modules that cannot be deployed or validated on the EVM, such as sidechains, oracle networks, and data availability layers. These modules typically require Active Validation Services (AVS), which are secured by their own tokens and suffer from issues such as bootstrapping their secure networks and low trust models. Re-staking solves this problem because security can be bootstrapped from Ethereum's large validator set, while attacking its pooled stake requires a much greater cost.

While Eigenlayer is the first re-pledge protocol, several other protocols have emerged as competitors. While they all aim to use re-pledged assets to provide security, there are subtle differences between them, which we will discuss in the next section.

Overview of Re-Pledge Protocols

Currently Supported Deposit Assets

The variety of deposit assets supported by each protocol is important as it determines their ability to accommodate deposit flows. Protocols with a wider range of asset support are more likely to attract greater flows over time. Currently, Eigenlayer only supports ETH and ETH Liquid Staking Tokens (LST), while Karak and Symbiotic support a wider range of assets. This diversity is the main differentiating factor between the three re-pledge protocols.

Karak accepts a variety of assets, including LST, Liquid Re-Pledge Tokens (LRT), Pendle LP tokens, and stablecoins. Meanwhile, Symbiotic supports LST, Ethena’s ENA, and sUSDE. While they currently accept different asset types, both plan to expand their product range. Karak can accept any asset for re-pledge, while Symbiotic allows any ERC-20 token as collateral for re-pledge. EigenLayer currently accepts a more limited range of assets, but future plans include dual staking and LP re-pledge options.

Security Model

Currently, Eigenlayer only accepts ETH and its variants, which are less volatile than other small-cap tokens. This is critical because it reduces the risk of large fluctuations that could compromise the security of the network that the Active Validation Service (AVS) is built on. In contrast, protocols like Karak and Symbiotic offer a wider range of assets to re-stake, providing more flexible security options for the Distributed Security Services (DSS) (on Karak) and networks (on Symbiotic) on their platforms.

Offering a variety of assets for re-staking allows for customizable security, allowing services to determine the level of economic security they require. By accepting yield-generating tokens, services built on re-staking protocols can reduce the additional yield required to attract validators, making it more cost-effective to protect their services. This customizable approach allows services to decide the type and level of security they require.

In terms of design, both Eigenlayer and Karak have upgradeable core smart contracts that are governed by multisigs. They have 3 and 2 different multisigs, respectively, controlling different parts of the infrastructure, distributing control among different users. Symbiotic, on the other hand, has immutable core contracts that eliminate governance risks and single points of failure. While this eliminates centralized governance issues, it requires redeployment if there are any bugs or flaws in the contract code.

While re-staking supports pooled security, there is a risk of operator collusion. For example, if a network worth $2 million is secured by $10 million worth of re-staked ETH, then it is not economically feasible to attack that network because the cost of attack ($5 million) is higher than the reward ($2 million). However, if the same $10 million of re-staked ETH also secures 10 other networks worth $2 million, then the attack is economically feasible. To mitigate this, limits can be placed on the re-staked assets of validators who are overly committed to other services to prevent excessive concentration of re-staked ETH.

Supported Chains and Partners

Eigenlayer and Symbiotic primarily only accept assets deposited on Ethereum, but Karak currently supports deposits from 5 chains. Integrating more chains that accept re-staked assets reduces the need for message bridges to access re-staking infrastructure outside of Ethereum. However, the vast majority of TVL is still held in Ethereum, and leveraging re-pledged assets on Ethereum provides the highest security.

Karak has also launched a layer 2 network, K2, which acts as a sandbox environment for DSS to test upgrades before launching them on Ethereum. In contrast to Eigenlayer or Symbiotic, neither network offers a similar testing environment as Karak, but protocols can also leverage different chains for testing.

Despite the differences between the above re-pledge protocols, it seems that they will eventually converge to provide similar services to each other, covering different re-pledged assets. Therefore, the success of each protocol ultimately depends on the partnerships they are able to establish in order to build services on top of their infrastructure.

Since Eigenlayer is a pioneer in the re-pledge space, it also has the largest number of AVS built on its infrastructure. The more notable AVS on Eigenlayer include EigenDA, AltLayer, and Hyperlane. While Karak has only announced one DSS, they have successfully integrated Wormhole to develop a decentralized validator network and decentralized relayer network for their native token transfers (NTT). While Symbiotic is the latest to launch, Ethena recently announced that Ethena will use its re-staking framework with LayerZero’s decentralized validator network (DVN) to secure cross-chain transfers of USDe and sUSDe assets.

Over time, more services are likely to leverage this type of re-staking infrastructure for security. Platforms that are able to consistently secure partnerships with large players will likely outperform others in the long term. Having explored the landscape of re-staking, it’s critical to dive deeper into the next layer of liquid re-staking protocols to understand the subtle differences and how they can add value to the entire ecosystem.

Liquid Restaking Overview

LRT Types

The Liquid Restaking Protocol provides you with its Liquid wrapped tokens when you deposit into a protocol. Depending on the protocol you choose, you can choose from several asset deposit options.

For example, Renzo allows wBETH deposits in addition to native ETH and stETH, while Kelp allows ETHx and sfrxETH deposits. No matter which token you deposit into these protocols, you will receive their LRT, ezETH, and rsETH, respectively. The 2 LRTs are considered basket-based LRTs because the LRT token is represented by a combination of underlying assets. Aggregating multiple LSTs into the same LRT can create complex management challenges and additional counterparty risk.

Other liquid rehypothecation protocols offer native LRTs where users can only deposit native ETH. For Puffer, while it currently accepts stETH, it will eventually convert stETH to native ETH for native rehypothecation as well. Previously, this was an advantage because Eigenlayer had a deposit cap on LST but not on native ETH. However, they later removed the deposit cap for all asset types and native LRT eliminates the risk of having to balance their LRT tokens with the underlying LST assets and their exposure to other LST protocol risks.

Eigenpie and Mellow both currently have independent LRTs, each issuing specific LRT tokens in exchange for specific deposits and vaults. While this isolates the risk of the LRT tokens to their respective LST/vaults, it also leads to further fragmentation of liquidity as there is little to no DEX pool liquidity available to quickly swap back to ETH and its underlying assets for the LST.

DeFi and Layer 2 Support

The value proposition of the Liquid Restaking Protocol is that you can unlock capital efficiency, earning accrued yield from restaking and DeFi with your deposited assets. Pendle is the most widely used and integrated platform for these protocols as its yield trading mechanism allows users to farm credits on the Liquid Restaking Protocol with leverage. Many depositors also provide liquidity on Pendle as they can provide liquidity without impermanent loss if they hold their positions to maturity.

Many DeFi integrations have expanded to other sectors and protocols. These LRTs also serve as liquidity for DEX swaps on platforms like Curve and Uniswap for users who want to exit early without waiting for a withdrawal unstaking period. Vaults have also emerged and provide different yield strategies for these LRTs through loops, options, etc. Now, some lending platforms such as Juice and Radiant also provide lending services with LRT as collateral.

In response to lower gas fees, these LRTs also support various Layer 2s. Users can choose to re-pledge assets directly on L2, or transfer re-pledged assets from Ethereum to L2 to reduce DeFi gas fees. Although most TVL and transaction volume are still on Ethereum, expanding these LRTs to L2 can also expand their market share as smaller players are hindered by high Ethereum gas fees.

Support Re-Pledge Protocol

The Liquidity Re-Pledge Protocol was originally built on Eigenlayer because it was the first protocol to offer re-pledge. Subsequently, Karak was launched, but it does not require these liquidity re-pledge protocols to integrate with it separately, as users can deposit their LRT directly into Karak after re-staking their underlying assets through the liquidity re-pledge protocol operator on Eigenlayer. As a result, most liquidity re-pledge protocols are currently integrated with both Eigenlayer and Karak.

Symbiotic, on the other hand, was launched in late June, and unlike Karak, does not allow LRT to be deposited into its platform. This makes it so that only LST can be deposited into Symbiotic for re-staking. If a liquidity re-pledge protocol wants to provide LRT for Symbiotic, they must set up a vault or operator to allow users' deposits to be delegated to them for re-staking on Symbiotic.

Given the recent controversy surrounding the Eigenlayer airdrop, many users were unhappy with the terms of the airdrop, and some users began to initiate withdrawal requests 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 choice. Although Symbiotic has capped its deposits at ~$200M, it has also been working with many other protocols. Mellow is the first liquidity re-pledge protocol built on Symbiotic, but many protocols previously built on Eigenlayer are now also working with Symbiotic to maintain market share.

Growth in Re-Pledge

Re-pledge deposits have surged since late 2023. The liquidity re-pledge ratio (TVL in liquidity re-pledge/TVL in re-pledge) has reached over 70% and has been growing by ~5-10% in recent months, suggesting that the majority of re-pledged liquidity is through liquidity re-pledge protocols. As the re-staking category expands, liquidity re-staking protocols are expected to expand as well.

However, there are clear signs that withdrawal outflows from Eigenlayer and Pendle deposits have dropped by more than 40% after their June 27 expiration. Although deposits that expire on Pendle can be rolled over, the outflows are likely caused by the TGE and token distributions of most major liquidity re-staking protocols in 2024.

Farmers will continue to farmer. Although Eigenlayer's airdrop EIGEN has been launched, it will still not be tradable until the end of September 2024. Therefore, farmers may withdraw their deposits and look for other airdrops to farm. Over time, some of this liquidity may flow to other protocols, namely Karak and Symbiotic.

Even for liquidity re-staking protocols that have launched tokens, they have subsequent airdrop seasons, and their LRT will still be available in Karak while working on integrating with Symbiotic. With future TGEs for Symbiotic and Karak and increases to their deposit caps, users are likely to continue to farm on these protocols.

Conclusion

As of July 1, 2024, the amount of ETH staked in the balance is close to 33 million, of which about 13.4 million ETH ($46 billion) is staked through the Liquid Staking Platform, accounting for 40.5% of all staked ETH. This proportion has recently declined due to the increase in native ETH deposits on Eigenlayer and the limited LST deposit cap.

With AVS rewards and slashing activated, new services on the restaking protocol could distribute rewards via new tokens, similar to staking rewards on Lido. While airdrop farmers may remove liquidity from distributed airdrop rewards, yield seekers may be attracted over time.

Currently, the ratio of restaking to liquid staking is ~35.6%, close to the ratio of liquid staked ETH to total staked ETH. As the restaking platform eventually removes deposit caps and expands to other assets (including experimenting with restaking Milady), it will have the potential to attract more inflows in the future.