#LiquidationHeatmap What Are The Risks to Liquid Staking?
Liquid staking and restaking have become popular options. However, they are not completely without risks. We look at some of these risks.
Liquid staking gained popularity in a short timeframe. It allows you to get twice the rewards compared to single staking. You single stake an asset and in turn you receive a liquid staking token (LST). So, now you can use this liquid staking token again in DeFi. So, you get rewards for staking your initial assets and for staking the LSTs. But you can also restake your LSTs.
However, is liquid staking and liquid restaking without risk? Letâs find out.
What Is Liquid Restaking?
Liquid restaking gives a new meaning to liquid staking. It allows you to use your underlying staked $ETH to secure another protocol. You earn more yield with your underlying staked $ETH. This results in increased capital efficiency. In other words, you stake your $ETH and receive an $ETH LST in return. Now you stake this $ETH LST in a different protocol or invest it as you like.
When doing this, AVS and AVS location play an important role. This is of importance for restaking protocols. They need to make sure that their users can use their LSTs in a safe and secure way. So, that also makes it important for us, the users. Letâs take a look at what the AVS and their allocations are.
Actively Validated Services (AVS) are blockchain-based apps. However, they operate outside the EVM or Ethereum Virtual Machine. These services can also utilize restaked $ETH for their security. For example,
âą Layer-2 chains.
âą Data availability layers.
âą Sequencers.Â
âą DApps.Â
âą Oracle networks.
âą Cross-chain bridges or
âą Virtual machines.
AVS allocation refers to the criteria used to assigning staked $ETH across AVSs. This also includes Node Operators (NOs). These AVS allocations play an essential role. Thatâs because they immediately impact the security and growth of liquid restaking protocols.
