1. Background of Staking and Liquidity Staking
Ethereum staking is to secure the network by staking ETH and receive additional ETH rewards in return. This mechanism was originally designed to strengthen the security of the Ethereum network, but it also has some risks and limitations. First, the staked ETH cannot be traded freely during the lock-up period, and liquidity is limited. Pledgers cannot withdraw or sell their ETH in a short period of time, which may lead to a shortage of liquidity in the asset. Second, the staking behavior may face the risk of being punished by the network due to improper verification. In addition, becoming a validator of the Ethereum network requires a high threshold, that is, individuals must stake at least 32 ETH, which is a relatively high requirement for ordinary investors.
In order to lower the threshold for entering the staking market and reduce the risk of limited liquidity, platforms such as ConsenSys and Ledger have begun to provide collective staking services. Such platforms allow users to pool their ETH to meet the minimum staking requirements, so that ordinary investors can also participate in staking. However, even through collective staking services, the pledged ETH is still locked and cannot be withdrawn immediately, and the liquidity problem in this case still exists.
To solve this problem, liquidity staking came into being. Liquidity staking enables users to continue to participate in market activities such as DeFi by minting liquidity tokens as a substitute for staked ETH. Lido is a pioneer in liquidity staking, followed by Rocket, Stader and other platforms. Such services not only lower the threshold for participating in staking, but also provide more flexibility for stakers. Through liquidity tokens, investors can not only enjoy the benefits of staking, but also use tokens for other investment strategies to achieve higher potential returns.
The difference between staking and liquidity staking
Traditional staking requires users to lock up their ETH until the unstaking period ends. Liquidity staking allows users to obtain a liquidity token that represents the ETH they stake, and they can trade these tokens freely on the market. This innovation not only improves the liquidity of funds, but also provides investors with diversified income opportunities. Through liquidity staking, investors can not only profit from staking rewards, but also further increase their income by using tokens on DeFi platforms.
2. The rise of re-staking
Restaking is a new concept pioneered by EigenLayer that allows the use of staked ETH to secure other modules that are not directly related to the Ethereum mainchain, such as sidechains, oracle networks, and data availability layers. These modules usually require Active Verification Services (AVS), which are secured by their own tokens and have the problem of high costs of building their own secure networks and low trust models. Restaking improves the security of these modules by leveraging Ethereum's large validator set, thereby reducing the cost of building independent secure networks.
The key to re-staking is that it can effectively direct Ethereum's validator security to other chains or applications, making the cost of attacking these modules far higher than the potential benefits. This mechanism enables the re-staking network to protect important modules in other blockchain ecosystems by sharing Ethereum's security.
Although EigenLayer is the first protocol to introduce the concept of re-staking, other protocols are emerging as the field matures. Different re-staking protocols differ in implementation methods and supported asset types, forming a diverse market competition landscape.
The EigenLayer white paper describes in detail the concept of "pooled security" in re-staking. This mechanism means that when multiple validators participate in the same network through re-staking, attackers must bear a greater cost to destroy the network. This design can effectively improve the security of the module, but there is also the risk of collusion among validators. Assuming that multiple modules share the same batch of pledged assets, once collusion between validators may cause multiple networks to be threatened at the same time. To this end, EigenLayer proposes to mitigate such risks by limiting the re-staking assets of each validator.
III. Overview of the Re-Pledge Agreement
1. Supported deposit assets
One of the main differences between the re-staking protocols is the types of assets supported for deposits. Currently, EigenLayer only supports ETH and ETH’s Liquid Staking Tokens (LST), while Karak and Symbiotic support a wider variety of assets. Karak accepts a variety of assets including Liquid Staking Tokens (LRT), Pendle LP tokens, and stablecoins, while Symbiotic supports additional asset types such as ENA and sUSDE.
This diversity of assets is critical to the attractiveness and development of re-pledge protocols. Being able to support more types of assets allows these protocols to attract more liquidity and user participation, especially in a multi-chain ecosystem. In the future, EigenLayer also plans to expand its asset class support by introducing more double pledge and LP re-pledge options.
2. Security Model
EigenLayer is more conservative in its security design, mainly accepting ETH and its variants as re-pledge assets to ensure network security and economic stability. In contrast, Karak and Symbiotic offer a wider range of re-pledge asset options, allowing for greater flexibility and customizable security.
The design of the security model of the re-staking protocol needs to balance flexibility and security. EigenLayer reduces the volatility risk brought by small-cap tokens by focusing on ETH and its related assets. Karak and Symbiotic provide security options that can be adjusted according to specific needs, allowing services to choose the level of economic security they need.
Both EigenLayer and Karak use upgradeable core smart contracts, with multi-signature management systems controlling different parts of the infrastructure, ensuring decentralized governance. Symbiotic uses an immutable contract design, which reduces governance risks, but means that if there are vulnerabilities or errors in the contract code, the protocol will need to be redeployed.
3. Supported chains and partners
The range of chains supported by the re-staking protocol is also one of its core competitiveness. Currently, EigenLayer and Symbiotic are mainly concentrated in the Ethereum ecosystem, while Karak has expanded to support deposits on 5 blockchains. Although most TVL is still concentrated on Ethereum, Karak's multi-chain support enables it to attract more assets on non-Ethereum chains to participate in re-staking.
Karak also launched a layer 2 network, K2, which acts as a test environment for DSS, enabling it to be upgraded and tested before running on Ethereum. In contrast, EigenLayer and Symbiotic do not provide similar test environment functions, but the protocol can be tested by integrating other chains and protocols.
Ultimately, the success of a protocol depends on the partnerships it is able to establish. EigenLayer has attracted the most AVS participation due to being a pioneer in the restaking space, with notable partners including EigenDA, AltLayer, and Hyperlane. Karak and Symbiotic have also gradually expanded their partnerships, integrating projects such as Wormhole and Ethena.
IV. Overview of Liquidity Re-Pledge
1. Types of Liquid Re-Staking Tokens
In the liquidity re-pledge protocol, users can obtain corresponding liquidity tokens (LRT) by depositing pledged assets. The role of LRT is to provide pledgers with higher capital efficiency and allow them to participate in more decentralized finance (DeFi) activities without unlocking pledged assets. For example, the Renzo protocol supports wBETH deposits and issues the corresponding liquidity token ezETH, while Kelp allows ETHx and sfrxETH deposits and issues rsETH. These tokens represent different types of pledged assets and further release capital efficiency in the DeFi ecosystem.
Some protocols aggregate multiple liquidity staking tokens (LST) into a single LRT token to achieve greater flexibility. Although this multi-asset-supported LRT has a higher capital utilization rate, it also increases the complexity of management and potential counterparty risk. For some native staking protocols, such as Puffer, although it supports stETH, it will eventually convert it into native ETH for re-staking to avoid dependence on the LST protocol and risk exposure.
Different types of LRT tokens not only provide users with a variety of staking asset options, but also make the integration between protocols more complicated. The management and use of these tokens need to strike a balance between security and flexibility.
2. DeFi and Layer 2 support
A key advantage of the liquidity re-pledge protocol is that it unlocks greater capital efficiency for users, allowing pledged assets to not only earn returns through re-pledge, but also generate further returns in the DeFi ecosystem. The yield trading mechanism of platforms such as Pendle enables users to stake through leverage and earn additional returns from liquidity re-pledge. Stakers can obtain returns before maturity and avoid the risk of impermanent loss by providing liquidity to platforms such as Pendle.
In addition, the liquidity re-pledge protocol is deeply integrated with decentralized exchanges (DEX) such as Curve and Uniswap to provide liquidity for LRT tokens and help pledgers quickly exit pledged assets when needed. At the same time, some protocols have also designed vaults with multiple income strategies, including circular re-pledge, options and other tools, further increasing the income of pledgers.
With the rapid development of Layer 2 solutions, liquidity re-pledge protocols are gradually supporting Layer 2 networks, providing users with lower gas fees and faster transaction speeds. Although most liquidity and transaction volume are still concentrated on the Ethereum mainnet, as Layer 2 matures, it is expected that more users will choose to pledge and re-pledge on Layer 2 in the future to obtain higher capital efficiency.
3. Support for re-pledge agreements
The Liquidity Re-Pledge Protocol was first built on Eigenlayer, a pioneer in the re-pledge field and the earliest protocol to provide re-pledge services. With the gradual launch of Karak and Symbiotic, the Liquidity Re-Pledge Protocol has gradually expanded to more platforms and integrated with multiple protocols. Karak allows users to deposit Liquidity Re-Pledge Tokens (LRT) directly into its platform for re-pledge, while Symbiotic restricts the use of LRT and users can only pledge through other channels.
Eigenlayer’s recent airdrop event has caused some controversy. Some users are dissatisfied with its airdrop rules and have begun to withdraw funds and turn to other protocols to continue looking for income and airdrop opportunities. Symbiotic has become the next hot choice with its flexible re-staking mechanism. Although its deposit limit is $200 million, it is expected to attract more users in the future through cooperation with multiple protocols.
Overall, competition among liquidity re-hypothecation protocols will intensify over time, and protocols that can provide greater capital efficiency and flexibility will capture a larger share of the market.
5. Growth and Future Outlook of Re-staking
The growth rate of rehypothecated deposits has accelerated significantly since the end of 2023. According to the latest data, the ratio of liquidity re-hypothecation (TVL in liquidity re-hypothecation/TVL in re-hypothecation) has exceeded 70% and has been growing by about 5%-10% per month in the past few months. This shows that most of the liquidity in re-hypothecation is carried out through the liquidity re-hypothecation protocol, and liquidity re-hypothecation has become an important growth engine in the re-hypothecation category.
However, despite the overall trend of growth, the withdrawal events of Eigenlayer and Pendle at the end of June 2024 show the volatility in the market. After the Eigenlayer airdrop event, the proportion of deposit outflow exceeded 40%. This shows that the airdrop incentive policy may attract speculators in the short term, but long-term capital retention may be affected. Therefore, the protocol needs to attract and retain users through long-term incentive mechanisms and stable revenue models.
Looking ahead, the rise of emerging protocols such as Karak and Symbiotic may further drive market competition. Karak has already attracted a portion of the market share with its support for multi-asset re-staking, while Symbiotic has also provided users with new re-staking options through its collaboration with other protocols and the use of decentralized validator networks (DVNs).
VI. Conclusion
As of July 2024, the amount of ETH staked in the balance is close to 33 million, of which about 13.4 million ETH (about $46 billion) is staked through the liquidity staking platform, accounting for 40.5% of the total stake. This ratio shows that liquidity staking has become a key component of the Ethereum staking ecosystem. However, due to the increase in Eigenlayer's support for native ETH deposits and the deposit cap of LST, this ratio has dropped slightly recently.
In the future, as re-staking platforms gradually open up more deposit options, remove deposit caps, and expand to other asset classes, the re-staking market will continue to expand. In particular, liquid re-staking protocols are expected to occupy a larger market share in the future. Although the attractiveness of airdrop rewards may lead to some short-term liquidity loss, in the long run, through cooperation with large DeFi protocols and platforms, the re-staking ecosystem will continue to grow and provide users with higher capital efficiency.
Throughout the re-staking industry, protocols such as Eigenlayer, Karak, and Symbiotic are leading the development of new security models and liquidity solutions. The rise of re-staking not only improves the security of staking, but also brings higher liquidity and capital efficiency to various assets in the decentralized financial ecosystem. As the re-staking protocol continues to develop, we have seen a series of new innovations and applications that not only expand the functionality of the Ethereum ecosystem, but also provide users with more investment opportunities.
As an innovative mechanism, re-staking can effectively leverage the security of the Ethereum network to support other blockchain modules and protocols. This mechanism not only enhances the security of the network, but also provides new economic incentives. The successful implementation and widespread adoption of protocols such as Eigenlayer, Karak, and Symbiotic indicate that re-staking will become an integral part of the blockchain ecosystem.
However, there are still challenges in this area. For example, the security and compliance issues of the re-pledge protocol, as well as the impact of market volatility on liquidity and capital efficiency, are factors that require continued attention. In the future, as technology develops and the market matures, it is expected that the re-pledge protocol will further improve its model and respond to these challenges through more effective mechanisms.
1. Impact of policies and regulations
As the re-pledge and liquidity re-pledge markets expand, regulators are likely to conduct more scrutiny and regulation on these emerging areas. How to strike a balance between promoting innovation and ensuring market stability will be an important issue facing policymakers and regulators in the future. Ensuring transparency and fairness and protecting the interests of investors will be key to the development of the industry.
2. User education and risk management
In the field of re-staking, user education and risk management are also crucial. Users need to understand the working principles, risks and benefits of different protocols to make wise investment decisions. In addition, how to effectively manage liquidity risk, market risk and operational risk will directly affect the user's benefits and the long-term stability of the protocol.
VII. Conclusion
The rapid development of the re-pledge industry has brought new growth points to the Ethereum ecosystem and the entire blockchain market. With the emergence of more re-pledge protocols and liquidity re-pledge solutions, users will be able to enjoy higher capital efficiency and flexibility, while promoting the further development of decentralized finance (DeFi). Despite the challenges, innovation and continuous optimization of protocols will drive the continued development of this field.
In general, re-staking and liquidity re-staking, as new growth points in the Ethereum ecosystem, not only provide new income opportunities for stakers, but also promote the evolution of blockchain technology. With the maturity of the market and the advancement of technology, the re-staking industry is expected to achieve wider applications and higher value creation in the future.
