The Staking ecosystem on Ethereum is becoming a hot topic and is becoming more and more discussed. However, there are still many investors who still do not know the difference and how they work. The article below will explain in the simplest way.
Before exploring more complex protocols, let's master the concept of Liquid Staking, an important mechanism in the DeFi ecosystem.
Liquid Staking is a protocol that allows users to stake assets (coins or tokens) on the blockchain and receive back a representative token (liquid staking token or LST) corresponding to the amount of staked assets at a ratio of 1: first. The advantage of LST is liquidity, allowing users to continue participating in other DeFi activities such as AMM, Lending, Borrowing, Yield Farming... without unstaking the original assets.
For example, when users stake ETH on the Lido protocol (Step 1), they will receive stETH back at a 1:1 ratio (Step 2). Then, stETH can be used as collateral on Aave to borrow other assets for investment purposes (Step 3).
If the user wants to get back the original asset, ETH, simply send the derivative asset (stETH) back to the platform and burn it, the platform will send the original asset back to the user.
The key point of Liquid Staking is to release assets from locked status when staking, providing flexibility and profit optimization for users.
Following the concept of Liquid Staking, Restaking was introduced by the EigenLayer project, opening up a new approach to optimizing profits from staked assets.
Basically, Restaking is the process of reinvesting or redeploying staked liquid tokens (LST) like stETH. The purpose of this is to provide security for middleware applications and at the same time bring additional rewards to users.
Specifically, after staking ETH on Lido and receiving stETH, users can participate in EigenLayer as a node operator or validator by restaking stETH into EigenLayer's smart contract. At this time, the node operator will choose to provide services for middleware such as Oracle, Data Availability, Sidechains, Rollups... and receive corresponding rewards.
The slashing mechanism will be applied to punish acts of fraud or harm to the system, ensuring transparency and security.
Restaking is like taking advantage of "compound interest", bringing profits from the initial stake to reinvest and create an additional source of income. This model brings dual benefits, both increasing profits for users and promoting sustainable growth for the entire project ecosystem.
After EigenLayer's breakthrough with the concept of restaking, a number of Liquid Restaking token (LRT) projects were born, to solve the liquidity problem for ETH/LST staking in EigenLayer.
Liquid Restaking's operating mechanism includes three main steps:
Liquid Staking: Users stake ETH and receive back LST (e.g. stETH) at a 1:1 ratio.
Liquid Retaking: Users continue to stake LSTÂ to receive LRT (liquid restacking token), representing the amount of LST retaken.
Liquid Restaking Finance: LRT can be used in specialized DeFi protocols for liquid restaking, providing more investment options and increased profits.
Liquid Restaking is considered a solution to improve liquidity for restaking activities, helping users take full advantage of the potential of staked assets and flexibly participate in diverse DeFi opportunities.
Liquid Restaking is considered a solution to improve liquidity for restaking activities, helping users take full advantage of the potential of staked assets and flexibly participate in diverse DeFi opportunities.
For example:
Step 1: Users bring ETH to the Lido protocol to stake and receive stETH.
Step 2: Users continue to bring stETH to the Etherfi protocol to retake and receive eETH.
Step 3: Users will bring eETH to LRT Finance activities like Pendle to farm profits.
EigenLayer ecosystem overview
Note: This article is only for the purpose of classifying and explaining the differences of each type of protocol, does not clearly state the advantages and disadvantages, and does not encourage investment.
