Liquid Restaking and Bubble Effect:
The restaking mechanism allows users to earn rewards by staking their crypto assets. These rewards are usually given in the form of protocol tokens.However, some of these tokens can be used to acquire another token. For example, ETH earned by staking on Ethereum can be used to provide liquidity on DeFi protocols or to invest in different tokens. Let’s examine the effects of these choices step by step in a market as volatile and speculative as the crypto market:
1- Price Volatility:
The increase in demand resulting from the use of the restaking mechanism to acquire another token can lead to rapid price increases followed by sudden drops. This situation can cause significant volatility in the market.
2- Novice Investors:
Rapid price increases can increase the FOMO among investors. This can lead to more investors entering the market and further inflating the bubble.
3- Bubble Burst:
When the bubble effect is not sustainable and prices suddenly fall, the bubble can burst, leading to significant losses. This situation can lead to a loss of liquidity and confidence in the market, followed by panic selling.
4- Protocol Token Depreciation:
We mentioned earlier that protocol tokens have a peg. When the bubble bursts, most users will likely want to convert the relevant protocol token back to the native token or switch to a stablecoin like USDT through swaps, resulting in losses.
In such a chaotic environment, protocol tokens will likely lose their pegs; users may swap the token they should take 1:1 at a loss. While this example is different,it brings to mind $LUNA and its effects on the market.
5-Regulatory Risk:
When such a situation occurs in liquid staking, regulators may take notice and impose stricter regulations on the crypto market.
Calculating my risk-to-gain ratio carefully and preferring to witness the development of this market with reasonable risks without being greedy for quick gains always emerges as the most rational scenario for this market.
Stay healthy; don’t stay illiquid. #Write2Earn
