Restaking Ethereum – how to profit from it and receive drops?

New trends are emerging, it’s time to delve into them! Today, we’ll talk about liquid restaking – what it is, how it works, how to profit from it, and the pros and cons! Let’s get started!

According to DeFiLlama data, at the time of writing, this segment includes 12 protocols and ranks tenth in terms of the volume of locked funds, with a total of $3.6 billion.

What is Liquid Restaking?

LRT services further develop the concept of restaking proposed by EigenLayer. It involves Ethereum network validators providing security for other projects such as cross-chain bridges and oracles. This mechanism has been extensively discussed in a separate article.

Precursor to the Storm: Can EigenLayer Set the Trend for Restaking on the Ethereum Network?

By taking on additional functions through EigenLayer, validators become operators, known as Actively Validated Services (AVS), who can receive rewards for providing consensus as a service. The integrity of AVS operators, regardless of the project for which they conduct data verification, is ensured by Ethereum’s slashing mechanism. In other words, if a node behaves dishonestly towards any application, it may lose a portion of its validator stake (32 ETH).

Liquid restaking services will collaborate with AVS operators, providing them with capital for their activities or launching their own nodes.

Ether.fi co-founder Rock Copp noted that their platform interacts with some AVS and plans to allocate a portion of the attracted ETH to ensure their security. Ether.fi is also building its own AVS called DappBridge, but specific details have not yet been disclosed.

At the time of writing, EigenLayer operates in a limited mode, so operators only provide security for the native layer of data availability (DA) required for modular blockchains. However, it is expected that in the future, operator services will be available to third-party AVS.

Similar to LSD, LRT providers offer users the opportunity to participate in EigenLayer restaking without becoming full-fledged operators or staking the full Ethereum validator stake. These protocols handle organizational matters, providing investors with a portion of the rewards received from AVS operators.

Thus, LRT is essentially a layer above EigenLayer, which in turn is built on top of native Ethereum staking and liquid staking platforms. This allows retail users to engage at four levels:

• Basic Ethereum staking;
• Liquid staking platforms (optional);
• EigenLayer restaking pools;
• Liquid restaking services.

It’s important to note that in exchange for staked capital, LRT providers return users with liquid tokens that can be utilized in DeFi operations, such as providing liquidity on decentralized exchanges (DEX).

How does Liquid Restaking Impact Protocol Security?

The current security system of Ethereum based on the Proof-of-Stake algorithm ensures that validators maintain the integrity and immutability of transactions. However, this protection only extends to on-chain data and does not cover off-chain data.

As a result, decentralized platforms whose operational model relies on consensus are forced to create their own nodes or rely on third-party providers. The most prominent examples are oracles and cross-chain bridges, which are also the most vulnerable elements in the entire DeFi ecosystem. For instance, in 2022, 62% of stolen funds were attributed to inter-network infrastructure.

The issue lies in the fact that developers of such protocols often cannot maintain a decentralized consensus network, often relying on only a few, and sometimes just one (in the case of oracles) node. The consequences of the absence of a professional consensus system are exemplified by cases like Ronin.

As we’ve mentioned, restaking aims to address this problem by allowing Ethereum validators to participate in the consensus of applications, not just the blockchain itself. This reduces the likelihood of attacks because now the security responsibility lies with AVS operators, who are technically and organizationally better protected than the projects’ own nodes.

It’s important to note that to become an AVS operator, one must first become an Ethereum validator, meaning they must stake the same 32 ETH deposit and possess the required skills and equipment. This entry barrier limits participation in the consensus.

EigenLayer partially addresses this issue by allowing users to simply deposit assets into a pool, shifting the technical workload to operators, similar to LSD protocols. However, unlike the latter, the project requires irreversible cryptocurrency locking, which deters some investors. Additionally, its pools are still limited.

On the other hand, LRT protocols introduce liquid tokens into this chain, allowing users to continue using their capital in DeFi operations. In the long run, this should stimulate the growth of restakers and, consequently, lead to more AVS operators, making their services more accessible.

What are the advantages for users and projects?

Thanks to Liquid Restaking services, EigenLayer transforms from a unique protocol into the backbone of an entire ecosystem, capable of establishing a conceptually new model for blockchain application security. Key advantages for projects include:

• Elimination of the need to create their own validator pools.
• Inherited security from the Ethereum network.
• Ability to more flexibly regulate expenses on application security.

In turn, Ethereum stakers receive:

• Tools to increase profitability from held ETH.
• New methods to participate in blockchain projects.
• Incentives and rewards from all links in the LRT chain.

Thus, on one hand, Ethereum’s main advantage—its security—can directly benefit projects not only on a technical level but also on an organizational one. On the other hand, this expanded consensus system allows for the utilization of resources from a larger user base, providing them with stable income while maintaining liquidity.

LRT Protocols: Increased Interest and Popular Applications

Until the full launch of EigenLayer and the emergence of AVS operators, the entire restaking ecosystem operates in a sort of testing mode. However, LRT protocols attract capital even under such conditions.

The general working principle of liquid restaking platforms has been described above, so let’s delve into the specifics of the largest projects in this segment.

1. Ether.fi – At the time of writing, it is the largest liquid restaking service. In exchange for staked Ether, it offers a wrapped token called eETH. There is also the option for solo staking (launching an Ethereum node) with partial or no deposit. Depositors receive EigenLayer and Ether.fi points depending on the amount of funds deposited. The APR at the time of writing is 3.57%.

2. Puffer.fi – The second most popular LRT provider. It offers native ETH restaking in EigenLayer with a liquid token called pufETH and the option to launch an Ethereum node. Its key feature is its high-quality interface and gamification strategy for liquidity attraction campaigns. The protocol has also launched a native slashing protection system and several other technical solutions that set it apart from competitors. The APR at the time of writing is 3.3%.

3. Kelp – Launched by the founders of Studer Labs and positioned as a DAO. Like other LRT services, it offers EigenLayer points and scores. However, the protocol tokenized the latter, issuing the KEP token (one KEP = one EL point). This expands trading opportunities for points and essentially allows participants to exit farming before the EigenLayer airdrop. Its key feature is the support for a wide range of assets, including ETH and LSD tokens from various providers. Additionally, Kelp aims to create community-managed infrastructure akin to a decentralized autonomous organization (DAO). Technical details are outlined in the project’s documentation.

4. Renzo – The protocol accepts ETH as well as liquid staking tokens from Lido and Binance. The assets attracted are sent to EigenLayer or directly to the Ethereum deposit contract with subsequent restaking. In addition to the LRT token ezETH, Renzo has also launched its own point system and referral program. The APR at the time of writing is 2.83%.

5. Eigenpie – This is a SubDAO on the DeFi platform Magpie, providing earning opportunities across various decentralized finance applications. Its key feature is the integration of a large number of LSD providers. Unlike its competitors, Eigenpie supports isolated pools for each asset and allows for the minting of individual LRT tokens. This enables more flexible distribution of incentives and rewards while reducing risks for investors.

In addition to these, there are several smaller projects. Most of them were launched a few months ago and are likely to demonstrate their capabilities. However, as with LSD, the “pioneer takes all” principle may come into play, propelling Ether.fi to the top of the market.

Points Programs

One of the key drivers of interest in LRT is the anticipation of an airdrop from EigenLayer and liquid restaking protocols themselves. All of the applications listed above have launched points programs, which are earned based on the amount of staked ETH.

By providing assets to any LRT service, users simultaneously earn points from both the project itself and EigenLayer. In the future, these points will be converted into tokens. For example, according to Copp, the Token Generation Event (TGE) for the Ether.fi protocol is scheduled for April 2024. However, the EigenLayer team has not yet announced a launch date.

In addition to these points, users also receive APR for native ETH staking and possible rewards from LSD protocols. It’s the increasing reward amount per locked asset that attracts most investors.

This effect has only intensified with the introduction of leverage for such operations. For example, the Gearbox platform recently launched liquid restaking with leverage up to x19. Pendle, a platform for trading yield, also offers boosts for farming LRT points.

These developments further incentivize participation in LRT and contribute to its growing popularity among investors.

Pendle and Its Significance for LRT

The key feature of Pendle is its ability to divide assets into a base portion and yield, representing them as separate tokens. This opens up opportunities for trading potential profits and maximizing them through borrowed liquidity. Pendle garnered attention during the peak of LSD, but its mechanics are also suitable for LRT protocols.

The easiest way to explain how it works is through a specific example: a user can deposit their ETH (or its wrapped variation) into a Pendle pool of one of the liquid restaking protocols, let’s say Ether.fi. In doing so, they can convert the base asset into one of two tokens:

1. Yield Token (YT) — allows leveraging for farming EigenLayer and Ether.fi points. For instance, by converting one ETH into YT, a user can receive the same amount of points as locking in LRT, let’s say, six ETH. It’s important to understand that YT has a maturity date, and as it approaches, the value of the yield token relative to the base asset decreases. On the maturity date, it becomes zero. Essentially, the user “burns” the deposited ETH (partially or completely) in exchange for a farming boost.

2. Principal Token (PT) — entails locking for a specified period with fixed yield. Upon maturity, the owner can redeem PT, receiving their asset and the promised profit. However, the yield of PT is dynamic — the maximum can only be claimed on the maturity date.

Thus, boosts for farming for YT holders are provided through the liquidity provided by PT holders. The former provide the base asset for leverage, while the latter receive a fixed percentage on the provided capital. The size of the boost and the rate of burning the base asset during farming depend on the asset ratio in YT and PT pools.

Such a strategy is justified for points hunters only if the rewards obtained in the future exceed the “burned” base assets. Considering that at the moment neither EigenLayer nor any of the LRT protocols have announced the conversion rate of points to tokens, farming through Pendle is a high-risk bet with many variables.

Risks of Liquid Restaking

In the long term, the key factor determining the success of LRT is the real demand for AVS operator services. This will determine whether liquid restaking providers can integrate into the existing blockchain infrastructure and establish a healthy tokenomics based not only on incentives and airdrops but also on income from serviced protocols. However, there are other risks to consider:

• Impact on Ethereum’s consensus: Despite Vitalik Buterin noting the low probability of a threat from EigenLayer, the development of liquid restaking and associated financial primitives could influence Ethereum validators. Potential issues include the right to slash nodes by third-party projects and further expansion of the validator set due to increased rewards. While the former problem remains theoretical, the latter has already affected Ethereum transaction finality. We’ve discussed the risks of further validator stack growth in an article dedicated to liquid staking.

• Security of services: As mentioned earlier, LRT protocols represent the top layer of the pie, within which EigenLayer and liquid staking providers operate. All these applications are potentially vulnerable to hacks and exploits, and breaching the security of any of them could compromise the entire ecosystem. Moreover, since liquid restaking transmits security to other platforms, entire ecosystems may depend on EigenLayer and similar services. For instance, if a malicious actor hacks the Puffer protocol, exploits could allow them to mint unbacked LRT tokens, then drain liquidity pools on DEXes, causing a peg loss between wrapped and native ETH. Subsequently, users might start withdrawing their funds en masse, prompting Puffer to withdraw assets from EigenLayer, and the latter might begin unwinding operators in the event of a liquidity crisis. In the case of a sufficiently large attack, some projects relying on inherited security may halt operations or significantly weaken their defenses.

• Consequences for Ethereum: Incentives from LRT protocols are attracting more investors interested in passive income. According to Glassnode, at the time of writing, the volume of ETH locked in smart contracts accounts for 35% of the total supply and continues to grow. At first glance, this seems positive, as a decrease in supply with sustained demand leads to price appreciation. However, a shock to the supply could also trigger a liquidity crisis for native ETH and ultimately deter investors. With the current trend, the question is only how quickly we will reach the supply “red line.”

Forecasting the real impact of restaking on the blockchain before the full launch of EigenLayer is challenging. However, changes will undoubtedly be noticeable, whether in technical or economic terms.

From everything discussed about Ethereum’s liquid staking, there are several ways to profit:

• Participation in Points Programs: Many LRT providers offer points programs that accrue points based on the amount of staked ETH. These points can be converted into tokens or used to gain additional benefits, such as airdrops or participation in other decentralized financial operations.

• Participation in Native Staking: By participating in native ETH staking on the Ethereum network, one can earn rewards in the form of percentages from the staked funds.

• Participation in Points Farming: By providing liquidity in various pools and participating in points farming, one can earn additional tokens or percentages from the earned funds.

• Token Trading: Tokens acquired through participation in points programs or farming can be traded on various decentralized exchanges to profit from differences in price.

• Participation in Financial Instruments: Some platforms, like Pendle, offer financial instruments allowing the separation of assets into base and yield parts, which can also be profitable when used correctly.

However, it’s essential to remember that any investments and participation in financial operations carry certain risks, and before making any decisions, it’s important to conduct research and assess one’s capabilities.

In addition to the methods of profit mentioned above, it’s also worth considering the opportunity to participate in airdrops from projects. Many projects in the field of liquid staking and decentralized finance offer airdrops of their tokens to participants who support their platform or participate in their ecosystem. Participating in these airdrops can yield additional tokens, which may have significant value in the future. However, it’s important to remember that participating in airdrops may also come with certain requirements or restrictions, and it’s crucial to carefully review the participation terms before getting started.

Conclusion:

In summary, liquid restaking is a new primitive in the Ethereum network, representing the next step in the evolution of restaking concepts. Currently, the growing interest in LRT providers is mainly driven by expectations of future airdrops and the opportunity to increase the potential yield of held ETH.

The sustainability of this “staking pyramid” and its ability to survive after token distributions will depend on the actual demand for AVS operator services. Furthermore, trust in the ecosystem depends on the security of all protocols: LSD, LRT, and restaking.

FAQ: 

1. What is liquid restaking (LRT)? Liquid restaking (LRT) is a concept that further develops the idea of restaking proposed by EigenLayer. It involves Ethereum network validators providing security for other projects, such as cross-chain bridges and oracles, and receiving rewards for their services.
2. How does liquid restaking work? Liquid restaking allows users to participate in EigenLayer restaking without becoming full-fledged operators or staking the full Ethereum validator stake. Users deposit their assets into LRT protocols, which handle organizational matters and provide investors with a portion of the rewards received from AVS operators.
3. What are the benefits of liquid restaking for users and projects? For projects, liquid restaking eliminates the need to create their own validator pools, inherits security from the Ethereum network, and provides flexibility in regulating expenses on application security. For Ethereum stakers, it offers tools to increase profitability from held ETH, new methods to participate in blockchain projects, and incentives from all links in the LRT chain.
4. What are some popular liquid restaking protocols? Some popular LRT protocols include Ether.fi, Puffer.fi, Kelp, Renzo, and Eigenpie. These platforms offer various features such as wrapped tokens, native restaking, referral programs, and support for a wide range of assets.
5. How can users profit from liquid restaking? Users can profit from liquid restaking by participating in points programs, native staking, points farming, token trading, and financial instruments offered by platforms like Pendle. Additionally, users may receive airdrops from projects in the liquid staking and decentralized finance space.
6. What are the risks associated with liquid restaking? Risks associated with liquid restaking include potential impacts on Ethereum’s consensus, security vulnerabilities in LRT protocols, and consequences for Ethereum’s overall liquidity. It’s important for users to conduct thorough research and assess their risk tolerance before participating in liquid restaking.
7. How can users participate in airdrops from liquid restaking projects? Many projects in the liquid staking and decentralized finance space offer airdrops to participants who support their platform or participate in their ecosystem. Users can participate in these airdrops by engaging with the projects’ protocols and meeting any requirements or restrictions set by the projects.

This FAQ provides an overview of liquid restaking on Ethereum, including its benefits, risks, popular protocols, and opportunities for users to profit and participate in airdrops.