In the crypto ecosystem, liquid restaking is a growing narrative that’s focused on enhancing capital efficiency within the DeFi ecosystem. In essence, it enables users to stake the same token across multiple protocols, securing dozens of networks at once.
By securing those protocols, restakers can magnify their staking rewards, but doing so involves taking on increased slashing risks.
Understanding Liquid Restaking
To understand how liquid restaking works, lets recap what traditional staking is: It’s the practice of locking up your cryptocurrency tokens into a smart contact to support the network, validate transactions and guarantee its security, earning rewards for contributing.
With liquid restaking, it becomes possible for stakers to not just have their cake, but gobble it down as well. They stake their tokens to earn the basic staking rewards, but they get the advantage of maintaining their liquidity. When they stake, they receive liquid restaking tokens or LRTs that can be traded or utilized elsewhere in the DeFi world.
It’s for this reason that liquid restaking is shaping up to become a game-changer for the DeFi industry, giving users more flexibility than ever before and dramatically enhancing their earnings potential.
The Benefit Of Liquid Restaking
It took Ethereum, the world’s biggest proof-of-stake blockchain, more than three years to build up its crypto-economic security, with more than 25% of all ETH tokens now staked. The total value of staked ETH is now worth more than $100 billion, surpassing the market cap of major blockchains such as Binance Smart Chain and Solana. To compromise the Ethereum network and carry out a 51% attack, someone would need to deploy an equivalent amount of capital, making the chances of this happening very, very low.
It’s safe to say Ethereum is extremely secure, but newer protocols trying to establish their own cryptoeconomic security cannot say the same. The difficulty is that they need to attract capital that isn’t already tied down in the crypto ecosystem securing existing networks. Alternatively, if they attract capital that secures an existing chain, it improves the security of their own network while weakening the one it was taken away from.
Attracting capital to secure a blockchain or protocol is a tough task, and that’s where liquid restaking comes in, as it provides a compelling alternative.
Liquid restaking was first introduced by EigenLayer, and it encourages ETH validators and stakers to secure additional protocols, known as Actively Validated Services, using their staked ETH. In this way, developers can create AVSs rather than traditional protocols and bootstrap their security much more rapidly by extending the security of Ethereum.
Since launching in the middle of last year, EigenLayer has risen to become the second-biggest protocol on Ethereum with a total value locked of more than $9.5 billion. EigenLayer’s LRT itself has a TVL of more than $4 billion.
EigenLayer’s website reveals that its nascent AVS ecosystem consists of 13 projects utilizing Ethereum’s security foundation to safeguard their own protocols.
Staking on Steroids
It’s fascinating to consider the evolution of staking. Just a few years ago, staking was a relatively new concept that simply meant locking up your assets to earn rewards. It was extremely inflexible, with users required to lock their tokens for an agreed-upon period of time, and during that time, they could neither withdraw them nor use them elsewhere. But with liquid restaking protocols, stakers now have far more flexibility over what they can do with their staked capital.
EigenLayer: The beating heart of liquid restaking
EigenLayer is the OG liquid restaking protocol and it has proven to be a game-changer for DeFi. For DeFi developers, it’s almost like a Swiss Army Knife, granting them the freedom to quickly build diverse applications that can immediately be bootstrapped. It was the first to introduce the radical concept of the LRT, meaning investors could stake their ETH tokens and retain their liquidity. Because they receive LRT tokens on a 1:1 basis for each ETH token staked, they can use these assets to participate in alternative DeFi yield-generating schemes.
EigenLayer gives investors the best of both worlds, rewarding them for supporting the Ethereum network without any penalty. In a nutshell, EigenLayer can be thought of as a DeFi lego, or a building block that developers can use to build more intricate DeFi restaking products, leveraging the fundamental security of Ethereum itself.
Ether.fi: the number one EigenLayer liquid restaking protocol
Ether.fi is the biggest and best-known liquid restaking protocol on Ethereum, and it enables users to stake ETH or liquid staking tokens (LSTs) such as stETH, cbETH, wBETH and receive eETH tokens at a 1:1 ratio. It uses those LSTs for staking on EigenLayer on behalf of its users, who then receive both staking and restaking rewards as APR, plus Ether.fi and EigenLayer points.
The protocol is all about optimizing capital efficiency for Ethereum stakers. It does this because eETH provides utility for AVS platforms that offer staking, borrowing, lending, liquidity providing and other DeFi services.
Ether.fi is noted for its compatibility with multiple DeFi protocols in a bid to increase the utility of eETH, and some of its notable partners include Pendle Finance, Balancer, Curve and Maverick.
Sumer: Unlocking new avenues with cross-chain LRT liquidity
The Sumer protocol introduces the concept of omni-chain synthetic assets that enable more flexible money markets and cross-chain liquidity. It utilizes a risk engine that underwrites user’s assets with liabilities based on correlations, maximizing capital efficiency in the process. With Sumer, users can create synthetic USD, BTC or ETH, as well as stablecoins and other types of crypto assets. It claims that for every dollar locked in Sumer, it generates three dollars for blockchains and two dollars of liquidity that can be used elsewhere.
Sumer was created to address the fact that the future of blockchain is multichain and, therefore, needs to support liquid restaking assets. Existing wrapped assets break the composability of DeFi applications, which means they can’t be used for complex, cross-chain transactions, hindering their growth and creating what Sumer terms “liquidity walls.”
The basic premise is that users deposit their assets into Sumer, on whichever blockchain they’re using, and use those deposits to create synthetic assets, which are omnichain. These omnichain synthetic assets can then be used on any blockchain that supports Sumer, which makes it easier for liquidity to flow across chains. In this way, it’s similar to the concept of a traveler’s check, which can be exchanged in almost any country even though its denominated in just one currency.
Sumer brings to the table hyper-composability by unlocking liquidity and enabling superior abstraction for users. The ability to transfer assets cross-chain no longer requires a custodial bridge, reducing the risks for users while enhancing capital efficiency.
In this way, Sumer’s synthetic assets act as a real growth engine for LRTs, enabling them to be moved across the entire DeFi ecosystem so they can participate in far more protocols while the user’s collateral remains on the native chain where it was staked.
Renzo — A smart staking strategy manager maximizing yield
Renzo is one of the rising stars in the nascent liquid staking industry, acting as an LRT manager for the EigenLayer ecosystem. It’s similar to having a staking strategy manager, and it can help users enhance their total staking yields.
It uses AVSs to safeguard applications building on EigenLayer by enabling them to tap into the secure foundation of Ethereum. It also bypasses the need to lock up staked ETH, by issuing stakers with ezETH tokens.
The ezETH token is an LRT that can be taken and used elsewhere in the DeFi ecosystem. But Renzi encourages users to deposit their ezETH in its own pools, where it can be actively deployed by its strategy managers to enhance users’ returns. It uses sophisticated mechanisms to maximize yield generation, with the added advantage of minimizing user’s slashing risk.
With a total of almost $3 billion in restaked ETH, Renzo has emerged as one of the fastest-growing liquid restaking protocols in the ecosystem, underscoring the enormous confidence users have in its platform.
Liquid Restaking Is Reshaping DeFi
As the amount of capital locked up in liquid restaking protocols continues to grow by the day, it has become clear that it’s not just a fad but the next evolution of staking itself. It’s the next frontier, not only for Ethereum but for the DeFi industry as a whole, paving the way for a more interconnected future that enhances both decentralization and opportunity for ecosystem participants.
