Evolution of Staking
Staking has always been important to blockchain ecosystems, rewarding people for locking their assets to aid in securing the network. Nevertheless, some limitations exist in traditional staking, the main one being that staked assets could not be utilized anywhere after being locked up.
LSTs allow one to access their staked assets’ liquidity while earning rewards. Hence, one can still earn passive income with the extra benefit of flexibility.
The Rise of Restaking With EigenLayer
While LSTs addressed the crypto liquidity issue, they failed to address scalability and multi-protocol security. Restaking allows the reuse of staked assets to aid in securing multiple protocols simultaneously while enhancing security.
EigenLayer, a protocol that expands staked assets’ utility, is a driving factor behind the innovation. It permits Ethereum validators and stakers to ‘opt-in’ and restake their tokens to secure extra services.
The seamless integration of restaking and staking has unlocked a new age of capital efficacy and cooperation in decentralized finance, establishing the foundation for the adoption of LRTs.
Liquid Staking Tokens
Liquid staking tokens (LSTs) allow stakers to maintain liquidity while participating in network security. Users acquire a derivative token that represents their staked holdings when they stake assets such as Ethereum.
LSTs address this by providing a derivative token that represents the staked assets, permitting users to retain liquidity. For instance, when one stakes Ether on a liquid staking platform such as Lido, they acquire stETH, a tokenized representation of the staked ETH.
Main benefits include:
- Yield optimization: One can earn staking rewards while concurrently leveraging the derivative token for extra opportunities.
- Liquidity: Unlocks the staked assets’ value, facilitating their lending, trading, and utilization in other DeFi protocols.
- Flexibility: Users can exist positions by selling their derivative tokens instead of waiting for unstaking periods.
Examples of LSTs include bLUNA (Anchor Protocol), stETH (Lido Finance), and rETH (Rocket Pool).
Liquid Restaking Tokens
Building on the foundation developed by LSTs, liquid restaking tokens unveil another functionality later by permitting users to reuse their staked assets to secure extra protocols or networks. For example, restaking permits stakers to secure ETH for concurrent staking their derivative token to take part in securing a layer-2 network.
The main benefits of LRTs include:
- Improved capital efficiency
- Multinetwork participation across chains or protocols
- Enhanced security for new protocols
Both LSTs and LRTs address unique challenges emerging within the staking space. LSTs prioritize unlocking liquidity for staked assets, while LRTs enable users to amplify the utility of their staked tokens across several protocols.
How LSTs Work
The steps involved include:
- Staking assets such as ETH on a liquid staking platform.
- The platform grants the user a derivative token, specifically stETH as the representative of staked assets.
- The user will reap the rewards while the derivative token is utilizable within the decentralized finance (DeFi) applications such as borrowing and lending.
How LRTs Work
The steps involved include:
- Staking assets on a primary network such as Ethereum via a protocol such as EigenLayer
- Once can restake and the derivative on another network or protocol.
- Restaking allows the user to contribute to the security of multiple networks or protocols.
Benefits of LSTs and LRTs in Crypto
The benefits of LSTs in decentralized finance include:
- Improved liquidity that drives trading volumes on decentralized exchanges
- Reduced opportunity cost
The benefits of LRTs in decentralized finance include:
- Bolstered decentralization
- Linking L1 and L2 ecosystems to improve scalability and interoperability
LRTs vs LSTs: Key Risks to be Aware of
Despite LSTs offering flexibility, they have the potential risk of de-pegging or price unpredictability of the derivative tokens. This can impact their value.
In LRTs, the risks are amplified because of the inherent exposure to numerous networks. A security breach or failure in one network can cascade and negatively affect the restaked assets, causing compounded losses.
People can minimize risk by assessing platform safety, analyzing the wider exposure, and understanding yield effects.
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