Liquid Staking Token Finance (LSTFI) is a new category of DeFi protocols that use liquid staking tokens (LSTs) to unlock new avenues for yield generation and asset management. LSTs are tokens that represent your staked crypto assets on proof-of-stake (PoS) blockchains, such as Ethereum 2.0, Polkadot, Cosmos, etc. By staking your crypto, you can earn rewards from the network, and by holding LSTs, you can enjoy the benefits of liquidity, capital efficiency, and access to various DeFi protocols.

However, did you know that you can further enhance your returns by restaking your LSTs on other protocols that offer additional rewards and fees? Restaking is a novel mechanism that enables LST holders to leverage their LSTs and maximize yield in the LSTFI ecosystem.

What are LSTs?

LSTs, short for liquid staking tokens, are tokens that represent your staked crypto assets on proof-of-stake (PoS) blockchains, such as Ethereum 2.0, Polkadot, Cosmos, etc. By staking your crypto, you can earn rewards from the network, and by holding LSTs, you can enjoy the benefits of liquidity, capital efficiency, and access to various DeFi protocols.

LSTs are created by liquid staking protocols, such as Lido, Rocket Pool, Swell, etc., which act as intermediaries between the stakers and the validators. These protocols pool the staked assets from the users and delegate them to the validators, who run the nodes and secure the network. In return, the protocols issue LSTs to the users, which are pegged to the value of the staked assets and accrue rewards over time. The users can then use their LSTs as collateral, payment, or investment in other DeFi protocols, such as lending, borrowing, swapping, etc.

How Did LSTFi Emerge?

The concept of LSTs was inspired by the evolution of Ethereum’s PoS consensus mechanism, which started in 2022 with the launch of the Beacon Chain, the first phase of Ethereum 2.0. The Beacon Chain introduced staking as a way to secure and validate the network, offering network participants the opportunity to earn rewards by locking up their ETH. However, staking on Ethereum 2.0 also came with some limitations and challenges, such as:

• High entry barrier: To become a validator on Ethereum 2.0, one needs to stake at least 32 ETH. This is a significant amount of money for most people and also creates a risk of centralization, as only a few wealthy entities can afford to run validators.
• Low liquidity: Once staked, the ETH can no longer be used. This means that the stakers have to lock up their ETH for a long period of time without being able to access or use their funds.
• High complexity: Running a validator on Ethereum 2.0 requires technical knowledge, hardware resources, and constant maintenance. The validators have to keep their nodes online and synced, follow the network rules and conditions, and avoid any faults or attacks. Otherwise, they may face penalties or slashing, which can result in losing a portion of their staked ETH.

To address these limitations and challenges, liquid staking protocols emerged as a solution that enables users to stake their ETH on Ethereum 2.0 and receive LSTs that represent their staked ETH and rewards. The first liquid staking protocol for Ethereum 2.0 was Lido, which launched in December 2022 and issued stETH as its LST. Lido quickly gained popularity and adoption, as it offered users a simple and convenient way to stake their ETH and earn rewards while also enjoying the benefits of liquidity, capital efficiency, and access to various DeFi protocols.

Benefits of LSTFi

Some of the benefits of LSTFi include:

• Enhanced returns: LSTFi protocols allow you to further enhance your returns by restaking your LSTs on other protocols that offer additional rewards and fees. For example, if you have stETH, which is an LST that represents your staked ETH on Ethereum 2.0, you can restake it on a protocol like EigenLayer, which is an LSTFi protocol that allows you to earn more yield from your stETH.
• Diversified portfolio: LSTFi protocols allow you to diversify your portfolio and reduce your risk by exploring and accessing different crypto projects and ecosystems and gaining exposure to various tokens and coins. For example, if you have stETH, you can use it to access and participate in other DeFi protocols, such as lending, borrowing, swapping, etc.
• Supporting the crypto community and innovation: LSTFi protocols allow you to support the crypto community and innovation by contributing to the security and decentralization of the network and supporting the development and adoption of the project. You are also participating in the governance and decision-making of the protocol and influencing its future direction and growth.

LSTFi Protocols Where You Can Restake Your LST

Restaking is a novel mechanism that enables LST holders to further enhance their returns by restaking their LSTs on other protocols that offer additional rewards and fees. Here are some of the leading LSTFi protocols that enable restaking;

EigenLayer

Source: Eigenlayer website

EigenLayer is a native restaking protocol that issues eLST for stETH holders and handles the staking and reward distribution of both ETH 2.0 and EigenLayer. EigenLayer acts as a proxy validator for Ethereum 2.0, and also as a reward aggregator for the restaked stETH. EigenLayer maintains a one-to-one mapping between stETH and eLST and ensures that eLST inherits the same properties and functionalities of stETH.

EigenLayer also collects the network fees and inflation rewards from Ethereum 2.0 and distributes them proportionally to the eLST holders. Additionally, EigenLayer generates its own rewards and fees from its own network operations and distributes them to the eLST holders as well. EigenLayer uses smart contracts to automate and secure the restaking process and also provides governance mechanisms for the eLST holders to participate in the network decisions.

EigenLayer is one of the simplest and most direct methods of restaking, as it offers low risk and low complexity, but also low flexibility and low reward.

Pendle

Source: Pendle Finance Website

Pendle is an LST restaking protocol that uses stETH as the derivative token for ETH holders and leverages the existing staking and reward distribution of Lido. Pendle acts as a liquidity provider and a yield optimizer for the underlying stETH. Pendle pools the stETH from the users and supplies them to other DeFi protocols that offer attractive returns, such as lending, borrowing, swapping, etc. Pendle then receives the stETH plus the returns from the DeFi protocols and distributes them to the users proportionally. Pendle also collects its own rewards and fees from its own network operations and distributes them to the users as well.

Pendle uses smart contracts to automate and secure the restaking process, and it also provides governance mechanisms for users to participate in network decisions. Pendle is one of the most advanced and indirect methods of restaking, as it offers high flexibility and complexity but also high risk and high cost.

Origin Ether

Source: Origin Ether Website

Origin Ether is an LSD restaking protocol that splits stETH into oETH and fyETH. oETH represents the principal of the staked ETH, while fyETH represents the future rewards of the staked ETH. Origin Ether acts as a market maker and a price oracle for the oETH and the fyETH. Origin Ether creates a synthetic market for the oETH and the fyETH, where users can buy and sell them at a fair price that reflects the present and future value of the staked ETH.

Origin Ether also provides a price oracle that feeds the real-time price of the oETH and the fyETH to other DeFi protocols, enabling them to integrate and interact with the oETH and the fyETH. Origin Ether uses smart contracts to automate and secure the restaking process and also provides governance mechanisms for the oETH and fyETH holders to participate in the network decisions. Origin Ether is one of the most innovative and hybrid methods of restaking, as it offers high capital efficiency and high liquidity, but also high complexity and high volatility.

These are some of the leading LSTFi protocols that enable restaking, and each of them has its own advantages and disadvantages, depending on the user’s preferences and goals.

How to Restake and Earn Passive Income

Restaking and earning passive income is not a complicated process, as long as you follow some simple steps and best practices.

Step 1: Choose the best LST and LSTFi protocol for your portfolio

The first step in restaking and earning passive income is to choose the best LST and LSTFi protocol for your portfolio based on your risk tolerance, return expectations, portfolio composition, liquidity needs, and preferences. There are several factors that you should consider when choosing the best LST and LSTFi protocol for your portfolio, such as:

• The underlying PoS blockchain and its staking rewards: Different PoS blockchains have different staking rewards, which depend on various factors, such as the inflation rate, the total staked ratio, the validator fees, the network performance, etc. You should choose a PoS blockchain that offers attractive and stable staking rewards and also aligns with your investment goals and values. For example, if you are bullish on Ethereum and its future, you may choose to stake ETH on Ethereum 2.0 and receive stETH as your LST.
• The liquid staking protocol and its features and benefits: Different liquid staking protocols have different features and benefits, which depend on various factors, such as design, architecture, governance, security, audit, etc. You should choose a liquid staking protocol that offers reliable and convenient features and benefits and also has a good reputation and track record in the industry. For example, if you value security and simplicity, you may choose to use Lido as your liquid staking protocol, which is the first and largest liquid staking protocol for Ethereum 2.0 and has the best security and audit standards.
• The LSTFi protocol and its restaking method and model: Different LSTFi protocols have different restaking methods and models, which depend on various factors, such as the derivative token, the reward distribution, the risk management, etc. You should choose an LSTFi protocol that offers a suitable and optimal restaking method and model and also has a strong and active community and governance. For example, if you want to maximize your yield and liquidity, you may choose to use Origin Ether as your LSTFi protocol, which is an LSD restaking protocol that splits stETH into oETH and fyETH and allows you to trade, hedge, and arbitrage them separately.

These are some of the factors that you should consider when choosing the best LST and LSTFi protocol for your portfolio. However, you should always do your own research and due diligence before making any restaking decisions.

Step 2: Restake your LST on the chosen LSTFi protocol

The second step in restaking and earning passive income is to restake your LST on the chosen LSTFi protocol and receive the derivative token that represents your restaked LST and rewards. The exact process of restaking your LST on the chosen LSTFi protocol may vary depending on the protocol’s interface and functionality, but the general steps are as follows:

• Connect your wallet: You need to connect your wallet that holds your LST to the LSTFi protocol’s website or app and grant the necessary permissions and approvals. You can use various wallets, such as MetaMask, Ledger, Trezor, etc., depending on the LSTFi protocol’s compatibility and support.
• Choose your LST and amount: You need to choose the LST that you want to restake and the amount that you want to restake. You can restake any amount of LST, as long as it meets the minimum and maximum requirements of the LSTFi protocol.

Source: EigenLayer website

• Confirm your transaction: You need to confirm your transaction and pay the necessary gas and network fees to execute the restaking process. The transaction may take some time to be processed and confirmed, depending on the network congestion and speed.
• Receive your derivative token: You will receive the derivative token that represents your restaked LST and rewards, which will be sent to your wallet address. The derivative token may have a different name and symbol than your LST, depending on the LSTFi protocol’s restaking method and model. For example, if you restake your stETH on EigenLayer, you will receive eLST, which is the derivative token that represents your stETH plus the rewards and fees from EigenLayer.

Source: EigenLayer website

These are the general steps for restaking your LST on the chosen LSTFi protocol. However, you should always follow the specific instructions and guidelines of the LSTFi protocol that you are using and be cautious when restaking your LST.

Step 3: How to monitor and manage your restaked LST and derivative token?

The third step of restaking and earning passive income is to monitor and manage your restaked LST and derivative token and optimize your restaking process and performance. The exact process of monitoring and managing your restaked LST and derivative token may vary depending on the LSTFi protocol’s interface and functionality, but the general steps are as follows:

• Check your balance and rewards: You need to check your balance and rewards of your restaked LST and derivative token and see how much you have earned and accrued from the restaking process. You can check your balance and rewards on the LSTFi protocol’s website or app, or on your wallet that holds your derivative token.
• Adjust your restaking strategy: You need to adjust your restaking strategy and make changes to your restaking process, if necessary or desired. You can adjust your restaking strategy by changing the amount, frequency, or duration of your restaking or by switching to a different LST or LSTFi protocol, depending on your risk tolerance, return expectations, portfolio composition, liquidity needs, and preferences.
• Participate in governance and innovation: You need to participate in the governance and innovation of the LSTFi protocol that you are using and influence its future direction and growth. You can participate in governance and innovation by voting on proposals, submitting suggestions, joining discussions, providing feedback, reporting bugs, etc. You can also earn rewards and incentives for your participation and contribution, depending on the LSTFi protocol’s governance token and mechanism.

These are the general steps for monitoring and managing your restaked LST and derivative token. However, you should always follow the specific instructions and guidelines of the LSTFi protocol that you are using and be proactive and responsible when monitoring and managing your restaked LST and derivative token.

Step 4: How to withdraw or redeem your restaked LST and derivative token?

The final step in restaking and earning passive income is to withdraw or redeem your restaked LST and derivative token and enjoy your profits and rewards. The exact process of withdrawing or redeeming your restaked LST and derivative token may vary depending on the LSTFi protocol’s interface and functionality, but the general steps are as follows:

• Connect your wallet: You need to connect your wallet that holds your derivative token to the LSTFi protocol’s website or app and grant the necessary permissions and approvals. You can use various wallets, such as MetaMask, Ledger, Trezor, etc., depending on the LSTFi protocol’s compatibility and support.
• Choose your derivative token and amount: You need to choose the derivative token that you want to withdraw or redeem and the amount that you want to withdraw or redeem. You can withdraw or redeem any amount of derivative token, as long as it meets the minimum and maximum requirements of the LSTFi protocol.

Source: EigenLayer website

• Confirm your transaction: You need to confirm your transaction and pay the necessary gas fees and network fees to execute the withdrawal or redemption process. The transaction may take some time to be processed and confirmed, depending on the network congestion and speed.
• Receive your LST and rewards: You will receive your LST and rewards that correspond to your withdrawn or redeemed derivative token, which will be sent to your wallet address. The LST and rewards may have a different name and symbol than your derivative token, depending on the LSTFi protocol’s restaking method and model. For example, if you withdraw or redeem your eLST on EigenLayer, you will receive stETH and ETH, which correspond to your stETH and the rewards and fees from EigenLayer.

Source: EigenLayer website

These are the general steps for withdrawing or redeeming your restaked LST and derivative token. However, you should always follow the specific instructions and guidelines of the LSTFi protocol that you are using, and be cautious when withdrawing or redeeming your restaked LST and derivative token.

Conclusion

Restaking LSTs is a powerful and innovative way to leverage your LSTs and maximize your yield in the LSTFi ecosystem. However, it also entails various risks and challenges that need to be considered and mitigated. Therefore, you should always do your own research and due diligence before making any restaking decisions.