Get an overview of the six major liquidity restaking protocols

Original author: 0xEdwardyw

Re-staking is poised to become a key narrative in this bull run, with more than a dozen liquid re-staking protocols vying for EigenLayer's total value locked of over $11 billion.

This article compares the six major liquidity restaking protocols, hoping to provide readers with an easy-to-understand way to understand the nuances between the various liquidity restaking protocols. Given the many trade-offs that exist in different LRT designs, investors should make their choice based on their personal preferences.

TL, DR, Here are the key features of each liquid restaking protocol:

• Puffer Finance and Ether.fi are the two largest liquid restaking protocols based on the market capitalization of liquid restaking tokens. Both focus on native restaking, which has fewer layers of risk than LST restaking. In addition, the two protocols work to promote the decentralization of Ethereum validators. Ether.fi has the largest number of DeFi integrations.
• Kelp and Renzo protocols support native re-staking and LST re-staking. They accept major LSTs like stETH, ETHx, and wBETH. It is worth mentioning that Renzo extends the restaking service to the second layer of Ethereum, providing users with the benefit of reduced gas fees.
• Swell was originally a liquid staking protocol with swETH as its liquid staking token. The swETH market size is approximately $950 million. Swell launched a re-staking service and launched a liquid re-staking token, rswETH. It offers native re-staking and swETH re-staking.
• Eigenpie is a sub-DAO of Magpie that focuses on LST restaking. It accepts 12 different LSTs and issues 12 different LRTs accordingly, providing a unique isolated LST re-staking model.

Different types of re-staking and liquidity re-staking tokens

Two types of re-staking on EigenLayer

There are two types of restaking, native re-staking and LST (liquid staking token) re-staking. For native restaking, validators stake their $ETH native on Ethereum's Beacon Chain and point to EigenLayer. LST restaking, on the other hand, allows holders of liquid staking tokens, such as stETH, to repledge their assets into the EigenLayer smart contract. Because of the need to run an Ethereum validator node, native restaking is more difficult for retail users to operate.

The advantage of native ETH re-staking is that it is not restricted, and EigenLayer has set a cap on LST restaking, only accepting deposits of LST within a certain cap or within a specified time frame. Native restaking, on the other hand, is not subject to these restrictions and can be deposited at any time. Native restaking also has advantages when it comes to security, as it does not involve the risks of the LST protocol.

Despite these differences, both native re-staking and LST re-staking on EigenLayer require assets to be deposited and locked, making them unusable for other purposes.

Liquidity re-staking protocol releases locked liquidity

Liquid Restaked Tokens (LRTs) are similar to liquid staking tokens on Ethereum and are tokenized representations of assets deposited into EigenLayer, effectively freeing up liquidity that would otherwise be locked.

The services provided by the liquidity restaking protocol are divided into native restaking services and LST restaking services. Most liquid restaking protocols offer native restaking to users, eliminating the need for users to run an Ethereum node. Users simply deposit ETH into these protocols, which process transactions operated by Ethereum nodes in the background.

At the same time, the largest LST stETH is accepted by almost all liquid restaking protocols, while some LRT protocols can accept multiple different LST deposits.

It's worth noting that Puffer Finance is essentially a native restaking protocol. Currently in the pre-mainnet phase, it accepts stETH deposits. After the mainnet goes live, the protocol plans to swap all stETH for ETH and natively restake on EigenLayer. Similarly, Ether.fi is a native re-staking protocol, but at this stage it can accept multiple types of liquid staking token (LST) deposits.

Two types of LRTs: based on blanket LSTs or isolating each LST

Most liquidity restaking protocols employ a basket LST-based approach that allows the deposit of various liquid staking tokens (LST) in exchange for the same liquid restaking token (LRT). Eigenpie employs a unique segregated liquidity staking token strategy. It accepts 12 different LSTs, issuing a unique LRT for each LST, resulting in 12 unique LRTs. While this approach mitigates the risks associated with putting different LSTs together, it may lead to the diversification of the liquidity of each individual LRT.

Restaking via the Ethereum Layer 2 protocol

Due to the current high gas costs on Ethereum mainnet, several LRT protocols have been able to restake through Ethereum Layer 2, providing users with a lower-cost alternative. Renzo Protocol has launched re-staking capabilities on Arbitrum and BNB Chain. Similarly, Ether.fi is also planning to launch a re-staking service on Arbitrum.

Risks and benefits of liquid restaking

The liquid repledge protocol deploys a set of smart contracts on top of EigenLayer to facilitate user interaction, helping users deposit and withdraw ETH or LST from EigenLayer, as well as minting/destroying liquid repledge tokens (LRT). As a result, the use of LRT entails the risk of a liquid restaking protocol.

In addition, the risk also depends on whether the liquid re-staking protocol provides LST re-staking services. In native restaking, funds are deposited into the Ethereum Beacon Chain. However, when using LST restaking, the funds are deposited into EigenLayer's smart contract, which introduces smart contract risk from EigenLayer. Using LSTs also involves smart contract risks associated with liquid staking protocols. As a result, users who hold LRT backed by LST are exposed to three types of smart contract risk: the EigenLayer, the specific LST used, and the risks associated with the LRT protocol itself.

Although native re-staking faces fewer layers of smart contract risk, liquid re-staking protocols that provide native re-staking services require participation in Ethereum staking. They can choose to partner with a professional staking company, run their own Ethereum node, or support individual independent validators.

Using established liquid staking tokens, such as Lido's stETH or Frix's sfrxETH, can provide reliable staking yields. These LST protocols have spent years perfecting their Ethereum staking services, and they are more experienced in maximizing staking rewards and minimizing slashing risks.

Decentralization of validators

When ETH/LST is deposited into EigenLayer, these assets will be distributed to a staking operator. This operator is responsible for performing verification services on Ethereum, as well as on AVS, an active verification service that they choose to secure. In addition to Ethereum staking rewards, stakers also receive rewards from these AVS. If an operator violates the rules set by AVS, then there is a risk that the staked assets will be cut.

If the restaking market is dominated by a handful of large operators responsible for securing the majority of AVS, then there is a risk of centralization and potential collusion. These operators with large hash rates may dominate restaking across numerous AVS networks and collude to use repledged ETH to influence or directly control these AVSs.

EigenLayer's Active Authentication Service (AVS) feature has not yet been activated, and only a limited number of AVS will initially be available. Most liquid restaking protocols do not disclose in detail how they will choose a restaking operator and AVS. At this stage, stakers are mainly exposed to the risk of slashing at the Ethereum level. For restaking via LST, this risk stems from the LST protocol itself. Native liquid restaking protocols employ a variety of methods for staking Ethereum. Some rely on large staking service providers like Figment and Allnodes, while some are developing infrastructure to facilitate independent validators.

DeFi integration

The sole purpose of a liquidity repledge token (LRT) is to unlock liquidity for use in DeFi. Every liquid restaking protocol is working to integrate various types of DeFi protocols. Currently, there are three main categories of DeFi integrations: yield protocols, DEXs, and lending protocols.

Earnings Agreement

Pendle Finance, a leading protocol in the space, has launched LRT pools that allow users to speculate on EigenLayer earnings and credits. Most LRT protocols are already integrated with Pendle.

DEX liquidity

Most LRTs have liquidity pools on major DEXs like Curve, Balancer, Maverick. We measure the liquidity of each LRT by the slippage when exchanging 1 K LRT to ETH on LlamaSwap. It's important to note that this is only a rough measure, as most LRTs are yield accumulation tokens that increase in value over time as staking yields accrue. As many LRT protocols are still in their infancy, the gains accumulated to date are relatively small compared to the principal.

Swell's rswETH, Renzo's ezETH, and Etherfi's weETH all have plenty of liquidity on DEXs, with little to no slippage when trading 1 K LRT.

Eigenpie has taken a unique approach by issuing 12 separate liquid restaking tokens, corresponding to 12 supported LSTs. While this strategy effectively isolates the risks associated with any single LST, it also leads to liquidity dispersion between different tokens.

Lending Protocol

LRTs carry more layers of risk than other types of assets. As a result, lending protocols are extra cautious when considering LRT as collateral for loans. Currently, lending protocols have limited acceptance of LRTs. Etherfi's weETH is accepted by several lending protocols because it is an existing LST, which has been transformed into LRT.