Ethereum Staking Evolution from LSTs to LRTs

2024-06-26, 06:03

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## [TL; DR]
Liquid staking and restaking have created new ways of earning crypto assets.

EigenLayer and Lido are the two leading liquid staking and restaking protocols.

The liquid staking and restaking TVL is more than $8 billion. 
## Introduction 
The rapid rate of innovation in the blockchain sector often results in new products and services which are worth investing in. For a long time, staking was one of the most important investment opportunities. Now, some crypto firms have capitalized on the demand for traditional staking services to introduce liquid staking and restaking opportunities.
This article explores the concepts of liquid staking and restaking and how crypto investors can benefit from these. We will also look at the difference between liquid staking tokens (LSTs) and liquid restaking tokens (LRTs).
## New Crypto Investment Opportunities: Liquid Staking and Liquid Restaking
Liquid staking and liquid restaking are key aspects of blockchains that use the [proof-of stake consensus](https://www.gate.io/learn/articles/what-is-proof-of-stake/60 "proof-of stake consensus") mechanism. These two concepts are an extension of the traditional staking process where investors lock their cryptocurrencies for a certain period. Primarily, staking is important to the blockchain system in two main ways.

First, with blockchains that use the proof-stake consensus mechanism, staking is part of the system used for securing the networks. The reason is that the crypto investors who stake their tokens can become validators and earn rewards for that. As an example, <a href="/th/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> investors who stake at least 32 ETH become the network’s validators. Second, staking reduces the circulating supply of a cryptocurrency which increases its short-term scarcity. Such a situation may help to boost the price of the specific coin or token.

Read also: [The 9 Best Proof of Stake (POS) Tokens in 2024](https://www.gate.io/learn/articles/the-9-best-proof-of-stake-pos-tokens-in-2024/2411 "The 9 Best Proof of Stake (POS) Tokens in 2024")

**Liquid Staking**: With liquid staking the investors who stake their cryptocurrencies get other crypto assets called liquid staking tokens (LSTs) they can use in other DeFi protocols for various reasons such as borrowing and lending. Therefore, the Liquid Staking Token (LST) represents a tokenized version of the cryptocurrency the investors have staked. With that the investors participate in other DeFi market activities without a need to unstake their original crypto assets. For example, the LSTs can be traded on cryptocurrency exchanges.

Thus, liquid staking creates a new earning opportunity for the investors. They can earn additional rewards from their investments.  An example of an LST is stETH which Lido offers the investors who stake their ETH. What this means is that the stETH holders can lend, trade them or provide liquidity on different DeFi platforms which enables them to earn more from their original investment.

**Liquid Restaking**: Liquid restaking is [the process of staking the LST tokens](https://www.gate.io/learn/articles/how-to-earn-passive-income-by-restaking-liquid-staking-tokens/1759 "the process of staking the LST tokens"). Alternatively, the investors can reinvest the LSTs in other yield-generating opportunities without unstaking their original crypto assets. In addition to increasing their potential earnings they also improve liquidity in the crypto ecosystems they invest in. After restaking the LST the investors get another type of crypto asset called Liquid Restaking Token (LRT), which they can also reinvest.

Basically, liquid staking and restaking enable crypto investors to <a href="/th/price/compound-comp" target="_blank" class="blog_inner_link">Compound</a> their earnings through investing in different DeFi platforms without unstaking their primary assets. At the same time they help to secure the networks they have invested in. Thus, liquid restaking has various advantages that include high capital efficiency, liquidity enhancement  as well as earning additional yields through investing LSTs in other DeFi protocols.
One reason the LRTs are popular is that they support Actively Validated Services (AVS) which include dApps, layer-2 networks, cross-chain bridges and data layers. Since the AVSs are integrated with the Ethereum blockchain they no longer need to have their own separate consensus mechanisms. Therefore, the investors can [restake their LSTs](https://www.gate.io/learn/articles/an-analysis-of-genesis-lrt/2455 "restake their LSTs") to secure the AVSs.

## The Shanghai Upgrade and the rise of Liquid Staking Derivatives (LSDs)
The game changers on how the Ethereum blockchain is operating were two key upgrades, the Merge and the [Shanghai Upgrade](https://www.gate.io/blog_detail/2108/everything-about-the-shanghai-upgrade-and-how-to-learn-more-on-gateio "Shanghai Upgrade"). The Merge upgrade that occurred in September 2022 changed the Ethereum protocol from the proof of work (PoW) consensus mechanism to the proof-of-stake one. As a result, the validators are required to stake 32 ETH and get an annual return of between 4-5%.

The additional spark for the current staking scenario was the Shanghai Upgrade that occurred in April 2023 that enabled crypto investors who staked their ETH in December 2022 to withdraw both their principal and the reward earned. That development led to a surge in Liquid Staking Derivatives (LDS).
## Lido and EigenLayer as key players
Although there are several liquid staking platforms, Lido and EigenLayer are the leaders in this regard. As a fact, EigenLayer launched and pioneered the liquid restaking in June 2023. That crypto protocol, with a TVL that exceeds $1.5 billion, was developed for restaking to enhance crypto economic security. It enables the stakers to use their staked ETH and LSTs to secure other protocols that exist on the Ethereum blockchain. Thus, EigenLayer’s staked ETH and Liquid Staking Derivatives enable the investors to earn from multiple protocols.

Apart from bolstering the security of the various Ethereum hosted dApps EigenLayer’s approach enhances flexibility for the developers. Just like EigenLayer, Lido allows investors to stake ETH and get stETH in return which they can use as collateral or for lending. On the other hand, they can still earn their daily staking rewards. It is worth noting that the stakers can unstake their ETH at any time through the stETH-ETH liquidity pools.

Read also: [LST-Backed Stablecoins: A New Frontier in DeFi Space](https://www.gate.io/learn/articles/lst-backed-stablecoins-a-new-frontier-in-defi-innovation-and-opportunity/2200 "LST-Backed Stablecoins: A New Frontier in DeFi Space")
## Risks of Liquid Restaking
Whereas the concepts of liquid staking and restaking sound enticing they have some risks. Let’s briefly discuss some of the risks.

**Smart Contract Risk**: Malicious actors may attack the staking and restaking protocols such as Lido and EigenLayer leading to the loss of much LSTs and LRTs. This is because bugs and vulnerabilities may exist in the staking protocols.
**Liquidation Risks**: Crypto market volatility may lead to sharp fall in values of different LSTs and LRTs which may lead to liquidations. If an automatic sell-off of these tokens occurs on a large scale that may lead to a domino effect.
**Liquidity Risks**: At certain times the market may face liquidity challenges that makes it difficult for the investors to convert their LSTs to the primary crypto assets. Extended lock-up periods and limited market depth may lead to such challenges.
**Depegging Risks**: The LRTs and LSTs’ prices [may deviate too much](https://www.gate.io/blog_detail/1302/the-impact-of-usdt-depegging-on-the-crypto-market "may deviate too much") from those of the primary assets due to various reasons including speculation, change in market sentiment and bugs in smart contracts.
**Slashing Risk**: Some staking and restaking protocols may slash the staked tokens if the validators fail to abide by their provisions.
**Regulatory Risk**: Some governments may introduce crypto regulations that affect the performance of these LSTs and LRTs. Therefore, it is essential for the investors to keep on scanning the regulatory environment around the globe. The regulations of leading economies like the United States and regional bodies such as the European Union may affect price movements of these digital assets.

As an example, EigenLayer may meet the Howey Test criteria of the United States. As a result, its digital assets, the LDS, may be classified as security crypto assets. The reason is that EigenLayer accepts crypto assets deposits from non-validators for yield, which is similar to staking on exchanges.
## TVL in the context of LSTs and LRTs 
LST and LRT protocols [such as Lido](https://www.gate.io/learn/articles/lido/1503 "such as Lido") and [EigenLayer](https://www.gate.io/blog_detail/2793 "EigenLayer") have managed to attract many users due to the compounding of returns. Thus, the increase in the number of the investors for such platforms have led to a rise in the total value locked of LSTs and LRTs. [TheBlock reports](https://www.theblock.co/post/285822/liquid-restaking-platforms-jump-to-near-8-billion-in-total-value-locked "TheBlock reports") that liquid restaking platforms have a cumulative of more than $8 billion in total value locked (TVL). For example, the TVLs of Etherfi, Renzo, Kelp and Puffer increased rapidly in April. The next graph shows Ethereum liquid restaking total value locked.

Read also: [How to Buy Eigenlayer (EIGEN)](https://www.gate.io/how-to-buy/eigenlayer-eigen "How to Buy Eigenlayer (EIGEN)")
![](https://gimg2.gateimg.com/image/article/17193817734.jpeg)
Liquid Restaking TVL -[ TheBlock](https://www.theblock.co/post/285822/liquid-restaking-platforms-jump-to-near-8-billion-in-total-value-locked " TheBlock")

As you note the liquid staking TVL is increasing at an astronomical rate. For instance, during April EigenLayer had a TVL of 13 billion. 
## Conclusion
Liquid staking and restaking have opened new ways for crypto investors to compound their returns as well as enhance the security of various dApps on the Ethereum network. Lido and EigenLayer are the two leading staking and restaking platforms. LSTs and LRTs, like the other digital assets, are prone to various risks such as liquidation and depegging.
## FAQs about Staking and Restaking
### What is a liquid restaked token?
A liquid restaked token is a tokenized version of a liquid staked cryptocurrency. For example, an investor gets a liquid restaked token (LRT) after staking an LST.
### What is the difference between liquid staking and liquid restaking?
Liquid staking is when an investor stakes the token he/she gets after staking a primary cryptocurrency like ETH. Liquid restaking occurs when an investor stakes the token he/she gets after staking a cryptocurrency like ETH.
### What are the advantages of liquid staking tokens?
Liquid staking tokens lead to compound returns, capital efficiency and enhances liquidity in a crypto ecosystem. This also means that some Actively Validated Services (AVSs) which include dApps, layer-2 networks, cross-chain bridges and data layers do not need to secure their networks as they rely on the Ethereum security system.
### What are LRTs in crypto?
Liquid Restaking Token LRTs are a type of crypto asset which investors get after staking Liquid Staking Tokens (LSTs). As a result, investors can use LRTs for other DeFi uses without unstaking the LSTs.

<div class="blog-details-info">
<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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