Original title: How Liquid Are Liquid Restaking Tokens?
Original author: Kairos Research
Original translation: Ladyfinger, Blockbeats
Editor’s Note:
EigenLabs’ newly launched data availability AVS, EigenDA, represents the beginning of the re-staking era on mainnet. This article aims to provide a comprehensive analysis of Liquidity Re-staking Tokens (LRTs), exploring their integration in the DeFi ecosystem and comparison with traditional staking tokens. We pay special attention to the current state of market liquidity and potential opportunities and challenges in the future lending market. Through this report, readers can get a clear understanding of this emerging market and understand how LRTs affect staking and re-staking strategies on a global scale.
EigenLayer's first AVS landed on the mainnet
Recently, EigenLabs released its data availability AVS, and EigenDA officially launched on the mainnet, which marks the beginning of the re-staking era. Although the road to the EigenLayer market is still long, one trend is already very clear, that is, Liquid Re-staking Tokens (LRT) will become the main way for re-stakers. More than 73% of all EigenLayer staking is carried out through LRT, but how liquid are these assets? This report delves into this question and discusses the overall details of EigenLayer.
Introduction to EigenLayer and LRT
EigenLayer enables the reuse of ETH on Ethereum's consensus layer through a new crypto-economic original concept - "re-staking". ETH can be re-staked on EigenLayer in two main ways: through native ETH re-staking or using Liquid Staking Tokens (LST). The re-staked ETH is used to support an additional application called Active Verification Service (AVS), which in turn allows re-stakers to earn additional staking rewards.
The main concern users have about staking and re-staking is the opportunity cost of staking ETH. For native ETH staking, this issue has been addressed with Liquidity Staking Tokens (LST), which can be thought of as liquidity receipt tokens that represent the amount of ETH someone has staked. The LST market on Ethereum is currently ~$48.65 billion, making it the largest DeFi sector by market size. Today, LST accounts for approximately 44% of all staked Ether, and as re-staking continues to gain popularity, we expect the Liquidity Re-staking Token (LRT) industry to follow a similar growth pattern, or perhaps even more aggressively.
While LRTs share some similar features with LSTs, their missions are very different. The end goal of each LST is essentially the same, which is to stake a user’s ETH and provide a liquidity receipt token. However, for LRTs, the end goal is to delegate a user’s stake to one or more operators who will back a number of AVSs. How each operator allocates its delegated stake to these different AVSs is up to the individual operator. Therefore, the operator to whom LRTs delegate their stake has a large impact on the overall liveness, operational performance, and security of the re-staked ETH. Finally, they must also ensure that appropriate risk assessments are performed on the unique AVSs supported by each operator, as slashing risk may vary depending on the service provided. It is important to note that most Active Validation Services (AVSs) have little to no slashing risk at launch, but over time and as the staking market becomes more open and permissionless, we will gradually see these protections removed.
However, despite the different structural risks, LRTs reduce the opportunity cost of re-staking capital by providing a liquidity receipt token that can be used as productive collateral in DeFi, or used to ease withdrawal periods. This last point is especially important because the main benefit of LRTs is to bypass the traditional withdrawal period, which is 7 days for EigenLayer. Given this core principle of LRTs, we expect them to naturally face net selling pressure, as the barriers to entry to re-staking are low, but the barriers to exit are high, so the liquidity of these LRTs will be their lifeblood.
Therefore, as EigenLayer’s TVL continues to climb, it’s important to understand the forces driving the protocol’s growth and how those forces may impact inflows/outflows in the coming months. As of the time of writing, 73% of all EigenLayer deposits are made in Liquidity Re-Staking Tokens (LRT). To provide a context, on December 1, 2023, deposits in LRT were approximately $71.74 million. Today, April 9, 2024, they have grown to approximately $10 billion, an increase of over 13,800% in less than four months. However, as LRT continues to dominate EigenLayer’s re-staking deposit growth, there are some important factors to consider.
Not all LRTs are composed of the same underlying assets. In the long run, LRTs will differ in their share commitments to AVS, but will not vary much in the short term. Most importantly, the liquidity characteristics of different LRTs vary widely.
Given that mobility is the most critical advantage of LRT, the bulk of this report will focus on the last point.
Currently, the bullish case for EigenLayer deposits is primarily motivated by the speculative nature of Eigen Points, which we can assume will translate into some form of airdrop distribution of potential EIGEN tokens. There are currently no AVS rewards coming online, which means there is currently no additional incremental yield on these LRTs. In order to drive and maintain over $13.35 billion in TVL, the AVS market must naturally find a balance between the incremental yield required by re-stakers and the price of security that AVS is willing to pay.
For LRT depositors, we have seen the huge success of EtherFi with its ETHFI governance token airdrop at the start, with a fully diluted valuation of ~$6 billion as of now. Taking all of the above into account, it is becoming increasingly likely that some funds may gradually flow out and re-stake after the launch of EIGEN and other expected LRT airdrops.
However, in terms of reasonable yields, users will be hard-pressed to find higher yields in the Ethereum ecosystem that do not involve EigenLayer. There are several interesting yield opportunities in the Ethereum ecosystem. For example, Ethena is a synthetic stablecoin backed by staked ETH and hedged through ETH futures. The protocol currently offers an annualized yield of about 30% on its sUSDe product. In addition, as users become more comfortable with interoperability and bridging to new chains, users seeking yield may look elsewhere, potentially driving a large-scale outflow of capital from Ethereum.
Nonetheless, we think it is reasonable to assume that there won’t be any incremental staking yield events larger than potential EIGEN token airdrops to re-stakers, and that large, blue-chip AVSs with nine-figure valuations in the private market may also issue their tokens to re-stakers. Therefore, it is reasonable to assume that a certain percentage of ETH will flow out of the EigenLayer deposit contract via withdrawals following these events.
Given that EigenLayer withdrawals have a seven-day cooldown period, and the vast majority of capital is re-collateralized via LRT, the quickest exit path would be to swap your LRT for ETH. However, the liquidity characteristics of these different LRTs vary widely, and many are not accessible for mass exits at market prices. Additionally, as of writing, EtherFi is the only LRT provider that has enabled withdrawals.
LRT trading at a lower value than its underlying asset could lead to painful arbitrage cycles in the re-staking protocol. Imagine an LRT trading at 90% of its underlying ETH value. A market maker arbitrageur might step in to buy this LRT and push the redemption process, hoping to make a profit of about 11.1% while hedging the ETH price. From a supply and demand perspective, LRT is more likely to face net selling pressure as sellers may avoid the 7-day withdrawal queue. On the other hand, users who wish to re-stake may deposit their ETH immediately, and buying LRT from the open market has little benefit to the staked ETH already owned.
Data Tracking
The data portion of this month's report, starting below, will track LRT's growth, adoption and liquidity conditions, as well as any notable news we feel should be covered.
Top 5 LRT Overview and Growth:
LRT Liquidity & Total
Staking via LST and LRT has several key advantages over traditional staking, but these advantages are almost completely undermined if LRT itself is illiquid. Liquidity refers to “the efficiency or ease with which an asset can be quickly converted into cash without affecting its market price.” It is critical to ensure that LRT issuers provide large holders with sufficient on-chain liquidity to enable them to redeem receipt tokens at a near 1:1 value.
Each existing LRT has very unique liquidity characteristics. We expect these conditions to persist for several reasons:
1. Some protocols may be lucky enough to get investors and users to provide liquidity for their LRT in the early stages;
2. There are many ways to incentivize liquidity through grants, token distribution, on-chain bribery systems, or through the anticipation of events such as "points";
3. Some protocols will have more complex and centralized liquidity providers who will keep their LRT pegged to the underlying asset close, with less overall USD liquidity. It should be noted that concentrated liquidity only works within a tight price range, and any price movement outside the selected range will result in significant price impact.
Here is a very simplified breakdown of on-chain pool liquidity for the top five LRTs on Ethereum mainnet (plus Arbitrum). Exit liquidity refers to the USD value of the cash-like side of an LRT liquidity pool.
The five largest LRT cohorts have over $136M in ready-made pool liquidity across platforms Curve, Balancer, and Uniswap, which is impressive considering the nascent nature of the restaking industry. However, to provide a clearer picture of the liquidity of each LRT, we will apply a liquidity/market cap ratio to each asset.
Compared to the top liquid staking token stETH, LRT’s liquidity ratios are not overly concerning. However, given the additional risk layer introduced by re-staking, and the seven-day withdrawal cycle added by Eigenlayer that exceeds Ethereum’s unstaking queue, LRT’s liquidity may be more important than LST’s liquidity. In addition, stETH is traded on several large centralized exchanges, and its order books are managed by professional high-frequency trading firms. This means that stETH’s liquidity far exceeds what is seen on-chain. For example, on OKX and Bybit, ±2% of the order book liquidity exceeds $2 million.
Therefore, LRT can also work with centralized exchanges to strengthen integration and educate market makers about the risks and rewards of being liquidity providers in these centralized venues.
LRT data
As shown in the above chart, rsETH, rswETH, and ezETH all trade relatively closely on a 1:1 basis with ETH, with a slight premium. Due to their nature, they should all trade at a "premium" in the future. Since these are non-rebase tokens, unlike stETH, they automatically compound staking rewards, which is then reflected in the token price. This is also why 1 wstETH currently trades at around 1.16 ETH. In theory, over time, the "fair value" of these tokens should continue to grow due to the factor of time*staking rewards and be reflected in the increased fair value of these tokens.
These LRT pegs are important because they essentially represent the level of trust market participants have in the project as a whole, which is directly impacted by the stake participants put in or the willingness of arbitrageurs to trade these premiums and discounts to keep the tokens trading at “fair value.”
As can be seen from the trading of the two most liquid LRTs, ezETH and weETH, their trading prices have been relatively stable over time, mostly in line with their fair values. EtherFi's weETH has slightly deviated from fair value, which can be mainly attributed to the launch of its governance token, where opportunistic farmers swapped out tokens, and naturally, other market participants stepped in to trade this discounted arbitrage. Once Renzo launches its governance token, we can expect to see similar events.
KelpDAO’s rsETH traded at a discount to fair value at launch, but has since slowly but steadily returned to parity.
For rswETH, it has been trading slightly below its fair value for most of the time, but recently seems to have reached parity with its fair value. Among all these LRTs, pufETH is the main outlier as they only trade at below fair value. However, this trend seems to be coming to an end as its trading value is gradually approaching the fair value of its underlying assets.
With the exception of EtherFi, none of these LRT providers have enabled withdrawals. We believe that ample liquidity coupled with the ability for users to withdraw funds at will will increase market participants’ confidence in trading these discounts or premiums.
LRT in the DeFi ecosystem
Once LRT is further integrated within the broader DeFi ecosystem, especially the lending market, its importance will increase significantly. For example, when we look at the current currency markets, specifically LST like wstETH/stETH is the largest collateralized asset on Aave and Spark, providing approximately $4.8 billion and $2.1 billion respectively. As LRT develops more and more in the DeFi ecosystem, we expect them to surpass LST in terms of final amount, especially as the market understands the risk and product structure better, they will become more valuable based on time. Lindy Features. Additionally, there are governance proposals on both Compound and Aave to introduce Renzo’s ezETH.
However, as mentioned before, liquidity will continue to be the lifeblood of these products to ensure the breadth and depth of their DeFi integration and overall durability.
Conclusion
While stETH got an early lead and dominated due to first mover advantage, a series of LRTs mentioned in this report were launched at roughly the same time and market momentum was on their side. We expect this to be a winner-takes-most market structure as most liquid assets apply power laws; simply put, liquidity begets liquidity. This is why Binance continues to dominate the centralized exchange market share despite all the negative news and turmoil.
In general, liquidity re-staking tokens are not extremely liquid. Liquidity is decent, but there is greater nuance to each individual LRT, which will only increase as delegation strategies start to differ in the long run. For first-time users, it may be easier to understand LRT as a staking ETF. Many will compete for the same market share, but allocation strategies and fee structures will likely be the determining factors in who the winners and losers are in the long run. Additionally, as products become more differentiated, liquidity will become more important, considering how long withdrawal cycles are.
In the crypto space, seven days can sometimes feel like a month in normal time, as global markets operate 24/7. Finally, as these LRTs begin to integrate into lending markets, pool liquidity will become even more important, as liquidators will only want to take acceptable risks, depending on the different liquidity characteristics of the underlying collateral in question.
