Original author: 0xEdwardyw
Original source: Odaily
Restaking is expected to become a key narrative in this bull run, with more than ten liquidity restaking protocols competing for EigenLayer’s total locked value of over $11 billion.
This article compares the six major liquidity re-pledge protocols, hoping to provide readers with an easy-to-understand way to understand the nuances between various liquidity re-pledge protocols. Given the numerous trade-offs in different LRT designs, investors should make choices based on their personal preferences.
TL;DR, here are the key features of each liquid re-staking protocol:
Puffer Finance and Ether.fi are the two largest liquid restaking protocols by market cap of liquid restaking tokens. Both focus on native restaking, which offers fewer layers of risk than LST restaking. In addition, both protocols are committed to promoting 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 such as stETH, ETHx, and wBETH. It is worth mentioning that Renzo extends the re-staking service to the second layer of Ethereum, providing users with the benefit of lower gas fees.
Swell was originally a liquid pledge protocol, and its liquid pledge token is swETH. The swETH market size is about $950 million. Swell launched a re-pledge service and launched a liquid re-pledge token rswETH. It provides native re-pledge and swETH re-pledge.
Eigenpie is a sub-DAO of Magpie that focuses on LST re-staking. It accepts 12 different LSTs and issues corresponding 12 different LRTs, 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 re-staking, native re-staking and LST (liquidity staking token) re-staking. For native re-staking, validators stake their $ETH natively on Ethereum’s Beacon Chain and point to EigenLayer. LST re-staking allows holders of liquidity staking tokens (such as stETH) to re-stake their assets into the EigenLayer smart contract. Native re-staking is more difficult for retail users to operate because it requires running an Ethereum validator node.
The advantage of native ETH re-staking is that it is unrestricted; EigenLayer sets an upper limit on LST re-staking, and only accepts deposits within a certain amount or within a specified time frame. Native re-staking is not subject to these restrictions and can be deposited at any time. Native re-staking also has an advantage in terms of security because it does not involve the risks of the LST protocol.
Despite these differences, both native re-staking on EigenLayer and LST re-staking require assets to be deposited and locked, making them unavailable for other uses.
Liquidity Re-Pledge Protocol Releases Locked Liquidity
Liquid Restaked Token (LRT) is similar to the Liquidity Staking Token on Ethereum. It is a tokenized representation of assets deposited in EigenLayer, effectively releasing the liquidity that was originally locked.
The services provided by the liquidity re-pledge protocol are divided into native re-pledge service and LST re-pledge service. Most liquidity re-pledge protocols provide native re-pledge to users without requiring users to run Ethereum nodes. Users only need to deposit ETH into these protocols, and these protocols will handle the transactions of Ethereum node operations in the background.
Meanwhile, the largest LST, stETH, is accepted by almost all liquid re-staking protocols, while some LRT protocols can accept multiple different LST deposits.
It is worth noting that Puffer Finance is essentially a native re-staking protocol. Currently, in the pre-mainnet stage, it accepts stETH deposits. After the mainnet is launched, the protocol plans to exchange all stETH for ETH and perform native re-staking on EigenLayer. Similarly, Ether.fi is a native re-staking protocol, but at the current stage it accepts multiple types of Liquid Staking Token (LST) deposits.
Two types of LRT: based on a basket of LSTs or isolating each LST
Most liquidity re-staking protocols adopt a basket-based approach of LST, allowing deposits of various liquidity staking tokens (LST) in exchange for the same liquidity re-staking token (LRT). Eigenpie adopts a unique segregated liquidity staking token strategy. It accepts 12 different LSTs and issues a unique LRT for each LST, resulting in 12 unique LRTs. While this approach mitigates the risks associated with putting different LSTs together, it can lead to fragmented liquidity for each individual LRT.
Restaking via Ethereum Layer 2
Due to the current high gas costs on Ethereum mainnet, several LRT protocols have been able to re-stake through Ethereum Layer 2, providing users with a lower-cost alternative. Renzo Protocol has launched re-staking capabilities on Arbitrum and BNB chains. Similarly, Ether.fi also plans to launch re-staking services on Arbitrum.
The risks and benefits of liquid re-pledge
The Liquidity Re-Pledge 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, and mint/destroy Liquidity Re-Pledge Tokens (LRT). Therefore, using LRT requires taking on the risks of the Liquidity Re-Pledge Protocol.
Additionally, the risk depends on whether the liquid re-staking protocol offers LST re-staking services. In native re-staking, funds are deposited into the Ethereum beacon chain. However, when using LST re-staking, funds are deposited into EigenLayer's smart contract, which introduces smart contract risks from EigenLayer. Using LST also involves smart contract risks associated with the liquid staking protocol. Therefore, users holding LRT backed by LST are exposed to three types of smart contract risks: risks associated with EigenLayer, the specific LST used, and the LRT protocol itself.
Although native restaking faces fewer layers of smart contract risk, liquidity restaking protocols that provide native restaking services need to participate in Ethereum staking. They can choose to work with professional staking companies, operate Ethereum nodes themselves, or support individual independent validators.
Using mature liquid staking tokens such as Lido’s stETH or Frax’s sfrxETH can provide reliable staking returns. 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 are assigned to a staking operator. This operator is responsible for performing validation services on Ethereum, as well as on the active validation services AVS they choose to protect. In addition to Ethereum staking rewards, stakers also receive rewards from these AVS. If the operator violates the rules set by the AVS, then the staked assets are at risk of being slashed.
If the re-staking market is dominated by a few large operators responsible for securing the majority of AVS, there is a risk of centralization and potential collusion. These operators with large computing power could dominate re-staking across many AVS networks and collude to use re-staking ETH to exert influence or direct control over these AVS.
EigenLayer's Active Validation Service (AVS) feature is not yet activated, and only a limited number of AVS will be available initially. Most liquid restaking protocols do not disclose detailed information about how they will select restaking operators and AVS. At this stage, stakers are primarily exposed to slashing risk 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 Ethereum staking. Some rely on large staking service providers such as Figment and Allnodes, while others are developing infrastructure to facilitate independent validators.
DeFi Integration
The sole purpose of the Liquidity Re-Pledge Token (LRT) is to unlock liquidity for use in DeFi. Each liquidity re-pledge protocol is working to integrate various types of DeFi protocols. Currently, there are three main categories of DeFi integrations: yield protocols, DEX, and lending protocols.
Revenue Agreement
Pendle Finance is a leading protocol in this space, which has launched an LRT pool that allows users to speculate on EigenLayer earnings and points. Most LRT protocols have integrated with Pendle.
DEX Liquidity
Most LRTs have liquidity pools on major DEXs such as Curve, Balancer, and Maverick. We measure the liquidity of each LRT by the slippage when exchanging 1 K LRT for ETH on LlamaSwap. It is important to note that this is only a rough measure as most LRTs are yield accumulating tokens whose value increases over time as staking rewards accumulate. As many LRT protocols are still in their infancy, the accumulated rewards to date are relatively small compared to the principal.
Swell’s rswETH, Renzo’s ezETH, and Etherfi’s weETH all have enough liquidity on DEXs to trade 1K LRT with little to no slippage.
Eigenpie took a unique approach by issuing 12 separate liquid re-staking tokens, one for each of the 12 supported LSTs. While this strategy effectively isolates the risk associated with any single LST, it also results in a fragmentation of liquidity between different tokens.
Loan Agreement
Compared to other types of assets, LRT carries more layers of risk. Therefore, lending protocols are extremely cautious when considering LRT as collateral for loans. Currently, lending protocols have limited acceptance of LRT. Etherfi's weETH is accepted by multiple lending protocols because it is an existing LST that has been transformed into LRT.
