Author: 0xEdwardyw
Re-staking is poised to become a key narrative in this bull run, with more than ten liquidity re-staking protocols vying 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 their choice based on their personal preferences.
TL, DR, the following are the key features of each liquid re-pledge protocol:
- Puffer Finance and Ether.fi are the two largest liquid staking protocols by market cap of liquid staking tokens. Both focus on native re-staking, which has fewer risk levels than LST re-staking. Additionally, both protocols work to promote decentralization among 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 has extended the re-staking service to the second layer of Ethereum, providing users with the benefit of lower gas fees.
- Swell was originally a liquid staking protocol, and its liquid staking token is swETH. The swETH market size is approximately US$950 million. Swell launched the re-pledge service and launched the liquid re-pledge token rswETH. It provides native re-staking and swETH re-staking.
- Eigenpie is a sub-DAO of Magpie, focusing on LST re-pledge. It accepts 12 different LSTs and issues corresponding 12 different LRTs, providing a unique isolated LST re-pledge model.
Different Types of Re-Staking and Liquidity Re-Staking Tokens
Two re-pledge types on EigenLayer
There are two types of re-staking, native re-staking and LST (Liquidity Staking Token) re-staking. For native re-staking, validators place their $ETH native stake on Ethereum's Beacon Chain and point it to EigenLayer. LST re-pledge allows holders of liquid staking tokens (such as stETH) to re-pledge their assets into the EigenLayer smart contract. Because of the need to run an Ethereum validator node, native re-staking is more difficult for retail users to operate.
The advantage of native ETH re-hypothecation is that it is not restricted; EigenLayer sets a cap on LST re-hypothecation and only accepts deposits of LST within a specific upper limit or within a specified time range. Native re-staking is not subject to these restrictions and can be deposited at any time. Native re-staking also has advantages in terms of security because it does not involve the risks of the LST protocol.
Despite these differences, both native restaking and LST restaking on EigenLayer 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 pledged token on Ethereum. It is a tokenized representation of the 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 services and LST re-pledge services. Most liquidity re-staking protocols offer native re-staking to users without requiring them to run an Ethereum node. Users simply deposit ETH into these protocols, which handle Ethereum node operations in the background.
At the same time, 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-pledge protocol. Currently in the pre-mainnet stage, it accepts stETH deposits. After the mainnet goes online, the protocol plans to exchange all stETH for ETH and perform native re-staking on EigenLayer. Similarly, Ether.fi is a native restaking protocol, but at the current stage accepts multiple types of liquid staking token (LST) deposits.
Two types of LRT: based on a blanket LST or isolating each LST
Most liquidity re-staking protocols adopt a basket-based LST approach, allowing various Liquidity Re-staking Tokens (LST) to be deposited in exchange for the same Liquidity Re-staking Token (LRT). Eigenpie employs a unique strategy of segregating liquid staking tokens. 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 pooling different LSTs, it may result in fragmentation of the liquidity of each individual LRT.
Re-staking via the Ethereum Layer 2 protocol
Due to the current high gas costs on the Ethereum mainnet, several LRT protocols have enabled re-staking through Ethereum Layer 2, providing users with lower-cost alternatives. Renzo Protocol has launched re-staking functionality on the Arbitrum and BNB chains. Similarly, Ether.fi also plans to launch a re-staking service on Arbitrum.
Risks and benefits of liquid re-pledge
The liquid re-pledge protocol deploys a set of smart contracts on EigenLayer to facilitate user interaction, help users deposit and withdraw ETH or LST from EigenLayer, and mint/destroy liquid re-pledge tokens (LRT). Therefore, using LRT requires bearing the risks of the liquid re-hypothecation protocol.
In addition, the risk also depends on whether the liquid re-pledge protocol provides LST re-pledge services. In native re-staking, funds are deposited into the Ethereum beacon chain. However, when using LST to re-pledge, the funds are deposited into EigenLayer's smart contract, thus introducing 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 related to EigenLayer, the specific LST used, and the LRT protocol itself.
Although native re-staking faces fewer smart contract risk layers, liquidity re-staking protocols that provide native re-staking services need to participate in Ethereum staking. They can choose to partner with a professional staking company, operate an Ethereum node 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 at maximizing staking rewards and minimizing slashing risks.
Decentralization of validators
When ETH/LST is deposited into EigenLayer, these assets are allocated to a staking operator. This operator is responsible for performing verification services on Ethereum, as well as on the active verification service AVS they choose to protect. In addition to Ethereum staking rewards, stakers will also receive rewards from these AVS. If an operator violates the rules set by AVS, then the pledged assets are at risk of being reduced.
If the re-hypothecation market is dominated by a few large operators responsible for securing the majority of AVS, then there will be risks of centralization and potential collusion. These operators with huge computing power may dominate re-hypothecation in many AVS networks and collude to use the re-hypothecation ETH to influence or directly control these AVS.
EigenLayer's Active Authentication Service (AVS) feature has not yet been activated, and only a limited number of AVS will be available initially. Most liquid re-hypothecation protocols do not disclose detailed information about how they will select re-hypothecation operators and AVS. At this stage, stakers are mainly exposed to the risk of slashing at the Ethereum level. For re-staking through LST, this risk stems from the LST protocol itself. The native liquid re-staking protocol uses various methods for Ethereum staking. Some rely on large staking providers like Figment and Allnodes, while others are developing infrastructure to facilitate independent validators.
DeFi integration
The sole purpose of Liquidity Recollateralized Tokens (LRT) is to unlock liquidity for use in DeFi. Every liquid re-staking protocol is working hard to integrate various types of DeFi protocols. Currently, there are three main categories of defi integration: income protocols, DEX and lending protocols.
income agreement
Pendle Finance, a leading protocol in the space, has launched an LRT pool that allows users to speculate on EigenLayer earnings and points. Most LRT protocols are 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 1K LRT for ETH on LlamaSwap. It’s important to note that this is only a rough measure, as most LRTs are revenue-accumulating tokens whose value increases over time as staking revenue accumulates. Since many LRT protocols are still in their infancy, the returns accumulated to date are relatively small compared to the principal.
Swell's rswETH, Renzo's ezETH and Etherfi's weETH all have sufficient liquidity on DEX, with almost no slippage when trading 1K LRT.
Eigenpie took a unique approach by issuing 12 independent liquid re-pledge tokens, corresponding to the 12 supported LSTs. While this strategy effectively isolates the risks associated with any single LST, it also results in dispersion of liquidity among different tokens.
loan agreement
LRT has many more layers of risk than other types of assets. Therefore, lending agreements are extremely cautious when considering LRT as loan collateral. Currently, lending agreements have limited acceptance of LRT. Etherfi's weETH is accepted by many lending protocols because it is an existing LST transformed into LRT.
