A Comprehensive Guide to the 3 Liquid Restaking Token Categories: Navigating the LRT Landscape

As proof-of-stake (PoS) blockchains gain traction, Liquid Staking Tokens (LSTs) have emerged as a transformative solution for traditional staking's inherent illiquidity. Offering readily tradable and DeFi-compatible representations of staked assets, LSTs unlock new capital efficiency opportunities and optimize wealth-building strategies within the staking ecosystem. With the growing interest in the new cryptoeconomic primitive called restaking, it’s expected we see similar adoption for the LRTFi products.

TL;DR:

• As proof-of-stake (POS) blockchains gain traction, staking has become one of the leading DeFi strategies for investors

• Liquid staking tokens (LSTs) have emerged as a market favorite, addressing the traditional staking inherent illiquidity problem.

• EigenLayer novel restaking primitive introduces a new narrative to this framework by enabling the repurposing of natively staked ETH and ETH LSTs to validate a new set of smart contracts

• LRTs are wrapped tokens that represent the underlying asset value accrued from the restaking rewards to be distributed.

• As the LRT landscape matures, three types of LRTs are emerging to cater to specific user preferences and risk profiles.

Staking and Liquid Staking Sectors

As proof-of-stake (POS) blockchains gain traction, staking has become one of the leading DeFi strategies for investors. Within this market niche, liquid staking tokens (LSTs) have emerged as a market favorite, addressing the inherent illiquidity problem of traditional staking.

Revisiting the principles, staking is the method used by POS blockchains to verify their transactions. The process requires investors to lock their coins for some time, and in return receive rewards for their pledge.

Within the staking market segment, liquid staking has risen as a leading solution by addressing the inherent illiquidity limitations of traditional staking. Liquid staking providers enable users to stake their coins, but in return mint a token that represents the staked amount and the corresponding staking rewards. This method has captured significant attention from stakers by offering readily tradable and DeFi-compatible representations of staked assets. Thus, LSTs unlock new capital efficiency opportunities and optimize DeFi strategies within the staking ecosystem.

The Current State of LSTs: Dominance and Diversity

Observing the current staking landscape, a clear dominance pattern emerges among liquid staking protocols. According to DefiLlama data, LST protocols currently amass more than $27 billion in total value locked (TVL), which represents almost half of the chain staking TVL:

Ethereum Overall Staking Panorama on 6 Jan 2024. Source

Among liquid staking providers, Lido Finance is the leading protocol, with approximately $20 billion in TVL, while the second and third providers, Rocket Pool and Binance Staked ETH, only record $2.65 billion and $1.37 billion, respectively. The remaining TVL is then split among the other 34 liquid staking protocols.

In conclusion, there is a noticeable dominance by the market leader, Lido Finance, which holds approximately 31% of the total market share.

EigenLayer and Restaking: Unlocking Capital Efficiency

EigenLayer's novel restaking primitive introduces new complexities to this framework. This middleware protocol built atop Ethereum enables the repurposing of natively staked ETH and ETH LSTs to validate a new set of smart contracts. In return for their restake, EigenLayer rewards investors with the fees generated by these smart contracts.

Despite having similar end goals, there are significant differences between the processes of restaking natively staked ETH and restaking an ETH LST. For the first method, to restake natively staked ETH, a user must create an EigenPod, on EigenLayer dApp, and connect its staking withdrawal credentials to the EigenPod address. This method is called the “under-the-hood” method.

Creating an EigenPod to restake Beacon Chain ETH. Source

On the other hand, to restake an LST, all the user has to do is choose the LST he wants to restake on the EigenLayer dApp and deposit the desired amount. This method is also named as the “over-the-top” restaking.

Restaking an LST on EigenLayer. Source

Liquid Restaking: EigenLayer Capital Efficiency with Enhanced Liquidity

Similar to Ethereum, EigenLayer doesn’t offer a liquid restaking feature. However, blockchain’s permissionless nature is fruitful in tackling these market inefficiencies and the concept of liquid restaking token (LRT) is already being developed by several other protocols.

Just like LSTs, LRTs are a token that represents the underlying asset value accrued from the restaking rewards to be distributed. Therefore, an LRT can be described as encapsulating the staked ETH amount, along with the staking and restaking rewards, in a single token.

This class of tokens unlocks a new level of capital efficiency, allowing restakers to maintain their liquidity and boost potential returns by leveraging the LRT on any other DeFi endeavor, thus optimizing their DeFi strategies.

The Rise of Diverse LRT Categories

As we’ve seen earlier, LSTs represent a large part of the overall staking market cap, so it's expected that LRTs have a similar response within the restaking framework. As the LRT landscape matures, several types of LRTs are emerging to cater to specific user preferences and risk profiles.

Here are three key categories:

I. Native LRTs (nLRTs):

a. Direct deposit and exchange: Users directly deposit their PoS tokens (e.g., ETH) into the protocol and receive the corresponding native LRT in exchange.

b. Two-step staking:

• Node selection: Users choose a node operator to directly validate transactions on the underlying blockchain network using their staked assets.

• EigenLayer Node Operators: Validators setup up an EigenPod and delegate to an EigenLayer Node Operators who run infrastructure for Actively Validated Services (AVSs)

II. Basket-based LRTs:(bLRT):

a. Consolidated staking power: Users deposit holdings from various liquid staking protocols (LSTs) into a single basket-based LRT, simplifying staking diversification.

b. Considerations: While convenient, basket-based LRTs introduce additional complexity and risk in managing underlying LSTs. The management of LST weights within the basket must also be taken into account.

III. Isolated LRTs (iLRTs):

a. Dedicated LRTs per LST: Users receive a unique LRT for each underlying LST deposited, offering transparency and a controlled risk exposure to the underlying LST a user is willing to get exposure to, while trusting the LRT protocol to earn staking rewards coming from delegating LSTs to EigenLayer node operators running infrastructure for AVSs.

In conclusion, as we navigate the market's early days, it's evident that these three categories of LRTs (Liquid Restaking Tokens) are on the cusp of cementing a significant presence in the overall framework. Each category uniquely embodies a distinct risk profile, intricately tied to the nuances of protocol management and the efficacy of validators' performance.

This differentiation not only highlights the diverse nature of LRTs but also underscores the critical role that both management strategies and validator performance play in shaping their market trajectory and stability. As the market evolves, the impact of these factors will undoubtedly become more pronounced, setting the stage for a dynamic and potentially transformative phase in the LRTs sector.