Liquid Staking and Restaking in DeFi: LSTfi vs LRTfi
The introduction of liquid staking derivatives marks a monumental shift towards a more accessible and secure DeFi (decentralized finance) space, enabling investors to participate in Ethereum staking without the need for a substantial upfront investment.
Following Ethereum’s Shapella Upgrade in April 2023, the introduction of LSTs (Liquid Staking Tokens) ushered in a surge of interest in staking, similar to the yield farming craze that occurred during the 2020 DeFi Summer.
Now, LRTs (Liquid Restaking Tokens) are taking liquid staking derivatives to the next level. Since EigenLayer introduced liquid restaking in June 2023, LRTs have captured the imagination of the DeFi community, garnering over $8 billion in TVL (Total Value Locked) in a short period.
As we can see, liquid staking tokens promise an exciting journey ahead for investors keen on optimizing their capital deployment. In this blog post, we will delve into the nature of LSTs and LRTs, their differences, and how they impact the DeFi industry.
What is Liquid Staking in DeFi?
Liquid Staking in DeFi (LSTfi) refers to a process where users can stake their crypto assets in exchange for Liquid Staking Tokens (LSTs), which represent their staked assets plus potential rewards.
This mechanism diverges from traditional staking by allowing users to retain liquidity and engage in other DeFi activities without locking their assets in a fixed contract. LSTs provide a means for DeFi users to compound their investments, offering liquidity and composability benefits.
However, this innovation doesn't come without risks. The complexity of the smart contracts involved can lead to vulnerabilities, and the varying quality of collateral pools may introduce additional risks. It’s also vital to choose reliable validators to avoid slashing losses.
What is Liquid Restaking in DeFi?
Liquid Restaking in DeFi (LRTfi) takes the concept of liquid staking further. It allows users to stake their LSTs to receive Liquid Restaking Tokens (LRTs), representing a stake of a stake.
This evolution introduces a dual-yield potential, where investors can earn rewards on both their staked assets and the staking tokens themselves.
While promising increased returns, the process also introduces heightened complexity and security considerations. The layered staking mechanism means more steps and interactions with smart contracts, increasing the risk of exploits and losses.
LSTfi vs LRTfi: Understanding the Key Differences
The primary distinction between LSTfi and LRTfi lies in the level of abstraction from the original staked asset and the mechanism for generating returns. LSTfi focuses on transforming staked assets into liquid tokens that can still earn rewards, while LRTfi represents a second layer of staking, offering potentially higher yields but with added complexity and risk.
In terms of risk profiles, LSTfi is a more straightforward approach to enhancing liquidity and yield, suitable for those seeking to balance opportunity with risk management. LRTfi, however, appeals to those with a higher risk tolerance and appetite for more complex strategies for potentially higher returns.
- LSTfi platforms:
Rocketpool and Lido are among the most popular liquid staking protocols, offering their services to a broad audience.
Lido has etched its name in the history books after its launch in December 2020. Since then, it has dominated the space becoming the LSTfi market leader, counting a whopping total of $34,8 billion in TVL.
[1] - Top 5 Current Liquid Staking Protocols on Ethereum by TVL since 2023: April 2024 (Source)
- LRTfi platforms:
Platforms like Ether. fi and Renzo are leading the restaking space in TVL, with EigenLayer's mainnet launch in April highlighting the sector's growth. However, up-and-coming protocols like Genesis and InceptionLRT are standing out due to their unique approaches.
InceptionLRT is notable for being one of the only protocols to use isolated LRTs, positioning itself alongside EigenPie as a leading solution in the space. Genesis, on the other hand, utilizes SSV Node operators for DVT-secured native liquid restaking.
[2] - Rise of Restaking TVL on Ethereum in 2024: April 2024 (Source)
Future of Staking and Restaking
The evolution of LSTfi and LRTfi sectors is poised to redefine investment strategies and risk management. As these mechanisms become more integrated and understood, they will continue to impact the liquidity and overall resilience of the DeFi ecosystem.
The future of staking and restaking is not without its challenges, particularly concerning security and user experience. However, as developers and the community learn from each iteration, these models will likely become more robust and user-friendly, paving the way for broader adoption and novel financial products.
As more innovations are introduced, alongside the upcoming EigenLayer mainnet launch, we should expect liquid staking derivatives to continue evolving. As the space becomes more mature, secure, and flexible in terms of investment options, we should see a continued surge of capital flowing into liquid staking derivatives.
