Liquid Restaking

Executive Summary

Liquid restaking is an advanced staking model that allows users to earn rewards while retaining liquidity through restaking derivatives.
It builds on Ethereum’s staking ecosystem and liquid staking derivatives (LSDs), enabling assets to be re-used for additional yield.
Liquid restaking enhances capital efficiency, allowing staked assets to remain productive across multiple DeFi applications.
It introduces risks, such as smart contract vulnerabilities and liquidation risks, due to the re-leveraging of staked assets.
Platforms like EigenLayer are pioneering the liquid restaking model, enabling broader network security and cross-protocol integrations.

Definition

Liquid restaking is a DeFi mechanism that allows stakers to earn staking rewards while keeping their assets liquid by issuing tradable derivatives. It extends liquid staking by enabling users to re-use staked assets as collateral or for additional yield opportunities without un-staking them from the original network.

Background

Traditional staking locks up assets in blockchain networks to secure operations and validate transactions. However, this limits liquidity and capital efficiency. The introduction of liquid staking allowed users to stake assets while receiving a liquid derivative token (e.g., stETH for Ethereum) that can be used in DeFi.

Liquid restaking builds upon this by enabling users to take their liquid staking derivatives (LSDs) and re-stake them for additional rewards, compounding potential yield and increasing security for various blockchain applications.

How Liquid Restaking is Used in the Industry Today

Ethereum and EigenLayer: EigenLayer is a leading protocol that enables Ethereum stakers to restake their ETH or LSDs to secure additional networks and earn rewards.
Yield Farming & DeFi: Liquid restaking derivatives can be deployed in DeFi applications for lending, borrowing, and farming strategies.
Network Security Enhancements: Restaked assets contribute to the security of new blockchain networks by providing economic incentives for validators.

How Does It Work? (Examples)

Example 1: EigenLayer’s Restaking Model

A user stakes ETH and receives stETH (a liquid staking derivative). Instead of just holding stETH, they deposit it into EigenLayer, which allows them to restake and earn additional rewards from securing new protocols.

Example 2: DeFi Integration

A user restakes their LSD, receives a liquid restaking derivative (LRT), and then uses that LRT as collateral to borrow stablecoins, enabling further yield-generating strategies in DeFi.

Analogy for Understanding Liquid Restaking

Imagine you deposit money in a bank (staking) and receive a certificate of deposit (liquid staking). Now, you take that certificate and use it as collateral to take out a loan while still earning interest from the original deposit—this is similar to liquid restaking in crypto.

ELI5 (Explain Like I’m 5)

Think of liquid restaking like lending a toy to your friend and getting a note saying, “You still own the toy.” Now, you take that note and trade it for another toy while still getting rewards for lending your first toy.

Stakeholders and Implementation

Stakers & Investors: Individuals who stake assets and want to maximize rewards while maintaining liquidity.
Protocols & Validators: Projects that use restaked assets to secure their networks.
DeFi Platforms: Applications that integrate liquid restaking derivatives into lending, trading, and farming.
Regulators & Risk Managers: Entities assessing the impact of liquid restaking on financial stability and security risks.

Pros & Cons of Liquid Restaking

Pros:

Increased capital efficiency and yield opportunities.
Enhances security for multiple blockchain networks.
Provides liquidity to stakers without requiring unstaking.

Cons:

Higher risk due to smart contract dependencies and liquidation risks.
Potential for cascading failures in case of restaking leverage collapse.
Regulatory uncertainty regarding its classification and risk exposure.

Future Outlook

Liquid restaking is expected to grow as staking ecosystems mature, enabling greater efficiency in DeFi. Innovations in smart contract security and risk management will play a key role in determining its long-term sustainability.