Understanding Restaking and its Potential to Revolutionize the DeFi Landscape
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In the wake of its merger last August, LSDFi has seen an impressive surge in terms of Total Value Locked (TVL), mindshare, and innovative product offerings. As the liquid staking market matures into the next year, restaking is poised to play a significant role in enhancing on-chain yields.
But what exactly is restaking, and why is it gaining such traction?
In this post, we’ll delve into the fundamental concept of restaking, explore why I’m bullish on LRTFi, and highlight a top-tier project spearheading progress in this niche.
We’ll also discuss the inherent risks involved and how restaking networks are enhancing security and unlocking the infinite liquidity source of the DeFi market. Let’s dive in.
𝗙𝗼𝗹𝗹𝗼𝘄𝗶𝗻𝗴 𝘁𝗵𝗲 𝗺𝗲𝗿𝗴𝗲 𝗹𝗮𝘀𝘁 𝗔𝘂𝗴𝘂𝘀𝘁, 𝗟𝗦𝗗𝗙𝗶 𝗵𝗮𝘀 𝗮𝗯𝘀𝗼𝗹𝘂𝘁𝗲𝗹𝘆 𝘁𝗮𝗸𝗲𝗻 𝗼𝗳𝗳 𝗶𝗻 𝘁𝗲𝗿𝗺𝘀 𝗼𝗳 𝗧𝗩𝗟, 𝗺𝗶𝗻𝗱𝘀𝗵𝗮𝗿𝗲, 𝗮𝗻𝗱 𝗶𝗻𝗻𝗼𝘃𝗮𝘁𝗶𝘃𝗲 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀. 𝗔𝘀 𝘁𝗵𝗲 𝗹𝗶𝗾𝘂𝗶𝗱 𝘀𝘁𝗮𝗸𝗶𝗻𝗴 𝗺𝗮𝗿𝗸𝗲𝘁 𝗺𝗮𝘁𝘂𝗿𝗲𝘀 𝗻𝗲𝘅𝘁 𝘆𝗲𝗮𝗿, 𝗿𝗲𝘀𝘁𝗮𝗸𝗶𝗻𝗴 𝗶𝘀 𝘀𝗲𝘁 𝘁𝗼 𝗽𝗹𝗮𝘆 𝗮 𝗺𝗮𝗷𝗼𝗿 𝗽𝗮𝗿𝘁 𝗶𝗻 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲𝗱 𝗼𝗻𝗰𝗵𝗮𝗶𝗻 𝘆𝗶𝗲𝗹𝗱𝘀…
But, what even is restaking?
In a world where the average APY for Ethereum staking has been around 4-5%, users are ready to take on more risk for more yield.
Thus, the LSDFi narrative has totally flourished in the recent year as many protocols have been able to take advantage of this demand.
This makes me quite bullish on ‘LRTFi’ or Liquid Restaking Finance.
In today’s post you’ll learn about the fundamental concept of restaking, why I’m bullish on LRTFi, and a top quality project leading the charge forward in this niche 👇
Restaking is the act of reusing staked ETH security for other networks and blockchains to enhance trust and security.
Basically, you can stake you Ethereum, get the receipt of this staked Ethereum and then restake it to earn further yield.
It amplifies the foundation of Ethereum’s cryptoeconomic security and extends its offerings to different applications on the network.
It’s a “double-profit” model, where speculators earn from the original network and the restaking network.
𝘏𝘰𝘸𝘦𝘷𝘦𝘳, 𝘪𝘵 𝘤𝘰𝘮𝘦𝘴 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘪𝘯𝘩𝘦𝘳𝘦𝘯𝘵 𝘳𝘪𝘴𝘬 𝘰𝘧 𝘴𝘮𝘢𝘳𝘵 𝘤𝘰𝘯𝘵𝘳𝘢𝘤𝘵𝘴 𝘭𝘪𝘬𝘦 𝘢𝘯𝘺 𝘰𝘵𝘩𝘦𝘳 𝘱𝘳𝘰𝘵𝘰𝘤𝘰𝘭.
Typical restaking networks accept LSTs and validators.
This increases the network’s security and unlocks the infinite liquidity source of the DeFi market, see below on @eigenlayer, for example, which supports liquid staking of @LidoFinance stETH, @Rocket_Pool ETH (rETH), and Coinbase Wrapped Staked ETH (cbETH):
Users in these pools certainly take on smart contract risks, so why would exactly would they choose to participate in restaking?
Lets dive into the benefits:
1. 𝗟𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗕𝗼𝗼𝘀𝘁: Staking LSD or validator Tokens in Validators not only increases the stake of the native asset on its network (double staking, extra yields) but also introduces more liquid options in the DeFi sector.
2. 𝗘𝗻𝗵𝗮𝗻𝗰𝗲𝗱 𝗣𝗿𝗼𝗳𝗶𝘁 𝗣𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹: Additionally, staking on the second network provides liquid assets that can be used to mint stablecoins, creating opportunities for further capital efficiency in the DeFi market.
3.𝗜𝗺𝗽𝗿𝗼𝘃𝗲𝗱 𝗡𝗲𝘁𝘄𝗼𝗿𝗸 𝗦𝗲𝗰𝘂𝗿𝗶𝘁𝘆: Restaking increases various networks value, making them more resilient against attacks.
4. 𝗥𝗲𝗱𝘂𝗰𝗲𝗱 𝗗𝘂𝗺𝗽𝗶𝗻𝗴: Restaking provides a tokenholder with a yield source and because of the increased yield, they will be less inclined to sell.
5. 𝗡𝗮𝘁𝗶𝘃𝗲 𝗡𝗲𝘁𝘄𝗼𝗿𝗸 𝗦𝗲𝗰𝘂𝗿𝗶𝘁𝘆: Encouraging original asset holders to participate in staking enhances the native network’s security and decentralization.
Overall, restakingenhances yield by approving the asset on two networks, increases network security, reduces token dumping/sell pressure by temporarily locking liquidity, and strengthens the security of the native network.
Today we’ll look into @RestakingCloud K2 restaking design, and why you should keep your eyes on it for this upcoming restaking narrative.
Restaking Cloud is a new infra layer for a modular blockchain future, launching with its flagship protocol, K2.
It replicates the economic security of staked ETH, offering a platform for other networks and protocols to enhance their operational logic and decentralized trust.
K2 was first introduced in 2022 by Matt Shams and is now fully operational and transitioning to testnet.
K2 accepts any validators, or LSTs. For example, somebody could mint LSTs and then restake the validator after.
𝗧𝗵𝗲 𝗮𝗱𝗱𝗿𝗲𝘀𝘀𝗮𝗯𝗹𝗲 𝗺𝗮𝗿𝗸𝗲𝘁 𝗶𝘀 𝗮𝗹𝗹 𝘃𝗮𝗹𝗶𝗱𝗮𝘁𝗼𝗿𝘀 𝗮𝗻𝗱 𝗟𝗦𝗧𝘀, 𝘄𝗵𝗶𝗰𝗵 𝗜 𝗲𝘅𝗽𝗲𝗰𝘁 𝘁𝗼 𝗯𝗲 𝗮 𝗧𝗥𝗜𝗟𝗟𝗜𝗢𝗡 𝗱𝗼𝗹𝗹𝗮𝗿 𝗺𝗮𝗿𝗸𝗲𝘁 𝗼𝗻𝗲 𝗱𝗮𝘆.
Users can use the LP token (an ERC20) from staking as an LST in DeFi if they choose,
The K2 validator delegation system is shown below:
As you can see, K2 redistributes the inherent security of Ethereum for other dApps, middlewares and infra to boost decentralization. By doing this, validators and LST holders are able to earn extra yield on their already staked ETH while also contributing to the state security of Ethereum.
K2 allows users to run a liquid staking validator and then restake that validator and assume no additional slashing risk. Slashing is managed at the pool level by K2’s risk engine.
@RestakingCloud 𝗮𝗰𝗰𝗲𝗽𝘁𝘀 𝘀𝘁𝗘𝗧𝗛, 𝗿𝗘𝗧𝗛, 𝗱𝗘𝗧𝗛, 𝗮𝗻𝗱 𝗸𝗘𝗧𝗛 𝗮𝘀 𝗱𝗲𝗽𝗼𝘀𝗶𝘁𝘀.
Native Delegation allows anyone to delegate their validators’ staked ETH to K2 without changing withdrawal credentials, adding additional capital, or operating additional software or hardware.
K2 uses a zk gadget (aka a Reporter) that allows middleware to tailor slashing rules to their specific requirements. This zk-based mechanism removes network overhead, provides a deterministic source of truth with a designated verifier, and ensures data privacy.
The baseline yield expected is an additional 5-10% APR, on top of the liquid staked Ethereum.
@RestakingCloud offers a comprehensive suite of features, including ETH payouts, protected principle deposits, which can be argued as missing in Eigenlayer. Its ability to replicate the economic security of staked ETH and its innovative zk gadget further distinguish it as a superior solution.
K2 enables applications and middle layers to access packaged and bespoke services across various domains and layers.
Using what the team calls “stake borrowing” allows you to create an ETH stake pool on K2 with customizable parameters with 24/7 slashing logic and K2 backed security.
As you can see above, the service layer is able to interact with different types of infra, which can interop with the Reporter for decentralized, secure restaking.
𝗧𝗼 𝘄𝗿𝗮𝗽 𝘂𝗽:
LSDFi has amassed a total value of roughly $20B TVL, without restaking.
Looking ahead, the future of restaking looks extremely ripe for disruption. As the Ethereum ecosystem continues to mature, restaking is likely to grow massive mindshare as the market becomes aware of the possibilities.
However, as with any emerging technology, the landscape of restaking is likely to evolve rapidly. New players may enter the field, and existing platforms may introduce new features or improvements. As such, it’s crucial for users to stay informed and understand the risks as well as the rewards.
I’m very much looking forward to supporting @RestakingCloud during their event at DevCon in Istanbul, and currently by being a content creator.
𝗔𝘀 𝘄𝗶𝘁𝗵 𝗲𝘃𝗲𝗿𝘆𝘁𝗵𝗶𝗻𝗴 𝗮𝗻𝗼𝗻, 𝗯𝗲 𝘀𝗮𝗳𝗲. 𝗗𝗬𝗢𝗥. 𝗦𝘂𝗿𝘃𝗶𝘃𝗲. 𝗕𝗼𝗼𝘀𝘁𝗲𝗱 𝗘𝘁𝗵𝗲𝗿𝗲𝘂𝗺 𝘆𝗶𝗲𝗹𝗱𝘀 𝗮𝘄𝗮𝗶𝘁 𝘆𝗼𝘂.
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