๐Ÿ“š The Rise of Liquid Restaking Finance: A Deep Dive into LSDFi’s Success and the Future of DeFi

 

Understanding Restaking and its Potential to Revolutionize the DeFi Landscape


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High Rollers:

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.

Cheers,

The Rollup


๐—™๐—ผ๐—น๐—น๐—ผ๐˜„๐—ถ๐—ป๐—ด ๐˜๐—ต๐—ฒ ๐—บ๐—ฒ๐—ฟ๐—ด๐—ฒ ๐—น๐—ฎ๐˜€๐˜ ๐—”๐˜‚๐—ด๐˜‚๐˜€๐˜, ๐—Ÿ๐—ฆ๐——๐—™๐—ถ ๐—ต๐—ฎ๐˜€ ๐—ฎ๐—ฏ๐˜€๐—ผ๐—น๐˜‚๐˜๐—ฒ๐—น๐˜† ๐˜๐—ฎ๐—ธ๐—ฒ๐—ป ๐—ผ๐—ณ๐—ณ ๐—ถ๐—ป ๐˜๐—ฒ๐—ฟ๐—บ๐˜€ ๐—ผ๐—ณ ๐—ง๐—ฉ๐—Ÿ, ๐—บ๐—ถ๐—ป๐—ฑ๐˜€๐—ต๐—ฎ๐—ฟ๐—ฒ, ๐—ฎ๐—ป๐—ฑ ๐—ถ๐—ป๐—ป๐—ผ๐˜ƒ๐—ฎ๐˜๐—ถ๐˜ƒ๐—ฒ ๐—ฝ๐—ฟ๐—ผ๐—ฑ๐˜‚๐—ฐ๐˜๐˜€. ๐—”๐˜€ ๐˜๐—ต๐—ฒ ๐—น๐—ถ๐—พ๐˜‚๐—ถ๐—ฑ ๐˜€๐˜๐—ฎ๐—ธ๐—ถ๐—ป๐—ด ๐—บ๐—ฎ๐—ฟ๐—ธ๐—ฒ๐˜ ๐—บ๐—ฎ๐˜๐˜‚๐—ฟ๐—ฒ๐˜€ ๐—ป๐—ฒ๐˜…๐˜ ๐˜†๐—ฒ๐—ฎ๐—ฟ, ๐—ฟ๐—ฒ๐˜€๐˜๐—ฎ๐—ธ๐—ถ๐—ป๐—ด ๐—ถ๐˜€ ๐˜€๐—ฒ๐˜ ๐˜๐—ผ ๐—ฝ๐—น๐—ฎ๐˜† ๐—ฎ ๐—บ๐—ฎ๐—ท๐—ผ๐—ฟ ๐—ฝ๐—ฎ๐—ฟ๐˜ ๐—ถ๐—ป ๐—ถ๐—ป๐—ฐ๐—ฟ๐—ฒ๐—ฎ๐˜€๐—ฒ๐—ฑ ๐—ผ๐—ป๐—ฐ๐—ต๐—ฎ๐—ถ๐—ป ๐˜†๐—ถ๐—ฒ๐—น๐—ฑ๐˜€โ€ฆ

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 ๐Ÿ‘‡

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.

๐˜๐˜ฐ๐˜ธ๐˜ฆ๐˜ท๐˜ฆ๐˜ณ, ๐˜ช๐˜ต ๐˜ค๐˜ฐ๐˜ฎ๐˜ฆ๐˜ด ๐˜ธ๐˜ช๐˜ต๐˜ฉ ๐˜ต๐˜ฉ๐˜ฆ ๐˜ช๐˜ฏ๐˜ฉ๐˜ฆ๐˜ณ๐˜ฆ๐˜ฏ๐˜ต ๐˜ณ๐˜ช๐˜ด๐˜ฌ ๐˜ฐ๐˜ง ๐˜ด๐˜ฎ๐˜ข๐˜ณ๐˜ต ๐˜ค๐˜ฐ๐˜ฏ๐˜ต๐˜ณ๐˜ข๐˜ค๐˜ต๐˜ด ๐˜ญ๐˜ช๐˜ฌ๐˜ฆ ๐˜ข๐˜ฏ๐˜บ ๐˜ฐ๐˜ต๐˜ฉ๐˜ฆ๐˜ณ ๐˜ฑ๐˜ณ๐˜ฐ๐˜ต๐˜ฐ๐˜ค๐˜ฐ๐˜ญ.

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. ๐—Ÿ๐—ถ๐—พ๐˜‚๐—ถ๐—ฑ๐—ถ๐˜๐˜† ๐—•๐—ผ๐—ผ๐˜€๐˜: 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. ๐—˜๐—ป๐—ต๐—ฎ๐—ป๐—ฐ๐—ฒ๐—ฑ ๐—ฃ๐—ฟ๐—ผ๐—ณ๐—ถ๐˜ ๐—ฃ๐—ผ๐˜๐—ฒ๐—ป๐˜๐—ถ๐—ฎ๐—น: 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.

3.๐—œ๐—บ๐—ฝ๐—ฟ๐—ผ๐˜ƒ๐—ฒ๐—ฑ ๐—ก๐—ฒ๐˜๐˜„๐—ผ๐—ฟ๐—ธ ๐—ฆ๐—ฒ๐—ฐ๐˜‚๐—ฟ๐—ถ๐˜๐˜†: Restaking increases various networks value, making them more resilient against attacks.

4. ๐—ฅ๐—ฒ๐—ฑ๐˜‚๐—ฐ๐—ฒ๐—ฑ ๐——๐˜‚๐—บ๐—ฝ๐—ถ๐—ป๐—ด: Restaking provides a tokenholder with a yield source and because of the increased yield, they will be less inclined to sell.

5. ๐—ก๐—ฎ๐˜๐—ถ๐˜ƒ๐—ฒ ๐—ก๐—ฒ๐˜๐˜„๐—ผ๐—ฟ๐—ธ ๐—ฆ๐—ฒ๐—ฐ๐˜‚๐—ฟ๐—ถ๐˜๐˜†: 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.

๐—ง๐—ต๐—ฒ ๐—ฎ๐—ฑ๐—ฑ๐—ฟ๐—ฒ๐˜€๐˜€๐—ฎ๐—ฏ๐—น๐—ฒ ๐—บ๐—ฎ๐—ฟ๐—ธ๐—ฒ๐˜ ๐—ถ๐˜€ ๐—ฎ๐—น๐—น ๐˜ƒ๐—ฎ๐—น๐—ถ๐—ฑ๐—ฎ๐˜๐—ผ๐—ฟ๐˜€ ๐—ฎ๐—ป๐—ฑ ๐—Ÿ๐—ฆ๐—ง๐˜€, ๐˜„๐—ต๐—ถ๐—ฐ๐—ต ๐—œ ๐—ฒ๐˜…๐—ฝ๐—ฒ๐—ฐ๐˜ ๐˜๐—ผ ๐—ฏ๐—ฒ ๐—ฎ ๐—ง๐—ฅ๐—œ๐—Ÿ๐—Ÿ๐—œ๐—ข๐—ก ๐—ฑ๐—ผ๐—น๐—น๐—ฎ๐—ฟ ๐—บ๐—ฎ๐—ฟ๐—ธ๐—ฒ๐˜ ๐—ผ๐—ป๐—ฒ ๐—ฑ๐—ฎ๐˜†.

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 ๐—ฎ๐—ฐ๐—ฐ๐—ฒ๐—ฝ๐˜๐˜€ ๐˜€๐˜๐—˜๐—ง๐—›, ๐—ฟ๐—˜๐—ง๐—›, ๐—ฑ๐—˜๐—ง๐—›, ๐—ฎ๐—ป๐—ฑ ๐—ธ๐—˜๐—ง๐—› ๐—ฎ๐˜€ ๐—ฑ๐—ฒ๐—ฝ๐—ผ๐˜€๐—ถ๐˜๐˜€.

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 โ€œstake borrowingโ€ 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.

๐—ง๐—ผ ๐˜„๐—ฟ๐—ฎ๐—ฝ ๐˜‚๐—ฝ:

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.

๐—”๐˜€ ๐˜„๐—ถ๐˜๐—ต ๐—ฒ๐˜ƒ๐—ฒ๐—ฟ๐˜†๐˜๐—ต๐—ถ๐—ป๐—ด ๐—ฎ๐—ป๐—ผ๐—ป, ๐—ฏ๐—ฒ ๐˜€๐—ฎ๐—ณ๐—ฒ. ๐——๐—ฌ๐—ข๐—ฅ. ๐—ฆ๐˜‚๐—ฟ๐˜ƒ๐—ถ๐˜ƒ๐—ฒ. ๐—•๐—ผ๐—ผ๐˜€๐˜๐—ฒ๐—ฑ ๐—˜๐˜๐—ต๐—ฒ๐—ฟ๐—ฒ๐˜‚๐—บ ๐˜†๐—ถ๐—ฒ๐—น๐—ฑ๐˜€ ๐—ฎ๐˜„๐—ฎ๐—ถ๐˜ ๐˜†๐—ผ๐˜‚.


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