Decentralized finance (DeFi) has experienced significant growth in 2024, with total value locked (TVL) more than doubling its value since the previous year. According to CoinGecko, the DeFi ecosystem boasts over $91.76 billion in locked assets as of June 2024, demonstrating a shift in market sentiment toward increased trust and adoption.
Among the significant contributions to this growth is staking—a crucial mechanism for securing blockchain networks and rewarding participants.
The benefits of staking and restaking
Staking is integral to the functioning of blockchains that utilize proof-of-stake (PoS) consensus mechanisms. By locking up their digital assets, stakers contribute to network security and consensus, helping to ensure the integrity of transactions. In return, they receive rewards in the form of newly minted tokens or a share of the transaction fees. This incentivizes participation and helps to distribute the network’s governance power more equitably.
For individuals and investors, staking offers several benefits, including passive income, network participation, governance rights, and diversification. The main disadvantage of staking is that liquidity gets locked up in the blockchain, leaving stakers unable to utilize their token holdings for other purposes such as liquidity while these are staked.
Building upon the foundation of staking, restaking is poised to further revolutionize the DeFi landscape. By enabling users to re-delegate staked assets across multiple blockchains and protocols, restaking unlocks new opportunities for yield optimization and risk management without the loss of liquidity.
Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs) represent innovative solutions in DeFi, enhancing liquidity and yield across multiple platforms. LSTs function as derivatives of staked assets, allowing them to be redeployed into diverse DeFi activities, thus enhancing capital efficiency. Building on this, LRTs, derived from LSTs, enable further leveraging by permitting multiple layers of staking and broader utility in DeFi applications, extending beyond conventional staking methods.
LRTs offer investors a compelling proposition: sustainable yields generated on-chain. This aligns with the growing demand for lower-risk investment options, especially in the context of Bitcoin Spot ETFs and the recent issuance of Ethereum Spot ETFs. In 2024, spot Bitcoin ETFs in the US experienced significant activity, setting new records for inflows. By mid-year, the cumulative net inflows for these ETFs exceeded $17 billion. This shift towards more structured yield products built on the foundation of Ethereum’s PoS represents a maturing DeFi industry.
Challenges in restaking
While restaking offers promising benefits, it also presents challenges. Engaging in restaking activities can involve a multi-step process that requires users to navigate different platforms, manage multiple transactions, and understand various protocols. Complexities and risks related to security and decentralization can also be daunting for new users. The high gas fees associated with cross-chain transactions can be a significant barrier to entry, especially for users with smaller investment pools.
Optimizing gas fees is a critical aspect of maximizing returns in restaking, which is one aspect being addressed by LRTs. Smart contract vulnerabilities, market volatility, and the potential for asset loss are other inherent risks in DeFi protocols. As with any other decentralized solution, users must be diligent in researching platforms and understanding the security measures in place to protect their investments.
Emerging solutions in the restaking space
The restaking space is witnessing innovation aimed at simplifying the process and addressing user challenges. Lido, Ether.fi, and StakeEase are three notable examples.
Lido lets users deposit their PoS tokens and receive an equivalent amount of Lido’s tokenized version (stAsset) on a 1:1 value basis. These stAsset tokens can be used in other DeFi protocols for additional yield generation, even while the original assets are staked. Lido currently supports staking on various blockchains like Ethereum, Solana, Polygon, Polkadot, and Kusama.
Ether.fi is also a decentralized, non-custodial delegated staking protocol built on the Ethereum blockchain that employs a smart contract system to manage staked Ether (ETH). Users who deposit ETH receive an equivalent amount of eETH, a liquid staking derivative token. This token represents their share in the staking pool and can be used in other DeFi applications while their ETH remains staked.
StakeEase is a platform designed to simplify and optimize the restaking process within the DeFi ecosystem. The platform aggregates various networks and protocols, enabling users to restake their ETH in a single step. This enables users to diversify their staked assets across different networks, potentially increasing yield by utilizing algorithms to identify and select the most profitable staking opportunities.
StakeEase simplifies the restaking experience by introducing a unified vault that consolidates a diverse array of assets—LRTs, LSTs, and ETH—under a single token representation, sxETH. This innovative approach not only simplifies the investment process but also enriches the user experience by offering access to diversified rewards. By pooling these assets, StakeEase opens up new yield-generating avenues, significantly reducing LRT fragmentation on Layer 2 solutions. Furthermore, the assets within the vault are actively managed to boost yields and ensure there’s no idle liquidity, maximizing the financial potential for stakeholders.
Leveraging cutting-edge technologies like Router’s Cross-chain Intent Framework (CCIF) is a “restaking index” that allows StakeEase to significantly reduce gas fees (a common challenge in cross-chain transactions), provide more efficient transactions, and optimize the user experience.
StakeEase and Ether.fi utilize EigenLayer restaking, maximizing yields while minimizing the complexities and risks associated with traditional restaking methods.
Restaking and the future of DeFi
As restaking technologies continue to evolve, the influence of these platforms on the DeFi space is expected to grow. Advancements like CCIF promise to streamline cross-chain interactions, further unlocking the potential of restaking. We can expect these solutions to focus more on user-centric approaches, making restaking more accessible to a broader audience. These advancements will empower more token holders with optimized investment strategies, leading to further growth and maturity of the DeFi ecosystem.
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