Liquid Restaking Tokens: What Are They and Why Are They Important?

This blog is part of our Restaking Series and dives into the concept of Liquid Restaking Tokens (LRTs), their significance, and the potential they unlock for Ethereum and the broader blockchain ecosystem. You can learn more about restaking in our restaking overview blog which will give you foundational context to understand restaking.

What is Restaking?

Restaking is a pioneering cryptoeconomic innovation introduced by EigenLayer. Operating as a middleware protocol on the Ethereum blockchain, EigenLayer offers a mechanism for users to utilize their staked ETH for the validation of the protocol’s smart contracts to support external systems such as rollups and oracles with a pre-existing economic security layer. This concept is critical for blockchains and blockchain-based applications, where achieving sufficient incentives and network effects for security is a significant challenge. Restaking allows Ethereum validators to repurpose their economic security by opting in to validate additional third-party services, called Actively Validated Services (AVSs), through the EigenLayer protocol. In turn, these services compensate validators with additional yield on top of the base ETH staking yield.

What are Liquid Restaking Tokens?

Liquid Restaking Tokens (LRTs) are tokens received when users deposit ETH in any number of liquid restaking DeFi protocols. As a liquid token representation of a restaked ETH position, LRTs allow users to gain access to the base ETH staking yield plus additional AVS yield, all while keeping their position liquid instead of locking up their tokens for an extended period of time. This is attractive to users because they benefit from increased yield on their ETH while also being able to use their restaked ETH position in other DeFi protocols. Essentially, LRTs are to restaking as Liquid Staking Tokens (LSTs) are to staking.

LRTs represent a significant advancement in the DeFi space by enabling users to earn on their restaked ETH without sacrificing liquidity, addressing a pain point of traditional restaking methods. This dual benefit of accessing enhanced yields while retaining the ability to participate in other DeFi opportunities makes LRTs an important tool for maximizing the utility and profitability of digital assets.

Features of Liquid Restaking Tokens

Several factors contribute to the rapid momentum of the LRT movement.

• Increased Yield Opportunities: With the demand for higher yields on ETH staking, LRTs offer an attractive avenue for investors seeking enhanced returns on their staked assets from AVSs.
• Simplified User Experience: The complexity of running a validator node is abstracted away by LRT protocols, making it easier for users to participate in the restaking process without needing technical expertise.
• Lower Capital Requirements: Users can gain access to ETH restaking yield without needing 32 ETH to run their own validator.
• Risk Management: Restaking comes with additional slashing risks since users are putting their ETH at stake to validate the Ethereum blockchain as well as AVSs. Each LRT protocol will decide which AVSs to validate with their pooled ETH, which means the protocol will be the one managing the AVS risk on behalf of its users.
• Capital Efficiency: Holders of LRTs receive restaking yield on their ETH while also keeping their position liquid. This gives them the ability to access other opportunities in DeFi with their capital such as borrowing against their LRTs on borrow/lend protocols.

Liquid Restaking Landscape Today

The Liquid Restaking landscape today consists of protocols like Ether.fi, Renzo, Puffer, Kelp DAO, Eigenpie, Swell, and others. The TVL of all major liquid staking protocols as of March 2024, stands at over $7 billion. This equates to roughly 60% of all restaked tokens finding their home in these LRT protocols, adding financialization to their natively restaked positions.

While the concept of rehypothecation is very familiar to the crypto scene, it is not without its risks. Liquid staking protocols are not officially endorsed by EigenLayer as an optimal destination for your restaked tokens. However, for users that accept these additional risks in exchange for additional yield on their Ether, these protocols are an option. We urge users to carefully consider these protocols individually, and evaluate them as they would any other protocol that receives staked assets. For more detailed information on the risk landscape of LRTs, you can read this report.

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Staking with Validation Cloud

While staking is the foundation to secure a PoS network, Ethereum staking directly on-chain requires specific hardware and software which are expensive and also tedious to maintain. Besides high operational costs, the staker must be well-versed with on-chain staking mechanisms. However, staking-as-a-service facilitates running the validator node on the staker’s behalf.

Platforms such as Validation Cloud offer staking-as-a-service and are SOC 2 Type 2 compliant, ensuring the highest levels of security and protection in staking.

Resources

• How-To Guide: How to Stake and Unstake Validators with Validation Cloud: A Step-by-Step Guide
• Validation Cloud Docs
• Blockworks: Validation Cloud launches platform for institutional stakers

About Validation Cloud

Validation Cloud is a Web3 data streaming and infrastructure company that connects organizations into Web3 through a fast, scalable, and intelligent platform. Headquartered in Zug, Switzerland, Validation Cloud offers highly performant and customizable products in staking, node, and data-as-a-service. Learn more at validationcloud.io| LinkedIn | X