Davos Protocol Welcomes Liquid Restaking Tokens (LRTs)
EigenLayer is a middleware protocol built on Ethereum, whose primary goal is to forge a decentralized trust marketplace and extend Ethereum’s security to other protocols requiring off-chain validation. At the core of this expansion is the new cryptoeconomic concept known as restaking, which empowers users to maximize their Ethereum (ETH) rewards, by allowing them to restake staked ETH or ETH liquid staking tokens, and earn additional layers of yields.
TL;DR:
- Restaking involves pledging your staked ETH or ETH liquid staking tokens (LSTs) into EigenLayer smart contracts.
- Restaking ties up investors’ capital, thus the creation of liquid restaking solutions.
- Davos Protocol will enable borrowing using LRTs as collateral.
- The soon-to-happen introduction of the DGT token by the Davos Protocol promises to bring yet another set of opportunities for platform users, and act as a TVL boost for protocols integrated within Davos Protocol.
Understanding Liquid Restaking Tokens (LRTs)
Restaking involves pledging your staked ETH or ETH liquid staking tokens (LSTs) into EigenLayer smart contracts, extending the chain trustworthiness and security across other networks. Doing so, with the same underlying asset, users will be earning rewards from the original staking, as well as from the restake, unlocking 2 layers of rewards.
However, restaking directly through EigenLayer can lead to a challenge: it ties up investors’ capital, limiting its immediate use. This is where liquid restaking solutions come into play. They enable users to restake and in exchange receive a liquid token that represents their position — the liquid restaked tokens (LRTs).
Keeping a keen eye on the markets, at Davos we identify a few protocols that are already building such solutions, such as InceptionLRT, Rio Network, Restake Fi, Renzo Protocol, GenesisLRT, Kelp DAO, YieldNest, Swell Network and Puffer Finance.
However, it’s important to note that while LRTs can offer attractive returns, they are also increasing the investment’s risk profile, since the user will be exposed to an additional slashing risk.
This risk is particularly pronounced with newer market approaches such as LRT platforms.
Enhancing DeFi Composability with Davos Protocol
The Davos Protocol takes pride in embodying the true spirit of DeFi composability, by offering a platform that empowers users to craft their own journey with the available “money legos”, enabling them to boost their DeFI earnings.
The introduction of LRTs into the platform marks another expansion milestone in Davos Protocol, enhancing the composability options available for users. However, as we noted above, high rewards often come with high risks.
Given that LRTs are likely to carry higher risks compared to Liquid Staking Tokens (LSTs), Davos proposes that they are framed within a higher borrowing interest rate to align with these potential risks and the higher yield that they generate. Concurrently, it seems prudent to propose an adjustment in the Loan-to-Value (LTV) ratios for LRTs. These ratios are envisioned to be lower than those for LSTs, reflecting and accommodating the unique risk elements associated with this new class of tokens. This proposal aims to ensure that our protocol dynamically adapts to the evolving risk landscape presented by LRTs and protects users from liquidation risks.
Moreover, it’s important to highlight that when users borrow DUSD by using their LRTs as collateral, they retain all their staking rewards. By using LRTs as collateral to borrow DUSD, users are able to undergo different DeFi strategies, on top of the yield being generated already, and further expand their position.
The Future of DeFi with Davos DGT Token
Davos Protocol is set to introduce its governance token, DGT, and with it give the community the power to shape the protocol. DGT Token holders will be able to deposit their DGT into 80–20 Balancer Liquidity Pools, and then lock their LP position, for which they will in turn receive veDGT (vote-escrowed DGT) allowing them to vote on key decisions concerning various parameters of the protocol. The lock-in period for veDGT varies from 2 to 52 weeks, offering flexibility and a boost dependent on the duration of the lock.
The integration of DGT into the Davos Protocol not only introduces a triple-layered yield structure for users but also empowers the veDGT mechanism to direct DGT emissions strategically toward specific liquidity and borrowing gauges. The aforementioned triple-layered yield refers to the combination of the underlying collateral yield, the incentives from DGT emissions, and the profits from different DeFi strategies using DUSD.
On the other hand, using veDGT to vote on which pools should benefit from the DGT emissions, tailors an incentive to the several collateral tokens, enhancing their appeal for depositing and borrowing DUSD. At the end of the day, users will choose which pools to make more attractive or not by voting, which we believe will lead to an increase in deposits, and foster a cycle of mutual growth between the LRT protocol and Davos, where governance tokens from LRT platforms may also be used to influence veDGT holder voting preferences.
This strategic use of governance token incentives boosts the Total Value Locked (TVL) across platforms and layers, creating a competitive and profitable DeFi landscape that merges the utility of LSTs and LRTs. Overall, the veDGT mechanism and the DGT’s role in the protocol cultivate a dynamic ecosystem that responds to and evolves with community preferences, bridging various aspects of the DeFi experience.
Exploring the Yield Potential with Davos Protocol
Let’s now illustrate the yield potential using a practical example. Imagine you have a LST that is earning an average return of 4% yearly. You decide to restake this token into platforms like InceptionLRT or Rio Network, aiming to secure an additional yield of 4–5%.
Once you’ve earned this extra yield, you receive a token representing your restaked position that is liquid. This token can then be used as collateral to borrow DUSD, which can then be used directly in the Davos Platform to leverage opportunities such as staking or yield farming. On top of this, Davos’ Protocol will bring forth incentives in the form of DGT for users who borrow DUSD against their collateral, which further enhances the yield generation potential.
In essence, this layered approach to investment and yield generation in the Davos Protocol can significantly amplify your earning potential, offering a multi-tiered strategy to maximize returns in the DeFi space.
