Liquid Staking Tokens and Liquid Restaking Tokens: What are the Differences
Despite its similar terminology, and overall similar framework, LSTs and LRTs differ on the underlying asset they represent. While LSTs represent the Ethereum natively staked tokens plus the correspondent staking rewards, LRTs represent the staked token, plus the correspondent staking and restaking rewards.
TL;DR:
- Liquid Staking Tokens (LSTs) are tokens that represent the staked amount of Ethereum (or other proof-of-stake blockchain token), and the corresponding rewards.
- Liquid Restaking Tokens (LRTs) are tokens that arise from the EigenLayer restaking primitive, that encompass an ETH or ETH LST and the corresponding staking and restaking rewards.
What are Liquid Staking Tokens
To understand what are liquid staking tokens (LSTs), one must first understand what is staking and what staking represents for a blockchain. Going back to the basics, proof-of-staking is the consensus mechanism that some of the most popular blockchains, like Ethereum, use to verify their transactions.
In traditional staking, token holders can lock or “stake” their tokens to participate in the network’s consensus mechanism and, in return, receive rewards, typically in the form of additional tokens. However, this method introduces a big constraint for the users. Once the tokens are staked, they are locked for a certain period and cannot be traded or used in other activities.
Addressing this limitation, and leveraging Ethereum’s permissionless innovation ecosystem, liquid staking tokens (LSTs) were created. When you stake your tokens through a platform offering liquid staking, you receive another representative token in return. This token is a “liquid” version of your staked asset and represents your staked investment as well as the corresponding staking rewards. Therefore, these tokens can be traded, used in decentralized finance (DeFi) dApps, or used as collateral in other blockchain-based activities.
LSTs’ key advantage is that they provide liquidity to the user, allowing them to retain some level of access to the assets without foregoing the benefits of staking. However, they also introduce additional complexity and risk, as the value of these liquid tokens depends on the underlying staked asset and the specific mechanics of the staking platform.
What are Liquid Restaking Tokens
Liquid restaking tokens (LRTs) arise from the new cryptoeconomic primitive, introduced by EigenLayer, called restaking. EigenLayer is a middleware protocol built atop Ethereum, that enables users the repurpose of staked ETH or LSTs to validate the protocol’s smart contracts.
Despite its vast ecosystem, Ethereum is not capable of validating any off-chain transactions. Thus, any app that required off-chain interactions, like an oracle, or bridge, had to build its validator network.
This poses a huge risk for the ecosystem, since the transactions that are done off-chain, don’t leverage the same security network as the ones on-chain. EigenLayer smart contracts make use of the restaked ETH or LSTs to sustain their Actively Validated Services (AVSs) that in turn, validate off-chain transactions, thus creating a decentralized trust marketplace. Once again, for the restakers, the reward is the network fees generated from the usage of these AVSs. To better understand how this trust expansion works, we invite you to read our “Programmable Trust: The Three Principles” blogpost.
Now, how does liquid restaking fit into the picture? The answer is quite straightforward. Just as Ethereum doesn’t encompass liquid staking natively, neither does EigenLayer. This means that despite a user being able to have two yields from the same asset, he ends up with that very same asset locked.
This is where InceptionLRT steps in and enables users to restake their tokens and in exchange mint an LRT. By enabling liquid-restaking, InceptionLRT opens doors for users to benefit from two layers of yield (the staking and restaking), remaining capital-efficient, by minting a liquid token.
Up to this moment, our protocol infrastructure is prepared to provide LRTs to the first two liquid-staking protocols featuring on EigenLayer: Lido Finance (instETH) and Rocket Pool (inrETH). However, as EigenLayer keeps on expanding the accepted LSTs, so will we continue to embrace new ones to our protocol, and enable the liquid restaking of the same.
Final Thoughts
Despite its similar terminology, and overall similar framework, LSTs and LRTs differ on the underlying asset they represent.
In the LST case, the token represents the staked tokens plus the correspondent staking rewards. In the LRT case, the token represents the staked token, plus the correspondent staking and restaking rewards.
Another major difference between both is the tokens’ risk profile. Since they are only exposed to the native Ethereum validator performance, LSTs are safer products than LRTs. Hence the importance of platforms such as InceptionLRT, that can curate the restaker validators and opt for the most secure solutions, diminishing the associated risk of activity.
