What are Liquid Restaking Tokens (LRTs)?
With EigenLayer going live on July 14, 2023, many Ethereum users have been exploring this protocol, taking advantage of its restaking feature for Ether (ETH).
In our previous article, we briefly covered EigenLayer and the benefits it could offer to the industry, such as simplifying and enhancing network security for Actively Validated Services (AVSs).
Now, with a basic understanding of EigenLayer, it’s time to highlight noteworthy projects that enable restaking for users, but not on EigenLayer itself.
These are known as Liquid Restaking Tokens (LRTs).
What are LRTs, and why are we highlighting them?
In this article, we will dive deeper into LRTs, exploring their purpose, the current options available, and uncovering the benefits and disadvantages.
Several of these projects might capture your attention, so gear up with your crypto boots, and let’s explore the world of LRTs!
EigenLayer
Before getting into LRTs, let’s refresh our understanding of EigenLayer.
EigenLayer is a decentralized protocol built on the Ethereum blockchain. It enables restaking for ETH depositors and helps secure Actively Validated Services (AVSs) by leveraging Ethereum’s robust network and security infrastructure.
What is an AVS?
An AVS, otherwise known as an Actively Validated Service, is a system that requires validation to provide its services securely
These services can range from bridges, oracle networks, sidechains, and much more.
Why is this important?
Previous trust systems often struggle to establish security and validated trust, as they require their own set of validators. This process demands significant effort, including the creation of a new token and the development of an entirely new trust network.
Due to the hassle these trust systems face, they frequently suffer from low security, high costs, and vulnerability to attacks.
What’s the Solution?
EigenLayer offers a solution by allowing AVSs to leverage Ethereum’s powerful and secure validator set. This translates to enhanced security and reduced costs for the new AVSs.
Think of EigenLayer as a middle layer between Ethereum and AVSs.
Remember, if you are new you can learn more about EigenLayer here!
Now that we have a refresher on EigenLayer, let’s move on to the main topic of this article, Liquid Restaking Tokens (LRTs)!
What are Liquid Restaking Tokens (LRTs)?
Liquid Restaking Tokens (LRTs) are tokens received when users deposit Ether (ETH) on a DeFi protocol that enables restaking, bypassing direct engagement with EigenLayer.
You might wonder, why opt for these restaking protocols instead of going to EigenLayer directly?
Consider this perspective.
If you want to deposit raw ETH into EigenLayer, you need to run a validator. From there, you create an EigenPod where you can restake the staked ETH from the validator.
By depositing your ETH into EigenLayer directly, you earn EigenLayer restaking points and potential restaking yield. You can learn more about restaking points here.
The restaked points and potential yield represent your contribution to the overall security of the EigenLayer ecosystem.
If you don’t run a validator but still want to participate through EigenLayer’s direct interface, you can deposit Liquid Staking Tokens (LSTs) such as stETH, rETH, cbETH, ETHx, etc. This route allows users to accumulate EigenLayer restaking points and potential restaking yield.
However, there are alternatives to directly depositing ETH or LSTs in EigenLayer, and that’s through LRT protocols.
When you deposit ETH through LRTs, your ETH is restaked on EigenLayer by the LRT protocol, with the hope of securing future AVSs.
This allows you to earn EigenLayer restaking points, potential restaking yield, and additional incentives from the LRT protocol (native token and/or points).
Types of Liquid Restaking Tokens (LRTs)
There is a diverse range of protocols that allow users to restake ETH and receive LRTs. Below are some of the most prominent protocols currently available.
Renzo
Renzo is a decentralized protocol/strategy manager and an LRT on EigenLayer. It offers a unique interface that allows users to deposit their ETH and, in return, receive ezETH. While depositing ETH to Renzo, it provides support for the EigenLayer ecosystem by securing Actively Validated Services.
https://www.renzoprotocol.com/
Ether.fi
Ether.fi is a decentralized protocol that offers liquid staking solutions on Ethereum. When you stake ETH, you will receive eETH, the native LRT. While ether.fi restakes your ETH, you will be receiving rewards from EigenLayer, ether.fi loyalty points, and other potential incentives from ether.fi.
KelpDao
Kelpdao is a liquid restaking solution. As of this writing, users who interact with this protocol can deposit ETHx, stETH, and sfrxETH and in return receive rsETH. While KelpDao restakes your ETH on EigenLayer, you’ll be receiving EigenLayer restaking points, KelpMiles, and other potential incentives from KelpDao.
Swell
Swell is a liquid staking and restaking protocol on Ethereum. It enables users to deposit their ETH and, in return, receive swETH, which can earn yield. With their restaking product, users can deposit their ETH and receive rswETH, earning EigenLayer restaking points, Pearls, and other potential incentives from Swell.
Take a look and learn more about these protocols above!
Benefits of LRTs
- Enhanced Rewards and Points: Liquid Restaking Tokens offer a unique dual incentive mechanism, enhancing traditional staking rewards. Users can enjoy the potential for increased yield through interacting with DeFi protocols and also gather additional points from both EigenLayer and the LRT protocol’s native token. This synergy between yield and points can potentially enhance overall returns, presenting an appealing option for those aiming to maximize their earnings.
- Increased Flexibility: Liquid Restaking Tokens grant users much greater control over their staked assets compared to traditional staking methods, where ETH is locked. These tokens, representing the staked ETH in a liquid form, can be utilized across various DeFi protocols, traded, or sold anytime. This fluidity enables users to quickly adjust their investment strategies in response to market shifts.
Risks of LRTs
- Smart Contract Exploitation: A major risk associated with Liquid Restaking Tokens is the potential for vulnerabilities within smart contracts. Given that these tokens and their issuing platforms rely on complex smart contracts, any bugs or exploitations could result in significant user losses.
- Centralization Risk: Despite the aim of Liquid Restaking Tokens to decentralize rewards and opportunities within the DeFi ecosystem, there’s a risk of centralization. The beauty of LRT benefits could lead to a considerable portion of the total restaked ETH being concentrated in a handful of LRT protocols. This centralization might challenge the decentralized nature of the blockchain and introduce heightened risks, including regulatory scrutiny or targeted attacks.
The Future of LRTs
Liquid Restaking Tokens (LRTs) stand out as a compelling innovation in the DeFi space, offering Ethereum users a unique blend of benefits, including enhanced rewards, increased flexibility, and access to a diversified portfolio of DeFi activities. By allowing users to earn dual incentives through both EigenLayer’s security contributions and additional rewards from LRT protocols, these protocols represent a significant step forward in maximizing the utility and profitability of staked ETH.
However, as with any innovative financial instrument, they come with their own set of risks, such as the potential for smart contract exploitation and the risk of centralization. Users must conduct thorough research and consider these factors before diving into the world of LRTs.
As the DeFi ecosystem progresses, Liquid Restaking Tokens may emerge as a key innovation, providing a more versatile and engaging staking experience. These tokens enhance the foundational security and functionality of platforms such as EigenLayer while granting users enhanced management of their investments. This facilitates smoother and more effective navigation through the intricate world of decentralized finance.
For both veteran crypto investors and newcomers alike, gaining insight into and making use of LRTs can unlock potential pathways for expansion and creativity within your digital asset portfolio.
