Liquid Restaking Volatility
The LRT competitive landscape and recent turbulence
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week, we explore the recent uncertainty within the Ethereum restaking space. We dive into the competitive landscape of liquid restaking protocols, and the recent misfortune by one of its industry leaders.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin fees reached a daily all-time high of over $80M on the back of the record-breaking launch of Runes
- Fees on Bitcoin have decreased significantly since, but remain 2–3x higher than prior to the week prior
- Conversely, fees on Ethereum dropped to a 6-month low as on-chain activity and volatility declined
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Nearly $1B worth of Bitcoin was deposited into CEXs, while ETF flows slow down simultaneously
- Ether recorded $190M of net outflows from CEXs this week
Liquid Restaking Volatility
EigenLayer recently surpassed $15B in total value locked (TVL). The EigenLayer protocol, which allows the creation of services validated by Ethereum’s security, continues to receive deposits in anticipation of its token launch.
The first set of actively validated services (AVSs) on top of EigenLayer have been launching the past few weeks. And while AVSs have operated smoothly thus far, a major liquid restaking project has hit some roadblocks this week.
Restaking Boom — Within less than a year, EigenLayer has managed to attract over $15B in deposits
- Nearly 4% of all ETH, and 40% of liquid staking tokens (LSTs) supply is currently being restaked into EigenLayer
- ETH deposits make up over 60% of all EigenLayer deposits, while stETH makes up 22%
- EigenLayer users can choose to deposit into the protocol directly themselves, or do so through a liquid restaking token (LRT), which aggregates and delegates assets into AVSs on their behalf
Competition in the LRT space has been fierce, with multiple projects running aggressive incentive programs in parallel.
LRT Landscape — Over $10B (or 2/3 of EigenLayer deposits) come through LRTs
- EtherFi has secured a first mover advantage and managed to stay leader in terms of deposits
- Renzo, which was the fourth protocol by TVL in February, has accelerated to second place by expanding its DeFi presence quickly, primarily in layer 2s
- This Tuesday, Renzo announced the upcoming launch of its governance token REZ, leading to some unexpected volatility in the price of their LRT, ezETH
In a now-infamous pie chart the Renzo team stated their token distribution, but with the size of each portion not being proportional to the assigned allocations. This drove criticism on social media, with community members claiming they were misguided.
Although ezETH is fully collateralized by ETH deposits, it is not redeemable at the moment. As Renzo criticism grew post-announcement, people began selling ezETH, leading it to trade at a discount relative to its underlying ETH holdings.
ezETH Depeg — The price of ezETH dropped by over 7% in ETH terms within hours
- Since ezETH is traded in multiple venues, without redemptions and difficulties bridging, prices varied significantly across chains, in some cases briefly reaching a discount as low as 50%
- The decline in prices was exacerbated by the liquidations of leveraged point farmers, who were using their ezETH as collateral for highly risky loans
- ezETH traded an LRT record $1.5B in volume on April 24 as liquidations, panic and uncertainty spread
FUD or Reason to Be Concerned? Depeg scenarios bring up scars for many in crypto, but they are not all the same
- Renzo’s ezETH is still fully collateralized by ETH
- The Renzo team announced they are working on three audits, preparing the protocol for redemptions of ezETH for the underlying ETH by May
- They also increased the supply allocated to the initial airdrop from 5% to 7% to appease the community
Despite the initial uncertainty, ezETH remains safe at the moment. Multiple users taking excessive risk got liquidated and led to volatility not seen in years for an asset that is supposed to be pegged. Ultimately, however, the protocol should recover from what has been the first major restaking upheaval.
