Unpacking the Potential of Restaking and New Yield Opportunities in Ethereum
Since Ethereum transitioned to proof of stake, staking Ether has become a popular way to earn a steady yield on holdings. However, for DeFi natives, simply earning a yield is not enough. They are looking for additional yield opportunities and ways to maximize their staked assets. This has led to the emergence of protocols that allow stakers to earn yield on their staked assets and also restake their tokens. This article explores the potential of restaking and new yield opportunities in Ethereum.
There are two main approaches to staking on Ethereum: running a validator or using liquid staking derivative tokens (LSD tokens). Running a validator involves locking up denominations of 32 Ether and running the consensus layer and execution layer clients. Validators are paid a yield directly into their Ethereum wallet. On the other hand, LSD tokens are issued by services to which you can delegate your Ether for them to stake on your behalf. In return, you receive a token that represents the value of your staked Ether and can be redeemed at any time.
LSD tokens, such as Lido’s stETH and RocketPool’s RETH, provide liquidity for staked Ether, offering additional yield opportunities for DeFi users. Users can obtain these tokens by depositing Ether via the respective websites or exchanging Ether for the tokens on decentralized exchanges like Uniswap. Additionally, RocketPool allows users to stake directly with them using denominations of 16 Ether and earn additional Ether staking rewards and their governance token RPL.
To further enhance yield opportunities, DeFi platforms like Curve Finance and Frax Finance offer liquidity pools for LSD tokens, where users can earn additional yield. Additionally, Origin Protocol’s OETH allows users to obtain yield across various DeFi services by depositing ETH or LSD tokens into their app. These yield opportunities are similar to those offered by stablecoins, as investors provide liquidity for DeFi services.
Eigenlayer is an upcoming platform that offers restaking opportunities for stakers. Restaking on Eigenlayer involves using existing staked assets to secure additional services such as rollups, bridges, and data availability networks. This eliminates the need for tokens to secure these services, as stakers can allocate proportions of their staked assets. Eigenlayer aims to incentivize new services to spin up using their infrastructure to provide enhanced security.
While the returns from restaking and LSD tokens can be attractive, it’s important to consider the risks associated with compounding investments. Smart contracts can be vulnerable to hacks, and token values can plummet. Staking Ether directly on the Ethereum network may be less risky compared to depositing it into a less proven protocol. Additionally, there is a concern that if a significant proportion of the Ethereum validator set restakes on other applications, they could influence decisions on the Ethereum mainnet, potentially leading to changes in Ethereum based on decisions made by separate applications.
It’s also important to consider liquidity concerns. If there were a liquidity crunch on a Curve Pool or LSD protocol, there may be difficulties in safely withdrawing funds. Despite these risks, restaking and LSD protocols are gaining momentum and are likely to be a significant area of growth in DeFi. While the sustainability of current projects remains to be seen, it is an exciting time as this sector is just getting started.
