Yellow Capital Blog/Liquidity and Tokenomics/Crypto Restaking: New Way of Capital Efficiency

Crypto Restaking: New Way of Capital Efficiency

Thursday, March 07, 2024

Staking has emerged as a popular method for generating passive income. By locking up their holdings for a predetermined period, users contribute to the security and operation of a blockchain network and are rewarded with new tokens or additional tokens from the staking pool. This approach, however, comes with a caveat: staked assets are typically rendered inaccessible for the duration of the staking period, limiting their overall utility.
This is where crypto restaking comes in, aiming to revolutionize the concept of staking by introducing a layer of flexibility. Unlike traditional staking, restaking allows users to unlock the full potential of their staked assets. Let's delve deeper into the mechanics of restaking and explore how it empowers crypto holders to maximize their capital efficiency.

Understanding Restaking

Restaking essentially involves taking your already staked assets and re-utilizing them to generate additional rewards and participate in various decentralized finance (DeFi) projects. This innovative concept unlocks new avenues for earning potential, extending beyond the initial rewards offered by traditional staking platforms.
Users can choose between two restaking options - Native and Liquid.
Native restaking
Native restaking is a process that involves leveraging smart contracts to manage assets held under the control of a validator's node. This helps to improve the overall security of the assets involved. To participate in native restaking programs, validators must utilize additional node software that is specific to the restaking module. This allows them to safely offer their staked assets for further utilization within the restaking ecosystem. By doing so, validators can earn additional rewards while ensuring that the assets remain secure.
Liquid restaking
The second option for restaking is liquid restaking, which involves the use of Liquid Staking Tokens (LSTs). When opting for this type of restaking, users stake their assets in an application and receive an LP (liquidity provider) token in return. This token can then be staked in a staking protocol.

How Does Crypto Restaking Work?

Restaking allows you to earn extra rewards and participate in various DeFi projects. Let's explore this innovative financial approach.

Traditional Staking:
To begin with, it is important to understand the concept of traditional staking. In this process, individuals put their cryptocurrency assets in a staking pool to help secure and operate a Proof-of-Stake blockchain network. As a result of their contribution, they receive rewards in the form of either new tokens or additional tokens from the pool. However, there is a significant limitation to this process. The assets that have been staked are typically locked for a specific period, which restricts their usage in other activities.

Enter Restaking:
This is where restaking comes in, providing a solution to the aforementioned limitation. It involves reusing already staked assets to:

  • Generate additional rewards: Besides the initial staking rewards, restaking can earn you additional income by using your staked assets in various DeFi protocols.
  • Participate in multiple DeFi projects: Restaking allows for greater DeFi activities compared to traditional staking, which is limited to a single platform. This includes lending, borrowing, liquidity provision, and more.​
How Does Crypto Restaking Work?

The Role of Intermediary Layers:

Protocols such as EigenLayer serve as a bridge between the main blockchain and DeFi applications. They make it easier for users to restake their assets. By using these intermediary layers, users can effortlessly link their staked assets to various DeFi protocols. This not only unlocks the full potential of their assets but also enables them to participate in the wider DeFi ecosystem.
The Flow of Restaking:
1. Stake your assets:
To get started, you need to stake your preferred cryptocurrency on a Proof-of-Stake blockchain platform of your choice.
2. Receive staking rewards: Earn rewards for contributing to network security and validation.
3. Connect to a restaking platform: It is essential to select a reliable restaking platform, such as EigenLayer, Kelp DAO, or Renzo Protocol.
4. Bridge your staked assets: Connect your staked assets (e.g., stETH, rETH) to the restaking platform via its bridge.
5. Select DeFi opportunities: Select various DeFi activities offered by the platform, such as lending, borrowing, or liquidity pools.
6. Earn additional rewards: Generate additional income by participating in chosen DeFi activities.
7. Monitor and manage: Continuously monitor your restaking activity, manage your assets, and adjust your strategy as needed.

The Core Elements

Here's a breakdown of the core elements involved in the restaking process:
Leverage Existing Staked Assets:
Restaking is a process that involves repurposing assets that are already locked up in staking pools. This means that the assets are no longer idle, but instead, they can be redeployed to generate additional returns. This process eliminates the traditional drawback of limited capital utilization that is associated with staking. As a result, users can extract maximum value from their holdings.
The Role of Restaking Protocols:
Restaking protocols serve as a bridge between the main blockchain and various decentralized finance (DeFi) applications. These protocols allow users to easily transfer their staked assets to different DeFi platforms, thereby enabling them to participate in a wider range of financial activities. By leveraging restaking protocols, users can seamlessly connect their assets to different DeFi protocols without any hassles.
In essence, restaking allows users to convert their staked assets into versatile financial tools, unlocking their potential for further engagement with the DeFi ecosystem, and opening doors to potentially lucrative opportunities.

Benefits of Crypto Restaking

The introduction of restaking presents a compelling proposition for crypto investors seeking to optimize their returns and navigate the dynamic DeFi landscape. Let's explore some of the key benefits associated with restaking:
1. Improved Rewards and Capital Efficiency for Stakers
At time of writing, Ethereum offers a 3.6% yield on solo staked assets, while LSTs offer a range of 3.08% to 4.06%. Once this is restaked on a restaking protocol, users will be able to earn additional rewards based on their restaking strategy as they secure additional protocols.
2. Participation in Multiple DeFi Projects:
Restaking expands beyond the limitations of individual staking platforms, creating opportunities to access a wider variety of DeFi options. By integrating staked assets with different DeFi protocols using platforms such as EigenLayer, users can participate in various financial activities such as lending, borrowing, and liquidity provision. This diversification not only enhances their earning potential but also enables them to explore a broader range of DeFi functionalities.
3. Potential for Higher Returns:
Restaking is a process that combines the initial rewards from traditional staking with additional income generated through DeFi participation. This combination offers the potential for significantly higher returns compared to traditional staking alone. Due to the multiplied earning potential, restaking is an attractive proposition for investors seeking to maximize their profits within the crypto market.
4. Enhanced Liquidity:
Traditional staking usually limits access to staked assets for a specific period. However, some restaking options provide more flexibility in terms of liquidity. Certain platforms enable users to withdraw a portion of their staked assets while still receiving rewards on the remaining portion. This enhanced liquidity feature gives users greater control over their assets and the ability to react strategically to market fluctuations.
5. Diversification and Risk Management:
Restaking in various DeFi protocols can help diversify investments, mitigating potential risks associated with a single project and promoting financial stability.

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Considerations and Risks of Crypto Restaking

While restaking presents a plethora of potential benefits, it's crucial to acknowledge the inherent complexities and potential risks associated with this innovative financial approach. Here are some key considerations for crypto investors contemplating venturing into the realm of restaking:

Complexity and Learning Curve:
Restaking in DeFi requires interacting with different protocols, each with its own rules, functionalities, and risks. The complexity of these protocols demands a comprehensive knowledge of DeFi concepts, underlying protocols, and associated investment risks. Engaging in restaking without adequate knowledge can result in unforeseen consequences and significant financial losses. Therefore, it is crucial to understand the risks involved before engaging in restaking activities.

Security Risks:
The DeFi ecosystem provides promising prospects, but it also brings certain risks. When users connect their assets to various DeFi protocols through restaking platforms, they expose themselves to vulnerabilities such as smart contract exploits, hacks, and rug pulls. Therefore, it is crucial to conduct thorough research, assess the security measures implemented by restaking platforms and DeFi protocols, and only engage with reputable entities that have a proven track record.

Impermanent Loss:
Participating in specific DeFi activities, such as providing liquidity through restaking, can leave users vulnerable to the risk of impermanent loss. This happens when the value of the underlying assets in a liquidity pool diverges significantly over the investment period. Although there is a potential for higher returns, there is also a possibility of incurring losses that exceed the earned rewards if the price difference persists.

Not All Assets are Suitable:
Not all cryptocurrencies can currently be used for restaking, and the availability of restaking options may vary based on the platform, asset class, and market conditions. It's important to stay informed about the available options and carefully evaluate each asset's suitability before committing to a restaking strategy.

Evolving Regulatory Landscape:
The regulatory environment for the crypto and DeFi industries is in a state of flux and ambiguity. As regulatory frameworks continue to evolve, the accessibility and capabilities of restaking platforms and DeFi protocols may be altered. Investors should remain informed about regulatory changes and take into account potential regulatory risks when deciding on investments.

Restaking Protocols to Keep an Eye On

Restaking is benefitial, but it can be confusing to choose from the different protocols available. Here are some restaking protocols you can consider. However, it's important to do your own research and due diligence before engaging with any platform:
EigenLayer: As a pioneer in the restaking space, EigenLayer facilitates restaking through its intermediate layer, enabling users to connect their staked assets to various DeFi applications.
Kelp DAO: This community-governed protocol focuses on offering a user-friendly platform for restaking various ETH derivatives like stETH, rETH, and cbETH, aiming to simplify the restaking process.
Renzo Protocol: Built on the EigenLayer ecosystem, Renzo Protocol simplifies staking by automatically compounding rewards and supporting multiple ETH derivatives.
Restake Finance: This protocol enables users to restake their Liquid Staked Derivatives (LSD) tokens on various DeFi platforms for additional rewards.
etherFi: This platform enables users to earn staking rewards while participating in DeFi activities like lending and borrowing wETH (wrapped ETH) tokens.
Puffer Finance: Designed specifically for stETH (Lido Staked ETH), Puffer Finance allows users to restake their stETH tokens and earn additional rewards through various DeFi strategies.

It is crucial to bear in mind that this is a partial list, and new restaking protocols are continually arising. Before engaging with any protocol, it is essential to conduct your own research (DYOR).

Crypto restaking is a promising avenue for investors looking to maximize the potential of their staked assets and actively participate in the dynamic decentralized finance (DeFi) ecosystem. Leveraging restaking enables users to unlock enhanced capital efficiency, broader participation opportunities, and potentially higher returns. However, it's important to acknowledge that there are inherent complexities and potential risks associated with restaking. These include the need for in-depth knowledge, security considerations, impermanent loss risks, limited asset availability, and an evolving regulatory landscape.
​Investors who are considering restaking should conduct thorough research beforehand. They should carefully evaluate their risk tolerance and prioritize a measured approach. By approaching restaking with prudence and committing to continuous learning, investors can optimize their DeFi experience and strategically navigate the ever-evolving crypto landscape.

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