What are Liquid Restaking Tokens?

What are Liquid Restaking Tokens?

Liquid Restaking Tokens (LRTs) are derivatives created by liquid restaking platforms, enabling users to unlock liquidity from staked assets while securing additional blockchain services. These tokens represent restaked assets like stETH, which are used to secure Actively Validated Services (AVSs) on platforms such as EigenLayer.

LRTs allow users to continue earning staking rewards while retaining the flexibility to trade, lend, or use their assets within DeFi ecosystems. The yield from LRTs typically includes both the original ETH staking rewards and additional returns from securing third-party services like a decentralized oracle, bidge or layer 2 rollup.

Platforms like Puffer Finance facilitate the restaking of liquid staking derivatives, such as stETH, to mint LRTs (e.g., pufETH). Through liquid restaking, investors not only earn yields from their staked assets but also gain additional rewards by contributing to the validation of AVSs.

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Examples of LRTs

Liquid Restaking Tokens (LRTs) allow investors to earn additional yield by leveraging their staked ETH in Actively Validated Services (AVSes). Below are key examples of LRTs:

• Etherfi (ETHFI): Etherfi enables users to stake ETH and receive eETH, a liquid restaking token. Integrated with EigenLayer, Etherfi allows ETH stakers to validate various Ethereum-based modules, enhancing both staking and restaking rewards.
• Renzo: Operating within the EigenLayer ecosystem, Renzo manages Liquid Restaking Tokens and optimizes the restaking process. By minting ezETH with an LST like stETH or mETH, users can earn an additional 3.1% APY to secure AVSes.
• Puffer Finance: Starting with a risk-free PoS validation module, Puffer Finance plans to expand with additional restaking modules. Stakers receive pufETH, which captures both PoS and restaking rewards, increasing value over time.
• Kelp DAO: Kelp DAO uses the rsETH token to decentralize Ethereum’s staking strategy by distributing staked assets across multiple Node Operators. This approach streamlines reward collection and offers flexible staking strategies.

These examples demonstrate how LRTs can enhance yield, security, and liquidity in the DeFi space, providing valuable options for those seeking diversified blockchain investments.

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Liquid Restaking Token Risks

Liquid Restaking Tokens (LRTs) offer new forms of yield onchain for ETH stakers, but they also carry specific risks that investors must carefully evaluate:

• ‍Security Risk: LRTs depend on third-party services and smart contracts, which can be vulnerable to bugs or exploits in the code, potentially leading to a loss of funds.‍
• Market Risk: LRTs are highly susceptible to market volatility, with their value fluctuating due to market trends, investor sentiment, and economic factors. The recent depegging of Renzo Protocol’s EzETH highlights these risks.‍
• Liquidity Risk: Some LRTs may face liquidity challenges, making it difficult to execute large trades without significantly impacting the token’s price, depending on the platform and market presence.‍
• Operational Risk: Failures in the underlying network infrastructure, such as downtime or performance issues, can disrupt LRT functionality, impacting validation processes and yield generation.‍
• Slashing Risks: Engaging in validation services with LRTs involves slashing risks, where a portion of staked tokens may be forfeited due to network violations or validator errors.‍
• Counterparty Risk: The involvement of multiple parties in LRTs introduces counterparty risks; if one fails to meet obligations, it can affect the overall performance and reliability of the tokens.

Investors should thoroughly assess these risks to ensure their decisions align with their risk tolerance and investment goals when engaging with LRTs.

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LRTs vs Liquid Staking Tokens

Liquid Staking Tokens (LSTs) like Lido's stETH and Rocket Pool's rETH represent staked assets in a blockchain network, providing liquidity while the underlying assets remain locked. These tokens allow users to engage in DeFi activities—such as trading, lending, or using them as collateral—while still earning staking rewards.

Liquid Restaking Tokens (LRTs) extend this concept by allowing the assets represented by LSTs to further support additional network protocols or smart contracts. This added utility offers LRT holders the potential for higher yields, but it also introduces more complexity and risk, making LRTs a more advanced derivative of LSTs with greater involvement in the broader ecosystem.

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Bottom Line

In summary, Liquid Restaking Tokens (LRTs) offer an advanced way for investors to enhance yields and capital efficiency by leveraging staked assets like stETH to secure additional blockchain services or 'AVSes'. While LRTs provide opportunities for higher returns, they also introduce new and novel risks, such as smart contract bugs and peg stability.

Understanding these risks and the differences between LRTs and traditional Liquid Staking Tokens (LSTs) is crucial for making informed decisions in the increasingly complex DeFi landscape.