DeFi Staking New Wave: Liquidity Re-staking Tokens and Layer 2 Public Chains

Author: Bing Ventures

The innovative application of Liquid Re-Staking Tokens (LRT) and the recent launch of Blast, a public chain supporting Layer 2 automatic staking functionality, are leading a new wave in the DeFi staking space. This article from Bing Ventures will focus on the background behind this dynamic, the significance of this development for the DeFi staking sector, and the current major trends and prospects in this field.

Liquid Staking Derivatives: The Latest Innovations in the LSD Space

Source: Bing Ventures

In the Ethereum ecosystem, especially after the Shanghai upgrade, the development of Liquid Staking Derivatives has shown significant innovation and adaptability. It began with Lido, a key player in Ethereum's staking mechanism. By providing staking solutions for Ethereum, Lido addressed the major issue of liquidity lock-up. Their approach allows users to stake Ethereum while maintaining a certain level of liquidity, marking a significant leap from the traditional, rigid staking paradigm.

Subsequently, the entry of Pendle Finance brought about a new shift by tokenizing yields, enabling users to trade yields through interest rate-based protocols, adding new gameplay to the LSD space and opening new avenues for yield optimization and risk management.

However, the market's desire for higher yields and more efficient use of staked assets has not been fully met. This has led to the development of more complex mechanisms, such as the re-staking protocol Eigenlayer. Eigenlayer allows stakers to re-stake their Ethereum, enhancing the security and reliability of other protocols. This not only increases the potential returns for stakers but also contributes to the resilience and security of the entire Ethereum network.

Soon, however, a challenge arose: tokens locked on Eigenlayer lost liquidity and became inactive, limiting diversity in the DeFi space. This led to the innovation of Liquid Re-Staking Tokens (LRT), a solution that unlocks the liquidity of these re-staked assets while allowing stakers to further enhance returns by participating in DeFi. Users can deposit LRT into liquidity re-staking protocols to earn yields.

As a result, the LSD space has evolved from a single-layer staking starting point into a more complex and multifaceted ecosystem. Recent developments, such as the launch of Blast, reflect this trend. Blast is an EVM-compatible Ethereum Layer 2 network that offers native ETH and stablecoin staking yields on its chain, further democratizing access to staking rewards and making the process more user-friendly and diverse. This evolution of the LSD narrative emphasizes a dynamic and adaptive Ethereum ecosystem that continuously innovates to meet users' demands for higher liquidity and yields while navigating the inherent complexities and risks of the decentralized finance world.

The Next Narrative in DeFi: LRT

Source: Dune, Bing Ventures

In the DeFi space, the emergence of Liquid Re-Staking Tokens (LRT) represents a profound innovation to traditional staking models. LRT not only breaks the limitations of single staking conceptually but also promotes the adoption of multi-protocol staking enhancements in practice. Through the EigenLayer platform, users can cross the boundaries of single protocols and diversify their ETH resources across multiple Active Validator Services (AVS), significantly enhancing network security and injecting more complex security layers into the DeFi ecosystem.

The advantages of LRT are multifaceted: significant improvements in capital efficiency, enhanced network security, and substantial savings for developers in resource allocation. However, at the same time, we must also be vigilant about the accompanying risks, including potential penalty risks, issues of protocol centralization, and yield dilution caused by intense market competition.

Regarding the market prospects for LRT, we see the immense temptation of its high yield potential. LRT provides ETH stakers with additional revenue channels, including not only basic staking yields but also rewards from Eigenlayer and potential token distributions. Furthermore, through incentives such as airdrops, LRT is expected to attract broader user participation, thereby driving overall growth in DeFi leverage, a trend that may replicate or even surpass the exuberance of the DeFi summer of 2020.

The future trends are promising. Driven by LRT, the DeFi space is expected to witness a competitive landscape similar to the "Curve War," and token economics may evolve towards more complex veTokenomics models. Additionally, the introduction of emerging AVS, which can influence token rewards or token issuance decisions for LRT protocols, could become a key driver for attracting ETH re-staking.

In summary, LRT has demonstrated its unique value in unlocking liquidity, enhancing yields, and optimizing governance and risk management. Thus, LRT is not just a staking tool but a key factor driving innovation and growth in DeFi. Its development and application will bring profound changes to the DeFi ecosystem, opening new possibilities for users, developers, and the entire blockchain world.

Associated Risks and Challenges

Stader Labs, as a dark horse in the industry, has recently launched the liquid re-staking token rsETH, which has garnered widespread attention on the Ethereum mainnet. Through rsETH, users can re-stake existing liquid staking tokens (such as Coinbase's cbETH, Lido's stETH, and Rocket Pool's rETH) across multiple networks and mint new liquid tokens representing their share in the re-staking protocol, greatly enhancing the flexibility and liquidity of staked assets. With the support of EigenLayer, rsETH has achieved large-scale re-staking of ETH by simplifying the process for users to enter the re-staking ecosystem, further strengthening the decentralization of the Ethereum network.

However, this innovative financial tool also brings numerous risks. Ethereum founder Vitalik Buterin and the co-founder of EigenLayer have pointed out that re-staking could lead to complex scenarios that threaten the security of the main network. Additionally, as more AVS and LRT emerge, the excessive dispersion of industry funds and attention may lead to market instability and weakened governance structures.

The Blast Layer 2 public chain, as an emerging force in the Web3 ecosystem, injects new vitality into Layer 2 solutions through its unique automatic compounding feature. The innovation of Blast lies in providing basic yields for deposits on Layer 2 networks, offering stable staking returns through partnerships with protocols like Lido, while also allocating stablecoin assets to protocols like MakerDAO for additional yields. Although Blast's operational model brings convenience and returns to users, its TVL composition and strategy also reveal potential centralization risks and market sensitivity issues.

The future challenge for Blast lies in how its strategy affects the actual utilization of assets and the dynamic capital conversion within the ecosystem. Blast's TVL strategy needs to shift from static capital preservation to dynamic capital appreciation, ensuring network vitality and liquidity for Dapps. Only then can it truly achieve its goal of promoting the growth of blockchain networks rather than merely serving as a medium for capital storage.

Overall, the emergence of Stader Labs' rsETH and the Blast Layer 2 public chain marks innovation and progress in staking models within the DeFi space. However, in the pursuit of maximizing yields, we must remain vigilant about the potential risks inherent in these emerging models to ensure the security and healthy development of the Ethereum network. The future DeFi ecosystem will need to find a more robust and sustainable balance between innovation and risk management.

Imagining New Ways to Stake Ethereum

We believe that dynamic staking strategies like LRT are having a profound impact on the Ethereum staking market. First, the automation and efficiency of these strategies lower the investment threshold, attracting more individual investors. Second, as more funds flow in, market liquidity significantly improves, helping to stabilize the entire DeFi ecosystem. Additionally, dynamic staking strategies promote market innovation and development by providing diversified and customized investment options. However, the implementation of this strategy also faces technical challenges, particularly in building efficient and accurate algorithmic models and ensuring system security against network attacks.

Source: Bing Ventures

At the same time, new paradigms for Ethereum staking beyond LRT are also being explored and are worth attention.

The Layered Staking System is emerging as a new model in the context of market maturation and diversified investor demand. This system distributes staked assets across different risk tiers, each with varying yield potentials and risk configurations. Low-risk tiers provide relatively stable returns, suitable for risk-averse investors, while high-risk tiers cater to those with a higher risk tolerance. The flexibility of this system allows investors to allocate assets according to their risk preferences and market forecasts. Implementing a layered staking system requires complex smart contracts and refined risk management strategies to ensure liquidity and security of assets across various tiers. The emergence of this system provides investors with more choices and flexibility, driving the Ethereum staking market towards greater maturity and diversification.

Moreover, automated staking strategies based on smart contracts enhance the efficiency and effectiveness of asset management by automatically executing staking, unstaking, or reallocating staked assets. The risk management capabilities of automated staking strategies are enhanced through specific risk parameters set within smart contracts, which automatically adjust staking positions once market conditions trigger these parameters. Despite challenges such as ensuring the security and reliability of smart contracts, it is expected that with technological advancements, the security of smart contracts will improve, promoting the application of automated staking strategies across broader fields.

Collective staking and shared yield models allow multiple investors to jointly stake their assets and proportionally share the generated yields. This model automatically allocates yields through smart contracts, providing small investors with opportunities for collaborative value addition. Smart contracts play a central role in collective staking models, automatically executing yield distribution to ensure that each participant receives fair returns. Collective staking offers small investors opportunities to reduce risks and costs, increasing the inclusivity of the DeFi ecosystem.

Finally, linking staked assets with real-world assets (RWA) represents an innovative development in the DeFi space. In this model, real-world assets such as real estate and artworks can serve as the underlying assets for staked assets, represented and used for staking through tokenization on the blockchain. This provides liquidity for typically illiquid assets and offers new funding sources for owners of real-world assets. Despite challenges such as ensuring accurate valuation and tokenization of real-world assets and addressing regulatory and compliance issues related to them, the model of linking staked assets with RWAs is expected to see broader application in the future, providing new funding channels for traditional asset holders and new investment opportunities for cryptocurrency investors, deepening the integration of the cryptocurrency market with traditional financial markets.

In conclusion, the DeFi staking space is poised for more innovation and development in the future, making it highly worthy of attention from investors and DeFi enthusiasts.