A comprehensive comparison of the six major liquidity re-staking protocols, which one is more suitable for your choice?

Original Author: 0xEdwardyw

In this round of the bull market, restaking is expected to become a key narrative, with over ten liquidity restaking protocols competing for EigenLayer's total locked value of over $11 billion.

This article compares six major liquidity restaking protocols, aiming to provide readers with an easy-to-understand way to grasp the subtle differences between various liquidity restaking protocols. Given the numerous trade-offs in different LRT designs, investors should make choices based on their personal preferences.

Here are the key features of each liquidity restaking protocol:

• Puffer Finance and Ether.fi are the two largest liquidity restaking protocols by market capitalization of liquidity restaking tokens. Both focus on native restaking, which carries less risk compared to LST restaking. Additionally, both protocols are committed to promoting the decentralization of Ethereum validators. Ether.fi has the highest number of DeFi integrations.

• Kelp and Renzo protocols support both native restaking and LST restaking. They accept major LSTs such as stETH, ETHx, and wBETH. Notably, Renzo extends restaking services to Ethereum's second layer, providing users with the benefit of reduced gas fees.

• Swell was originally a liquidity staking protocol with its liquidity staking token being swETH. The market size of swETH is approximately $950 million. Swell launched restaking services and introduced the liquidity restaking token rswETH. It offers native restaking and swETH restaking.

• Eigenpie is a sub-DAO of Magpie, focusing on LST restaking. It accepts 12 different LSTs and issues corresponding 12 different LRTs, providing a unique isolated LST restaking model.

Different Types of Restaking and Liquidity Restaking Tokens

Two Types of Restaking on EigenLayer

There are two types of restaking: native restaking and LST (liquidity staking tokens) restaking. For native restaking, validators stake their $ETH natively on Ethereum's Beacon Chain and point to EigenLayer. LST restaking allows holders of liquidity staking tokens (such as stETH) to restake their assets into EigenLayer smart contracts. Native restaking is more challenging for retail users as it requires running an Ethereum validator node.

The advantage of native ETH restaking is that it is unrestricted; EigenLayer sets a cap on LST restaking, only accepting deposits within a specific limit or time frame. Native restaking does not have these restrictions and can be deposited at any time. In terms of security, native restaking also has an advantage as it does not involve the risks associated with LST protocols.

Despite these differences, both native restaking and LST restaking on EigenLayer require assets to be deposited and locked, making them unavailable for other uses.

Liquidity Restaking Protocols Unlocking Locked Liquidity

Liquidity Restaked Tokens (LRT) are similar to liquidity staking tokens on Ethereum, serving as a tokenized representation of assets deposited into EigenLayer, effectively unlocking previously locked liquidity.

The services provided by liquidity restaking protocols are divided into native restaking services and LST restaking services. Most liquidity restaking protocols offer native restaking to users without requiring them to run Ethereum nodes. Users simply deposit ETH into these protocols, which handle the transactions of operating Ethereum nodes in the background.

At the same time, the largest LST, stETH, is accepted by almost all liquidity restaking protocols, while some LRT protocols can accept various different LST deposits.

It is worth noting that Puffer Finance is essentially a native restaking protocol. Currently, in the pre-mainnet launch phase, it accepts stETH deposits. After the mainnet launch, the protocol plans to convert all stETH into ETH and perform native restaking on EigenLayer. Similarly, Ether.fi is a native restaking protocol but currently accepts various types of liquidity staking token (LST) deposits.

Two Types of LRT: Basket of LST or Isolated Each LST

Most liquidity restaking protocols adopt a basket of LST approach, allowing deposits of various liquidity staking tokens (LST) in exchange for the same liquidity restaking token (LRT). Eigenpie employs a unique isolated liquidity staking token strategy. It accepts 12 different LSTs and issues a unique LRT for each LST, resulting in 12 distinct LRTs. While this approach mitigates the risks associated with pooling different LSTs together, it may lead to fragmented liquidity for each individual LRT.

Restaking Through Ethereum Layer 2 Protocols

Due to the current high gas costs on the Ethereum mainnet, several LRT protocols have enabled restaking through Ethereum Layer 2, providing users with a lower-cost alternative. The Renzo Protocol has launched restaking features on Arbitrum and BNB Chain. Similarly, Ether.fi also plans to launch restaking services on Arbitrum.

Liquidity Restaking Risks and Rewards

Liquidity restaking protocols deploy a set of smart contracts on top of EigenLayer to facilitate user interactions, helping users deposit ETH or LST into and withdraw from EigenLayer, as well as minting/destroying liquidity restaking tokens (LRT). Therefore, using LRT involves taking on the risks associated with the liquidity restaking protocol.

Additionally, the risks depend on whether the liquidity restaking protocol offers LST restaking services. In native restaking, funds are deposited into the Ethereum Beacon Chain. However, when using LST restaking, funds are deposited into EigenLayer's smart contracts, introducing risks from EigenLayer's smart contracts. Using LST also involves smart contract risks associated with the liquidity staking protocol. Therefore, users holding LRT backed by LST face three types of smart contract risks: those from EigenLayer, the specific LST used, and the LRT protocol itself.

While native restaking faces fewer layers of smart contract risks, liquidity restaking protocols providing native restaking services need to participate in Ethereum staking. They can choose to partner with professional staking companies, operate Ethereum nodes themselves, or support independent validators.

Using established liquidity staking tokens (such as Lido's stETH or Frax's sfrxETH) can provide reliable staking yields. These LST protocols have spent years refining their Ethereum staking services, and they are more experienced in maximizing staking rewards and minimizing slashing risks.

Decentralization of Validators

When ETH/LST is deposited into EigenLayer, these assets are allocated to a staking operator. The operator is responsible for executing validation services on Ethereum, as well as validation services for the active validation services (AVS) they choose to protect. In addition to Ethereum staking rewards, stakers also earn rewards from these AVS. If the operator violates the rules set by the AVS, there is a risk of slashing the staked assets.

If the restaking market is dominated by a few large operators responsible for protecting most AVS, it could lead to centralization and potential collusion risks. These operators with substantial computing power may dominate restaking across numerous AVS networks and collude to exert influence or directly control these AVS using the restaked ETH.

The active validation service (AVS) functionality of EigenLayer has not yet been activated, and initially, only a limited number of AVS will be available. Most liquidity restaking protocols do not disclose detailed information about how they will select restaking operators and AVS. At this stage, stakers primarily face slashing risks at the Ethereum layer. For restaking conducted through LST, this risk originates from the LST protocol itself. Native liquidity restaking protocols employ various methods for Ethereum staking. Some rely on large staking service providers like Figment and Allnodes, while others are developing infrastructure to facilitate independent validators.

DeFi Integration

The sole purpose of Liquidity Restaked Tokens (LRT) is to unlock liquidity for use in DeFi. Each liquidity restaking protocol is striving to integrate various types of DeFi protocols. Currently, DeFi integration mainly falls into three categories: yield protocols, DEXs, and lending protocols.

Yield Protocols

Pendle Finance is the leading protocol in this field, launching LRT pools that allow users to speculate on EigenLayer yields and points. Most LRT protocols have integrated with Pendle.

DEX Liquidity

Most LRTs have liquidity pools on major DEXs such as Curve, Balancer, and Maverick. We measure the liquidity of each LRT by the slippage when exchanging 1K LRT for ETH on LlamaSwap. It is important to note that this is only a rough measure, as most LRTs are yield-accruing tokens whose value increases over time as staking rewards accumulate. Since many LRT protocols are still in their early stages, the accumulated rewards to date are relatively small compared to the principal.

Swell's rswETH, Renzo's ezETH, and Etherfi's weETH have sufficient liquidity on DEXs, with almost no slippage when trading 1K LRT.

Eigenpie takes a unique approach by issuing 12 independent liquidity restaking tokens, each corresponding to one of the 12 supported LSTs. While this strategy effectively isolates the risks associated with any individual LST, it also leads to fragmented liquidity between different tokens.

Lending Protocols

Compared to other types of assets, LRT carries more layers of risk. Therefore, lending protocols are particularly cautious when considering LRT as loan collateral. Currently, the acceptance of LRT by lending protocols is limited. Etherfi's weETH is accepted by several lending protocols as it is an existing LST that has transitioned into LRT.