How much liquidity can liquidity re-staking bring?
EigenLabs has released its data availability AVS, and EigenDA has officially launched on the mainnet, marking the beginning of the re-staking era.Original Title: "How Liquid Are Liquid Restaking Tokens?" Original Author: Kairos Research Original Translation: Ladyfinger, Blockbeats Editor's Note: EigenLabs' newly launched data availability AVS, EigenDA, marks the beginning of the restaking era on the mainnet. This article aims to provide a comprehensive analysis of Liquid Restaking Tokens (LRT), exploring their integration into the DeFi ecosystem and comparing them with traditional staking tokens. We particularly focus on the current state of market liquidity and the potential opportunities and challenges in the future lending market. Through this report, readers can gain a clear understanding of this emerging market and how LRTs are globally impacting staking and restaking strategies.
EigenLayer's First AVS Launches on Mainnet
Recently, EigenLabs officially launched its data availability AVS, EigenDA, marking the start of the restaking era. Although the road for the EigenLayer market is still long, one trend has become very clear: Liquid Restaking Tokens (LRT) will become the primary avenue for restakers. Over 73% of all EigenLayer staking is conducted through LRTs, but how liquid are these assets? This report delves into this question and discusses the overall details of EigenLayer.
Introduction to EigenLayer and LRT
EigenLayer allows the reuse of ETH on Ethereum's consensus layer through a new cryptoeconomic primitive concept—"restaking." ETH can be restaked on EigenLayer in two main ways: through native ETH restaking or using Liquid Staking Tokens (LST). The restaked ETH is used to support additional applications known as Active Validation Services (AVS), which in turn allows restakers to earn extra staking rewards.
The main concern for users regarding staking and restaking is the opportunity cost of staking ETH. For native ETH staking, this issue has been addressed through Liquid Staking Tokens (LST), which can be viewed as liquidity receipt tokens representing the amount of ETH someone has staked. The LST market on Ethereum currently stands at approximately $48.65 billion, making it the largest market in the DeFi space. Today, LSTs account for about 44% of all staked ETH, and as restaking continues to gain traction, we expect the Liquid Restaking Token (LRT) sector to follow a similar growth pattern, potentially even more aggressively.
While LRTs share some characteristics with LSTs, their missions are entirely different. The ultimate goal of each LST is fundamentally the same: to stake users' ETH and provide a liquidity receipt token. However, for LRTs, the ultimate goal is to delegate users' stakes to one or more operators, who will support some AVS. How each operator allocates their delegated stakes to these different AVS depends on the individual operators. Therefore, the operators to whom LRT delegates its stakes have a significant impact on the overall activity, operational performance, and security of the restaked ETH. Finally, they must also ensure proper risk assessments for each unique AVS supported by each operator, as the risk cuts may vary depending on the services provided. It is worth noting that most Active Validation Services (AVS) have little to no risk cuts at launch, but over time, as the staking market gradually opens up and becomes permissionless, we will gradually see these protections lifted.
However, despite the structural risks being different, LRTs reduce the opportunity cost of restaking capital by providing liquidity receipt tokens that can be used as productive collateral in DeFi or to mitigate withdrawal periods. This last point is particularly important, as the main advantage of LRTs is to bypass the traditional withdrawal period, which is seven days for EigenLayer. Given this core principle of LRTs, we expect them to naturally face net selling pressure, as the barrier to entry for restaking is low, but the barrier to exit is high, making the liquidity of these LRTs their lifeline.
Thus, as EigenLayer's TVL continues to rise, it is crucial to understand the driving forces behind the protocol's growth and how these forces will affect capital inflows/outflows in the coming months. As of the writing of this article, 73% of all EigenLayer deposits are completed through Liquid Restaking Tokens (LRT). To provide context, on December 1, 2023, LRT deposits were approximately $71.74 million. Today, on April 9, 2024, they have grown to around $10 billion, an increase of over 13,800% in less than four months. However, as LRTs continue to dominate the growth of EigenLayer's restaking deposits, there are several important factors to consider.
Not all LRTs are composed of the same underlying assets. In the long run, the delegation of stakes to AVS by LRTs will vary, but there will be little change in the short term. Most importantly, the liquidity characteristics of different LRTs vary significantly.
Given that liquidity is the most critical advantage of LRTs, most of this report will focus on this aspect.
Currently, the bullish outlook for EigenLayer deposits is primarily driven by the speculative nature of Eigen Points, and we can assume this will translate into some form of airdrop allocation of potential EIGEN tokens. There are currently no AVS rewards live, which means there are no additional incremental yields on these LRTs at present. To drive and maintain a TVL exceeding $13.35 billion, the AVS market must naturally find a balance between the incremental yields that restakers require and the security price that AVS are willing to pay.
For LRT depositors, we have already seen EtherFi achieve tremendous success at launch with its ETHFI governance token airdrop, which currently has a fully diluted valuation of about $6 billion. Considering all these factors, it is increasingly likely that some funds may gradually flow out of restaking after the release of EIGEN and other anticipated LRT airdrops.
However, in terms of reasonable yields, users will find it challenging to discover higher yields in the Ethereum ecosystem that do not involve EigenLayer. There are several interesting yield opportunities within the Ethereum ecosystem. For example, Ethena is a synthetic stablecoin backed by staked ETH and hedged through ETH futures. The protocol currently offers an annualized yield of about 30% on its sUSDe product. Additionally, as users become more accustomed to interoperability and bridging to new chains, yield-seeking users may look elsewhere, potentially driving capital out of Ethereum on a large scale.
Nevertheless, we believe it is reasonable to assume that there will be no greater incremental staking yield events for restakers than the potential EIGEN token airdrop, and large, blue-chip AVS with valuations reaching nine figures in private markets may also issue their tokens to restakers. Therefore, it is reasonable to assume that a certain proportion of ETH will flow out of EigenLayer deposit contracts following these events.
Given that EigenLayer withdrawals have a seven-day cooling-off period and the vast majority of capital is restaked through LRTs, the fastest exit route will be to swap your LRT for ETH. However, the liquidity characteristics of these different LRTs vary significantly, and many LRTs cannot facilitate large-scale exits at market prices. Furthermore, as of the time of writing, EtherFi is the only LRT provider that has enabled withdrawals.
The trading value of LRTs below their underlying assets may lead to painful arbitrage cycles within the restaking protocol. Imagine an LRT trading at 90% of its underlying ETH value; an arbitrageur might step in to purchase this LRT and advance the redemption process, hoping to gain approximately 11.1% profit while hedging the ETH price. From a supply-demand perspective, LRTs are more likely to face net selling pressure, as sellers may avoid the seven-day withdrawal queue. On the other hand, users hoping to restake may immediately deposit their ETH, as purchasing LRTs from the open market offers little benefit to their already staked ETH.
Data Tracking
The data section of this month's report begins below, tracking the growth, adoption, and liquidity status of LRTs, as well as any significant news we believe should be reported.
Top 5 LRT Overview and Growth:
LRT Liquidity & Total Volume
Staking through LSTs and LRTs has several key advantages over traditional staking, but these advantages are nearly entirely undermined if the liquidity of LRTs themselves is insufficient. Liquidity refers to "the efficiency or convenience with which an asset can be quickly converted to cash without affecting its market price." It is crucial to ensure that LRT issuers provide sufficient on-chain liquidity for large holders, allowing them to exchange receipt tokens at nearly a 1:1 value.
Each existing LRT has very unique liquidity characteristics. We expect these conditions to persist for several reasons:
Certain protocols may be fortunate to attract liquidity from investors and users for their LRTs in the early stages;
There are many ways to incentivize liquidity through grants, token distributions, on-chain bribery systems, or through the anticipation of events like "points";
Some protocols will have more complex and concentrated liquidity providers, which will keep their LRT closely pegged to the underlying assets, while overall dollar liquidity may be lower. It should be noted that concentrated liquidity is only effective within tight price ranges; any price movement beyond the selected range will result in significant price impacts.
Below is a very simple breakdown of the on-chain pool liquidity of the top five LRTs on the Ethereum mainnet (plus Arbitrum). Exit liquidity refers to the dollar value on the cash-like side of the LRT liquidity pool.
On platforms like Curve, Balancer, and Uniswap, the ready pool liquidity of these five largest LRT groups exceeds $136 million, which is impressive considering the nascent nature of the restaking industry. However, to more clearly illustrate the liquidity of each LRT, we will apply a liquidity/market cap ratio to each asset.
Compared to the top liquid staking token stETH, the liquidity ratios of LRTs are not overly concerning. However, given the additional layers of risk introduced by restaking and the seven-day withdrawal period imposed by EigenLayer, which exceeds Ethereum's unstaking queue, the liquidity of LRTs may be more critical than that of LSTs. Additionally, stETH trades on several large centralized exchanges, with its order book managed by professional high-frequency trading firms. This means that the liquidity of stETH far exceeds what is seen on-chain. For example, on OKX and Bybit, ±2% order book liquidity exceeds $2 million.
Therefore, LRTs can also collaborate with centralized exchanges to strengthen integration and educate market makers about the risks and rewards of being liquidity providers in these centralized venues.
LRT Data
As shown in the chart above, rsETH, rswETH, and ezETH trade relatively closely to ETH at a 1:1 basis, with slight premiums. Due to their nature, they should all trade at a "premium" in the future. Since these are non-rebase tokens, unlike stETH, they automatically compound staking rewards, which then reflects in the token price. This is also why the current trading price of 1 wstETH is approximately 1.16 ETH. Theoretically, over time, due to the time * staking rewards factor, the "fair value" of these tokens should continue to grow and be reflected in the increasing fair value of these tokens.
The anchoring of these LRTs is crucial, as they essentially represent the level of trust market participants have in the entire project, which is directly influenced by the stakes participants have put in or the willingness of arbitrageurs to trade these premiums and discounts to keep the tokens trading at "fair value."
From the trading situation of the two most liquid LRTs, ezETH and weETH, it can be seen that their trading prices remain relatively stable over time, mostly in line with their fair values. EtherFi's weETH deviates slightly from fair value, primarily due to the launch of its governance token, with opportunistic farmers swapping out the tokens, naturally leading other market participants to step in and trade this discount arbitrage. Once Renzo launches its governance token, similar events can be expected.
KelpDAO's rsETH traded at a discount relative to fair value at launch but has since slowly and steadily returned to parity.
For rswETH, its trading value has been slightly below its fair value for most of the time but recently seems to have reached parity with its fair value. Among all these LRTs, pufETH is the main outlier, as it trades only below fair value. However, this trend seems to be nearing its end, as its trading value is gradually approaching the fair value of its underlying asset.
Aside from EtherFi, none of these LRT providers have enabled withdrawal features. We believe that sufficient liquidity, combined with users' ability to withdraw funds at will, will enhance market participants' confidence in trading these discounts or premiums.
LRT in the DeFi Ecosystem
Once LRTs further integrate into the broader DeFi ecosystem, especially in the lending market, their importance will significantly increase. For example, when we look at the current money markets, particularly LSTs like wstETH/stETH, they are the largest collateral assets on Aave and Spark, providing approximately $4.8 billion and $2.1 billion, respectively. As LRTs increasingly develop within the DeFi ecosystem, we expect them to eventually surpass LSTs in total amounts, especially as the market gains a deeper understanding of risks and product structures, making them more Lindy over time. Additionally, there are governance proposals on both Compound and Aave to introduce Renzo's ezETH.
However, as previously mentioned, liquidity will continue to be the lifeline of these products to ensure their breadth and depth of DeFi integration and overall sustainability.
Conclusion
While stETH gained early leadership and dominance due to its first-mover advantage, the series of LRTs mentioned in this report launched around the same time, and market momentum is on their side. We expect this to be a winner-takes-most market structure, as most liquid assets follow a power law; simply put, liquidity begets liquidity. This is also why Binance continues to dominate market share in centralized exchanges despite all the negative news and turmoil.
Overall, the liquidity of Liquid Restaking Tokens is not exceptionally strong. The liquidity is decent, but each individual LRT has greater nuances, and as delegation strategies begin to differ in the long run, these nuances will only increase. For first-time users, it may be easier to understand LRTs as staking ETFs. Many will compete for the same market share, but in the long run, allocation strategies and fee structures may be the decisive factors in determining who the winners and losers are. Additionally, as products become more differentiated, liquidity will become increasingly important, considering how long the withdrawal periods are.
In the cryptocurrency space, seven days can sometimes feel like a month of normal time, as global markets operate 24/7. Ultimately, as these LRTs begin to integrate into the lending market, pool liquidity will become increasingly important, as liquidators will only want to take on acceptable risks, depending on the varying liquidity characteristics of the underlying collateral being discussed.
