Ethereum Restaking Promises New Growth but Carries Hidden Risks, Warns Coinbase
Summary:
Coinbase analysts detail the potential risks associated with Ethereum restaking, including compounded risks and the overconcentration of restakers with high-yield providers. Despite the concerns, they predict Ethereum restaking could become an important component of new decentralized blockchain services and that the amount of restaked Ether (ETH) will likely increase in the future. They also acknowledge possible temporary fluctuations in total locked value. Ethereum developers highlight the excessive leverage created by restaking, while advocates argue it provides additional gains for those who have already staked their ETH.
Coinbase suggests that Ethereum restaking could serve as the foundation for a plethora of fresh decentralized apps on the blockchain, however, this venture might uncover novel, concealed risks. In their research document of April 2, Coinbase researchers David Han and David Duong outline some of the potential pitfalls associated with restaking and the distribution of what they refer to as liquid restaking tokens (LRTs). The Ethereum restaking protocol, Eigenlayer, permits users to earn additional rewards - LRTs - by reinforcing actively validated services (AVS). This is achieved by staking derivative tokens, which are offered to those who have already staked Ether (ETH) using liquid staking protocols like Lido (LDO).
As the Eigenlayer protocol is first initiated, the restaking procedure, according to the analysts, should be pretty clear-cut, but a characteristic of EigenLayer is its functionality allowing staked tokens allocated to one AVS to be able to be staked to another AVS. The analysts warn of the risk of compound risks and that such action could enhance the yields, but it could also result in the same capital being distributed to identical validators for a heightened yield. Adding LRTs could also imply that restakers might gravitate towards riskier providers who offer larger yields. They suggest such LRTs could be encouraged to optimize their yields in order to achieve a larger market presence, but this might be risky.
In conclusion, Han and Duong expect that Ethereum restaking will have long-term growth, but foresee a temporary dip in Eigenlayer's TVL when point farming ends or if early AVS rewards are lower than anticipated. As of March 6, Eigenlayer surpassed lending heavyweight Aave to become the second-biggest DeFi protocol, boasting a total of $11.5 billion in total value locked (TVL) according to DefiLlama, trailing only behind Ethereum liquid staking protocol Lido. Eigenlayer currently has $11.5 billion in TVL. Reports have already suggested that the enthusiasm for restaking has been clouded with disputes and Ethereum developers have issued warnings about the potential creation of an alarming amount of leverage. Advocates for restaking believe that it offers lucrative rewards to those who have already staked their ETH.
Published At
4/3/2024 5:00:16 AM
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