Different types of LRT Protocols

Restaking is gaining significant traction, and Staking Circle is fully prepared to foster development and provide educational opportunities for their members through engaging weekly round tables featuring influential leaders in this field.

Our latest Space welcomed esteemed guests from YieldNest and TagusLabs.

In case you missed it, here are the most prominent questions from the event.

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Speakers: Amadeo (YieldNest) - Founder of Yield Nest, a natively Liquid Restaking Protocol.

Filipe Gonçalves (TagusLabs) - Founder and CEO of Tagus Labs, a venture studio focusing on LSTFI, LRT, PhI, where they advise and co-build as well protocols related to liquid restaking

Quick recap of what Restaking is. So I think from my understanding, I kind of see it as Eigen layer has essentially created this mechanism which will allow anyone to tap into the root of trust from Ethereum's proof of stake network and be able to transfer it to anyone else, which can essentially be used for anything that requires decentralized validation.

YieldNest: I also think merge mining is actually also a good analogy. So we first started with Satoshi Nakamoto himself - where he thought it was interesting to use merge mining as an extended security model for bitcoin. And as we all know, that didn't really work out. And then now EigenLayer, I think, iterated more on that concept and basically built a shared security model where we have based security from the main settlement layer, and in this case, Eth. And we can extend that security to our different applications, different avs and different use cases.

TagusLabs: I will also emphasize on the capital efficiency of restaking as well, especially for instance, like middlewares. Most of the middlewares that we have on the market have some difficulty to decentralize just because it's not very viable. For a chain, you have more possibility to earn enough fees to basically reward validators and so on. But when you're a middleware, the amount of fees it's like a “race to the bottom”. I mean, you can use maybe as an example, even for Link and Chain Link, it's extremely challenging to have enough revenues to then give some rewards to your own token. Imagine that now you're a new entrant to the market. It's going to be almost impossible to compete. And I think that's really what EigenLayer was trying to achieve, is really to enable that (as they call it) permissionless innovation. It makes these new middleware solutions or any other solution that needs decentralized validation to rent that layer of trust and security from EigenLayer and try to compete with other players that are already in the market for a longer time.

I'd love to understand how does this liquid restaking work? And potentially, if you could highlight some of its differences compared to liquid staking.

TagusLabs: What is liquid staking - So if you go in delegated proof of stake chains or proof of authority like BNB chain (I think it's an interesting example) the job of liquid staking is fundamentally just to come up with some sort of delegation strategy and make sure that it is delegating to the best possible validator nodes to get as many rewards as possible in a risk like balanced way. For Ethereum, it's not delegated proof of stake. So all liquid staking protocols need to have their own node operators that are taking validation keys, offering that validation service. And then the liquid staking protocol is going to allow them to basically get some fees for restaking. For Liquid Restaking - You basically need to go into that second step where there is fundamentally two options with EiganLayer, either you can, with the Eiganpod, connect your validator nodes, and then you can offer these additional validation services to multiple AVS’s and get restaking rewards. So with liquid restaking you are expected to in the future receive the staking rewards plus restaking rewards. But as there is two options to do it on EigenLayer, there are also multiple ways to do liquid restaking.

Provide some insights into what these different types of LRT protocols are:

TagusLabs: We actually released a paper a few weeks ago on TagusLabs about that. So we identified three types of LRT’s in the market. The first one it will be Native Liquid Restaking - like Etherfi, for example. So here it's interesting because first it needs actually to have the full capabilities of a traditional liquid staking protocol. But then it needs to have that layer on top to be able to create an EigenPod and basically restake with different EigenLayer node operators and collect these rewards. And at this stage, as we mentioned before, it is not possible to have restaking rewards. So please bear in mind that all LRT’s right now, they are not giving you restaking rewards immediately.

The second one, it's Basket Based LRT’s - Some protocols, like Kelpdao, for example, decide to let people have the choice of just like give me some ethx and Steth or whatever you want that we accept, and they're just giving you one single receipt token. So then you have a basket of different restaked LST’s inside of that LRT pool. Here I will say that the issue probably is that you have then multiple counterparty risk because you have exposure to all the underlying lsts but you don't really have an option to actually receive additional rewards because you cannot really earn additional swap fees.

The third one is Isolated LRT. The isolated one is basically, give me one specific type of LST - I'm giving you one specific type of LRT, and if you give me a second type of LST - I'm going to give you a second type of LRT where the counterparty risk is fully isolated. So if you have one LST that is compromised, the other ones will not be compromised, the ones that actually restrict a different LST. So that makes a little bit more sense on a risk perspective. Borrowing something that has a stronger relation in terms of the staking rewards, probably in the future, it will make more sense with isolated LRT, in my personal opinion.

What risk mitigation techniques are you using or employing?

TagusLabs: Related to the risk mitigation. So obviously we're currently studying different type of slashing that could happen, including correlated slashing. If you get slashed one time, is there like a risk of contagion to other AVS depending on which node operator you select? That's why we really prefer to just use external node operators. There are other solutions like Cubist DVT that's targeted to support EigenLayer that will certainly be open to explore that kind of option. I think there is still a little bit of underdeveloped area which might be like slashing insurance. But actually I think it will be more fair to pay an insurance premium on top of ETH LST’s that will be probably more capital efficient as well. If there is any innovation coming from that end, that could also be a way to mitigate as well the risks on that side. One thing is for sure is that if you get slashed on EigenLayer, the magnitude of it is probably going to be much larger than what you experienced on Ethereum. But in finance, what you can do is mostly diversification, I will say, and then use the technical tools that are available on the market to minimize slashing.

YieldNest: In our case, we're basically building our own strategy engine next to the core strategy engine from EigenLayer itself, where we will actively monitor all the different nodes and all the different AVS’s that will be run. Also see if together with our partners we can run our own nodes so we have more control over the risks and that's what we're doing right now. And one other thing that we also want to implement is also educating the community on the AVS’s. If some small thing goes wrong, to have a more clear view on all these different risk factors and then share them openly with the community so that also other teams and other users can learn from that. And then we have our own kind of risk engine that just looks at different AVS’s and different nodes and acts accordingly depending on the different risks.

Regarding the two projects that TagusLabs represent, is there any upcoming features or developments that you'd be willing to share with users and maybe your opinion on EigenLayer? Is it going to be the biggest thing concerning Ethereum in 2024?

TagusLabs: I think restaking in general, yes, it's going to be, I think, the most relevant innovation. The innovation of restaking is very significant and that will trigger a lot of innovation in different areas. I think there is also very interesting plays with layer two trying to attract LSTs and LRTs. Making the right partnerships with a few chains very early and so on, that can also be quite significant.

So on our hand, we are helping Genesis and Inception to have their own bridge without having additional counterparty risks. So it's currently under audit.

I will say that for InceptionLRT the goal is to be as neutral as possible and a trusted partner for LST’s. Really with that predictability that it's not a basket. So there will never be a dilution.

For GenesisLRT, obviously with my background before at Ankr staking, I believe it will be able to offer some competitive rewards in terms of being an native LRT that will offer staking rewards that are very competitive. And since we are not running nodes ourselves, we'll just be focused on providing the best possible APY and select the best node operators that we find on the market.