ETH Liquid Staking Tokens are tokens that represent a staked amount of ETH tokens and the corresponding rewards. To earn ETH staking rewards, it is necessary to be a validator node on Ethereum, which requires 32 ETH. Liquid Staking was created to reduce the barriers to entry to stake ETH (any amount can be staked) by:

• Enabling stakers, who provide ETH tokens.
• Outsourcing the function of being a validator node on Ethereum to Liquid Staking node operators, running ETH validator nodes on behalf of all Liquid Staking Protocol’s stakers.
• Enabling instant liquidity to ETH stakers through DeFi. Indeed, market liquidity for LSTs unlocks multiple use cases for LSTs, such as DEX liquidity provision, lending, borrowing, collateralizing in CDP protocols to mint stablecoins, and restaking, for instance.
• Unlocking DeFi composability on top of staked ETH, allowing users to no longer choose between ETH yield farming and staking, with the option to opt-in to reuse LSTs in DeFi to earn additional rewards.

Restaking

Restaking involves the application of LSTs to stake in validators across different networks and blockchains, aiming to maximize profits while contributing to the security and decentralization of the network. Stakers can leverage their collateral, initially committed to secure transactions on the Ethereum blockchain, to simultaneously secure other applications, ranging from dApps to layer-2 sidechains.

Restaking is a capital efficient way to provide crypto-economic security and trust to middleware solutions. EigenLayer was responsible for introducing the restaking mechanism, which allows ETH and ETH-based LSTs to be restaked through its layer, managed by on-chain decentralized smart contracts. EigenLayer currently enables two different ways to restake ETH:

• Integration under-the-hood, which involves enabling ETH validators to restake their staked ETH in exchange for letting EigenLayer EigenPod’s access the validator’s credentials. This solution allows EigenLayer to slash restakers.
• Integration over-the-top, that involves restaking ETH LSTs, following multiple restaking strategies.

In the following graph, it is possible to analyze supported LSTs’ market share on EigenLayer, as of 29th Dec. 2023, only 10 days after the addition of six new LSTs on the restaking platform. The combined value staked on EigenLayer is the equivalent of 452,474.99 ETH.

What will be the importance of restaking for LSTs?

Currently, the total market capitalization of LSTs has surpassed $24B and around 4.38% of all supported LSTs are staked on EigenLayer. If stETH was removed from the aforementioned group, this value would rise to 21.71%, according to data collected from EigenLayer and Arkham. In the following graph, it is possible to observe the proportion of each LST that is restaked on EigenLayer.

What will be the impact of Liquid Restaking?

Just as LSTs revolutionized the Ethereum ecosystem in December 2020 by eliminating the need to choose between ETH staking and ETH yield farming, Liquid Restaking further allows users not to choose anymore between restaking their ETH or ETH LSTs and engaging in ETH LST yield farming.

Several impacts are likely to be observed as the number of LRT protocols on mainnet increases, particularly concerning the liquidity risk associated with restaking LSTs:

• Increased Liquidity and Reduced Risk: With all LRT protocols on the mainnet, there will likely be a more robust and liquid market for these tokens. This can reduce the liquidity risk for LSTs restaked on platforms like EigenLayer, as the ease of converting these tokens into other assets or their underlying staked cryptocurrency is improved.

• Enhanced Security and Trust: The full deployment of LRT protocols on the mainnet usually comes with rigorous testing and security audits, enhancing trust in these systems. This could lead to more users being willing to restake their LSTs, contributing to the overall health and stability of the ecosystem.

• Greater Interoperability and Integration: With a fully operational mainnet, there might be better interoperability between different blockchain networks and protocols. This can facilitate the seamless restaking of LSTs on platforms like EigenLayer, potentially increasing the utility and efficiency of the staking process.

As a result of the mentioned advantages that arise from the growth of LRT protocols, the staked percentage of LSTs is expected to increase significantly in the next few months. ETH Liquid Staking protocols already account for between 2.18% and 79.80% of their LSTs in EigenLayer restaking strategies and this percentage is expected to increase substantially as the restaking caps for ETH LSTs are lifted. About 42% of all staked ETH is staked through ETH LST protocols and, given the speed of adoption of LST restaking, it would make sense to expect that LRT could account over time for a market share similar to that of LST protocols.