As the decentralized finance (DeFi) industry evolves, Ethereum's shift to Proof-of-Stake (PoS) allowed liquid staking to gain significance. Liquid Staking Tokens (LSTs) have transformed how users interact with their staked assets, enabling liquidity while preserving the exposure to staking rewards. Simultaneously, innovations such as EigenLayer's restaking platform have led to the emergence of Liquid Restaking Tokens (LRTs), providing further avenues to increase yield potential for DeFi users.

While staking and liquid staking are already by now well-understood concepts, the introduction of restaking and liquid restaking brings deeper implications for the overall DeFi ecosystem. This article will examine the nuances, benefits, risks, and future prospects of LSTs and LRTs, providing an in-depth comparison of their impact on the network, user yields, and ecosystem development.

From Staking to Liquid Staking and LSTs

What is Staking?

Staking has evolved into a critical component of blockchain networks such as Ethereum, in which users lock their assets to help secure the network and validate transactions. In exchange, stakers receive incentives based on the amount staked and the duration of their commitment.

The locked assets serve a dual purpose: they ensure the staker’s loyalty to the network while also reducing the likelihood of malicious behavior, as any improper activities can result in slashing (partial loss of locked funds). This mechanism not only assures network security, but it also aligns financial incentives among participants and promotes the blockchain’s long-term stability.

What is Liquid Staking?

Liquid Staking disrupted this concept by enabling stakers to retain liquidity through Liquid Staking Tokens (LSTs). When users stake assets (like ETH on the Ethereum Network), they receive LSTs in return, representing the underlying position and their right to rewards.

This allows participants to simultaneously stake assets, receive network rewards, while leveraging the liquidity of the derivative tokens in various DeFi strategies and protocols. Liquid Staking Tokens (LSTs) such as stETH from Lido have transformed how users manage their capital, significantly increasing capital efficiency.

The Significance of Liquid Staking

As of right now, liquid staking stands as the singular largest DeFi sub-sector in terms of Total Value Locked (TVL), with approximately $45 billion in TVL across various networks and protocols. This makes it the dominant force in DeFi, outpacing other sectors such as lending, decentralized exchanges,yield and others. This growth further emphasizes the trust users place in liquid staking solutions as they look for balance between staking rewards and maintaining liquidity in the broader DeFi market.

On the Ethereum network, approximately 31% of all staked ETH is allocated through liquid staking protocols, showcasing the increasing preference for liquidity and capital efficiency among Ethereum stakers. Of this, Lido, a leading liquid staking protocol, accounts for roughly 28% of all staked ETH, highlighting its critical role in the liquid staking ecosystem.

This shift toward liquid staking solutions reflects not only individual stakers but also institutional investors seeking to maximize returns while retaining the flexibility to further participate in Defi strategies.

Amount of ETH staked by Category (Source)

Overall, 28.19% of the total ETH supply is now staked, further emphasizing the strong trust in Ethereum’s Proof-of-Stake mechanism. Liquid staking, with its added benefits of liquidity and composability, continues to capture an increasing share of this staked capital, solidifying its position as a dominant sub sector in this space.

The combination of expanding validator participation and the rising proportion of staked ETH in liquid protocols points to a future where liquid staking will become even more integral to the broader DeFi landscape. As decentralized infrastructure continues to mature and more participants enter the ecosystem, liquid staking is set to maintain its trajectory as a core driver of growth and innovation.

The Emergence of Restaking, Liquid Restaking, and LRTs

What is Restaking?

Restaking extends traditional staking by allowing users to restake assets they've already staked to secure multiple services. This concept, pioneered by EigenLayer, enables re-stakers to secure not only the underlying blockchain network but also additional decentralized applications and services, such as layer 2 solutions or oracles. Restaking further increases capital efficiency for validators, offering additional security layers and revenue streams without requiring unstaking.

Restaking Workflow (Source)

This innovation supports the scaling of decentralized ecosystems by using existing staked capital to secure more than one network or service, a concept popularized as Security-as-a-Service.

What is Liquid Restaking?

Liquid Restaking takes restaking a step further by adding liquidity through Liquid Restaking Tokens (LRTs). Users can restake their Liquid Staking Tokens (LSTs) to mint LRTs, which retain liquidity while outsourcing security to multiple networks and protocols. This model increases yield opportunities for re-stakers by allowing them to earn rewards across various protocols, all while maintaining access to their capital for DeFi strategies. LRTs amplify restaking’s flexibility, enabling stakers to secure multiple services with liquid assets.

The Rise of Restaking in DeFi

Restaking and liquid restaking have been among the fastest-growing DeFi sub-sectors in 2024, driven by protocols like EigenLayer. As a pioneering force in the restaking landscape, EigenLayer allows users to restake Ethereum (ETH) or Liquid Staking Tokens (LSTs) such as Lidos stETH, securing multiple Active Validator Services (AVSs) and earning additional rewards.

By leveraging Ethereum’s existing validator set, EigenLayer boosts the security of layer 2 solutions, oracle networks, and other decentralized services while reducing fragmentation in trust networks. As of now, the platform has over 135,547 unique depositors, reflecting its growing market dominance.

Symbiotic, another emerging player, focuses on maximizing yields through a modular restaking activities. By offering cross-chain opportunities and risk management features, Symbiotic provides a different model for liquid restaking.

Currently, 7.8% of the staked ETH supply is being restaked throughLiquid Restaking protocols, showcasing the expanding role of restaking in the DeFi space. The sector’s rapid growth is underscored by its strong market interest, with protocols like Etherfi and Puffer Finance leading the charge. Etherfi alone has amassed over $6 billion in TVL, indicating the broad adoption of multi-layered staking models in DeFi.

Growth of Liquid Restaking Protocols Since April 2023 (Source)

The Battle of Yields: LSTs vs. LRTs

The primary distinction between Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs) revolves around how they generate yield. LSTs rely on the native staking rewards from their underlying assets, for example: The Ethereum’s Proof of Stake (PoS) chain. This yield mechanism is well-established, reliable, and somewhat predictable returns, reflecting the stability of Ethereum’s PoS structure. For example, tokens like stETH allow users to earn staking rewards while maintaining liquidity for other DeFi activities, such as lending on AAVE or providing liquidity on Curve Finance.

On the other hand, LRTs introduce a dual-yield design, increasing the potential returns by incorporating an additional layer of staking. By restaking LSTs, users can earn not only the native staking rewards but also extra yields through Active Validator Services (AVSs). These AVSs provide services to various decentralized applications, such as Layer 2 solutions, bridges, and oracles, leveraging restaked assets for additional security. This compounded reward structure offers a higher yield potential, attracting risk-tolerant users seeking greater returns.

However, while LRTs have higher yield potential, they are still emerging as a more complex and riskier solution. For instance, on EigenLayer, a leading restaking protocol, there are currently 24 Active AVSs, a relatively small number given the protocol's ambition. This limited range of AVSs means that while restaking has the potential to generate higher yields, the ecosystem is still developing, and risks associated with immature infrastructures are present.

For those keen to dive deeper into the evolving dynamics of Liquid Staking and Restaking, join us for our X (Twitter) Space: Battle of Yield: LSTs vs LRTs, where leading figures from both the Liquid Staking and Restaking spaces will debate the future of these DeFi sub-sectors. This is an essential discussion for anyone interested in staking innovations and maximizing yield in DeFi!

Future Prospects: How Staking/Liquid Staking Is Evolving

Staking and liquid staking are rapidly evolving as DeFi continues to innovate. Restaking frameworks like EigenLayer and Symbiotic are pushing the boundaries of what staking can achieve, adding new layers of security and yield to the ecosystem.

An exciting development is the entry of Bitcoin into the restaking conversation. With Bitcoin’s immense liquidity and the introduction of layer 2 scaling solutions, BTC can now participate in staking and restaking, providing additional security to decentralized applications. This could unlock vast amounts of liquidity for DeFi protocols and significantly enhance the security of layer 2 networks.

The future of staking lies in its ability to adapt to new market conditions and offer users both flexibility and higher yields. As the staking landscape evolves, we are likely to see increased competition between LST and LRT protocols, further boosting innovation in DeFi.

Conclusion: A Bright Future for Yield Seekers

The shift from traditional staking to more advanced models involving LSTs and LRTs marks a significant transformation in the DeFi landscape. Liquid staking has unlocked capital efficiency and composability, while restaking introduces new yield opportunities and enhances network security. As the DeFi sector grows, both liquid staking and restaking will play pivotal roles in shaping the future of decentralized finance. Investors and participants in DeFi should keep a close eye on the evolving dynamics of LSTs and LRTs, making informed decisions based on their risk tolerance, yield expectations, and understanding of the underlying protocols.

Join our community at Staking Circle as we explore these innovations and help the next wave of DeFi users navigate this dynamic and lucrative space.