Liquid restaking tokens were one of the major DeFi success stories in 2024, and they’re continuing to blaze a trail in the crypto markets as we make our way into the new year, with their total market capitalization now exceeding $60 billion.
These assets, known as LRTs (liquid restaking tokens), are tokenized versions of restaked digital assets, and they span a growing number of blockchain ecosystems, including Ethereum and other proof-of-stake blockchains like Solana, as well as the king of crypto, Bitcoin itself.
LRTs can be thought of as derivatives that make it possible for users to unlock liquidity in staked assets, such as stETH, which are received when they stake their original ETH tokens to secure the underlying blockchain and earn rewards. With these derivatives, users can earn additional yield by supporting Actively Validated Services, Bitcoin Validated Services, or their counterparts on other chains.
The benefits of LRTs include additional rewards plus the flexibility to trade, lend, and use those staked assets within the wider DeFi ecosystem. So investors will accumulate both the original staking rewards plus additional returns from securing third-party services such as a decentralized oracle or bridge or through other DeFi activities.
In this article, we’re going to look at the possibilities for restaking LRTs on several different blockchains, exploring the potential opportunities for restaking diversification. We’ll cover some of the better-known options, such as Puffer Finance and Ether.fi on Ethereum, as well as newer options for Bitcoin restaking, such as SatLayer, and Solayer on Solana.
Ethereum Restaking
The concept of restaking first emerged Ethereum with EigenLayer, which is why it boasts the most complex and sophisticated restaking ecosystem. Unique to Ethereum, there are two kinds of restaking – namely, native restaking and LST (liquid staked token) restaking. Native restaking is more complicated as it requires running an Ethereum validator node, and involves validators natively restaking ETH on Ethereum’s Beacon Chain to EigenLayer. On the other hand, LST restaking is for holders of LSTs such as stETH, who can restake those assets through EigenLayer smart contracts.
Users can restake native ETH or LSTs to support Ethereum’s Actively Validated Services, which are decentralized applications that utilize staking to benefit from the foundational security of the main Ethereum chain.
Native restaking comes with fewer restrictions, with no cap imposed on how many tokens the user wants to restake. That’s not true with LST restaking, which imposes limits on deposits. In addition, native restaking is seen as more secure as users can avoid the risks associated with LST protocols.
Users have plenty of options for Ethereum restaking, with two of the biggest liquid restaking protocols being Puffer Finance and Ether.Fi. Because they’re focused solely on native restaking, they minimize risk while promoting greater decentralization of Ethereum validators. They also boast a high number of DeFi integrations, giving users more optionality over what they can do with their restaked assets.
Other options include Kelp and Renzo Protocol, which support both native and LST restaking. As such, they accept popular LSTs including stETH, wBETH, and ETHx. Renzo sets itself apart by extending its restaking protocol to Ethereum Layer-2 networks, so users can benefit from lower gas fees and faster transaction times.
Restakers can also consider Swell, which is a restaking protocol that supports native and LST restaking, only accepting the swETH and rswETH LST tokens. There’s also Eigenpie, a subDAO of Magpie Finance, which is exclusively focused on LST restaking and is unique in supporting the top 12 LST tokens.
Bitcoin Restaking
Bitcoin is not a Proof-of-Stake blockchain, yet it supports staking thanks to the efforts of Babylon Chain, which has come up with a creative way for users to stake native BTC tokens to support third-party blockchains that do use the PoS consensus mechanism. It does this through the implementation of an extract one-time signature that enables staked BTC to be slashed in the event of malicious activity. This helps keep validators in line while incentivizing Bitcoin holders to stake their assets to boost PoS security.
Building on this novel concept is SatLayer, the first and so far, only Bitcoin restaking protocol, which introduces the concept of Bitcoin Validated Services, similar to the Actively Validated Services on Ethereum. By staking BTC to support BVS, investors can provide security to dApps and services built on the Bitcoin blockchain and earn rewards for doing so. In this way, SatLayer brings fresh utility to BTC, transforming it into a more productive asset.
SatLayer has created its own, smart contract-based slashing mechanism to do this, and developers who create BVSs can choose to redirect those funds to the protocol, or simply just burn them, to incentivize good behavior.
Solana Restaking
Solana’s nascent restaking ecosystem is led Solayer protocol, which allows SOL stakers to reuse their staked tokens to support a number of Solana-based dApps and services.
Instead of AVS or BVS, Solayer has created what it calls EndoAVS, which enables dApp developers to tap the base security of Solana and also take advantage of features like MEV Boost and pooled liquidity, so they can increase efficiency in addition to securing themselves. That’s because Solayer differs from EigenLayer. Rather than focusing on cross-chain bridges and oracles as EigenLayer does, it’s designed for native Solana dApps. Its unified liquidity layer, based on the sSOL token, can uniquely benefit collateral and spot trading for these dApps.
Besides Solayer, users can also participate in Solana restaking via Jito’s (Re)staking protocol, which Renzo developed to expand away from Ethereum.
Diversification As A Restaking Strategy
As with most investments, it pays to have a diversified portfolio when restaking crypto assets. It’s important to remember that each liquid restaking token supports a different subset of AVSs, BVSs, and EndoAVSs.
For the best results when restaking, investors can take steps to ensure their staked assets are spread across a combination of different services within the EigenLayer, SatLayer, and Solayer ecosystems. As such, users should take the time to select specific AVS and BVS combinations, so they can optimize the balance between risk and rewards.
Within SatLayer’s ecosystem, users must delegate their staked BTC tokens to different BVS operators, who are free to choose which BVS they want to secure. What that means is users must study each Operator’s proposal to see which dApps they’re backing, so they can consider the reliability of each one. SatLayer also allows BVSs to set their own rewards ratio, encouraging competition among them to secure the backing of Bitcoin restakers.
Of course, it’s not only the risks/rewards that investors need to consider. They’ll also need to consider the ecosystem itself. Bitcoin, Ethereum, and Solana all have very different tokenomics, which impacts the long-term potential of their underlying crypto assets, and therefore, the price of their LST assets. In addition, each network has its own DeFi ecosystem, providing a range of different opportunities for lending, borrowing, and yield farming activities for LRT tokens.
Users should also consider that Ethereum’s restaking ecosystem dwarfs those of Bitcoin and Solana, which only have one and two restaking protocols, respectively. On Ethereum, investors have dozens of different protocols to choose from, each offering their own native “points” as rewards.
Balancing Reward, Risk, and Reputation
Restaking is a powerful way for DeFi investors to compound their staking returns, but it demands a lot of attention, as they must carefully consider where they intend to restake, making sure they secure the most reliable AVSs and BVSs while balancing risk and reward.
By diversifying their restaked positions across various LST assets, users can offset some of the risks and optimize their returns. While investing in multiple LSTs can create headaches and cause hassles, it’s a far preferable strategy to using only one protocol and risks losing everything in the event something goes wrong, such as an exploit or rug pull.
Investors should therefore consider the LST protocols with a proven track record and strong security measures, while also considering the strength of the underlying blockchain itself, and its long-term potential as a security foundation for dApps and services.
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