Digital Assets
What are Liquid Restaking Tokens (LRTs)?
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Liquid Restaking Tokens promise to expand innovation, security, and ROIs in the blockchain space. These assets are the culmination of years of development in the DeFi sector. Now, anyone can leverage LRTs to improve their strategy and support emerging platforms in the market. Here's everything you need to know about Liquid Restaking Tokens (LRTs)
What is Staking?
To grasp LRTs, you need to have a firm understanding of a few concepts first. Primarily, you need to know what staking is and its purpose. Staking is a term that refers to a method of locking up your tokens into smart contracts for a predetermined time.
Staked assets can serve multiple purposes. The most common form of staking is used to secure and validate transactions on a Proof-of-Stake (PoS) blockchain. These networks eliminate miners and the need for expensive hardware requirements.
Source – EigenLayer
In a PoS network, users secure the network when they stake their tokens. Some consider this approach to be more democratic and open to the community. Notably, PoS blockchains are more energy efficient, scale better, and enable anyone to join.
There are also DeFi staking pools designed to help you secure passive returns. These pools don’t secure any network in particular. Rather, they are a tool to magnify DeFi earnings without increasing risk. Consequently, staking is hugely popular in the market.
What are LSTs?
Staking continues to evolve in its scope and features. Liquid staking tokens have the advantages of staking but without some of the major drawbacks. These digital assets are designed to help solve the problem of locked liquidity. In the traditional staking process, your tokens remain locked up until the end of the staking period.
This structure meant that you would lose rewards and potentially incur additional fines if you accessed your crypto earlier than the agreed staking date. Notably, many platforms don’t even allow you to access your tokens at all during the lockup. These networks led to more users becoming hesitant about staking,
Liquid staking tokens changed the market considerably. These assets get issued to stakers when they deposit funds into the staking pool. LSTs act as a receipt and representation of your staked assets. Notably, these tokens get created using a smart contract that wraps your staked asset and creates a new one that shares the value of the original.
Liquid staking protocols have become more common in the market because they enable traders to securely unlock these previously inaccessible funds. LSTs allow traders to trade or sell their staked assets without breaking the staking contract. As such, you can use LST for trading, collateral, and many other options.
What are LRTs?
Liquid restaking tokens take the concept of staking and expand on it even further. These tokens get issued to stakers like LSTs upon their deposit. Users deposit LSTs to access LRTs. This structure means that the same value can be used multiple times.
LRTs also represent the value of the staked assets you hold. As such, you can have the value of your LRTs drop if your staked assets lose value due to market conditions or network penalties.
LSTs vs LRTs
LST and LRTs differ in their purpose and uses. LSTs help to unlock liquidity and provide more options for users. LRTs are designed to drive innovation and can be used to provide validation services to other applications and networks. This structure improves security, promotes adoption, and drives innovation.
What Problems Do Liquid Restaking Tokens (LRTs) Attempt to Fix?
Liquid restaking tokens help to reduce a variety of concerns that have plagued stakers since the feature first entered the market. Like LSTs, LRTs help improve market liquidity by allowing users to leverage the same value on multiple occasions. This improved capital efficiency results in more returns and opportunities.
Slowed Development
Unlike LSTs, LRTs can be used to secure passive income while also supporting dapp innovations. LRTs may be used to integrate additional validation processes. As such, they enable Dapp creators to integrate more features and security. For example, you could take your assets and then restake the same value to support the integration of Oracle sensors, bridges, random functions, and much more.
Limited Options
Another major issue that LRTs help to resolve is a lack of options. In the past, LSTs have been restricted to their networks. Users had no choice regarding what AVS to use their LSTs on in most scenarios. LRTs changed the game and offered the community the ability to choose their offerings based on their strategy rather than availability.
Liquid Restaking tokens were designed to be highly interoperable and easily integrated from day one. As such, users have far more options regarding what AVS to use. This structure means that you could take your original assets on one network and then restake your LRTs on a completely different blockchain or service provider.
Source – EigenLayer – AVS Options
High Startup Costs
The rise of LRTs has helped considerably reduce the startup costs for Dapp developers. They can leverage their LRTs to create and operate advanced security measures on their dapps while their original assets remain locked. This structure ensures that the dapp and network remain secure even as the ecosystem expands.
Benefits of Liquid Restaking Tokens (LRTs)
There are many reasons why the LRT movement is in full swing. For one, there is a strong demand for more liquidity in the DeFi market. Since day one, DeFi networks have had liquidity concerns. These issues originate from a lack of interoperability and an increase in staked assets. Remember, in a traditional network, staked assets are inaccessible during their lock-up.
Drives Innovation
LRTs introduce many benefits that make them ideal for today's market. The ability to leverage the same capital but with more utility is a major draw for these assets. This structure creates innovative momentum in the ecosystem and lowers validation costs for dapps.
New developers can leverage the best aspects of networks like Ethereum while still stretching the boundaries of the technology using LRTs. They may extend the original blockchain's security effortlessly and easily integrate advanced systems to drive liquidity and participation.
User Network Scalability
Another cool benefit of LRTs is that they help users increase their footprint in a particular blockchain ecosystem. These systems make it easier for more people to participate in PoS consensus mechanisms and DeFi options. This structure also opens the door for more returns as validation nodes can support additional services like oracles using the same capital staked to help secure the main network.
Network Value
Notably, LRTs help to drive network value up. Any time you have a token staked, it adds to the network's overall TVL (total value locked). Remember, decentralized PoS networks become more secure the more stakers are involved. Consequently, The higher the TVL, the more attractive and secure the network is to traders.
Node Returns
One of the largest benefits that LRT users obtain is higher returns. Restaking services can provide an additional low-risk revenue stream to your strategy. Additionally, validators that leverage retaking protocols can offer their delegates more returns in a DPoS (Delegated Proof-of-Stake) setup.
How Do Liquid Restaking Tokens (LRTs) Work?
Liquid restaking tokens operate on blockchain networks, leveraging purpose-built smart contracts to ensure security and transparency to validators. The first step is to deposit your tokens into a liquid pool and receive LSTs. These assets will fluctuate based on the value of your staked assets.
From here, LRT service providers offer you the ability to create another token that can be used to improve utility alongside capital efficiency. To accomplish this task, you must first lock up your LST into another staking protocol. From there, you are issued an LRT representing the value of your LSTs.
LRTs can then be used by validators to complete vital network tasks such as offering Oracle or validation services to middleware/dapps. Notably, validators offer their services to dapps while gaining rewards from their original staked assets on multiple platforms.
The main thing to understand about LRTs is that they improve utility and liquidity for both users and developers. This structure helps DeFi networks expand and prevents capital from remaining stagnant. It also drives innovation and Dapp development.
Risks of LRTs
The LRT movement has drawn the attention of crypto users across the market. Unfortunately, not all of this attention has been positive. Recently, some developers expressed concern over the reuse of the same capital over and over again in these networks.
They argue that this approach weakens the network's overall security by creating a multiple-layer structure dependent on the same value. They argue that if the same assets can be restaked repeatedly, the network has no real added intrinsic value.
Centralization
Centralization is one of the biggest concerns expressed regarding the growing use of LRTs in the market. Some users believe that LRTs could result in a loss of monetary neutrality. They argue that if a particular validator can offer LRT rewards in addition to their normal staking ROIs, the other nodes are disadvantaged.
This financial disadvantage could lead to more delegators focusing on the higher return validators, which would limit decentralization. Concerns regarding the hypothecation of staked assets have hit the highest levels of the market. Even Ethereum developer Vitalik Buterin has expressed concerns over the constant reuse of the same funds.
Source – Dune Analytics – Risk of LRTs (Liquid Restaking Tokens)
Buterin has stated that it could be an issue in the future if staked assets on one network have their value transferred to another network via LRTs. This situation would lead to a thinning of security on the primary network if left unchecked.
He also cautioned the community regarding how nodes could gain more influence using these platforms. He stated that this scenario could lead to Ethereum decision-making being determined by subnetworks that operate on Ethereum but leverage LRTs.
Custodial LRTs
Another major issue that developers have pointed out is the growing number of custodial LRT options. These platforms require you to relinquish custody of your assets to participate in the staking options. Anytime you use a non-custodial platform, you open yourself up to additional risks.
Top LRT Protocols Operating Today
The number of LRT platforms continues to expand as more stakers seek out ways to secure higher ROIs. As with any new DeFi features, finding the right provider for your needs can be confusing. Here are a few of the top LRT providers available today.
1. EigenLayer
EigenLayer is one of the best-known LRT providers in operation today. This Ethereum-based network secured $64.5M in series funding in 2023 and has expanded its offerings since its launch that year. Notably, the EigenLayer LRT platform currently operates on the Ethereum network.
EigenLayer adds flexibility to the LRT process. Users can restake on EigenLayer by depositing LSTs into the platform's pools. Notably, you can use a variety of LSTs, including Lido stETH (stETH), Rocket Pool ETH (rETH), and Coinbase Wrapped Staked ETH (cbETH).
2. Omni
The Omni Network is an Ethereum-based blockchain ecosystem that offers support for Ethereum's rollup-centric future. Omni enables developers to create auxiliary networks to support additional validation processes. Notably, Omni staking allows users to simultaneously secure rewards from the Ethereum mainnet and the Omni blockchain.
The goal of Omni staking is to expand functionality in the ecosystem. This structure allows you to stake your original assets and then leverage LSTs to improve returns. Omni LRTs help secure additional rewards by providing an avenue to offer additional network services to dapps.
Restaking – Pushing DeFi to new heights
The rise of innovative DeFi protocols, such as LRTs, demonstrates the evolving nature of the market. DeFi developers are constantly thinking of new ways for users to secure low-risk returns while driving innovation. LRTs are a great example of how this approach can lead to some really interesting results.
You can learn more about exciting blockchain projects here.
