What Is Liquid Restaking?
Liquid restaking is a concept that emerged from DeFi staking, where tokens are locked in smart contracts to secure the network in exchange for rewards. With restaking, staked tokens can still be utilized through secondary tokens that represent your staked assets.
That way, you support and secure the network while maintaining token utility. If the project issues a secondary asset, you can also stake this representation to earn additional rewards by reinvesting in the liquidity pool.
Let’s say that you stake your assets to earn rewards, but the project has also issued a secondary asset to allow you to use a representation of staked tokens. In cases where liquid restaking is possible, you are also able to stake the secondary asset, thus reinvesting back into the liquidity pool, and earning rewards from those tokens as well.
Apart from restaking the assets, you can use DeFi flexibility to the maximum by using them in other activities in the decentralized finance arena, such as lending, borrowing, yield farming, providing crypto liquidity, and alike. All of these can help bring crypto passive income, which is why staking tokenized assets became one of the most popular activities in DeFi.
The Role of Liquid Restaking Tokens
The key part of the liquid restaking process are liquid restaking tokens. This is the secondary asset mentioned in the previous segment — a derivative or representation of the initially staked assets that you can use in various ways.
For example, if you were to stake 1 ETH on a liquid staking platform, it would give you an equivalent in the form of a liquid token. This token serves as proof that you have staked ETH on the staking platform of your choosing. However, they can also be used in place of the staked assets.
Liquid tokens exist because typically, staked assets are locked, and cannot be used in any other way. This can sometimes be a bad thing as it reduces liquidity. But, with liquid tokens taking on the role of staked assets, the liquidity is unlocked again, even though the asset itself is still safely locked up in staking smart contracts.
All that remains is to start using the liquid token, and if you opt to stake it again, that is where liquid restaking comes in.
How Liquid Restaking Differs From Liquid Staking
When it comes to the difference between liquid staking and liquid restaking, it is quite simple.
Once you stake assets and receive a liquid token, that is liquid staking. You can then use your liquid token in other DeFi activities, and the original asset is locked up in the smart contract.
Liquid restaking differs from this by allowing you to restake the liquid token received during liquid staking. That allows you to earn rewards from the original staking, and then again from the restaking.
In other words, liquid restaking comes after liquid staking, and it represents the next step in using your liquid token.
Benefits
Liquid restaking represents a big step in staking innovation, and as such, it comes with numerous benefits. Some of the biggest and most notable ones include:
Flexibility in staking - Liquid restaking enables greater flexibility by allowing token holders to use their liquid tokens across multiple protocols, including cross-chain staking.
Enhanced Liquidity - By receiving liquid tokens, you unlock liquidity for initially staked assets, improving capital efficiency for trading or lending.
New opportunities for yield - Liquid restaking expands earning potential through multiple DeFi applications like yield farming, providing liquidity, and restaking - maximizing returns without additional investment.
Risks & Challenges of Liquid Restaking
Smart Contract Risks
One of the biggest risks involving liquid restaking revolves around smart contracts. The entire process of staking, issuing liquid tokens, and restaking depends on smart contracts, which were designed to make these processes automatic and safe.
However, no code is perfect, and smart contracts could suffer from bugs, but also, they might have vulnerabilities that bad actors could exploit, which might put users’ funds at risk.
Centralization Concerns
Another concern comes from potential centralization. DeFi, or decentralized finance, relies on decentralization to keep the process secure and ensure that it doesn’t require trust between anyone involved in the process. The code is transparent, and once it is confirmed to be safe, users can freely use the automated process to make money through restaking.
But, if the system loses its decentralized nature, problems could arise. Specifically, liquid restaking protocols might aggregate staked assets into one pool, or have a small number of validators in order to be more efficient. But, the downside of this is that only a few entities might be in charge, or that stake assets might be heavily concentrated.
In these situations, a small group of people could have greater control over network security or governance, allowing them to take control or at the very least, disrupt the mechanisms set into place.
Market Volatility
Another major concern is market volatility, where price fluctuation can affect the value of liquid tokens. If this happens, the value of liquid tokens might change drastically, and be significantly different from the amount of staked tokens.
For example, if a major sell-off happens, the price of the liquid token could drop below its true value, which would result in possible losses for the token holder. Alternatively, their value could be inflated, and again mismatch the staked tokens. In both cases, the system could end up being destabilized.
Popular Liquid Restaking Protocols
Several platforms now offer liquid restaking. EigenLayer, a pioneer on Ethereum's network, lets you restake liquid tokens received from platforms like Rocket Pool or Lido, providing additional security and rewards through its decentralized marketplace.
Lido Finance offers both liquid staking and restaking functionalities for stETH, while Ankr supports multiple assets including ETH and BNB, specializing in cross-chain staking and enabling staking interoperability.
Finally, you can also consider Ankr, which also offers both liquid staking and restaking options, like Lido. The platform supports multiple assets, including ETH and BNB, among others. It specializes in cross-chain staking and restaking, enabling staking interoperability and enabling multiple staking ecosystems.
Use Cases for Liquid Restaking Tokens
Liquid restaking tokens come with several other potential use cases that you might want to consider. Many come with different utilities allowing you to do things such as:
Participating in Governance
Many restaking protocols allow you to use your liquid tokens to join project governance and vote on various proposals, and even submit some yourself. The main benefit here is that you can become more involved in decision-making while you still get to earn your staking rewards.
Providing Collateral In DeFi
Liquid tokens can also be used as a form of token collateral in DeFi protocols, letting you borrow assets, leverage positions, or mint stablecoins. This way, you get to unlock new assets or even find other ways to earn money in addition to your earnings coming from staking the original asset.
Diversifying yield strategies
Liquid restaking tokens can also be used in other DeFi protocols, allowing you to engage in yield farming, and make more money. The biggest benefit here is that you can diversify your sources of passive income, so not all of it comes from staking and restaking. Sometimes, you may find more rewarding opportunities in addition to earning staking rewards by staking the original tokens.
Liquid Restaking vs. Traditional Staking
We talked about how liquid restaking differs from liquid staking, but what about traditional staking?
Traditional staking allows you to lock up your cryptos to earn rewards and/or secure a network, but that is usually where your options end. In traditional staking, you do not get liquid tokens that you can continue using elsewhere — only rewards from the staked tokens.
Liquid restaking, as explained before, lets you receive liquid tokens, which you can then restake and earn from two different sources using what is essentially the same asset.
The Future
Like other aspects of crypto, liquid restaking will continue to evolve, likely seeing new trends and growing institutional adoption. Multi-chain and cross-chain capabilities will expand as Web3 develops, while increasing regulatory clarity may encourage institutional participation.
Innovation in risk management, improved reward models, and solutions to current concerns could make the sector more attractive than ever.
Conclusion
In this article, we discussed what liquid restaking is, how it compares to liquid staking, as well as traditional staking. We also covered the purpose and potential use cases of liquid tokens, as well as the benefits and risks involved with the process.
Overall, liquid restaking is far more rewarding than traditional staking, although it comes with risks and concerns that have not yet been fully explored and addressed. Still, with enough time, liquid restaking could see greater work done on this part of the DeFi sector, addressing concerns, and making this a standard practice.
And, if you wish to learn more about different aspects of crypto and blockchain, you can read some of our other articles, including a deep dive into DeFi, governance tokens, or wallet addresses for ERC-20 tokens.
