Key takeaways:
- Coinbase’s analysis of Ethereum restaking underscores the balance between rewards and risks for validators.
- Restaking is a significant player in Ethereum’s DeFi scene, with an impressive TVL nearing $8.5 billion.
A recent report from Coinbase has shed light on the rapidly growing restaking sector within Ethereum’s DeFi ecosystem, while also highlighting potential risks accompanying its expansion.
As Ethereum shifted to a Proof-of-Stake (PoS) network post-The Merge event in September 2022, the rise of liquid staking protocols has been notable. However, concerns regarding financial and security vulnerabilities have surfaced, especially with the emergence of liquid restaking tokens (LRTs).
The report, authored by Coinbase analysts David Han and David Duong, identifies several risks associated with restaking and the issuance of LRTs.
EigenLayer, an Ethereum restaking protocol, has gained attention for allowing users to earn extra rewards by securing actively validated services (AVS) through staking derivative tokens obtained from platforms like Lido (LDO).
Despite EigenLayer’s significant growth, fueled by its $12.4 billion total value locked (TVL), concerns remain. The absence of live AVS and short-term farming opportunities may lead to fluctuations in TVL, according to Coinbase analysts.
Moreover, the competition among LRT providers to offer the highest rewards poses additional risks, as they may engage in multiple restakings to attract more users.
‘The adoption of LRT wrappers around the underlying protocol could lead to hidden risks from nontransparent staking strategies or temporary dislocations from their underlying’
While the report acknowledges EigenLayer’s potential to become a foundation for new Ethereum services, it also underscores the challenges facing LRTs, particularly regarding relatively low AVS yields post-launch.
Overall, while restaking presents opportunities for Ethereum validators to earn additional rewards and potentially mitigate declines in native staking issuance, Coinbase emphasizes the need for caution amidst evolving risks and uncertainties in the restaking sector.
Looking ahead, restaking may become a vital avenue for ETH yields in the long term, particularly if native staking issuance declines due to heightened staking participation, which typically reduces yields as more validators join the network.
Additionally, ongoing discussions about reducing emissions from native staked ETH could further enhance the relevance of restaking yields, although these deliberations are still in their early stages.
