Liquid Restaking in Crypto: Liquid Staking vs Liquid Restaking
After the launch of staking cryptocurrencies, it was considered the only breakthrough solution for a long time. However, progress keeps advancing. Crypto enthusiasts who were not satisfied with the limitations of native staking were constantly looking for solutions. In other articles of our blog, we have already analyzed all types of staking except for one, which we will discuss here. It is about liquid restaking, and we will tell you all its details and components. After covering the details, we will proceed to an in-depth study-comparison of Liquid Restaking vs Liquid Staking.
What is Liquid Restaking?
Just like most other innovative types, liquid restaking is an advanced form of native staking based on the principles of the proof-of-stake (PoS) system. The main objective of native staking is to use investments to ensure the security of the blockchain network. In exchange for the investment, users receive a reward.
Liquid restaking has become a breakthrough solution not only for native staking but also for other new approaches. Its significance lies in the fact that it not only provides liquidity but also combines the principle of restaking, which allows the spread of network security. Generally speaking, it considerably improves the security distribution aspect and at the same time is more accessible to investors, who can also receive higher rewards.
One of the first platforms to promote liquid restaking was the Ethereum protocol called EigenLayer. It allows users to deposit through liquidity protocols and restake the received liquid staking tokens (LST) for which they will receive liquid restaking tokens (LRT). They can use their restake to support various actively validated services (AVS). These AVSs or modules, as they are also called, include various oracles that need additional security but cannot afford to create their own sets of validators.
Liquid Restaking Process
The liquid restaking process is based on the restaking method itself, where investments are re-invested to provide more security. More specifically, in liquid restaking, investors can deposit liquid tokens received for staking. In this way, they provide security for several blockchain protocols and receive liquid restaking tokens. The process is as follows:
1. You stake a cryptocurrency, such as ETH, in a liquid protocol.
2. According to the principle of the liquid protocol, you receive an LST, for example, stETH from Lido.
3. Next, the actual liquid restaking starts, you stake again, but this time you use the received LSTs through the platform as an EigenLayer.
4. For this type of investing, you receive liquid restaking tokens, LRT.
5. LRTs give you the opportunity to secure even more protocols or trade on DeFi platforms.
What is a Liquid Restaking Token (LRT)?
After staking a cryptocurrency and then LST, investors receive liquid restaking tokens in exchange for LST. Like LST, they are a digital representation of staking assets and can serve several purposes in the decentralized finance ecosystem. Just like other tokens, LRTs can be used to support additional protocols. They are also freely available for trading, selling, or lending on decentralized finance platforms for additional profit.
In other words, the principle of liquidity in LST is also part of liquid restocking tokens. This principle means that LRTs still have the same dual benefit of being both a security mechanism and a trading asset. Liquidity is highly valued and particularly beneficial in markets where it is of primary importance.
Pros and Cons of Liquid Restaking
Despite the overall superiority and advancement of liquid restaking, it still has not only advantages but also drawbacks or risks. Let's analyze them in detail, without fluff, in order to make an objective evaluation.
Benefits of Liquid Restaking
Multiplied reward
By staking assets not just twice, but as many as three times, users can literally triple their reward, receiving it from different sources. The benefit for active participants in DeFi ecosystems is obvious, and it lies in the multiplier effect.
Double liquidity
Unlike regular restaking, liquidity restaking provides access to funds. Most investors no longer hesitate to choose between rewards and liquidity, preferring both. Double liquidity means having both regular liquid tokens and restakeable ones during the process.
Supporting more projects
As you already know, the restaking method is beneficial not only for providing rewards to investors but also for helping startup projects gain much-needed cost-effective security.
Maximizing security
Liquid restaking takes the support for startups to a new level by multiplying its quantity. In other words, the essence of restaking as such is to provide smaller blockchain protocols with the opportunity to use the security of larger, well-protected networks, facilitating their development in the blockchain space.
Risks of Liquid Restaking
Multiplied risk of slashing
Each protocol has its own smart contract terms and conditions, which can lead to a loss of funds in case of violation by validators. The more staking you do at the same time, the greater the risk of being slashed, multiplying this risk by the number of staking protocols. This risk is even more serious because a platform failure or hack can affect the entire ecosystem, which can negatively impact your contributions.
Expertise requirements
Unfortunately, liquid restaking is not characterized by user-friendliness. It has a level of technical skills required by the user. The user will need to have sufficient expertise to be able to understand how the assets are being used. Expertise is also needed to be able to analyze risks and calculate potential rewards. This level of expertise is necessary to protect users from misinformed decisions or unexpected losses.
Liquid Restaking Protocols
Having thoroughly researched liquid restaking, you can move on to choosing a platform and its protocol for it if you have already made up your mind. For that case, we present you with 3 leading protocols that are preferred by investors. If you are interested in a larger range of options, we, TheCoinEarn, already partner with as many as 24 best platforms that have their own staking protocols, also providing detailed analytics on each of them.
Ether.fi
Ether finance is a prominent leader because this protocol controls more than 50% of the liquid restaking market and, according to various sources, owns assets worth more than $9 billion. Its strength is remarkable user-friendliness, which is provided by a convenient model designed to simplify complex restaking operations in a tokenized format.
EigenLayer
Of course, we could not miss the protocol of one of the largest staking networks and cryptocurrencies in general, Ethereum. EigenLayer is exactly the protocol that provides liquid restaking capabilities in the Ethereum network. It allows users to restake their ETH or its derivative LSTs, thus increasing the crypto-economic security of Ethereum.
Puffer Finance
Another Ethereum network protocol developed on top of EigenLayer is Puffer Finance. Its prominence lies in the idea of developing anti-slashing technology. In addition to this feature, it provides a permissionless validator setting to make Ethereum staking more accessible and secure.
Liquid Restaking vs Liquid Staking Comparison
Liquid staking is an advanced form of staking that emerged as a response to the limitations of traditional staking, mainly the lack of liquidity. The traditional staking process locks up the coins, making them unavailable for use until the staking period expires. To summarize, this approach bridges the gap between generating passive income through staking and maintaining the freedom to operate or use your assets, making it an increasingly popular strategy in the cryptocurrency market.
Now that we have fully explained the principle of liquid restaking, including all its components, and provided the main aspects of liquid staking, let's move on to the final comparison.
| Feature | Liquid Staking | Liquid Restaking |
| Profit Potential | Reward for staking, around 4-6%+profit from the DeFi. | Rewards from the initial staking+restaking (8-15% in total)+operations with the LRT. |
| Security Implications | Problems with the validator node will lead to a loss of staking. | Failure in at least one AVS affects like dominoes, failing staking positions. |
| Capital Efficiency | Higher efficiency than in native staking. | Maximized capital efficiency through re-investment. |
| Composability in DeFi | High composability. LST are widely integrated. | Highest potential compatibility. Unlike LSTs, LRTs have all the same functions but also interact with new staking services. |
| Risks & Slashing Exposure | Validator slashing will affect investors. No cascading effect outside the underlying network. | The risks depend on the slashing, but its occurrence will affect all the user's staking. |
Profit Potential
In the context of profit potential, liquid restaking wins because its process involves double staking, which means that the APY will be twice as high as the percentage from liquid staking. Liquid restaking tokens can be used in decentralized finance applications just like LST. That is, the potential is equal in all ways, except that you will receive a much higher APY for restaking.
Security Implications
In terms of security, liquid staking wins, because you need to carefully choose only one protocol when engaging in it. With liquid restaking, you need to carefully choose at least two protocols, and the unreliability of at least one will lead to financial losses. The only thing that both of them are equal in is that if there is a violation of the protocol, your finances will be affected.
Capital Efficiency
Both approaches are designed to improve capital efficiency. Improving the cryptocurrency deposit process with these approaches focused on the free use of investments rather than simply blocking them. However, liquid restaking has taken efficiency to a new level by not only unlocking liquidity but also increasing the revenue from APY. Validators and users can earn from multiple sources without additional capital. Potential earnings are maximized because, in addition to repeat staking, investors can use LRT in a decentralized financial system.
Composability in DeFi
LSTs are highly integrated and can be supplied, borrowed, or pooled in DeFi (lending markets, DEX pools, staking derivatives, etc.). Meanwhile, the compatibility of liquid restaking tokens is the highest, as they integrate in the same way as LSTs, but also interact with new staking services. You can trade or lend LRTs on DeFi just like any other token, with the ability to use innovative strategies.
Risks & Slashing Exposure
In this aspect, liquid staking wins. In its case, the risk depends on the rules of the underlying blockchain and the provider's risk. A validator's failure will affect investors. There is no cascading effect outside the underlying network. In contrast, liquid restaking has multiplied risks, as failures can spread to the entire restaking blockchain. The risks depend on the slashing, but its occurrence will affect all user stakes.
Final Thoughts on Liquid Restaking vs Liquid Staking
The difference between liquid staking and liquid restaking is mainly in the amount of profit and risk. Although liquid staking is not as functional and developed as liquid restaking, it is still safer. Meanwhile, Liquid restaking offers high-profit potential, but at least one failure in the system will lead to a cascading crash of all stakeholdings. However, it also has a good potential future as it offers new opportunities, growth, and innovation.
Regardless of which staking option you choose, you will definitely need a platform to view real-time cryptocurrency analytics. That is exactly what TheCoinEarn is! We are a platform where you can view analytical data from all coins, stakes, and staking platforms.
