Liquid Restaked Token (LRT) - A Playbook for the New Ponzitokenomics Era.
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Liquid Restaked Token (LRT) - A Playbook for the New Ponzitokenomics Era.
And three protocols worth checking out.
Note: For those in a hurry, the key information is highlighted in bold for quick reference.
Last month, I shared my bullish perspective on two emerging sectors in the DeFi space: Liquid Restaked Tokens and Bitcoin DeFi.
Both are captivating and are currently under development, but now is the perfect time to focus and position ourselves for LRTs, because the things are starting to get interesting despite crypto prices going down.
Before we do, today I have a unique sponsor protocol, so please do check them out.
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Phase 1: Early Adopters
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Stay Tuned! - Follow ZKX on Twitter for an exciting announcement this Wednesday (Sept, 20)!
What’s restaking? The Key Points to Know.
Skip to “Introducing Liquid Restaked Tokens (LRT)” if you know what restaking is, or read below for a brief summary of the longer Coingecko article below.
Restaking is a feature in EigenLayer, a middleware allowing you to stake your ETH on multiple protocols, called Actively validated services (AVS), at once, thereby securing multiple networks/services simultaneously with Pooled Security.
Those services are typically responsible for their own security that include bridges, oracles, sidechains, but we will see some crazy new ideas and concepts pick up in the future.
How it Works
EigenLayer acts as a bridge, letting you to "restake" your already staked ETH across various protocols - AVS. You can opt for restaking ETH directly or using liquid staking tokens, like stETH, rETH, or cbETH.
Benefits
Capital Efficiency: Users earn rewards from multiple protocols with the same capital.
Enhanced Security: EigenLayer allows new protocols to tap into Ethereum's existing security layer.
Developer Freedom: Saves developers time and resources by not having to establish a new security layer.
Risks
Slashing Risk: Increased risk of losing staked ETH due to malicious activities.
Centralization Risk: Potential for systemic risk to Ethereum if too many stakers move to EigenLayer.
Yield Risk: High yield competition among protocols could dilute staking rewards.
Restaking offers a way to maximize staking rewards and protocol security, but it comes with its own set of risks, particularly around slashing and centralization.
Introducing Liquid Restaked Tokens (LRT)
Eigenlayer's restaking model has one more significant drawback for DeFi: once your Liquid Staking Tokens (LSTs) are locked on Eigenlayer, they become illiquid. Oh, the irony. You can't trade them, use as collateral, or use anywhere else in DeFi.
Liquid Restaked Tokens (LRT) offer a solution by unlocking this liquidity and adding another layer of leverage to boost yields. Instead of depositing your LSTs to Eigenlayer directly, you could choose to deposit via a Liquid Restaking protocol. It’s a similar logic to why we use Lido.
The core advantages of LRT include:
Liquidity: Unlock previously staked tokens to use elsewhere in DeFi
Higher Yields: Increase returns through added leverage
Governance Aggregator: No manual work required as DAOs or protocols manage restaking
Compounding Yields: Save on gas fees while optimizing yield
Diversify and Reduce risk: If you restake on Eigenlayer you can only delegate to 1 Operator. LRTs allow to delegate to multiple different Operators, reducing the risk of 1 bad Operator
Why I’m Bullish on LRTs
Liquid Restaking is building a house of cards with high-reward potential for early adopters.
LRTs offer higher yields on the most precious crypto asset - ETH. Thanks to LRTs we can earn Ethereum staking yield (~5%)+ rewards from Eigenlayer restaking (~10%)+LRT protocol token emissions (~10% and more). It’s not hard to imagine earning 25% on ETH even before the real bull market starts.
Airdrops. Eigenlayer+ AVS + LRT protocol token airdrops.
I believe liquidity unlocked by LRTs (which would otherwise be locked in Eigenlayer) will create more leverage in DeFi, pushing all the TVL numbers and the price of ETH higher in a similar manner to what we experienced during the DeFi Summer of 2020. Even before the bull market starts. This will ultimately lead to a new crash.
We are early. Eigenlayer is still in beta mode with limited capacity for restaking, so I believe that the fun will start when Eigenlayer limits are removed and when new AVS that require restaking launch.
Tokenomics and The Upcoming "LRT Wars"
Even before LRT protocol tokens are live, I believe there’s a potential game to play.
The tokenomics for LRT protocols look highly promising, and I believe they will evolve in a manner similar to veTokenomics.
When new AVS launch on Eigenlayer's Pool Security, they will offer something valuable to attract restaked ETH. This will come in the form of a new, shiny token and a compelling narrative. First AVS to launch may find it easier to attract liquidity, as there will be fewer options for us to consider.
However, deciding which protocol to restake in is a time-consuming task that requires specialized knowledge. Most users will gravitate towards AVS offering the highest rewards. Simple.
Enter LRT protocol governance tokens.
Rather than attempting to entice users/TVL directly, new AVS might find it more cost-effective to influence LRT protocols to steer deposits their way. Acquiring LRT tokens to vote on token emissions could be a more efficient strategy than offering native token rewards.
For example, a new Bridge X launches and requires to reuse of ETH on the consensus layer to secure the protocol. The Bridge X team could target Eigenlayer restaker whales and retail investors by offering them their own token rewards. Yet, it might be easier to lobby the LRT protocols that will have acquired a large portion of restaked ETH.
This dynamic, in turn, boosts demand for LRT tokens, particularly those that successfully attract a significant amount of restaked ETH.
Just as we've seen with the 'Curve Wars,' there's likely to be fierce competition among AVS vying for DAO votes. However, be careful with the stories they sell you: these tokens will likely to be highly inflationary.
Protocols to Watch
As we are still early and Eigenlayer is still at the initial launch, none of the LRT protocols are currently live on mainnet. Which is a good news if you want an airdrop and need time to catch up on your research.
A few promising LRT protocols are:
Stader Labs.
Launched rsETH which is backed by LSTs accepted on EigenLayer.
rsETH is currently on testnet, but make sure you try it out to understand how it works before the mainnet launch. For more high level explanation check the blog post here.
Furthermore, Stader is more than just an LRT protocol. Two months ago, it launched a liquid staking token called ETHx, which has already attracted $32M USD deposits for ETHx. While Stader may have entered the LST game a bit late, it's getting an early start in the LRT era.
Stader already has a token SD which trades at $18M MC ($92M FDV) as of writing. The existence of the token likely rules out the possibility of an airdrop. However, as the LRT narrative gains momentum, SD could become an attractive bet.
Website: https://www.staderlabs.com
Testnet staking: https://lrt-testnet.staderlabs.com/
Astrid Finance
Astrid works slightly differently from Stader as it has two LRTs instead of one.
You can deposit stETH or rETH (LSTs) into a pool and get LRTs (rstETH or rrETH) in return. These pooled tokens are then restaked on EigenLayer and allocated to various operators chosen by Astrid DAO.
Earned rewards are automatically compounded and balances of rstETH or rrETH holders are adjusted through a balance rebase.
Website: https://astrid.finance/
Testnet staking: https://testnet.astrid.finance/
InceptionLST
Another new protocol live on testnet.
You can deposit stETH or rETH to receive LRT called inETH².
Website: https://www.inceptionlst.com/
Testnet: https://testnet.inceptionlst.com/restaking
Both Astrid and InceptionLST don’t have tokens so it could be beneficial to engage with them now, especially for potential airdrops.
Finally, there’s a possibility that Lido, Rocket Pool could expand into the LRTs as well. I hope not, as new LRT projects offer more opportunities for higher gains.
The Playbook
Here’s what I plan to do:
Study: LRT is new, so need to get acquainted with various protocols, and closely follow updates from Eigenlayer.
Due Diligence: Prior to any protocol launch, I will test each one. I'll join their Discord channels, ask them about their roadmaps, upcoming upgrades, and overall strategies.
Market Dynamics: The real action will kick off once Eigenlayer lifts deposit limits. The key metric to follow is on which LRT protocol gets the most TVL. My expectation is that the LRT market will mirror the LST market, where a single protocol could dominate up to 80% of the market.
Risk Management: Protect my ETH principal by farming conservatively. Specifically, I'll put less than 5% of my total ETH holdings per protocol. I'm staying away of anything too exotic; after all, bugs, hacks, and exploits are practically inevitable.
Token Strategy: My bet is on LRT governance tokens with compelling "ponzitokenomics" that build a self-sustaining flywheel. These tokens should offer attractive staking yields, real yield rewards, and voting power over which AVS receives restaked ETH. Plus, they need to have an inflation rate that's low enough to counteract any selling pressure from farmers.
Exit Strategy: During periods of market exuberance, when everyone's talking about how LRT governance tokens are the new "meta" for generating 'generational wealth,' I'll cash out and rotate back into ETH. Best is to sell not at one go, but bit by bit as the price goes up.
Revisit and Adapt: Hopefully the market will offer something new that we haven’t seen yet. If you see a WTF moment that confuses anyone, but keeps them talking about it on CT (even if it’s negative), pay attention, learn and adapt. Those are the best bets.
The Risks: How Could It All Collapse?
As with any financial leverage mechanism, Liquid RestakedTokens also will come with risks. We're essentially stacking leverage upon leverage, similar to the early days of DeFi, making the system more vulnerable to market volatility and systemic failures.
Vitalik himself warned that re-staking can introduce complex scenarios that risk the mainnet’s security, like slashing on third-party chains. EigenLayer's co-founder agrees, stating that while re-staking can be used for low-risk purposes, it should avoid adding unnecessary complexity that could jeopardize Ethereum's security.
Yet, if the past serves as any lessons, restaking will probably be used and overused. Pushed to the maximum by launching AVS that don’t need access to Ethereum’s consensus layer.
However, while Ethereum will be probably alright, the sheer number of new AVS and LRTs could dilute the dollar amount and attention entering the sector, leading to price collapse of their governance tokens.
To learn more what I mean, check the previous article here.
Extra: how go get ETH and stETH on Goerli testnet for testing.
Get goETH here: https://goerlifaucet.com/
Get stETH by sending goETH to 0x1643E812aE58766192Cf7D2Cf9567dF2C37e9B7F
So there you have it—Liquid Restaked Tokens are setting the stage for a new chapter in DeFi.
Feel free to reach out if you have any more protocols to add to the watchlist, and stay tuned for more updates in this exciting new space.
Liquid Restaked Token (LRT) - A Playbook for the New Ponzitokenomics Era.
I don't like this at all. I like the general concept: Doing more with less. But this just brings back such strong memories of the process that led to the 2008 banking crisis.
Let's quickly review how that happened:
Lenders see falling yields from mortgages so they package them into bonds making them more liquid and allowing risk to be diversified and more investment money sourced.
- Actually a solid strategy. Works well for ages. The bond holders are not too far removed from the underlying mortgages so can accurately assess and manage risk.
Mortgage bonds see falling yields due to lower interest rates and an exhaustion of good mortgage candidates. But the investor market is starved for AAA investments. So the mortgage bonds are consolidated into larger, more diverse instruments containing many thousands of mortgages and ranked in terms of risk categories. Extremely high risk and extremely low risk mortgages are in the same bond.
- Much worse. Very few if any investors are able to understand the risk. Rating agencies are tasked with understanding it and through a combination of incompetence, greed and "market forces" choose to mostly not understand it and default to the diversified portfolio thesis, i.e., there's a range of risk so it's all low risk.
Synthetic financial instruments are designed to bet on the outcomes of these now mostly black box mortgage super bonds.
- Literally the end of Rome. You take something pretty much no one understands and then place leveraged bets on it via a mechanism that is designed to not be understood by anyone. Even the people who made it.
All of it is sold is sold as low risk. That's the issue. Not that it is high risk, but that it was sold as low risk. And low risk, low returns sells 1,000,000x more than high risk, high returns.
Now how does this equate to restaking on ETH. This is how I think it lines up:
- ETH staking yields are falling. Fast. The demand to become a validator is outpacing the demand for transactions on Ethereum. Ethereum transactions just hit new lows whilst validator queues hit new highs. It won't always be this way... but it'll be this way for long enough.
- Validating on Ethereum is a complex task so you need to be good at it to do well. Staking with a validator is a relatively low risk task you can easily assess the risk for.
- People take their staked ETH and liquid stake it to then increase their yield in defi: Pretty solid. It's less easy to assess the staking risk across the pool of validators, but it's not that hard, and you can directly control for what your risk is in defi.
- People take staked ETH and use it to stake against another chain, in this case EigenLayer. But the validator use cases are wide and varied. Low chance of understanding what risk is in each one and probably a lower chance of any of them being good at validating anyway given these are new and novel validating use cases. So now you have the staking risk from the liquid staking (medium difficulty) and the risk from the restaking (maybe impossible).
- You take all the above and jam THAT into a liquid restaking token. Wowsers. I don't think you can actually assess the risk at that point. I think you're essentially blind. But I know this: It's ETH staking. It will be sold as low risk.
Of course I could be totally wrong. Cause I am frequently.
Can you do a section on BTC DeFi next?