Deep Dive into the Staking Track: Working Principles, Pros and Cons, and Potential Projects

Original author: Beehive Validator, original translation: Deep Tide TechFlow

Currently, Staking is one of the largest areas in the DeFi market, with the liquidity staking protocol Lido having the highest total value locked (TVL). It allows ETH holders to earn more profits and increases the decentralization and security of the Ethereum network.

Since Ethereum switched to PoS, the demand for staking ETH has grown rapidly, leading to the development of liquidity staking protocols. Currently, a large number of blockchain platforms, including Ethereum, Near, BNB Chain, Avalanche, Cosmos, Sui, Aptos, etc., use PoS consensus mechanism. Therefore, we believe that the potential of the liquidity staking market is huge.

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So, why use liquidity staking?

Liquidity staking solves the main problems of simplifying staking, not binding liquidity, and increasing network decentralization. In the DeFi market, we are closely watching the issue of not locking liquidity, such as the Lido protocol allowing users to stake ETH and receive stETH of the same value, with the ability to move it to other exchanges and operate in the DeFi market.

ReStake is one of the activities involving the repeated use of liquidity staking token assets (such as stETH) to stake to validators on the network or other blockchain platforms. This concept was initially introduced by EigenLayer, which maximizes the use of liquidity staking liquidity and paves the way for the development of many other applications.

What is ReStaking

ReStaking is using liquidity staking token assets to stake to validators on other networks and blockchain platforms to earn more rewards while still contributing to the security and decentralization of the new network.

ReStaking can also be understood as using a portion or all of the rewards obtained from staking to continue depositing to that node to increase future profits. However, the main focus of this article is on the concept of staking LSD tokens on other networks.

Through ReStaking, investors can get double rewards from both the original network and the ReStaking network. Although ReStaking enables stakers to earn greater rewards, it also poses risks of smart contract failures and validator staking behavior fraud.

In addition to accepting the native asset, the ReStaking network also accepts other assets such as LSD tokens, LP tokens, etc., which increases the security of the network. And while still generating actual revenue for the protocol and its users, it releases an infinite source of liquidity for the DeFi market.

The revenue for the ReStaking network and the standard network comes from fees generated from secure leasing, validators, and dApps, protocols, and layers. Stakers on the network will receive a portion of the network revenue and may also receive inflationary rewards of the network’s native token.

How ReStaking (Liquidity Staking) Works

The ReStaking network is similar to other networks, with the only difference being that it accepts more low-volatile, low-risk, and security-enhancing assets. When the staked value on the network is high, hackers need to acquire a large portion of the staked equity, which requires a substantial amount of assets. Additionally, ReStaking assists holders in increasing profits.

Each ReStaking project will have different goals and operating mechanisms, but their differences are minimal.

Pros and Cons of ReStaking

Pros:

1. Unlocking liquidity for LSD and LP tokens: Staking LSD or LP tokens with validators can increase the staked amount of native assets on the native network, providing more liquidity asset choices for the DeFi industry.

2. Increased profits: By approving that asset on two networks, the staker can earn twice the profits. Additionally, after staking assets in the second network, investors can continue to receive assets that can represent assets that can be used to mortgage to mint stablecoins and bring to the DeFi market to create profits.

3. Increased security for networks using liquidity staking: As more assets are staked, the network’s value increases, making it more resistant to attacks and becoming a trusted location for other decentralized applications, protocols, and platforms.

4. Reduce sell-offs: ReStaking makes the native token more useful, avoiding sell-offs that could lead to significant value loss for the project and its investors.

5. Increase motivation for native asset holders to participate in staking: Increasing network security and decentralization.

Cons:

1. Asset loss risk: If a node engages in improper behavior, your assets face the risk of being seized or fined, which may result in partial or complete loss of assets.

2. Smart contract risk: If the network is hacked, you risk losing all of your assets. However, in theory, networks using liquidity mining are extremely difficult to attack.

3. Asset bubble: Inflating the market value of new Wrap Tokens or Tokens causes the market value to no longer reflect their true value. In addition to the platform, continuing to use assets that represent value locked in validators to mint stablecoins increases risk and makes original asset liquidity vulnerable.

4. Too many tokens in the market: When there are too many tokens in the market, DeFi novices are easily confused and vulnerable to scams. Especially low-quality projects that mint large amounts of junk tokens will flood the cryptocurrency market.

Comparison of Re-Staking and Liquidity Mining

Excellent Projects in the ReStake Field

EigenLayer

EigenLayer is developed by a highly respected and experienced team in the cryptocurrency market. The project has received up to $64.5 million in funding support, including well-known supporters such as Blockchain Capital, Coinbase Ventures, Polychain Capital, and Electric Capital.

EigenLayer is the first team to develop and introduce the ReStake model to the community. The project uses LSD ETH and LP ETH for validator staking. Ethereum network nodes continue to participate in Ethereum network validation.

EigenLayer’s main business model is secure leasing and validation. Customers can be dApps, Layer 2 protocols, or cross-chain bridge protocols. They can use high-security or low-security validators, depending on their requirements. A single validator can perform identity verification for multiple consumers.

Protocols that adopt this network will generate revenue for EigenLayer. A portion of the assets will be awarded to the staker. Users do not receive a second token when staking assets on the EigenLayer network. In addition, users must choose validators with good reputations to ensure asset security. If a validator engages in improper behavior, the network will fine them, which may result in partial or complete seizure of assets. Therefore, those who authorize validators will also lose their assets.

Pros and Cons of EigenLayer

Pros:

1. EigenLayer is the foundation of many other dApps, protocols, Layer 2, Layer 3, and clients.

2. The structure of attaching validators to individual layers can multiply network value. By punishing validators for improper behavior, the risk of being hacked is minimized.

3. Ethereum nodes can earn additional income by participating in the EigenLayer network. In addition, a single validator can verify multiple clients.

4. Maximize profits from holding LSD ETH and LP ETH assets and their applicability.

5. Staking ETH has attracted many people due to the increased security and high yield of the Ethereum network.

Cons:

1. Smart contract risk, in the event of a hack of the network, you may lose all of your assets. However, in theory, networks using ReStaking are extremely difficult to attack.

2. There is a risk of having your assets confiscated or fined when nodes misbehave, which could result in partial or permanent loss of your assets.

3. There may be a split in the Ethereum community when there are branches or issues. As Vitalik recently stated, EigenLayer reuses ETH assets and validators on Ethereum.

4. EigenLayer must develop a large enough ecosystem and customer base. If incentives are distributed in the form of project tokens, or if there are no incentives, profits are no longer attractive to those who choose to stake.

Tenet

Tenet is the L1 of the Cosmos ecosystem, developed using the Cosmos SDK toolkit. The project was developed by the same team that developed the largest liquidity staking project ANKR in the BNB Chain ecosystem and the Cosmos ecosystem.

Tenet and other blockchain platforms use the PoS consensus mechanism and integrate project governance Stake Tokens into validators to ensure network security. Compared to networks that accept LSD Token assets such as Ethereum, BNB Chain, Cosmos, Cardano, Polygon, Avalanche, and Polkadot, Tenet is more advanced.

Investors who participate in asset staking will be accepted and issued tLSDToken tokens. This asset can be used as collateral for the Mint Stablecoin LSDC to continue to profit from the DeFi market.

Tenet’s business model includes charging fees to the network and compensating validators. Additionally, the network offers TENET governance tokens as a reward for each generated block. The reward will be proportional to the staked amount. The weight of TENET is always 1, while the DAO will decide how much weight other assets should have, which will all be less than 1.

When borrowing LSDC, borrowers only need to pay a one-time fee, which is calculated as a percentage of the total assets ranging from 0.5% to 5%. Alternatively, users can convert LSDC on TENET, and only need to bear a one-time exchange fee ranging from 0.5% to 5%. All of these fees will depend on the conversion activity on the network; if the activity is low, the fees will be cheap, and vice versa, to ensure the value of LSDC remains anchored at $1.

Staking TENET will earn veTENET, which can be used for project governance, profit sharing, and additional rewards.

Tenet has created a large enough revenue ecosystem to attract investors, which is still the most important factor. If network activity is slow and no users are using TENET tokens as a reward for each new generated block, the network will not develop.

Tenet’s Pros and Cons

Pros:

1. Supports multiple native tokens from other blockchains.

2. Staking and receiving tLSDToken tokens as collateral allows Mint Stablecoin LSDC to participate in the DeFi market and earn greater profits.

3. Provides interest-free LSDC loans based on network activity with a Mint fee ranging from 0.5% to 5%.

4. Fees also increase when conversion activity is high, and vice versa. This mechanism helps maintain the price of LSDC.

5. The veToken model using TENET governance tokens is excellent and can prevent the dumping of Token TENET when veTENET holders can participate in the index and share profits.

Cons:

1. Smart contract risks and original asset liquidation risks exist when borrowing Stablecoin LSDC.

2. Each new generated block rewards TENET Tokens, causing inflation.

Predictions for ReStaking

Currently, the largest market in the DeFi industry is Staking, with a total value of approximately $20 billion TVL. Particularly with many blockchain platforms currently in development, the cryptocurrency market continues to expand. Therefore, the ReStaking market will have many opportunities for growth.

With contributions from Staking and ReStaking to the DeFi market, the underlying blockchain becomes more secure and investors receive greater passive income. Additionally, the development of these two markets will pave the way for growth in other markets, such as AMM, Lending, and Farming.

In the current market, ReStaking has many opportunities to grow and become an indispensable part of DeFi. In addition to increasing profits, ReStake also increases participants’ risk exposure.

Summary

By the end of 2022, approximately half a year after ReStaking’s birth, this market will rapidly expand and become a trend. ReStaking is not a narrative that will quickly disappear but one of the most important and promising areas in DeFi.

Because ReStaking not only helps users gain profits, but also helps platforms improve their security, especially by promoting growth in other areas of the industry and driving market expansion.

However, this also comes with risks, such as asset loss, smart contract risk, property value inflation, and bubble collapse. Therefore, we must proceed with caution and be willing to tolerate the risk of capital loss when participating in this market.

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