An overview of the differentiated designs of the six major liquidity re-pledge protocols

Re-staking is poised to become a key narrative in this bull run, with more than ten liquidity re-staking protocols vying for more than $11 billion of EigenLayer’s total locked value.

This article compares six major liquidity re-hypothecation protocols, aiming to provide readers with a concise and easy-to-understand way to help them understand the subtle differences between various liquidity re-hypothecation protocols. Because there are many trade-offs in different LRT designs, investors should make their choice based on personal preference.

TL,DR, the following are the key features of each liquid re-staking protocol:

• Puffer Finance and Ether.fi are the two largest by market cap of liquid re-staking tokens Liquid re-pledge protocol. Both focus on native re-staking, which has fewer layers of risk than LST re-staking. Additionally, both protocols work to promote decentralization among Ethereum validators. Ether.fi has the largest number of DeFi integrations.
• Kelp and Renzo protocols support native re-staking and LST re-staking. They accept major LSTs such as stETH, ETHx, and wBETH. It is worth mentioning that Renzo has extended the re-staking service to the second layer of Ethereum, providing users with the benefit of lower gas fees.
• Swell was originally a liquid staking protocol, and its liquid staking token is swETH. The swETH market size is approximately $950 million. Swell launches re-staking service and launches liquid re-staking token rswETH. It offers native re-staking and swETH re-staking.
• Eigenpie is a sub-DAO of Magpie that focuses on LST re-staking. It accepts 12 different LSTs and issues corresponding 12 different LRTs, providing a unique segregated LST re-staking model.

Different types of re-staking and liquidity re-staking tokens

Two re-staking types on EigenLayer

There are two types of re-staking: native re-staking and LST (liquidity pledged token) re-staking. In native restaking, validators will natively stake their $ETH on Ethereum’s Beacon Chain and connect to EigenLayer. LST re-staking allows holders of liquid staking tokens (such as stETH) to re-stake their assets into the EigenLayer smart contract. Since native re-staking requires running an Ethereum validator node, it is more complicated to operate for retail users.

The main advantage of ETH native re-staking is that there is no limit; EigenLayer sets a cap on LST re-staking and only accepts LST deposits within a specific amount or time. Native re-staking does not have these restrictions and can be deposited at any time. In terms of security, native re-staking is also more advantageous because there is no LST protocol risk involved.

Despite these differences, both native restaking and LST restaking on EigenLayer require users to deposit and lock their assets to ensure they cannot be used for other purposes.

Liquid Restaked Protocol Releases Locked Liquidity

Liquid Restaked Token (LRT) is similar to the liquidity pledged token on Ethereum, on the EigenLayer platform Convert assets into token form, effectively releasing otherwise frozen liquidity.

The services provided by the liquidity re-pledge protocol are divided into native re-pledge services and LST re-pledge services. Most liquidity re-staking protocols offer native re-staking to users without requiring them to run an Ethereum node. Users simply deposit ETH into these protocols, which handle Ethereum node operations behind the scenes.

Meanwhile, the largest LST stETH is accepted by almost all liquid re-staking protocols, while some LRT protocols can accept multiple different LST deposits.

It is worth noting that Puffer Finance is essentially a native re-pledge protocol. Currently in the pre-mainnet phase, it accepts stETH deposits. After the mainnet goes online, the protocol plans to exchange all stETH for ETH and perform native re-staking on EigenLayer. Similarly, Ether.fi is a native restaking protocol, but at the current stage accepts multiple types of Liquid Staked Token (LST) deposits.

Two kinds of LRT: based on a basket of LST or isolating each LST

Most liquidity re-staking protocols adopt a basket-based LST approach, allowing deposits of various liquidity pledged tokens ( LST) in exchange for the same Liquidity Recollateral Token (LRT). Eigenpie employs a unique strategy of segregating liquid staking tokens. It accepts 12 different LSTs and issues a unique LRT for each LST, resulting in 12 unique LRTs. While this approach mitigates the risks associated with pooling different LSTs, it may result in fragmentation of the liquidity of each individual LRT.

Re-staking through Ethereum Layer 2 Protocol

Due to the current high gas cost on the Ethereum mainnet, several LRT protocols can already be re-staking through Ethereum Layer 2, providing users with Lower cost alternatives. Renzo Protocol has launched restaking functionality on the Arbitrum and BNB chains. Likewise, Ether.fi plans to launch a restaking service on Arbitrum.

Risks and benefits of liquid re-pledge

The Liquid Re-pledge Protocol deploys a set of smart contracts on top of EigenLayer to facilitate user interaction, helping users deposit and withdraw ETH or LST from EigenLayer, as well as mint/destroy Liquid Re-pledge Tokens (LRT). Therefore, using LRT comes with the risk of a liquid rehypothecation protocol.

In addition, the risk also depends on whether the liquid re-hypothecation protocol provides LST re-hypothecation services. In native re-staking, funds are deposited into the Ethereum beacon chain. However, when using LST to re-pledge, the funds are deposited into EigenLayer's smart contract, thus introducing smart contract risks from EigenLayer. Using LST also involves smart contract risks associated with liquidity staking protocols. Users holding LRT backed by LST are therefore exposed to three types of smart contract risks: risks associated with the EigenLayer, the specific LST used, and the LRT protocol itself.

Although native re-pledge faces fewer smart contract risk layers, liquidity re-pledge protocols that provide native re-pledge services need to participate in Ethereum staking. They can choose to partner with a professional staking company, operate an Ethereum node themselves, or support individual independent validators.

Using mature liquid staking tokens such as Lido’s stETH or Frax’s sfrxETH can provide reliable staking returns. These LST protocols have spent years perfecting their Ethereum staking services, and they are more experienced at maximizing staking rewards and minimizing slashing risks.

Decentralization of Validators

When ETH/LST is deposited into EigenLayer, these assets are assigned to a staking operator. This operator is responsible for performing verification services on Ethereum, as well as on AVS, the active verification service they choose to secure. In addition to Ethereum staking rewards, stakers will also receive rewards from these AVS. If an operator violates the rules set by AVS, then the staked assets are at risk of being slashed.

If the re-hypothecation market is dominated by a few large operators responsible for securing the majority of AVS, then centralization and potential collusion risks will arise. These operators with huge computing power may dominate re-staking in many AVS networks and collude to use the re-staking ETH to influence or directly control these AVS.

EigenLayer's Active Authentication Service (AVS) feature has not yet been activated, and only a limited number of AVS will be available initially. Most liquid re-hypothecation protocols do not disclose detailed information about how they will select the re-hypothecation operator and AVS. At this stage, stakers are mainly exposed to the risk of slashing at the Ethereum level. For re-staking via LST, this risk stems from the LST protocol itself. The native liquid re-staking protocol uses various methods for Ethereum staking. Some rely on large staking providers like Figment and Allnodes, while others are developing infrastructure to facilitate independent validators.

DeFi Integration

The sole purpose of Liquidity Recollateral Tokens (LRT) is to unlock liquidity for use in DeFi. Every liquidity restaking protocol is working hard to integrate various types of DeFi protocols. Currently, there are three main categories of defi integration: income protocols, DEX and lending protocols.

Yield Protocol

Pendle Finance, a leading protocol in the space, has launched an LRT pool that allows users to speculate on EigenLayer earnings and points. Most LRT protocols are integrated with Pendle.

DEX Liquidity

Most LRTs have liquidity pools on major DEXs, such as Curve, Balancer, Maverick. We measure the liquidity of each LRT by the slippage when exchanging 1K LRT for ETH on LlamaSwap. It’s important to note that this is only a rough measure, as most LRTs are revenue-accumulating tokens whose value increases over time as staking revenue accumulates. Since many LRT protocols are still in their infancy, the returns accumulated to date have been relatively small compared to the principal.

Swell’s rswETH, Renzo’s ezETH, and Etherfi’s weETH all have sufficient liquidity on the DEX with virtually no slippage when trading 1K LRT.

Eigenpie has taken a unique approach by issuing 12 separate liquid re-collateralized tokens, corresponding to each of the 12 supported LSTs. While this strategy effectively isolates the risks associated with any single LST, it also results in fragmented liquidity among different tokens.

Lending Agreement

LRT has more levels of risk than other types of assets. Lending agreements therefore exercise extreme caution when considering LRT as collateral for loans. Currently, lending protocols have limited acceptance of LRT. Etherfi's weETH is accepted by many lending protocols because it is an existing LST transformed into LRT.

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