In-depth interpretation of the re-mortgage track: working principles, advantages and disadvantages, and potential projects

Original author: Beehive Validator Original compilation: Deep Tide TechFlow

Currently, staking is one of the largest areas in the DeFi market, with the liquid staking protocol Lido topping the list in terms of total value staked (TVL). It makes ETH holders more profitable and improves the decentralization and security of the Ethereum network.

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

So, why use liquid staking?

Liquidity staking solves the main problems of simplifying staking, untethering liquidity, and improving network decentralization. In the DeFi market, we pay close attention to the issue of not locking liquidity. For example, the Lido protocol allows users to pledge ETH and obtain stETH of the same value, with the ability to transfer it to other exchanges, operating in the DeFi market.

ReStaking refers to one of the activities that involves the reuse of liquid staked token assets (such as stETH) for staking into the validators of the network or other blockchain platforms. This concept was originally introduced by EigenLayer, which maximizes the utilization of liquid staking liquidity and paves the way for the development of numerous other applications.

What is Restaking

ReStaking is the act of staking liquid staking token assets with validators on other networks and blockchains to earn more rewards while still helping to improve the security and decentralization of the new network.

ReStaking can also be understood as using some or all of the rewards obtained from staking to continue depositing to the 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 twice the income from both the original network and the ReStaking network. Although ReStaking enables stakers to obtain greater returns, it also has smart contract risks and risks of validator staking fraud.

In addition to accepting original assets, 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 real revenue for the protocol and its users, it unlocks an unlimited source of liquidity for the DeFi market.

Both the ReStaking network and the standard network generate revenue from security leases, fees incurred by validators and dApps, protocols and layers. Staking participants on the network will receive a portion of the network's revenue and may also be rewarded with inflation in the network's native token.

How Liquidity Staking (ReStaking) works

The ReStaking network is similar to other networks, the only difference is that it accepts more assets with low volatility, low risk and increased security. When the pledged value of the network is high, hackers need to obtain most of the pledged interests, which requires a large amount of assets. Additionally, ReStaking assists holders in increasing profits.

Every ReStaking project will have different goals and operating mechanisms, but the differences between them are small.

Advantages and disadvantages of ReStaking

advantage:

1. Unlock the liquidity of LSD and LP tokens: Pledging LSD or LP tokens to validators can increase the number of pledges of original assets on the native network and provide more liquid asset options for the DeFi industry.
2. Yield Enhancement: Stakers can earn twice as much by approving the asset on both networks. In addition, after staking assets in the second network, investors can continue to obtain representative assets, which can be used for staking to mint stablecoins, and brought to the DeFi market to generate profits.
3. Increased security of networks staking with liquidity: As more assets are staked, the value of the network increases, making it more resistant to attacks and a trusted location for other decentralized applications, protocols, and platforms.
4. Reduce dumping: ReStaking makes the original token more useful, thereby avoiding dumps, which would result in a significant loss of value for the project and its investors.
5. Improve the motivation of original asset holders to participate in staking: increase the security and decentralization of the network.

shortcoming:

1. Risk of asset loss: If the node conducts misconduct, your assets are at risk of being expropriated or fined, which may result in the loss of some or all of your assets.
2. Smart contract risk: If the network is hacked, you run the risk of losing all your assets. But theoretically, the networks of projects using liquidity staking are extremely hard to attack.
3. Asset bubble: Inflate the market through new Wrap Tokens or the multiplication of the value of Tokens, causing the market value to no longer reflect its true value. Continuing to mint stablecoins with assets representing value locked in validators, in addition to the platform, increases risk and makes the original asset vulnerable to liquidity.
4. Too many tokens in the market: When there are too many tokens in the market, DeFi newcomers can easily get confused and be easily scammed. Especially those low-quality projects that mint a lot of junk tokens will flood the cryptocurrency market.

Comparing Re-Pledging and Liquidity Staking

Excellent projects in ReStake field

OwnLayer

EigenLayer is developed by a highly respected and experienced team in the cryptocurrency market. The project has received a whopping $64.5 million in funding, including notable backers such as Blockchain Capital, Coinbase Ventures, Polychain Capital, and Electric Capital.

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

EigenLayer's main business model is security leasing and verification. Clients can be dApps, Layer 2 protocols, or cross-chain bridge protocols. They can use high or low security authenticators, depending on their requirements. A single validator can authenticate multiple consumers.

The protocol that adopts this network will generate revenue for EigenLayer. A portion of these assets will be awarded to stakers. Users do not receive a second token when staking assets on the EigenLayer network. Additionally, users must choose reputable validators to ensure the security of their assets. If validators misbehave, the network will enforce fines against them, which may result in the forfeiture of some or all assets. Therefore, those who authorize validators will also lose their assets.

Advantages and disadvantages of EigenLayer

advantage:

1. EigenLayer is the foundation of many other dApps, protocols, Layer 2, Layer 3 and clients.
2. For the structure of additional validators at a single level, the value of the network can be multiplied. Minimize the risk of being hacked by penalizing misbehaving validators.
3. Ethereum nodes can earn extra income by participating in the EigenLayer network. Additionally, a single validator can validate multiple clients.
4. Maximize the profit of holding LSD ETH and LP ETH assets and their applicability.
5. Due to the enhanced security and high yield of the Ethereum network, staking ETH has attracted many people.

shortcoming:

1. Smart contract risk, when the network is hacked, you may lose all your assets. But in theory, the network of projects using ReStaking is extremely difficult to attack.
2. When the node behaves improperly, it may be punished, and your assets are at risk of being confiscated or fined, which may result in some or all permanent losses.
3. When a fork or issue occurs, it may split the Ethereum community. As Vitalik said recently, EigenLayer reuses ETH assets and validators on Ethereum.
4. EigenLayer must develop an ecosystem and customer base of sufficient scale. If incentives are issued in the form of project tokens, or if there are no incentives, profits are no longer attractive for those who choose to stake.

Tenet

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

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

Investors participating in asset pledge will be accepted and issued tLSDToken tokens. This asset can be used as collateral for Mint Stablecoin LSDC to continue profiting from the DeFi market.

Tenet's business model includes charging fees to the network and compensating validators. Additionally, the network provides TENET governance tokens as rewards for each block generated. Rewards will be proportional to staked shares. TENET will always have a weight of 1, while the DAO will decide what the weights of other assets should be, and they will all be less than 1.

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

Staking TENET will get veTENET, which can participate in project governance, share revenue and obtain additional rewards.

Tenet's creation of a revenue-generating ecosystem large enough to attract investors remains the most important factor. If network activity is slow, the network will not be able to grow without users using TENET tokens as rewards for each newly generated block.

Pros and Cons of Tenet

advantage:

1. Support multiple native tokens from other blockchains.
2. Pledge and get tLSDToken tokens as collateral, enabling Mint Stablecoin LSDC to participate in the DeFi market and gain greater profits.
3. Provide interest-free LSDC loans based on Mint fees of 0.5% to 5% of network activity.
4. When conversion activity is high, fees will be high and vice versa. This mechanism helps maintain the LSDC price.
5. The veToken model using TENET governance tokens is excellent. When veTENET holders can participate in the index and share the benefits, the dumping of Token TENET can be prevented.

shortcoming:

1. When borrowing Stablecoin LSDC, smart contract risks and original asset liquidation risks exist.
2. Each newly generated block will reward TENET Tokens, resulting in inflation.

Predictions for ReStaking

Currently, the largest market in the DeFi industry is staking, with a total value of about $20 billion (TVL). Especially now that many blockchain platforms are being developed and the size of the cryptocurrency market continues to expand. Therefore, the ReStaking market will have numerous growth opportunities.

As Staking and ReStaking contribute to the expansion of the DeFi market, the underlying blockchain becomes more secure and investors earn 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, among others.

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

Summarize

At the end of 2022, about half a year after the birth of ReStaking, this market will expand rapidly and become a trend. ReStaking is not a rapidly disappearing narrative, but one of the most important and promising areas in DeFi.

Because ReStaking not only helps users earn 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, etc. Therefore, we must exercise caution and tolerate the risk of capital loss when participating in this market.