Coinbase has highlighted the potential benefits and risks of Ethereum restaking, stating that it could serve as the foundation for new decentralized applications (dApps) on the blockchain. However, Coinbase analysts David Han and David Duong have also pointed out several hidden risks associated with restaking and the issuance of liquid restaking tokens (LRTs).
The restaking protocol Eigenlayer allows users to earn extra rewards in the form of LRTs by securing actively validated services (AVS) through staking derivative tokens. These tokens are given to individuals who have already staked Ether (ETH) using liquid staking protocols like Lido (LDO). While the initial restaking process is relatively straightforward, EigenLayer’s feature of allowing staked tokens to be restaked to different AVS can compound risks by allocating the same funds to similar validators.
Another risk identified by the analysts is the potential concentration of restakers in high-risk providers that offer the highest yields. The pursuit of maximum yields by LRTs may come at the cost of a higher, albeit hidden, risk profile. Additionally, LRT providers and decentralized autonomous organizations (DAOs) may feel incentivized to restake multiple times to remain competitive.
Despite these risks, the analysts believe that EigenLayer’s restaking protocol has the potential to become the foundation for various new services and middleware on Ethereum, which could generate significant ETH rewards for validators in the future. However, they also predict a short-term drop in Eigenlayer’s total value locked (TVL) when point farming ends or if early AVS rewards fall below expectations.
Eigenlayer has already surpassed lending giant Aave to become the second-largest DeFi protocol with a TVL of $11.5 billion, according to DefiLlama. This market enthusiasm for restaking has sparked controversy, with Ethereum developers warning about the potential creation of excessive leverage.
Despite the concerns, proponents of restaking argue that it offers additional rewards for those who have already staked their ETH. In related news, a team of white hat hackers called “SEAL 911” has been formed to combat crypto hacks in real time.