What is Liquid Restaking? Liquid Staking vs Liquid Restaking

Liquid restaking has fast become one of the hottest sectors in DeFi.  It allows staked assets to be tokenized into liquid restaking tokens (LRTs), which can be utilized across multiple blockchain protocols. This approach maintains liquidity while maximizing capital efficiency. This blog will explore the concept of liquid restaking, its benefits, and associated risks.

What Is Liquid Restaking?

At its core, liquid restaking is an advanced form of staking that builds upon the principles of the proof of stake (PoS) system. Traditionally, in a PoS system, validators secure the blockchain network by staking their cryptocurrency as collateral. In return, these validators earn rewards proportional to the amount they have staked. However, liquid restaking introduces a new layer of functionality by allowing staked assets to be reused, or "restaked," to secure additional blockchain protocols.

The concept of liquid restaking was popularized by platforms like EigenLayer, which enables users to take their staked Ethereum (ETH) in liquid protocol and restake it to support various actively validated services (AVSs). These AVSs might include applications like Ethereum scaling solutions or oracles, which require additional security but cannot afford to establish their own native validator sets. By utilizing liquid restaking, these applications can leverage the security provided by Ethereum’s validator network, thus enhancing their operational stability.

What are Liquid Restaking Tokens?

When a user deposits their liquid staking tokens (LSTs) into a restaking platform, they receive LRTs in return. These tokens are essentially digital representations of the staked assets, and they serve multiple purposes within the DeFi ecosystem. Not only can LRTs be used to secure additional protocols, but they can also be traded, sold, or lent on DeFi platforms to generate additional returns.

This dual utility of LRTs—both as a security mechanism and as a tradable asset—opens up new avenues for capital efficiency. Validators and investors can now earn rewards from multiple sources without needing to lock up more capital. This is particularly advantageous in a market where liquidity is paramount.

How Does Liquid Restaking Work?

Liquid restaking works by leveraging a process known as rehypothecation, where the same collateral is used to back different financial activities. In the context of liquid restaking, this means that the staked assets (or their liquid representations) can be reused to secure multiple blockchain protocols.

For example, if you have staked ETH and received an LST (like stETH from Lido), you can restake that LST on a platform like EigenLayer to receive an LRT. This LRT can then be used to secure additional protocols or traded on DeFi platforms.

The Benefits of Liquid Restaking

• Higher Returns: By restaking staked assets, investors can earn additional rewards from multiple sources. This compounding effect can significantly increase the profitability of staking, especially for those who are actively involved in DeFi.
• Enhanced Liquidity: Liquid restaking enhances liquidity by allowing staked assets to remain active in the market. Investors no longer need to choose between staking and maintaining liquidity.
• Support for Emerging Projects: By enabling smaller blockchain protocols to leverage the security of larger networks, liquid restaking helps to support the growth of emerging projects. 

The Risks of Liquid Restaking

Despite its many benefits, liquid restaking is not without risks. 

• Systemic Risk: The rehypothecation of assets means that if one system fails, it could have a cascading effect on others secured by the same assets. Essentially, the failure of one protocol could lead to losses across multiple platforms.
• Increased Complexity: Liquid restaking adds a level of complexity to the staking process, making it more challenging for average users to understand and engage with effectively.

Liquid Restaking vs Liquid Staking

Liquid staking involves tokenizing staked assets to provide liquidity while participating in staking. In contrast, liquid restaking takes this concept further by allowing these tokenized assets to be restaked across multiple protocols, thus earning additional rewards.

For beginners, liquid staking might be a more straightforward entry point into the DeFi ecosystem, while experienced traders might prefer the higher potential returns offered by liquid restaking.

Liquid Restaking and BNB Chain

Restaking and liquid restaking are part of BNB Chain's broader mission to expand its DeFi applications and utilities to onboard the next billion Web3 users.

Restaking Yield Opportunities on BNB Chain

BNB Chain's base infrastructure layers will provide the foundation for advanced staking strategies by allowing users to restake their liquid-staked tokens into new protocols, further optimizing their rewards. For example, users can deposit slisBNB from ListaDAO into LRT vaults and enjoy boosted yields.

Several wallets have also streamlined the staking process, offering a user-friendly experience where users can easily stake their BNB tokens and earn liquidity staking rewards, with real-time APY updates displayed directly on their platforms.

BNB Chain's AVS Ecosystem

BNB Chain's restaking infrastructure also supports sophisticated AVS (actively validated services). AVSs are blockchain-based services that extend the staking model beyond the core network through restaking, allowing validators to secure additional services like layer-2 chains, oracles, and bridges.

By tying their behavior to slashing penalties, AVSs are incentivized to act responsibly, as misbehavior can lead to financial losses. This makes them essential for increasing the security and accountability of the blockchain ecosystem, as restaking broadens the protection to these services while also introducing higher risks and rewards for validators and users.

Here are some common AVS categories:

1. Rollup Services: Provide data availability, sequencing, verification, and finality for scalable blockchain applications, with RaaS offering ready-made rollup solutions.
2. Coprocessors: Handle complex computations off-chain, including ZK proofs, database acceleration, TEEs, MPC, and FHE for enhanced security and performance.
3. Interoperability: Enable cross-chain token transfers and data exchanges through bridges and messaging protocols.
4. Web3 Infrastructure: Secured networks, oracles, and DePINs leverage restaked ETH for decentralized security.
5. AVS Tooling: Includes inter-AVS services, developer tools, management, monitoring, and security solutions.

Conclusion: The Future of Liquid Restaking

Liquid restaking can be extremely attractive due to its capital efficiency. However, it comes with risks that investors should carefully assess. As DeFi evolves, liquid restaking could offer new opportunities for growth and innovation.

Follow us to stay updated on everything BNB Chain

Website | Twitter | Telegram | Facebook | dApp Store | YouTube | Discord | LinkedIn | Build N' Build Forum