Three new token projects ride $1bn EigenLayer hype

Liquid restaking tokens that will allow crypto investors to leverage Ether for greater yields are riding excitement sparked by EigenLayer, a six-month-old protocol that surged to more than $1 billion in user deposits last week.

Their rise could kick off another speculative frenzy, or another Terra-style crash, according to people in the industry who spoke to DL News.

Three tokens have launched in the past two weeks, and one company announced a fundraise led by prominent crypto-focused venture capital firms.

This flurry of news comes amid EigenLayer’s decision to raise its cap on user deposits. That’s because the current crop of liquid restaking providers all intend to build on top of EigenLayer, the first protocol to enable restaking on Ethereum.

“The protocols are taking the first steps into this new staking realm,” Pedro Verdades, co-founder of liquid restaking provider InceptionLRT, told DL News. “We will see more and more of this over the coming weeks and months.”

Earlier this month, Kelp DAO launched a liquid restaking token, rsETH. As of Tuesday, users had deposited more than $125 million worth of crypto, according to data from DefiLlama.

On December 18, liquid restaking provider Renzo launched its own liquid restaking token, ezETH, and Rio, a competitor, announced a seed round led by venture capital firms Polychain Capital, Blockchain Capital, and Breyer Capital. Rio did not disclose the amount of the round.

On December 20, users began claiming a governance token, RSTK, from Restake Finance, another liquid restaking provider.

Those three join Ether.Fi, which launched its restaking token, eETH, in November.

Since an upgrade in 2022, Ethereum relies on a process called staking to verify and order transactions. To stake, users must lock up their Ether in exchange for an annual yield. Liquid staking providers such as Lido address the opportunity cost of locking up Ether by providing receipt tokens — staked Ether — that can be used in lieu of Ether across the DeFi ecosystem.

Biggest business in DeFi

Liquid staking is now the biggest business in DeFi, with more than $32 billion in user deposits, according to Defi Llama.

Restaking allows users to stake their staked Ether — not to secure Ethereum, but to secure protocols that would otherwise have to run on their own networks, such as the bridges that allow users to transfer tokens between otherwise incompatible blockchains.

In exchange for staked Ether, protocols using EigenLayer pay restakers, boosting the relatively risk-free yields they can earn from old-fashioned staking.

Like liquid staking providers, liquid restaking providers address the opportunity cost of locking up staked Ether by providing receipt tokens.

Proponents say this will dramatically reduce the cost of certain protocols, such as bridges, other blockchains, oracles, and other technology critical to the crypto ecosystem.

“This is the most groundbreaking evolution since Ethereum,” Verdades said. “In a few years, this will be a $20 billion to $25 billion industry and we’re [frontrunning] it!”

Risks

Still, others say it’s a business model that could cause systemic risk if providers aren’t careful.

That’s because liquid restaking is a leveraged play that allows users to effectively place bets on the various protocols that use EigenLayer, some of which may be poorly run.

As the market matures, observers predict liquid restaking tokens will integrate with the broader DeFi ecosystem and be used as collateral to borrow other crypto, mint stablecoins, and more.

Those layers of leverage are potential points of failure, according to Lucas Kozinski, a founding contributor to Renzo. Liquid restaking providers will have to carefully manage which EigenLayer-based businesses they support and the yields they promise users.

“You have to think about risk management, similar to collateral assets on a lending protocol,” Kozinski said.

Gabe Tramble, co-founder of crypto research firm Shoal Research, agrees.

In a report on liquid restaking published this week, Tramble and a co-author detail some of the issues of the emerging sector.

“I do see significant risk though of rehypothecation,” he told DL News, referring to the practice in which a financial institution users customer collateral for its own purposes. “[It’s] something to keep an eye on.”