More than $18 billion worth of cryptocurrency has shifted to a new platform type offering rewards for locking up tokens, a scheme that analysts warn poses significant risks for users and the broader crypto market.
The increasing popularity of “re-staking” highlights the rising risk appetite in crypto markets as prices surge and traders chase higher yields. Bitcoin, the leading cryptocurrency, is nearing all-time highs, while ether, the second largest, has risen over 60% this year.
At the forefront of the re-staking trend is Seattle-based startup EigenLayer. The company, which secured $100 million in February from US venture capital firm Andreessen Horowitz’s crypto arm, has attracted $18.8 billion worth of crypto to its platform, up from less than $400 million just six months ago.
EigenLayer pioneered re-staking to extend the traditional crypto practice known as staking, explained its founder, Sreeram Kannan. Staking involves crypto token owners locking up their assets to participate in blockchain validation processes, earning yields in return but losing immediate access to their tokens.
Re-staking takes this a step further, allowing owners to stake new tokens—created to represent staked cryptocurrencies—again with various blockchain-based programs and applications, aiming for higher returns.
More than $18 billion worth of cryptocurrency has moved into a new type of platform which offers investors rewards in exchange for locking up their tokens, in a complex scheme that analysts warn poses a risk for users and the crypto market https://t.co/dZeZ2TtE3v
— Reuters (@Reuters) May 31, 2024
Debate Emerges Within Crypto Community
The crypto community is divided over re-staking’s risks. Some insiders argue it is too early to fully assess the practice, while analysts express concerns. They warn that using new tokens from re-staked cryptocurrencies as collateral in extensive crypto lending markets could create cycles of borrowing based on limited underlying assets.
“When there’s anything that has collateral on collateral, it’s not ideal. It adds a new element of risk that wasn’t there,” said Adam Morgan McCarthy, a research analyst at crypto data provider Kaiko.
The appeal for investors lies in the yield. Staking on the Ethereum blockchain typically offers returns between 3% and 5%. Analysts suggest that re-staking could yield higher returns, as investors can earn multiple yields simultaneously.
Re-staking is a recent innovation in decentralized finance (DeFi), where cryptocurrency holders invest in experimental schemes seeking significant returns without selling their assets.
EigenLayer has yet to pay out staking rewards directly, as the mechanism is still under development. Users join in anticipation of future rewards or giveaways known as airdrops. Currently, EigenLayer distributes its newly-created token, EIGEN, to users, who hope it will gain value.
New re-staking platforms, such as EtherFi, Renzo, and Kelp DAO, have emerged, re-staking clients’ tokens on EigenLayer and creating new tokens to be used as collateral elsewhere. Kannan clarified that EigenLayer’s goal is to empower users to choose staking locations and support new blockchain services, not incentivize more crypto-backed borrowing.
Institutional Interest in Re-Staking
Some experts downplay the risks, noting that re-staking’s scale is small compared to the global crypto market’s $2.5 trillion in assets. Regulators have expressed long-standing concerns about potential losses in the crypto sector affecting wider financial markets.
“For now, we do not see any meaningful risk of contagion from re-staking issues to traditional financial markets,” said Andrew O’Neill, digital assets analytical lead at S&P Global Ratings.
However, the intertwining of crypto and mainstream finance continues to grow, and re-staking is attracting institutional interest. Zodia Custody, Standard Chartered’s crypto arm, has seen significant institutional interest in staking but remains cautious about re-staking due to the difficulty in tracking assets and apportioning rewards.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO for re-staking some of its funds, and Swiss crypto-focused bank Sygnum expects a new ecosystem around re-staking to emerge.
