EigenLayer has drawn over $18 billion into its re-staking platform, allowing investors to earn multiple yields by staking and re-staking crypto assets. While the potential for higher returns is attractive, analysts warn that the practice could pose significant risks to the crypto market if not managed properly.
31 May 2024 – More than $18 billion worth of cryptocurrency has recently flowed into a new type of platform known as “re-staking,” which offers investors rewards for locking up their tokens in a complex scheme that analysts warn could pose significant risks to users and the broader crypto market.
The rising popularity of re-staking highlights the current risk-taking trend in crypto markets, with traders seeking high yields as prices rally. Bitcoin, the largest cryptocurrency, is nearing its all-time highs, while Ether, the second largest, has surged over 60% this year.
At the forefront of this trend is Seattle-based start-up EigenLayer. Founded by Sreeram Kannan, EigenLayer has attracted $18.8 billion in crypto assets to its platform since February, a sharp increase from less than $400 million six months ago. The company raised $100 million from Andreessen Horowitz’s crypto arm to further its innovative approach.
Re-staking builds on the existing practice of staking, where owners of cryptocurrencies like Ether lock up their assets to help validate blockchain transactions, earning yields in return. Re-staking allows these new tokens, received as staking rewards, to be staked again with different blockchain applications, potentially increasing returns.
The crypto community is divided over the risks associated with re-staking. While some view it as an unproven practice, others, including analysts, worry that using these new tokens as collateral in crypto lending markets could lead to excessive borrowing based on a limited number of underlying assets. This could destabilize the crypto market if many participants try to exit at once.
Adam Morgan McCarthy, a research analyst at crypto data provider Kaiko, noted, “When there’s anything that has collateral on collateral, it’s not ideal. It adds a new element of risk that wasn’t there before.”
Investors are drawn to re-staking by the potential for higher yields. Staking on the Ethereum blockchain typically offers returns in the 3%-5% range, but re-staking can provide multiple yields simultaneously.
EigenLayer’s platform is still developing mechanisms to directly pay out staking rewards. For now, users are incentivized with EigenLayer’s own newly-created token, “EIGEN,” in anticipation of future rewards or other giveaways known as airdrops.
David Duong, head of research at Coinbase, which offers staking but not re-staking, described the practice as “very risky.” He explained that users are participating pre-emptively, hoping for rewards that have not been defined yet.
EigenLayer has attracted significant attention, and other re-staking platforms like EtherFi, Renzo, and Kelp DAO have emerged, allowing users to re-stake tokens and generate new tokens for further use, including as collateral in borrowing.
Kannan emphasized that the primary risk lies not in re-staking but in the lending protocols mispricing the associated risks. He noted that re-staking’s cash flow is minimal compared to the global crypto industry’s $2.5 trillion in net assets.
Regulators and some institutional players, however, remain cautious. Standard Chartered’s crypto arm, Zodia Custody, and Sygnum, a Swiss crypto-focused bank, have expressed concerns about the complexities and potential hidden risks of re-staking.
Andrew O’Neill, digital assets analytical lead at S&P Global Ratings, remarked, “For now, we do not see any meaningful risk of contagion from re-staking issues to traditional financial markets.”
Despite the risks, re-staking is gaining traction, with institutional investors increasingly exploring this new frontier in decentralized finance.
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