The Evolution of DeFi: From Staking to Restaking
The history of Decentralized Finance (DeFi) is relatively recent, with the first protocols emerging in 2017. However, it wasn't until the DeFi summer of 2020 and the yield farming craze that ensued, that the sector truly gained significant attention and traction.
Today, DeFi has evolved to become more mature, secure, and integrated with traditional finance. It offers innovative ways for individuals to earn and engage in financial activities without the need for intermediaries, reshaping the financial landscape with increased transparency and never-before-seen financial products.
One of the foundational elements of DeFi is staking, especially within Proof of Stake (PoS) networks. As the DeFi ecosystem evolves, we see an evolution from traditional staking to liquid staking and now to restaking, exemplified by protocols like InceptionLRT.
This article explores this evolution, providing data-driven insights into each stage in the evolution from staking to Liquid Restaking.
Staking and PoS Networks
Staking is a fundamental mechanism in Proof-of-Stake (PoS) networks, where validators secure the network by locking up their tokens. In the case of any wrongdoings from network validators, part of the locked tokens are removed, an event also known as Slashing. This process serves as a built-in protection against malicious participants maintaining the network's integrity while rewarding participants with returns on their staked assets.
Staking is prevalent on PoS blockchains such as Cardano, Solana, and Avalanche. However, it became increasingly widespread and gained immense popularity after Ethereum transitioned to the PoS consensus mechanism in 2022.
Ethereum’s Transition to PoS: Ethereum 2.0
Ethereum's transition from Proof-of-Work to Proof-of-Stake with Ethereum 2.0 marks a significant milestone, as it upgraded the scalability of the Ethereum network. But how exactly are users supporting the network by staking?
- Security: By requiring validators to lock up a substantial amount of ETH, the network ensures that validators have a financial incentive to act honestly.
- Decentralization: Staking allows more participants to take part in the network's consensus process compared to Proof-of-Work (PoW) systems, which often require expensive hardware.
- Energy Efficiency: PoS is more energy-efficient than PoW, as it does not require extensive computational power from mining rigs. This efficiency makes Ethereum 2.0 more sustainable and environmentally friendly.
- Scalability: The new PoS mechanism is designed to handle more transactions per second, reducing congestion and lowering transaction fees.
How Staking Works on Ethereum
In Ethereum 2.0, users can stake their ETH by locking it in the network to become validators. Validators propose and validate new blocks, earning rewards in the process. However, a great barrier entry to hosting a node and becoming a validator is the need to own 32 ETH.
Alternatively, users who do not have 32ETH or prefer not to run their own validator node can delegate their ETH to another validator. The delegation allows users to participate in staking and earn rewards without the need to manage the technical aspects of running a validator node, thereby lowering the entry barrier and encouraging broader participation on the Ethereum network.
PoS Staking Market Analysis
Here are some statistics to gauge the growth and size of the staking ecosystem on Ethereum:
- Number of ETH Staked: Over 32 million ETH staked.
- Number of Validators: Approximately 1M validators.
- Average Returns: Around 4-6% annual percentage yield (APY).
(Source)
The Rise of Liquid Staking Protocols
Liquid staking changed the rules of the game by allowing users to stake their assets while retaining liquidity. Unlike traditional staking, where assets are locked up, liquid staking issues derivative tokens, like inETH, that can be used in other DeFi activities.
Benefits of Liquid Staking
The following are a couple of the benefits Liquid Staking has to offer:
- Liquidity: Users can stake their ETH while retaining the ability to trade or use the derivative token, maintaining access to the assets value.
- Flexibility: Allows users to unstake their assets easily, offering greater control over their position
- Greater DeFi Composability: Enhances integration with other DeFi applications, enabling complex investment strategies that increase rewards and airdrops possibilities.
Liquid Staking Market Analysis
The liquid staking market has experienced significant growth, with the total value locked (TVL) across all chains now surpassing $48 billion. A substantial portion of this capital is concentrated on the Ethereum blockchain, which commands over $42 billion in TVL.
(Source)
This dominance highlights Ethereum's central role in the liquid staking ecosystem, driven by its mature ecosystem of well-established protocols and dedicated communities. The Shapella upgrade in 2023 further solidified Ethereum’s dominance, increasing the number of validators and the total staked ETH.
The Restaking Narrative and Rise of EigenLayer
Restaking extends the concept of staking by allowing staked assets to be used for additional security and validation tasks across multiple networks, thereby maximizing the utility of staked tokens. Here are some benefits of Restaking:
Benefits of Restaking
- Increased Security: Provides additional layers of security to multiple networks.
- Higher Returns: Allows stakers to earn multiple streams of income.
- Network Synergy: Promotes collaboration and resource sharing among Proof of Stake (PoS) networks.
EigenLayer: Pioneering Restaking
EigenLayer is a decentralized security platform that enables restaking. It allows users to restake their assets to provide security services across various networks. Its architecture is designed to leverage existing staked assets to offer security as a service (SaaS) to other networks, presenting an alternative to emerging chains and protocols instead of them having to set up their own validator capabilities.
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The rapid growth of EigenLayer, which has already seen significant adoption and substantial total value locked (TVL) of over $15 billion, underscores the increasing demand for more efficient and secure decentralized infrastructures.
With plans to introduce new restaking products, the protocol aims to further increase the operational capabilities of services it’s actively keeping secure. This way, EigenLayer is set to play a critical role in the future of decentralized finance and blockchain security.
Liquid Restaking Protocols
Liquid restaking protocols are the final stage of this evolution. They combine the benefits of liquid Staking and Restaking, allowing users to maintain liquidity while leveraging their Re-staked assets for additional security tasks. Protocols like InceptionLRT also introduce innovative mechanisms to maximize the utility and returns of restaked assets, ensuring users can reap multiple benefits from multiple ecosystems.
Liquid Restaking Market Analysis
The liquid restaking market is emerging, with several protocols entering the space. The market is projected to grow significantly as more services adopt this Security as a Service (SaaS) model.
Currently, several key players are leading the way in Liquid Restaking, each contributing to the market’s development and setting benchmarks for security and reward maximization. Here’s how the current market share on Ethereum is divided:
(Source)
What comes next?
Looking forward, the continued development and adoption of liquid restaking protocols, such as InceptionLRT, will play a crucial role in shaping the future of decentralized finance (Defi). These protocols offer a glimpse into a more integrated and efficient financial system where users can maintain liquidity, earn multiple streams of income, and enhance the security of multiple networks.
As these technologies mature, they will unlock new possibilities, redefine digital asset interaction, and force people to look at finance in a different way. The advancements in staking and restaking are just the beginning, with the potential to deliver even more sophisticated and integrated financial services in the future.
