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.
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.
