Liquid restaking tokens vs. liquid staking tokens

Key takeaways

• Liquid staking tokens (LSTs) and liquid restaking tokens (LRTs) are innovative DeFi products for those looking to maximize the value of their staked assets.
• LSTs allow you to earn staking rewards while keeping your staked assets liquid.
• LRTs take things further by letting you use your staked assets to secure multiple protocols at once, unlocking new ways to earn.
• Protocols like Lido and EigenLayer have been crucial in making liquid staking and restaking more accessible.

Decentralized finance (DeFi) is constantly evolving, and with the rise of liquid staking tokens (LSTs) and liquid restaking tokens (LRTs), you have more options to manage your crypto assets. 

While LSTs have been around for some time, LRTs are the new players in the game, creating fresh opportunities and challenges. So, what’s the deal with these tokens, and how can they benefit you? Let’s break it down.

Evolution of staking: From traditional to liquid restaking

Staking has always been key to blockchain ecosystems, rewarding you for locking your assets to help secure the network. Still, traditional staking came with its limitations — mainly that once your staked assets were locked up, they could not be used elsewhere. This made things a bit tricky for anyone who wanted to take advantage of other opportunities in the crypto space.

Enter LSTs. 

These tokens allow you to access the liquidity of your staked assets while still earning rewards. So, you can still earn passive income but with the added benefit of flexibility.

The rise of restaking with EigenLayer

While LSTs solved the crypto liquidity problem, they did not address another issue: scalability and multi-protocol security. This is where LRTs come in. Restaking lets you reuse your staked assets to help secure multiple protocols at once while boosting security.

A driving force behind this innovation is EigenLayer, a protocol that extends the utility of staked assets. EigenLayer enables Ethereum validators and stakers to “opt-in” and restake (reuse) their tokens to secure additional services, such as data availability layers, oracles and crosschain bridges and to avail new yield opportunities.

This seamless integration of staking and restaking has unlocked a new era of capital efficiency and collaboration in DeFi, laying the foundation for the adoption of LRTs.

Did you know? EigenLayer, a pioneering restaking protocol, raised $50 million in a Series A funding round led by Blockchain Capital in 2023. The protocol enables Ethereum stakers to leverage their staked ETH to secure additional networks and applications, effectively multiplying their staking rewards. 

What are liquid staking tokens?

Liquid staking tokens (LSTs) provide a way for stakers to maintain liquidity while participating in network security. When users stake assets like Ethereum, they receive a derivative token (e.g., stETH from Lido) that represents their staked holdings. This derivative can then be used in DeFi protocols for trading, lending or yield farming.

LSTs solve this by issuing a derivative token that represents the staked asset, allowing users to retain liquidity. For example, when you stake Ether (ETH) on a liquid staking platform like Lido, you receive stETH, a tokenized representation of your staked ETH.

Key benefits of LSTs:

• Liquidity: Unlocks the value of staked assets, enabling users to trade, lend or use them in other DeFi protocols.
• Yield optimization: Earn staking rewards while simultaneously leveraging the derivative token for additional opportunities.
• Flexibility: Users can exit positions by selling their derivative tokens rather than waiting for unstaking periods.

Examples of LSTs:

• stETH (Lido Finance): Liquid staking for Ethereum.
• rETH (Rocket Pool): Decentralized liquid staking for Ethereum.
• bLUNA (Anchor Protocol): Liquid staking for Terra assets.

Did you know? Lido Finance, in April 2024, reached one million Ethereum validators as the largest decentralized finance (DeFi) protocol.

What are liquid restaking tokens?

Building on the foundation laid by LSTs, liquid restaking tokens introduce a new layer of functionality by allowing users to reuse their staked assets to secure additional networks or protocols.

For instance, restaking allows a user who has already staked ETH to secure Ethereum to simultaneously stake their derivative token (like stETH) to participate in securing a layer-2 network or an application-specific blockchain.

Key benefits of LRTs:

• Enhanced capital efficiency: Users can extract additional value from their staked assets without requiring more upfront capital.
• Multi-network participation: Enables staking across multiple chains or protocols simultaneously.
• Decentralized security: Boosts security for new protocols by leveraging existing staked assets.

LSTs vs. LRTs: Key differences explained

Both LSTs and LRTs address distinct challenges in the staking ecosystem. While LSTs focus on unlocking liquidity for staked assets, LRTs go a step further by enabling users to amplify the utility of their staked tokens across multiple protocols. 

Here’s a closer look at the key differences between these two innovations:

While LSTs are focused on improving liquidity, LRTs are designed to enhance security scalability, making them complementary rather than competitive technologies.

Liquid restaking tokens vs. liquid staking tokens: How they work

How LSTs work:

1. A user stakes assets (e.g., ETH) on a liquid staking platform.
2. The platform issues a derivative token (e.g., stETH) representing the staked asset.
3. The user earns staking rewards while the derivative token can be used in DeFi applications such as lending, borrowing or yield farming, unlocking additional opportunities for earning yield.

Example: You hold 10 ETH and decide to stake it on a liquid staking platform like Lido. In return, you receive 10 stETH. While your stETH accrues staking rewards, you can also use it on DeFi platforms — perhaps as collateral to borrow stablecoins or to earn yield in a liquidity pool. This flexibility allows you to maximize the utility of your staked ETH without losing access to liquidity.

How LRTs work:

1. A user stakes assets on a primary network (e.g., Ethereum) through a protocol like EigenLayer.
2. The platform allows the staked asset or its derivative to be “restaked” on another protocol or network.
3. By restaking, the user contributes to the security of multiple networks or protocols, earning additional rewards for their participation.

Example: Imagine you stake 10 ETH on Ethereum (Lido) and receive stETH. Instead of just holding that stETH for staking rewards, you can use EigenLayer to restake it on a different blockchain, like an L2 solution. This way, your ETH is helping secure multiple networks and you’re earning rewards from both the Ethereum network and the L2 solution.

This dual-layered staking approach allows you to maximize the utility and yield of your assets while supporting the decentralized security of multiple ecosystems.

Benefits of LSTs and LRTs in crypto

Both LSTs and LRTs play significant roles in the evolving DeFi landscape. While LSTs have been instrumental in boosting liquidity, LRTs are seen as the next step in improving capital efficiency and security. Together, they unlock opportunities for users and developers.

Benefits of LSTs in DeFi:

• Lower opportunity cost: Traditional staking locks assets, limiting liquidity. LSTs solve this by offering derivative tokens (e.g., stETH), which earn rewards while remaining usable in DeFi. This enables strategies like earning rewards and borrowing stablecoins simultaneously.
• Boost liquidity: LSTs enhance DeFi liquidity by driving trading volumes on decentralized exchanges and improving lending markets. For instance, stETH is widely used in liquidity pools, offering users additional yield opportunities.

Did you know? As of recent data, the stETH/ETH liquidity pool on Aave has over $1.8 billion in total value locked (TVL), enabling users to earn trading fees and liquidity mining rewards while maintaining high liquidity and efficiency for swaps. 

Benefits of LRTs in DeFi:

• Strengthen decentralization: LRTs secure multiple networks, boosting resilience for newer protocols. For example, restaking stETH via EigenLayer supports both Ethereum and systems like Chainlink. 
• Bridge L1 and L2 ecosystems: By leveraging staked assets across L1 and L2 (e.g., Ethereum and Arbitrum), LRTs enhance scalability and interoperability while earning rewards from multiple layers.

LRTs vs. LSTs: Key risks to be aware of

LSTs allow you to keep your staked assets flexible, earning rewards without being locked in. LRTs, on the other hand, allow you to take your staking to the next level — securing multiple networks at once and earning diversified rewards. 

While LSTs offer flexibility, they come with the potential risk of de-pegging or price volatility of the derivative tokens, which can affect their value. For LRTs, the risks are amplified due to the inherent exposure to multiple networks. A failure or security breach in one network could cascade and negatively impact the restaked assets, leading to compounded losses.

To minimize risks, evaluate platform security, understand yield impacts and analyze the broader exposure. This helps ensure informed decision-making and better risk management.

Written by: Shailey Singh