Brief introduction to AVSs and Node Operators
This is a brief introduction to AVSs and Node Operators, as well as various LRT protocols, along with recent developments in the space.
To become an Ethereum validator, you need two resources: 32 ETH and the hardware necessary to run node software. If you lack the required 32 ETH, you can entrust your funds to liquid staking solutions. These platforms will supplement your ETH and operate the node on your behalf, sharing the rewards earned with you.
Currently, in the liquid staking solutions market, Lido holds a 30% market share, followed by Coinbase at 14%, Binance at 3.88%, and other providers.
Liquid staking solutions such as Lido, Coinbase, and Rocket Pool offer derivative tokens that represent the ETH staked by users. Lido provides STETH, Coinbase offers cbETH, and Rocket Pool provides RETH. These liquid staking derivative tokens function like other ERC20 tokens in the DeFi ecosystem, enabling users to provide liquidity in decentralized exchanges (DEXs), participate in borrowing protocols, and engage in various other DeFi activities.
EigenLayer
EigenLayer is a restaking protocol that advances liquid staking protocols. While liquid staking allows users to use their staked tokens in other DeFi protocols, EigenLayer enables restaking of ETH in other protocols requiring security. Protocols using EigenLayer’s restaked ETH for security are called Actively Validated Services (AVS).
Actively Validated Services (AVSs) integrate with Ethereum’s security mechanisms using the EigenLayer protocol, enhancing validation for blockchain applications without their own consensus mechanisms.
ETH is staked on both the Ethereum network and Actively Validated Services (AVS). Renowned projects like AltLayer, Celo, Espresso, EigenDA, Hyperlane, Mantle, and Polyhedra plan to participate as early AVS in EigenLayer. The staked ETH can earn rewards from both staking types, although it’s subjected to different slashing conditions.
How can ETH be staked simultaneously on the Ethereum network and other AVS protocols?
Ethereum validators can set withdrawal credentials to allow ETH withdrawals, including EigenLayer’s smart contract. This enables Ethereum validators to participate in AVS validation through EigenLayer restaking, running the required client, and setting withdrawal credentials to EigenLayer’s smart contract. EigenLayer has the authority to slash ETH if a validator meets AVS slashing conditions, subjecting restaked ETH to both slashing conditions.
Node Operators within EigenLayer
Node operators secure AVS transactions by restaking their ETH on EigenLayer, receiving additional validation rewards from AVS operations atop Ethereum rewards. This creates a financially incentivized ecosystem for validators to support AVS networks.
2.1 What are Liquid Restaked Token protocols?
Liquid Restaked Token (LRT) protocols are designed to unlock the liquidity of ETH restaked on EigenLayer, similar to how liquid staking tokens unlock ETH staked on Ethereum. From the end user’s perspective, Liquid Restaked Token protocols address several inconveniences encountered when interacting directly with EigenLayer.
Inconveniences in using EigenLayer directly:
Node operator selection: End users find it challenging to select a node operator on EigenLayer due to the complexity of considering both risks and rewards. Interest compounding: Users must manually compound rewards in EigenLayer to benefit from compound interest, which incurs expensive gas fees. Illiquidity: ETH restaked on EigenLayer lacks liquidity and cannot be easily utilized elsewhere. The LRT protocol addresses these issues by restaking deposited ETH across various operators in EigenLayer to standardize reward and risk profiles. Additionally, it provides users with tokenized representations of their restaked ETH and rewards, enabling them to leverage these tokens in other DeFi protocols for additional benefits.
Different Types of LRT Protocols:
3.1 Native Liquid Restaking:
Native Liquid Restaking protocols require the full capabilities of traditional liquid staking protocols and an additional layer to create EigenPods for restaking with different EigenLayer node operators.
3.1.1 Ether.fi:
This protocol enables users to mint eETH, the first native liquid restaking token on Ethereum, by staking their ETH. By minting eETH, users can benefit from rewards generated through staking and restaking activities facilitated by Ether.fi.
Ether.fi is the only protocol where stakers control the keys, reducing counterparty risk for node operators and the protocol.
Ether.fi runs Operation Solo Staker, further decentralizing Ethereum by launching nodes across diverse geographies.
3.1.2 Puffer:
Puffer is a decentralized native liquid restaking protocol (nLRP) built on Eigenlayer, making native restaking on Eigenlayer more accessible. It allows anyone to run an Ethereum Proof of Stake (PoS) validator while supercharging their rewards.
Capital Efficiency: Less than 2 ETH is required to run a validator. Slash Protection: First-of-its-kind anti-slashing hardware support. MEV Autonomy: Node operators choose their MEV strategy. 3.1.3 Swell:
Swell allows users to earn passive income by staking or restaking ETH to earn both blockchain rewards and restaked AVS rewards. In return, users receive a yield-bearing liquid token (LST or LRT) to hold or participate in the wider DeFi ecosystem to earn additional yield.
3.2 Basket Based LRTs:
Allows users to stake various tokens and receive a single receipt token representing a basket of restaked Liquid Staking Tokens (LSTs). Exposes users to multiple counterparty risks due to exposure to different tokens.
3.2.1 Renzo:
Strategy manager for Eigenlayer guiding users on restaking strategies.
Key Product: ezETH, a liquid restaking token representing a user’s restaked position. Functionality: Users can deposit liquid staking tokens (stETH, rETH, cbETH) in exchange for ezETH. For every LST or ETH deposited on Renzo, it mints an equivalent amount of ezETH.
3.2.2 Kelp DAO:
rsETH is a single liquid restaked token for all accepted ETH LSTs. Kelp’s rsETH is a Liquid Restaked Token (LRT) that provides liquidity to illiquid assets deposited into restaking platforms like EigenLayer.
3.3 Isolated LRTs:
Involves exchanging one specific type of Liquid Staking Token (LST) for a corresponding specific type of Liquid Restaked Token (LRT). Minimizes counterparty risk by isolating the relationship between LSTs and LRTs.
3.3.1 Astrid Finance:
Users deposit LSTs (stETH, rETH, or cbETH) into the restaking pool and receive Astrid liquid restaked tokens or LRTs (rstETH, rrETH, rcbETH) in return. Pooled LSTs are restaked on EigenLayer and delegated across multiple operators voted by the Astrid DAO. Rewards earned are compounded and distributed through a balance rebase, automatically adjusting users’ balances.
These protocols cater to different user preferences and risk profiles, offering flexibility in managing staked assets while considering factors like counterparty risk and reward structures.
Recent developments in LRT protocols and the EigenLayer space:
4.1 Expansion of AVS Providers:
The number of AVS projects listed on the EigenLayer website has reached approximately 76, with new launches occurring daily.
4.2 Growth of Liquid Restaking Protocols:
Liquid Restaking Protocols have experienced significant popularity and adoption, attracting over $5 billion in TVL into projects like Ether.fi, Puffer, and Swell.
4.3 Increase in TVL of EigenLayer:
The Total Value Locked (TVL) of EigenLayer has risen from $2 billion in January to $11 billion, marking a fivefold increase.
4.4 Innovative Token Models:
Various types of LRT protocols have emerged, including Native Liquid Restaking (e.g., Ether.fi), Basket-Based LRTs (e.g., Kelp DAO), and Isolated LRTs targeting specific Liquid Staking Tokens (LSTs). These diverse models provide users with multiple options for restaking assets while managing counterparty risks and maximizing rewards.
Conclusion: Similar to how we have seen Liquid Staking Tokens become the most used tokens in the DeFi space in decentralized exchanges and borrowing and lending protocols, we can expect the same thing to happen with LRT tokens. Numerous projects are already creating different types of liquid restaking tokens with different pros and cons.
While it does introduce an additional leverage effect, the core added risk comes from the new slashing conditions leading to de-pegging. This risk is not as complicated or as dangerous as the community might perceive. If LRT protocols become more active, ETH, despite its vast market capitalization, can generate significant value, and we can anticipate even more vitality in the Ethereum DeFi ecosystem.
