Elizabeth Howcroft
LONDON (Reuters) – More than $18 billion worth of cryptocurrency has been moved to a new type of platform that offers investors rewards in exchange for locking up their tokens in a complex scheme that analysts warn poses a risk to users and the cryptocurrency market.
The growing popularity of so-called “restaking” is the latest sign of risk-taking in cryptocurrency markets as prices rise and traders hunt for yield. , the largest cryptocurrency, is near all-time highs, and Ether, the second-largest, is up more than 60% this year.
At the center of the restaking boom is Seattle-based startup EigenLayer. The company, which raised $100 million from the crypto arm of US venture capital firm Andreessen Horowitz in February, has attracted $18.8 billion worth of cryptocurrency to its platform – up from less than $400 million six months ago.
EigenLayer invented restacking to expand on a long-standing cryptographic practice called staking, its founder Sriram Kannan told Reuters.
Blockchains are a kind of database that includes many computers on a network that check and confirm who owns which cryptocurrencies. To achieve this, owners of crypto tokens such as Ether allow their assets to be locked as part of the verification process. Holders lose instant access to their tokens while they are staking, but receive income in return.
Some betting platforms also provide users with newly created cryptocurrencies to represent the cryptocurrencies they have staked. Restaking allows holders to take these new tokens and stake them again through various blockchain-based programs and applications in hopes of making a larger profit.
The cryptocurrency world is divided on how risky restaging is, with some insiders saying the practice is too nascent to know about.
But others, including analysts, fear that if new tokens representing re-supplied cryptocurrencies are used as collateral in vast cryptocurrency lending markets, endless cycles of borrowing could ensue based on a small number of underlying assets. This could destabilize broader crypto markets if everyone tries to exit them at the same time, they said.
“When you have something that has 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 attraction for investors is the yield: yields on blockchain bets are typically in the 3-5% range, but analysts say returns could be higher with repeat bets since investors can earn multiple returns at once.
Restaking is the latest development in the risky world of decentralized finance, or DeFi, in which cryptocurrency holders invest in experimental schemes in hopes of making a bigger profit on their assets without having to sell them.
However, the EigenLayer platform does not yet pay staking rewards directly to users, as the mechanism for this has not yet been developed. Users join the platform in anticipation of future rewards or other gifts, known as giveaways.
For now, EigenLayer is giving away its own newly created token to people using the platform. Users hope that this token, called “EIGEN,” will be worth something in the future.
Kaiko’s Morgan McCarthy said the rise of re-staking platforms has been driven by users seeking such airdrops, calling it “really, really speculative, this free money thing.”
“It’s very risky,” said David Duong, head of research at US crypto exchange Coinbase (NASDAQ:), which offers staking but not re-staking.
“They’re doing it proactively right now, expecting to be rewarded with something, but they don’t know what,” Duong said.
ENTER YOUR OWN LAYER
EigenLayer was launched last year by Sriram Kannan, a former assistant professor at the University of Washington in Seattle and part of the team that launched India’s first student-designed microsatellite, according to its academic website.
EigenLayer positions itself as a marketplace for verification services, connecting potential stakers with applications that need staked tokens.
New re-staking platforms have emerged, including EtherFi, Renzo and Kelp DAO, which re-stake clients’ tokens on EigenLayer for them and generate new tokens to represent those re-stakes. These tokens can be used anywhere, for example, as collateral for a loan.
Kannan said the goal of his platform is to allow users to choose where to stake their tokens and help new blockchain services grow, not to encourage even more cryptocurrency-backed borrowing.
“We don’t have any official relationship with any of these players… This is an emerging phenomenon,” he said.
Coinbase’s Duong says restacking may come with “hidden risks”—if restacked tokens are used in crypto lending, it could lead to forced liquidations and greater volatility during market downturns, he wrote in a note.
The sell-off in crypto markets in 2022 was exacerbated by high-risk lending as crypto tokens used as collateral quickly lost their value following the collapse of the Terra and Luna tokens.
Kannan distances EigenLayer from risks.
“The risk is not in the re-rate, but in the lending protocols. Lending protocols misjudge risk,” he said.
Some experts are not concerned about the restacking, noting that the funds in the restaging protocols are dwarfed by the net assets of the global crypto industry of $2.5 trillion.
Regulators have long been concerned that losses in the cryptocurrency world could spill over into broader financial markets.
“At this point, we don’t see any meaningful contagion risk from problems spreading to traditional financial markets,” said Andrew O’Neill, head of digital asset analysis at S&P Global Ratings.
However, the world of cryptocurrencies is increasingly linked to mainstream finance, and institutional investors are gaining traction.
Standard Chartered’s (OTC:) cryptocurrency arm, Zodia Custody, has seen significant institutional interest in staking, but believes re-staking has gone too far because it is difficult to establish a paper trail of where assets go and how rewards are distributed. This was announced by Risk Director Anush Arevshatyan.
Nomura’s cryptocurrency arm, Laser Digital, has partnered with Kelp DAO to re-pledge some of its funds, Kelp DAO said in an April blog post. Laser Digital did not respond to Reuters’ request for comment.
Swiss cryptocurrency bank Sygnum said it is staking clients’ crypto assets and expects “a new ecosystem around re-staking to emerge.”