Exploring Liquid Staking and Restaking in the Ethereum Ecosystem

02.22.2024

Wave Leadership Thoughts (Gerard Barile, Investment and Venture Principal)

The Rise of Liquid Staking & Restaking

Recently, the Ethereum ecosystem has been captivated by the fascinating world of Liquid Staking and the unfolding narrative of Liquid Restaking. In the world of blockchain finance, these concepts are reshaping our understanding of native yield products and the economics surrounding them. I’ll first explain how liquid staking works and provide an overview on the rise of liquid restaking.

Liquid Staking, a token concept alleviating constraints linked to traditional staking models, allows participants to stake Ethereum and receive a yield-bearing liquid token representing their staked holdings and the native staking yield of Ethereum. Notably, Lido dominates the Liquid Staking market, offering users both staking engagement and the flexibility to trade or use assets in decentralized finance (DeFi) platforms.

As of this writing on 2/20/2024, Lido holds a strong lead with $28.76B TVL followed by Rocket Pool, a more decentralized protocol at $3.59B TVL.

Taking this a step further, Liquid Restaking protocols rehypothecate staked ETH into Eigen Layer, boosting yields. Popular Liquid Restaking platforms such as EtherFi, Puffer Finance, and Kelp DAO have seen a significant rise in TVL over the past few months by offering users a “one stop shop” for multiple staking yields in one token.  We’re also beginning to see ETH products, including platforms like Pendle, facilitating the trading of tokenized future yield on an automated market maker (AMM) system.

Latest News:

WELCOME FRIENDS: Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking these developments in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:

• A partnership between ENS and GoDaddy has allowed DNS addresses (like .com or .net) to be connected to ENS names (.eth), enabling the use of DNS domains with cryptocurrency apps and wallets.
• Swiss multinational bank UBS’ Hong Kong subsidiary has tokenized an investment warrant on the Ethereum blockchain together with cryptocurrency exchange OSL. The tokenized product is an options call warrant with Chinese smartphone giant Xiaomi Corporation as the underlying stock. After tokenization, the digital asset was then sold to the OSL Exchange. 
• In a recent report, Citi outlined how it leveraged the Avalanche network to test how the combination of blockchain infrastructure, tokenization, and smart contract logic might help to re-architect capital markets and enhance financial services. The bank tested use cases on Avalanche “Spruce,” an Evergreen testnet Subnet designed for buy- and sell-side institutions to benefit from public blockchain infrastructure and innovation in a permissioned manner.

REGULATORY ROUNDUP: We’re living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and providing public comment.

• Thailand is exempting crypto traders from paying a hefty tax to strengthen the country’s ambitions to become an Asian digital assets hub. The Finance Ministry will remove the need to pay a 7% value-added tax on earnings from trading cryptocurrencies and digital tokens, according to local news outlets.
• The government of Hong Kong will tighten regulations on over-the-counter (OTC) digital assets trade by subjecting it to the same requirements as the retail digital assets trade. On Feb. 8, the government published its “Public Consultation on Legislative Proposals to Regulate Over-the-Counter Trading of Virtual Assets.” The consultation will last until April 12. The primary suggestion of the paper is to include OTC trade under the jurisdiction of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), effective from June 2023. Typically, OTC means deals conducted directly between the provider and the customer without a centralized marketplace, such as an exchange.

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