Markets
Crypto re-staking platforms grow as traders chase returns
LONDON >> More than $18 billion worth of cryptocurrencies have been transferred to a new type of platform that offers rewards to investors in exchange for locking up their tokens, in a complex scheme that analysts warn poses a risk to users and the crypto market.
The growing popularity of so-called “re-staking” is the latest sign of risk-taking in crypto markets as prices rise and traders seek yield. Bitcoin, the largest cryptocurrency, is near all-time highs, while ether, the second largest, is up more than 60% this year.
At the center of the re-staking boom is Seattle-based start-up EigenLayer. The company, which in February raised $100 million from the crypto arm of US venture capital firm Andreessen Horowitz, has attracted $18.8 billion worth of crypto to its platform – up from less than $400 million six months ago .
EigenLayer invented re-staking to expand a long-standing crypto practice called staking, its founder Sreeram Kannan told Reuters.
Blockchains are a type of database that involves many computers in a network, checking and confirming who owns which cryptocurrencies. To do this, owners of cryptographic tokens like Ether allow their assets to be locked as part of the validation process. Holders lose instant access to their tokens while staking, but earn a yield in return.
Some staking platforms also provide users with newly minted cryptocurrencies to represent the cryptocurrencies they have staked. Re-staking allows owners to take these new tokens and re-stake them with different blockchain-based programs and applications in hopes of greater returns.
The crypto world is divided over how risky re-staking is, with some experts saying the practice is too nascent to be known about.
But others, including analysts, fear that if new tokens representing re-stakes cryptocurrencies are used as collateral in the vast cryptocurrency lending markets, there could be endless cycles of lending based on a small number of underlying assets. This could destabilize broader crypto markets if everyone tries to exit simultaneously, they say.
“When there’s something that has guarantees, it’s not ideal, it adds a new element of risk that wasn’t there,” said Adam Morgan McCarthy, research analyst at crypto data provider Kaiko.
The appeal for investors is the yield: returns from staking on the Ethereum blockchain are typically in the 3% to 5% range, but analysts say returns could be higher for staking again as investors can earn multiple returns at the same time.
Re-staking is the latest development in the risky world of decentralized finance, or DeFi, in which cryptocurrency holders invest in experimental schemes in the hope of generating big returns on their holdings without having to sell them.
The EigenLayer platform has not yet paid out staking rewards directly to users because the mechanism to do so has not been developed. Users are joining the platform in anticipation of future rewards or other freebies known as airdrops.
For now, EigenLayer is distributing 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 growth of re-staking platforms was driven by users seeking such airdrops, calling them “very, very speculative, this free money thing.”
“It’s very risky,” said David Duong, head of research at U.S. cryptocurrency exchange Coinbase, which offers staking but not re-staking.
“They are doing it preemptively now, (with the) expectation that they will be rewarded with something, but they don’t know what,” Duong said.
BETWEEN EIGENLAYER
EigenLayer was launched last year by Sreeram Kannan, a former assistant professor at the University of Washington in Seattle and part of a team that launched the first student-designed microsatellite in India, according to his academic website.
EigenLayer describes itself as a marketplace for validation services, connecting potential stakeholders with applications that need staked tokens.
New re-staking platforms have emerged, including EtherFi, Renzo, and Kelp DAO, which re-stake customers’ tokens on the EigenLayer for them and generate new tokens to represent these re-stake assets. These tokens can be used elsewhere, for example as collateral in loans.
Kannan said the goal of his platform is to let users choose where to stake their tokens and help new blockchain services grow, not to encourage more and more crypto-backed loans.
“We have no official relationship with any of these players… This is an emerging phenomenon,” he said.
Coinbase’s Duong says re-staking can bring “hidden risks” – if re-staking tokens are used in crypto loans, there could be forced liquidations and more volatility during market downturns, he wrote in a note.
The 2022 sell-off in cryptocurrency markets was exacerbated by high-risk lending as crypto tokens used as collateral rapidly lost their value following the collapse of Terra and Luna tokens.
Kannan distances EigenLayer from risks.
“The risk is not in the re-staking, but in the lending protocols. Lending protocols are misjudging risk,” he said.
Some experts are not worried about re-staking, noting that the money in re-staking protocols is minuscule relative to the global cryptocurrency industry’s $2.5 trillion in liquid assets.
Regulators have long been concerned that losses in the crypto world will spill over into broader financial markets.
“For now, we do not see any significant risk of contagion from the issuance reset to traditional financial markets,” said Andrew O’Neill, digital asset analytical lead at S&P Global Ratings.
Still, the crypto world is becoming increasingly linked to conventional finance and re-staking is attracting institutional investors.
Standard Chartered’s crypto arm Zodia Custody has seen significant institutional interest in staking, but considers re-staking a step too far because it is difficult to establish a “paper trail” of where assets go and how rewards are distributed , Chief Risk Officer Anoosh Arevshatian said.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO to reinvest some of its funds, Kelp DAO said in an April blog post. Laser Digital did not respond to a Reuters request for comment.
Crypto-focused Swiss bank Sygnum said it is staking customers’ crypto assets and expects “a new ecosystem around re-staking will emerge.”