Coinbase: Restaking Becomes Ethereum’s Second Largest DeFi Sector

Ever since the Ethereum blockchain transitioned into a Proof-of-Stake (PoS) network after The Merge event in September 2022, there’s been a steep rise of the liquid staking protocols on the platform. However, restaking is getting even more attention in recent times with the rise of liquid restaking tokens (LRTs).

Eigen Layer Becomes Ethereum’s Second-Largest DeFi Protocol

EigenLayer has emerged as Ethereum’s second-largest DeFi protocol by total value locked (TVL), currently standing at $12.4 billion, thanks to Ethereum’s well-established staking infrastructure and surplus security budget. EigenLayer facilitates validators to earn extra rewards by securing actively validated services (AVS) through restaking their staked ETH.

The remarkable growth of EigenLayer’s TVL positions it as the runner-up only to Lido, Ethereum’s leading liquid staking protocol.

EigenLayer’s restaking protocol was launched on Ethereum’s mainnet in June 2023, with AVSs set to be introduced in the next phase of its multi-phase rollout in the second quarter of 2024. This innovative concept of “restaking” by EigenLayer allows validators to secure new Ethereum features, such as data availability layers, rollups, bridges, oracles, and cross-chain messages, potentially earning additional rewards. This introduces a novel income stream for validators in the form of “security-as-a-service”.

In its report, Coinbase also highlighted the emergence of a burgeoning ecosystem surrounding Liquid Restaking Tokens (LRTs), mirroring the success of Liquid Staking Tokens (LSTs). This ecosystem now boasts over half a dozen protocols, each offering its own iteration of liquid restaking tokens, featuring diverse incentives and airdrop schemes. Moreover, of the 3 million ETH locked in EigenLayer, approximately 2.1 million ETH, accounting for 62%, are wrapped in secondary protocols.

The Future of Restaking Tokens

Coinbase also noted the potential significance of restaking as a pathway for ETH returns, particularly if there’s a decline in native staking issuance due to increased participation in staking activities. However, Coinbase also highlighted the expected challenges for Liquid Restaking Tokens (LRTs) in the near term, as Actively Validated Services (AVS) yields are relatively low post-launch.

Notably, no AVS has been launched on the mainnet as of now, with EigenDA, the first AVS expected to roll out in early Q2 2024. EigenDA is likely to function as a data availability layer similar to Celestia or Ethereum’s blob storage.

Considering the success of the Dencun upgrade in significantly reducing layer-2 (L2) fees, Coinbase anticipates that EigenDA will offer yet another avenue for cost-effective L2 transactions, contributing to Ethereum’s diverse toolkit.