Decentralized Finance (DeFi) innovations have changed how financial services are delivered, from centralized ecosystems run by long standing custodians such as banks and investment firms to a level playing field where automated smart contracts run the show.
But despite the growth of this burgeoning crypto niche over the past three years, one cannot help but notice some key challenges towards achieving mass adoption. For context, the total market cap of all publicly traded stocks across the world stood at $111 trillion as of the end of 2023 while DeFi’s total value locked (TVL) is currently at a mere $82 billion.
One of the main factors that has contributed to the sluggish adoption is the lack of enough liquidity or rather the fragmentation of the DeFi ecosystem. Of course, there have been quite a number of solutions fronted to solve this hurdle, including cross-chain infrastructures, and more nascent ideas such as that of superchains.
All these are brilliant and much needed ideas to bridge the liquidity gap, but what I find even more intriguing is a concept that has been the talk of the DeFi community over the past year; restaking.
What is Restaking in DeFi?
Although a fairly new concept, restaking is one of the most effective ways that DeFi users can achieve maximum capital efficiency while unlocking more liquidity to be used across the larger ecosystem.
So, what exactly is restaking? The idea derives its fundamentals from the staking process which PoS blockchains such as Ethereum and Solana leverage for network security and the validation of on-chain transactions. However, unlike the traditional native staking process where the staked or locked tokens are left idle, restaking provides an avenue for these staked assets to be redeployed across multiple protocols.
The goal is to use these staked assets towards supporting Actively Validated Services (AVS). To provide some context, a validator who has already staked their ETH on Ethereum can redeploy through a restaking platform such as Eigen Layer, which then uses the same tokens to support the security and operations of other PoS protocols or services (AVS). This could be DApps built on Ethereum that focus on data availability, L2 scaling, and many more.
Now that we have described how restaking works, let’s dive into the fundamental value proposition in enhancing the liquidity of the DeFi ecosystem:
Maximizing Capital Efficiency
Whether traditional or modern markets, capital efficiency is one of the most important factors for the stakeholders. Restaking is changing how capital is allocated in DeFi by allowing the same tokens locked for staking on one network to be used simultaneously in the validation and security of other PoS services.
What’s even more promising is the emergence of liquid restaking projects such as Kelp DAO that are taking the idea to another level. Instead of holding restaked tokens on Eigen Layer, this liquid restaking protocol has pioneered a Liquid Restaked Token (LRT) dubbed rsETH. Restakers who have assets on Eigen Layer can deposit their LSTs and in turn mint the rsETH token – a liquid restaked token that can be used to power more DeFi services. Simply put, the rsETH tokens are introducing another layer of liquidity beyond the typical restaking model.
Support for More DeFi Protocols
As DeFi natives chase maximum optimization of their capital, they are also providing support for potential projects that would have probably lacked enough stakers to guarantee security or ensure a seamless validation of on-chain transactions.
Imagine a validator who probably runs 10 Ethereum nodes, this translates to around 320 ETH staked given that running a node requires 32 ETH. If the validator was to go the native staking direction, then all the 320 ETH would only be dedicated to securing the Ethereum network. While the contribution is significant to the overall security and on-chain operations of the Ethereum blockchain, restaking provides more room for the assets to secure more DeFi apps or protocols.
For instance, Eigen Layer supports over 10 AVS, including the likes of Aethos, Blockless, Ethos, and Omni. In addition, this restaking ecosystem also features prominent rollup services such as Celo, Caldera, Polymer Labs, and Mantle.
Bridging the Liquidity in Multichain Ecosystems
It is also important to highlight that restaking is breaking the fragmentation barriers that have long haunted the DeFi market. A good example of a restaking project that is building along these lines is Karak.
Designed as a universal restaking layer, this protocol currently supports 7 chains which include Ethereum, Mantle, K2, Arbitrum, BSC, Blast, and Fraxtal. At the core, Karak’s restaking model is based on a multiasset approach, allowing restakers to provide universal security or on-chain support across various DeFi-oriented blockchains. The project currently enjoys a total value locked (TVL) of $510 million placing it behind Eigen Layer and Symbiotic protocol as per DeFi Llama metrics.
Wrap Up
The evolution of the DeFi ecosystem has come a long way in a very short period compared to any established markets out there. It took the internet almost two decades to go mainstream – active DeFi is only three years. What this means is that the untapped opportunity for growth is bigger than what currently meets the eye.
With liquidity solutions such as restaking now gaining momentum, the industry is almost ready for the next phase of adoption which will likely be driven by institutions. This lot is very careful about the ROI, and what better value proposition than an ecosystem where idle assets can be put to use simultaneously?
As restaking matures and more niche-focused projects continue to innovate within this space, the DeFi sector could see an influx of new capital from institutions looking for efficient ways to maximize yield and improve capital utilization.
