LRT services develop the concept of re-staking proposed by EigenLayer. It provides that Ethereum network validators can provide a layer of security for other projects such as cross-chain bridges and oracles.
LST vs LRT
LST and LRT differ in their purpose and use. LSTs help unlock liquidity and provide users with more options. LRTs are intended to stimulate innovation and can be used to provide verification services to other applications and networks. This framework improves safety, promotes adoption, and stimulates innovation.
What problems are Liquid Restaking Tokens (LRT) trying to solve?
Liquid re-staking tokens help mitigate many of the issues that have plagued stakers since the feature first came to market. Like LSTs, LRTs help improve market liquidity by allowing users to use the same value multiple times. Improved capital efficiency leads to greater profits and opportunities.
By taking on additional functions through EigenLayer, validators become so-called operators and can receive rewards from AVS (actively validated services) platforms, providing consensus as a service.
The integrity of AVS operators, regardless of the project for which they perform data verification, is ensured by the Ethereum slashing mechanism. That is, if a node behaves dishonestly towards any application, it can lose part of its validator stake (32 ETH).
Liquid restaking services will partner with AVS operators to provide capital for their operations, or run their own nodes.
In a conversation with Incrypted, Ether.fi co-founder Rock Kopp noted that the platform interacts with some AVS and plans to allocate a portion of the ETH raised to ensure their security. According to him, Ether.fi is also building its own AVS called DappBridge
As with LSD, LRT providers provide users with the ability to participate in EigenLayer restaking without having to become a full-fledged operator or pay full Ethereum validator collateral. These protocols take care of organizational issues, providing investors with a portion of the reward received from AVS operators.
Thus, LRT is essentially a superstructure on top of EigenLayer, which in turn is built on top of native Ethereum staking and liquid staking platforms. Therefore, the assets of a retail user who does not plan to launch his own node will be used at four levels at once:
Ethereum basic staking;
liquid staking platform (optional);
EigenLayer restaking pools;
liquid restake service.
And the lego doesn’t end there, because in return for staked capital, the LRT provider returns liquid tokens to users that can be used in DeFi operations, for example, providing liquidity on a DEX.
How Liquid Restaking Affects Protocol Security
Ethereum's current Proof-of-Stake security system requires validators to ensure the integrity and immutability of transactions. However, this protection only applies to information from the blockchain itself and does not extend to off-chain data.
Because of this, decentralized platforms whose operating model relies on consensus are forced to create their own nodes or rely on third-party providers. The most striking examples are oracles and cross-chain bridges. They are also the most vulnerable elements in the entire DeFi ecosystem. Thus, in 2022, 62% of stolen funds came from the internetwork infrastructure.
The problem is that developers of such protocols often cannot maintain an extensive consensus network, limiting themselves to only a few, and sometimes even one (in the case of oracles) nodes. The consequences of the absence of a professional consensus system are demonstrated by the example of Ronin.
As we have already pointed out, restaking is intended to solve this problem by allowing Ethereum validators to participate in the consensus of applications, not just the blockchain itself. This will reduce the likelihood of attacks, since now AVS operators, who are both technically and organizationally protected better than their own project nodes, will be responsible for security.
It is important to consider that in order to obtain the status of an AVS operator, you must first become an Ethereum validator, that is, make the same deposit of 32 ETH, as well as possess skills and equipment. This entry threshold reduces the ability to participate in consensus.
EigenLayer partially solves this problem because it allows you to simply add assets to the pool, shifting the technical part of the work to operators, as LSD protocols do. But unlike the latter, the project requires permanent blocking of cryptocurrency, which repels some investors. In addition, its pools are still limited.
LRT protocols add liquid tokens to this chain, leaving the opportunity to continue to use capital in DeFi operations. In the future, this should stimulate an increase in the number of restakers, and as a result, lead to the emergence of more AVS operators, which will make their services more accessible.
Stimulates innovation
LRTs have many advantages that make them ideal for today's market. The ability to use the same capital, but with greater utility, is the main advantage of these assets. This framework creates innovation momentum in the ecosystem and reduces the cost of validating decentralized applications.
New developers can leverage the best aspects of networks like Ethereum while pushing the boundaries of the technology with LRT. They can effortlessly extend the security of the original blockchain and easily integrate advanced systems to improve liquidity and participation.
