Markets
Crypto re-staking platforms explode as traders seek bigger returns
London: Over Rs 15,01,42,59,00,000 ($18 billion) worth of cryptocurrency has been transferred to a new type of platform that offers investors rewards in exchange for locking their tokens, in part of a complex system which, according to analysts, poses a problem. risk to users and the crypto market.
The growing popularity of “re-staking” is the latest sign of risk-taking in crypto markets, as prices rally and traders search for yield. Bitcoin, the largest cryptocurrency, is hitting all-time highs, while Ether, the second largest, is up more than 60% this year.
Seattle-based startup EigenLayer is at the heart of the re-staking boom. The company, which raised $100 million from the crypto arm of US venture capital firm Andreessen Horowitz in February, has attracted $18.8 billion in crypto to its platform, up from less than $400 million it 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 kind of database that involves many computers in a network verifying and confirming who owns which cryptocurrencies. To do this, owners of crypto tokens, such as ether, allow their assets to be locked as part of the validation process. Holders lose instant access to their tokens as long as they participate in staking, but they earn yield in return.
Some staking platforms also offer users newly created cryptocurrencies to represent the cryptocurrencies they have staked. Re-staking allows owners to take these new tokens and stake them again with different blockchain-based programs and applications in the hopes of achieving greater returns.
The crypto world is divided over the risk of re-staking, with some insiders saying the practice is too nascent to know about.
But others, including analysts, fear that if new tokens representing the re-staked cryptocurrencies are used as collateral in crypto’s vast lending markets, there could be endless borrowing loops based on a small number of underlying assets. It could destabilize broader crypto markets if everyone tried to exit simultaneously, they say.
“When something has collateral, 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 lies in yield: yields from staking on the Ethereum blockchain are typically between 3 and 5 percent, but analysts say yields could be higher with re-staking as investors can get several yields at once.
Re-staking is the latest development in the risky world of decentralized finance, or DeFi, in which cryptocurrency holders invest in experimental programs in hopes of generating significant returns on their holdings without having to sell them .
However, the EigenLayer platform has not yet paid out staking rewards directly to users, as the mechanism to do so has not been developed. Users join the platform in anticipation of future rewards or other gifts called airdrops.
For now, EigenLayer is distributing its own newly created token to people who use 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 fueled by users seeking such airdrops, calling it “really, really speculative, this free money thing.”
“It’s very risky,” said David Duong, head of research at US crypto exchange Coinbase, which offers staking but not re-staking.
“They’re doing this preemptively right now, (with) the hope of being rewarded with something, but they don’t know what,” Duong said.
EigenLayer was launched last year by Sreeram Kannan, a former assistant professor at the University of Washington in Seattle and a member of the team that launched the first student-designed micro-satellite in India, according to his university website.
EigenLayer describes itself as a validation services marketplace, connecting potential players to applications requiring staked tokens.
New re-staking platforms have emerged, including EtherFi, Renzo and Kelp DAO, which re-stake clients’ tokens on EigenLayer for them and generate new tokens to represent these re-staked assets. These tokens can be used elsewhere, for example as collateral when borrowing.
Kannan said the goal of his platform is to allow users to choose where to place their tokens and help new blockchain services grow, not to encourage ever more cryptocurrency-backed borrowing.
“We have no official relationship with any of these players… This is an emerging phenomenon,” he said.
Coinbase’s Duong says re-staking could carry “hidden risks”: If re-staking tokens are used in crypto lending, there could be forced liquidations and greater volatility in the event of a market downturn, he wrote in a note.
The 2022 selloff in crypto markets was exacerbated by subprime lending as crypto tokens used as collateral quickly lost value after the collapse of Terra and Luna tokens.
Kannan keeps EigenLayer away from risks.
“The risk is not in the new staking but rather in the lending protocols. The lending protocols misprice the risk,” he said.
Some experts don’t care about re-staking, noting that the liquidity contained in re-staking protocols is minimal compared to the global crypto industry’s $2.5 trillion in net assets.
Regulators have long been concerned about losses in the crypto world spilling over into broader financial markets.
“At this time, we do not see any significant risk of contagion of readjustment issues to traditional financial markets,” said Andrew O’Neill, head of digital assets analytics at SP Global Ratings.
Yet the crypto world is increasingly connected to traditional finance, and re-staking is gaining ground among institutional investors.
Standard Chartered’s crypto arm, Zodia Custody, has seen significant institutional interest in staking, but sees re-salting as a step too far as it is difficult to establish a “paper trail” of where assets go and how rewards are distributed, said Anoosh, chief risk officer. » said Arevshatian.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO to reinvest a portion of its funds, Kelp DAO said in a blog post in April. Laser Digital did not respond to a Reuters request for comment.
Swiss crypto-focused bank Sygnum said it is staking its clients’ crypto assets and expects “a new ecosystem around re-staking to emerge.”
Published on May 31, 2024, 09:16 IST