Markets
$18 billion in cryptocurrencies move to risky new re-staking platforms
More than $18 billion worth of cryptocurrencies have moved to a new type of platform that offers rewards for locking tokens, a scheme that analysts warn poses significant risks to users and the cryptocurrency market overall.
The growing popularity of “re-staking” highlights the growing appetite for risk in cryptocurrency markets as prices rise and traders chase higher returns. Bitcointhe leading cryptocurrency, is approaching all-time highs, while ether, the second largest, is up more than 60% this year.
At the forefront of the re-staking trend is Seattle-based startup EigenLayer. The company, which secured $100 million from the crypto arm of US venture capital firm Andreessen Horowitz in February, has attracted $18.8 billion in cryptocurrencies to its platform, compared to less than $400 million from just six months ago.
EigenLayer pioneered re-staking to extend the traditional cryptographic practice known as staking, explained its founder, Sreeram Kannan. Staking involves crypto token owners locking up their assets to participate in it blockchain
validation processes, gaining in exchange but losing immediate access to their tokens.
Re-staking goes a step further, allowing owners to stake new tokens, created to be staked cryptocurrencies—always with various blockchain-based programs and applications, aiming for higher returns.
Debate emerges within the crypto community
The crypto community is divided on the risks of re-staking. Some industry insiders say it is too early to fully evaluate the practice, while analysts express concerns. They warn that using new tokens from re-staking cryptocurrencies as collateral in large cryptocurrency lending markets could create lending cycles based on limited underlying assets.
“When you have something that has collateral upon 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 attraction for investors lies in the yield. Staking on the Ethereum blockchain typically offers returns between 3% and 5%. Analysts suggest that re-staking could yield higher returns, as investors can earn multiple returns at once.
Re-staking is a recent innovation in decentralized finance (DeFi)where cryptocurrency holders invest in experimental schemes seeking significant returns without selling their assets.
EigenLayer has yet to pay staking rewards directly, as the mechanism is still under development. Users join in anticipation of future prizes or freebies known as airdrops. Currently, EigenLayer distributes its newly created token, EIGEN, to users, who hope it will gain value.
New re-staking platforms have emerged, such as EtherFi, Renzo and Kelp DAO, which re-stake customer tokens on EigenLayer and create new tokens to use as collateral elsewhere. Kannan clarified that EigenLayer’s goal is to allow users to choose staking locations and support new blockchain services, not to incentivize further cryptocurrency-backed lending.
Institutional interest in re-staking
Some experts downplay the risks, pointing out that the scale of re-staking is small compared to the $2.5 trillion in assets in the global cryptocurrency market. Regulators have expressed long-standing concerns about potential losses in the cryptocurrency sector impacting broader financial markets.
“For now, we see no significant risk of contagion from re-staking issues to traditional financial markets,” said Andrew O’Neill, head of digital assets analytics at S&P Global Ratings.
However, the intertwining of cryptocurrencies and traditional finance continues to grow and re-staking is attracting institutional interest. Zodia Custody, the crypto arm of Standard Chartered, has seen significant institutional interest in staking, but remains cautious about re-staking due to the difficulty in tracking assets and distributing rewards.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO to re-stake some of its funds, and crypto-focused Swiss bank Sygnum expects a new ecosystem to emerge around re-staking.
More than $18 billion worth of cryptocurrencies have moved to a new type of platform that offers rewards for locking tokens, a scheme that analysts warn poses significant risks to users and the cryptocurrency market overall.
The growing popularity of “re-staking” highlights the growing appetite for risk in cryptocurrency markets as prices rise and traders chase higher returns. Bitcointhe leading cryptocurrency, is approaching all-time highs, while ether, the second largest, is up more than 60% this year.
At the forefront of the re-staking trend is Seattle-based startup EigenLayer. The company, which secured $100 million from the crypto arm of US venture capital firm Andreessen Horowitz in February, has attracted $18.8 billion in cryptocurrencies to its platform, compared to less than $400 million from just six months ago.
EigenLayer pioneered re-staking to extend the traditional cryptographic practice known as staking, explained its founder, Sreeram Kannan. Staking involves crypto token owners locking up their assets to participate in it blockchain
validation processes, gaining in exchange but losing immediate access to their tokens.
Re-staking goes a step further, allowing owners to stake new tokens, created to be staked cryptocurrencies—always with various blockchain-based programs and applications, aiming for higher returns.
Debate emerges within the crypto community
The crypto community is divided on the risks of re-staking. Some industry insiders say it is too early to fully evaluate the practice, while analysts express concerns. They warn that using new tokens from re-staking cryptocurrencies as collateral in large cryptocurrency lending markets could create lending cycles based on limited underlying assets.
“When you have something that has collateral upon 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 attraction for investors lies in the yield. Staking on the Ethereum blockchain typically offers returns between 3% and 5%. Analysts suggest that re-staking could yield higher returns, as investors can earn multiple returns at once.
Re-staking is a recent innovation in decentralized finance (DeFi)where cryptocurrency holders invest in experimental schemes seeking significant returns without selling their assets.
EigenLayer has yet to pay staking rewards directly, as the mechanism is still under development. Users join in anticipation of future prizes or freebies known as airdrops. Currently, EigenLayer distributes its newly created token, EIGEN, to users, who hope it will gain value.
New re-staking platforms have emerged, such as EtherFi, Renzo and Kelp DAO, which re-stake customer tokens on EigenLayer and create new tokens to use as collateral elsewhere. Kannan clarified that EigenLayer’s goal is to allow users to choose staking locations and support new blockchain services, not to incentivize further cryptocurrency-backed lending.
Institutional interest in re-staking
Some experts downplay the risks, pointing out that the scale of re-staking is small compared to the $2.5 trillion in assets in the global cryptocurrency market. Regulators have expressed long-standing concerns about potential losses in the cryptocurrency sector impacting broader financial markets.
“For now, we see no significant risk of contagion from re-staking issues to traditional financial markets,” said Andrew O’Neill, head of digital assets analytics at S&P Global Ratings.
However, the intertwining of cryptocurrencies and traditional finance continues to grow and re-staking is attracting institutional interest. Zodia Custody, the crypto arm of Standard Chartered, has seen significant institutional interest in staking, but remains cautious about re-staking due to the difficulty in tracking assets and distributing rewards.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO to re-stake some of its funds, and crypto-focused Swiss bank Sygnum expects a new ecosystem to emerge around re-staking.