The influx of over $18 billion worth of cryptocurrency into a new type of platform offering rewards in exchange for token locking has drawn attention to the growing trend of “re-staking,” a complex practice that poses risks for users and the crypto market, analysts caution.
Seattle-based start-up EigenLayer lies at the heart of this re-staking surge. Having raised $100 million in February from U.S. venture capital firm Andreessen Horowitz’s crypto arm, EigenLayer has witnessed a staggering rise in crypto influx to its platform, soaring from under $400 million six months ago to the current $18.8 billion.
Re-staking, an innovation by EigenLayer, extends the traditional practice of staking in the crypto realm. Blockchains, acting as databases, rely on numerous networked computers to validate ownership of cryptocurrencies. Owners of crypto tokens, such as ether, allow their assets to be locked up during the validation process, sacrificing instant access in exchange for yields.
Re-staking takes this a step further, enabling token owners to re-stake new tokens obtained from staking with different blockchain programs and applications, potentially yielding higher returns.
While some view re-staking as too nascent to assess its risk, others, including analysts, express concern. They warn of potential instability in the broader crypto market if tokens representing re-staked cryptocurrencies are used as collateral in lending markets, leading to a cascade of borrowing based on a limited pool of underlying assets.
Despite the allure of higher yields, driven by the potential for multiple returns through re-staking, analysts caution against the speculative nature of the practice. EigenLayer, for instance, has yet to distribute staking rewards directly, relying instead on its own newly-created token, “EIGEN,” as incentives.
EigenLayer’s founder, Sreeram Kannan, emphasizes the platform’s role as a marketplace for validation services, facilitating connections between stakers and applications requiring staked tokens. However, concerns persist regarding the hidden risks associated with re-staking, particularly if re-staking tokens are utilized in crypto lending, potentially exacerbating market volatility during downturns.
While some experts downplay the significance of re-staking risks relative to the vast crypto industry, regulators remain vigilant, wary of potential contagion effects on traditional financial markets.
As the crypto world increasingly intersects with mainstream finance, institutional interest in re-staking grows. While some players, like Standard Chartered’s Zodia Custody, exercise caution due to challenges in tracking assets and rewards, others, such as Nomura’s Laser Digital, embrace re-staking initiatives.
As the landscape evolves, Swiss crypto-focused bank Sygnum anticipates the emergence of a new ecosystem around re-staking, underscoring the dynamic and evolving nature of the crypto market.
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