Coinbase Report Raises Concerns About Risks in Ethereum’s Restake Sector

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Coinbase’s analysis of Ethereum re-staking highlights the balance between rewards and risks for validators.

Restking is a major player in Ethereum’s DeFi scene, with a TVL approaching $8.5 billion.

A recent report from Coinbase highlights the fast-growing restaking sector within Ethereum’s DeFi ecosystem, while also highlighting the potential risks of its expansion.

Following The Merge event in September 2022, Ethereum’s transition to a Proof-of-Stake (PoS) network saw the emergence of liquid staking protocols. However, concerns about financial and security vulnerabilities have surfaced, especially with the emergence of Liquid Restake Tokens (LRTs).

The report, written by Coinbase analysts David Han and David Duong, identifies several risks associated with LRT re-staking and issuance.

EigenLayer, an Ethereum re-staking protocol, has gained attention by allowing users to earn additional rewards by staking derivative tokens earned on platforms such as Lido (LDO) to secure an Actively Verified Service (AVS).

Despite EigenLayer’s significant growth, driven by $12.4 billion in total value constant (TVL), concerns remain. According to Coinbase analysts, the absence of real-time AVS and short-term farming opportunities could lead to fluctuations in TVL.

Moreover, competition between LRT providers to offer the highest rewards introduces additional risk as they may engage in multiple re-stakings to attract more users.

‘Adopting an LRT wrapper around the underlying protocol may introduce hidden risks due to opaque staking strategies or temporary departures from the underlying.’

While the report acknowledges the potential for EigenLayer to become the foundation for new Ethereum services, it also highlights the challenges facing LRT, particularly with regard to relatively low AVS yields following launch.

Overall, while re-staking provides an opportunity for Ethereum validators to earn additional rewards and potentially mitigate the decline in native staking issuance, Coinbase needs to be cautious amid the evolving risks and uncertainties in the re-staking sector. I emphasize that this is so.

Going forward, re-staking could become an important tool for long-term ETH returns. This is especially true if native staking issuance declines due to increased staking participation. This typically results in diminishing returns as more validators join the network.

Additionally, ongoing discussions on reducing the emissions of native staked ETH could further enhance the relevance of revenue recapture, although these deliberations are still in their early stages.