Coinbase’s study confirms the risks of Ethereum Restake.

• Coinbase analysts have discovered potential risks associated with Ethereum’s EigenLayer restaking protocol.
• According to analysts, the protocol involves both security and financial risks.
• Analysts also highlight the protocol’s nurturing potential. Ethereum innovation and infrastructure development.

In a research post dated April 2, Coinbase analysts David Han and David Duong highlighted the hidden risks, both security and financial, inherent in re-staking, an area that has grown to become the second-largest DeFi sector on Ethereum.

Ethereum’s re-staking protocol, EigenLayer, has the potential to become “the foundation for a wide range of new services and middleware on Ethereum,” according to analysts’ insights. They added that the re-staking protocol helps create “a meaningful source of Ethereum (ETH) rewards for future validators.”

EigenLayer, which reportedly currently boasts a TVL of around $12 billion, allows validators to earn additional rewards, or LRT, by participating in Actively Verified Services (AVS). Reclaiming the protocol allows you to store assets with EigenLayer and increase your returns, but it also introduces additional challenges. “While this could increase returns, it could also increase risk,” the analysts wrote. They added,

“We believe that re-staking and LRT may pose additional risks compared to traditional staking products from both a security and financial perspective. “As AVS numbers increase and LRTs differentiate operator strategies, these risks may become increasingly unclear.”

Sharing more insights into potential risks, analysts said reinvestors are engaging in “high-risk profiles” for the highest returns. Additionally, LRT providers and decentralized autonomous organizations (DAOs) will be incentivized to reinvest multiple times in the competitive space. Analysts noted:

“We believe that what will be important will be risk-adjusted compensation rather than absolute compensation, but achieving transparency around this can be difficult. LRT DAOs may incur additional risk as they are incentivized to re-stake as many times as possible to remain competitive.”

Despite these challenges, analysts have highlighted the important role of EigenLayer in Ethereum. According to analyst predictions, the re-staking protocol could crucially help drive innovation and infrastructure development on Ethereum.