The burgeoning trend of “re-staking” has seen over $18 billion worth of cryptocurrency funneled into new platforms, offering investors the lure of greater rewards in exchange for locking up their tokens. This complex financial scheme, however, has analysts voicing concerns about potential risks to both users and the broader crypto market.
As cryptocurrency prices soar, with Bitcoin hovering near all-time highs and Ethereum’s ether up more than 60% this year, traders are increasingly seeking higher yields. The advent of re-staking is a testament to this intensified risk-taking in the crypto market.
Leading the charge in the re-staking boom is Seattle-based startup EigenLayer. In February, the company secured $100 million from Andreessen Horowitz’s crypto division and has since attracted a staggering $18.8 billion in crypto assets to its platform, a meteoric rise from just $400 million six months ago.
EigenLayer’s founder, Sreeram Kannan, explained to Reuters that the company pioneered re-staking to enhance the established crypto practice of staking. Blockchains, which function as decentralized databases, rely on a network of computers to verify and record cryptocurrency ownership. Owners of tokens like ether can lock up their assets in this process, known as staking, earning a yield while losing instant access to their tokens.
Some staking platforms create new cryptocurrencies to represent the staked tokens. Re-staking allows owners to take these newly-minted tokens and stake them again in different blockchain programs and applications, aiming for even higher returns.
The crypto community remains divided on the risks of re-staking. Some industry insiders argue that the practice is too new to fully understand its implications. However, many analysts are apprehensive, warning that using new tokens from re-staked cryptocurrencies as collateral in crypto’s vast lending markets could create dangerous loops of borrowing based on a limited number of underlying assets. This could potentially destabilize the broader market if a mass exit occurred simultaneously.
Adam Morgan McCarthy, a research analyst at crypto data provider Kaiko, cautioned, “When there’s anything that has collateral on collateral, it’s not ideal. It adds a new element of risk that wasn’t there.”
The primary appeal for investors is the promise of higher yields. While typical returns from staking on the Ethereum blockchain range from 3% to 5%, re-staking offers the potential for multiple yields simultaneously, making it an attractive, albeit risky, proposition.
Re-staking represents the latest development in decentralized finance (DeFi), where cryptocurrency holders invest in innovative and often experimental schemes to generate substantial returns without selling their holdings. Despite its appeal, the EigenLayer platform has yet to distribute staking rewards directly to users due to the underdevelopment of the payout mechanism. Instead, users are flocking to the platform in anticipation of future rewards or other giveaways known as airdrops.
Currently, EigenLayer incentivizes participation by issuing its own token, “EIGEN.” Users are hopeful that this token will gain value over time.
Kaiko’s McCarthy attributed the rapid growth of re-staking platforms to users chasing these speculative airdrops. “It’s really, really speculative, this free money thing,” he remarked.
David Duong, head of research at U.S. crypto exchange Coinbase, which offers staking but not re-staking, echoed these sentiments, stating, “It’s very risky.”
As the re-staking trend continues to grow, it remains to be seen how this high-stakes gamble will impact the broader cryptocurrency market and whether the promised rewards will materialize for investors.