Ethereum at Potential Risk due to Restaking, Warns Coinbase

Key Points

• Ethereum restaking could be the foundation for new decentralized applications but may introduce hidden risks.
• Coinbase analysts highlight concerns about liquid restaking tokens (LRTs) and the potential for increased risk exposure.

Ethereum restaking, according to Coinbase, could potentially become the foundation for numerous new decentralized applications on the blockchain. However, they warn that it could also introduce several unseen risks.

Understanding Risks and Rewards

In a recent research report, Coinbase analysts David Han and David Duong identified several risks associated with restaking and the issuance of liquid restaking tokens (LRTs). They explained that the Ethereum restaking protocol, Eigenlayer, allows users to earn extra rewards – LRTs – by securing actively validated services (AVS) through staking derivative tokens. These tokens are given to those who have already staked Ether (ETH) through liquid staking protocols such as Lido (LDO).

When the Eigenlayer protocol is initially launched, the restaking process should be simple, they noted. However, a feature of EigenLayer allows staked tokens committed to one AVS to be staked again to another AVS. While this can boost earnings, it can also multiply risks as the same funds are allocated to similar validators for increased yield.

Concerns about Liquid Restaking Tokens

The addition of LRTs could lead to restakers becoming concentrated into higher-risk providers offering the highest yields. The analysts expressed concern that LRT providers and decentralized autonomous organizations (DAOs) would be motivated to restake multiple times to stay competitive. This could result in a higher, albeit hidden, risk profile.

Despite these risks, the Coinbase analysts believe EigenLayer’s restaking protocol could become the foundation for a wide range of new services on Ethereum. This, in turn, could generate a significant source of ETH rewards for validators in the future. They also predicted that despite the amount of restaked ETH continuing to grow in the long term, there could be a reasonable short-term drop in Eigenlayer’s total value locked (TVL) when point farming ends or if early AVS rewards are below expectations.

On March 6, Eigenlayer surpassed lending giant Aave to become the second-largest DeFi protocol, commanding a total of $11.5 billion in TVL. This is second only to the Ethereum liquid staking protocol Lido. Eigenlayer now holds $11.5 billion in TVL.

The market enthusiasm for restaking has already been met with controversy and Ethereum developers warn it could create a concerning amount of leverage. Restaking proponents, on the other hand, argue that it offers further rewards to those who have already staked their ETH.