Ethereum is At Risk From Restacking Becoming Popular

According to a research report released by Coinbase (COIN) on Tuesday, restaking has emerged as the second-largest decentralized finance (DeFi) sector on the Ethereum blockchain and is anticipated to play a pivotal role in the ecosystem’s infrastructure.

However, Coinbase warns that it may also introduce hidden risks.

Analysts David Han and David Duong highlighted EigenLayer’s staking protocol, positioning it to serve as the foundation for various new services and middleware on Ethereum.

EigenLayer enables validators to earn additional rewards by securing actively validated services (AVS) through restaking their staked ether.

The protocol has garnered significant attention, securing its position as the second-largest DeFi protocol with a total value locked of $12.4 billion.

The protocol builds upon the existing staking ecosystem by collateralizing a diverse pool of liquid staked tokens (LSTs) or native staked ETH.

Liquid restaking platforms utilize EigenLayer to park assets, providing users with tradable receipts known as liquid restaking tokens (LRTs).

However, Coinbase cautions that restaking and LRTs may introduce additional risks compared to conventional staking products, both financially and in terms of security.

The report warns about potential hidden risks stemming from non-transparent staking strategies or temporary dislocations from the underlying assets.

Additionally, the initial yield from AVSs may not meet the exceedingly high market expectations.

Also, the report highlights the potential risks associated with stakers being drawn to LRT providers offering the highest rewards.

Coinbase emphasizes the importance of risk-adjusted rewards over absolute rewards, though transparency on this matter may be challenging to achieve.

Despite these risks, Coinbase believes that restocking fosters the open innovation of Ethereum and will become an integral part of the ecosystem’s infrastructure.

Josh Alba
Josh Alba
Josh Alba stands at the forefront of contemporary business journalism, his words weaving narratives that illuminate the intricate workings of the corporate world. With a keen eye for detail and a penchant for uncovering the underlying stories behind financial trends, Josh has established himself as a trusted authority in business writing. Drawing from his wealth of experience and relentless pursuit of truth, Josh delivers insights that resonate with readers across industries.
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