Liquidity Re-collateralized Tokens Revive Ethereum DeFi, Can the Hype Last?

php Editor Xigua Recently, the Ethereum DeFi market has once again been swept by "liquidity re-hypothecation tokens", which has aroused heated discussion and attention in the market. How long can this hype last? How will the market evolve? Let’s explore the factors behind this phenomenon and possible development trends.

Written by Sam Kessler

Translation: Vernacular Blockchain

In the past month alone, billions of dollars have poured in New Ethereum-based liquidity re-collateralization projects have been launched, such as Ether.Fi and Puffer. These emerging platforms are vying to replace Lido’s collateralized ETH (stETH) token as the asset of choice for decentralized finance (DeFi) traders.

At the heart of the entire trend is the development of a new protocol called EigenLayer, which debuted a new “re-staking” system last June. The platform is building a solution that lets blockchain applications and networks borrow Ethereum’s security system, and it attracted more than $1 billion in new deposits in a 24-hour period this month. The total now stands at over $7 billion, which means the platform alone has amassed over 1.5% of circulating ether (ETH), according to data from DefiLllama.

Restaking provides a way to secure the blockchain protocol and network using security borrowed from Ethereum’s proof-of-stake network. ETH deposits in EigenLayer can be "re-staking" into other protocols, meaning they don't have to build their own proof-of-stake networks.

Investors are flocking to EigenLayer because it promises higher interest than traditional ETH staking. However, the platform’s recent growth is largely due to a group of third parties – “liquidity re-staking protocols” such as Ether.Fi, Puffer and Swell – which claim to streamline the re-staking process on behalf of users.

These liquidity re-mortgage platforms act as intermediaries between users and EigenLayer: these platforms "re-mortgage" users' deposits to EigenLayer and deliver corresponding newly generated LRT in exchange so that users can Trading can also continue while the deposit is being used for re-hypothecation.

LRT represents user deposits in EigenLayer, meaning they accumulate mortgage interest and can be redeemed back to their underlying value. LRT can also be used in DeFi, meaning people can borrow and exchange LRT for greater returns.

Aside from the convenience of LRT, the real appeal of recent liquidity re-hypothecation platforms is “points” – rewards that may qualify users for future Token airdrops. While the monetary value of points is unclear, they have given rise to a whole new ecosystem of add-on platforms, such as Pendle, which allows users to maximize their points through trading strategies that often involve high leverage.

This complex points system, high-yield and high-risk trading strategies are reminiscent of the scene in 2021 - "yield farms" and the pursuit of high returns have triggered the boom and bust of DeFi, and The industry has yet to fully recover. While some experts are wary of the risks of liquidity recollateralization, proponents of the technology insist there is real substance beyond the hype.

1. Staking 101

Liquidity re-staking is based on the two-year growth of the Ethereum staking industry.

Ethereum is run by over 900,000 validators, which are addresses on the network where people around the world lock ETHTokens to help secure the chain. Collateralized Tokens accumulate steady interest, but once they are used to run the network, they cannot be used for other purposes, such as loans or other types of investments.

This restriction prompted the rise of “liquidity mortgage”. Services like Lido allow users to stake on their behalf and give them Liquidity Staking Tokens (LST) that represent their underlying deposits. Like Lido's Collateralized ETH (stETH) Token, LSTs earn interest like regular collateralized Ethereum (currently around 3%), but they can also be used in DeFi - meaning investors can borrow these tokens , to obtain additional income.

In the past few years, the liquid mortgage industry has boomed. Lido, the largest liquidity staking protocol to date, has over $25 billion in deposits. Its collateralized ETH (stETH) token regularly sees higher transaction volume than regular ETH in the largest lending protocols on the web.

2. From Liquidity Staking to Liquidity Re-staking

Now, a similar liquidity staking trend is emerging on EigenLayer, a much-talked about introduction of re-staking to Ethereum new agreement.

"EigenLayer basically builds a tool that allows other networks to leverage the security of Ethereum to bootstrap," explained Austin King, CEO of Omni Labs, which is building a re-collateralization-driven Bridge protocol.

Investors have turned to EigenLayer to receive additional rewards on their ETH: on the one hand, the interest earned for protecting Ethereum, and on the other hand, for protecting so-called AVS that use EigenLayer to borrow Ethereum’s security. (Active Verification Service).

According to EigenLayer, these AVS will eventually include Celo, a layer-1 blockchain that is transforming into a layer-2 network based on Ethereum; EigenDA, EigenLayer’s own data availability service; and Omni, which Bridging infrastructure is being built to help different blockchain networks communicate with each other.

But this system also has shortcomings, one of the key issues is that Tokens re-mortgaged through EigenLayer cannot be used in DeFi after depositing. This lock-in mechanism is a major disadvantage for investors looking to maximize returns.

So, liquidity re-mortgage came into being, which is essentially a liquidity mortgage designed for EigenLayer.

The Liquidity Re-mortgage Protocol accepts deposits (such as stETH), re-mortgages through EigenLayer, and then issues "liquidity re-mortgage Tokens" such as pufETH, eETH and rswETH, which can be used in DeFi to earn additional points and other rewards.

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