More than $18 billion worth of cryptocurrency has moved to a new platform type offering rewards for locking up tokens.
This scheme, known as “re-staking,” poses significant risks to users and the broader crypto market, analysts warn.
Re-staking’s rising popularity reflects the increasing risk appetite in crypto markets as prices surge and traders seek higher yields.
Bitcoin, the leading cryptocurrency, is approaching all-time highs, while ether, the second largest, has gained over 60% this year.
Seattle-based startup EigenLayer is at the forefront of the re-staking trend.
The company, backed by a $100 million investment from Andreessen Horowitz’s crypto arm in February, has seen $18.8 billion worth of crypto move to its platform, up from less than $400 million six months ago.
EigenLayer’s founder, Sreeram Kannan, explains that re-staking builds on the traditional crypto practice of staking.
Staking involves locking up crypto tokens to participate in blockchain validation processes, earning yields in return but losing immediate access to the tokens.
Re-staking allows owners to stake new tokens—created to represent staked cryptocurrencies—again with various blockchain-based programs and applications, aiming for higher returns.
The crypto community is divided over re-staking’s risks.
Some insiders argue it is too early to fully assess the practice, while analysts express concerns about the potential for creating cycles of borrowing based on limited underlying assets.
“When there’s anything that has collateral on collateral, it’s not ideal.
It adds a new element of risk that wasn’t there,” said Adam Morgan McCarthy, a research analyst at crypto data provider Kaiko.
Investors are drawn to the potential yield. Staking on the Ethereum blockchain typically offers returns between 3% and 5%.
Re-staking could yield higher returns, as investors can earn multiple yields simultaneously.
Re-staking is a new innovation in decentralized finance (DeFi), where cryptocurrency holders invest in experimental schemes seeking significant returns without selling their assets.
EigenLayer has yet to pay out staking rewards directly, as the mechanism is still under development. Users join in anticipation of future rewards or giveaways known as airdrops.
Currently, EigenLayer distributes its newly-created token, EIGEN, to users, who hope it will gain value.
New re-staking platforms, such as EtherFi, Renzo, and Kelp DAO, have emerged, re-staking clients’ tokens on EigenLayer and creating new tokens to be used as collateral elsewhere.
Kannan clarified that EigenLayer’s goal is to empower users to choose staking locations and support new blockchain services, not incentivize more crypto-backed borrowing.
Some experts downplay the risks, noting that re-staking’s scale is small compared to the global crypto market’s $2.5 trillion in assets.
Regulators have long-standing concerns about potential losses in the crypto sector affecting wider financial markets.
“For now, we do not see any meaningful risk of contagion from re-staking issues to traditional financial markets,” said Andrew O’Neill, digital assets analytical lead at S&P Global Ratings.
Despite the cautious outlook, re-staking is attracting institutional interest.
Zodia Custody, Standard Chartered’s crypto arm, has seen significant institutional interest in staking but remains cautious about re-staking.
Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO for re-staking some of its funds, and Swiss crypto-focused bank Sygnum expects a new ecosystem around re-staking to emerge.