More than $18 billion worth of cryptocurrency has been transferred to a new kind of platform that pays investors for locking up their tokens. Analysts worry that this intricate plan puts consumers and the cryptocurrency market at danger.

As cryptocurrency prices rise and traders seek yield, the practice known as “re-staking” is becoming more and more common. This is the newest example of risk-taking in the field. The largest cryptocurrency, Bitcoin, is almost at an all-time high, while the second-largest, ether, has increased by more than 60% this year.

Seattle-based start-up EigenLayer is at the centre of the re-staking explosion.

The startup has drawn $18.8 billion worth of cryptocurrency to its platform, up from less than $400 million six months ago. The company raised $100 million in February from the cryptocurrency branch of American venture capital firm Andreessen Horowitz.

EigenLayer’s creator, Sreeram Kannan, stated that the company created re-staking in order to extend the cryptocurrency activity known as staking.

Blockchains are a type of database that use a large number of computers connected to a network to verify and check who is the owner of each cryptocurrency. Owners of cryptocurrency tokens, like ether, consent to the validation process locking up their assets in order to do this. As long as they engage in staking, holders forfeit quick access to their tokens but receive a dividend in exchange.

In addition, some staking systems allow users to symbolise the cryptocurrencies they have staked with freshly generated coins. Re-staking gives owners the opportunity to stake their newly acquired tokens once more using various blockchain-based apps and programmes in the hopes of earning greater rewards.

The second-largest cryptocurrency in the world, Ether, was expected to rise for the first time in over two years on Tuesday due to optimism.

The cryptocurrency community is split on the riskiness of re-staking; some insiders claim the technique is still too new to be certain of.

However, some people, including experts, worry that there may be never-ending cycles of borrowing based on a limited quantity of underlying assets if fresh tokens representing the re-staken cryptocurrencies are utilised as collateral in the massive loan markets for cryptocurrencies.

They claim that if everyone tried to leave at once, it may cause instability in the larger cryptocurrency exchanges.

“It’s not ideal to have collateral on collateral because it introduces an additional layer of risk that wasn’t there,” research analyst Adam Morgan McCarthy of crypto data provider Kaiko said.

The yield is what attracts investors to staking on the Ethereum blockchain; returns are often between 3% and 5%, although analysts speculate that returns might be greater if investors re-stake, as they can receive many yields simultaneously.

In the volatile world of decentralised finance, or DeFi, where cryptocurrency users participate in pilot projects in the hopes of earning substantial profits on their holdings without having to sell them, re-staking is the newest innovation.

However, the EigenLayer platform has not yet paid out staking rewards to users directly since the necessary mechanism has not been created. In anticipation of potential incentives or other giveaways known as airdrops, users are signing up for the programme.

EigenLayer has been rewarding platform users with its own recently developed coin up to this point. The “EIGEN” token is intended to have some value in the future, according to users.

According to Morgan McCarthy of Kaiko, people looking for these kinds of airdrops are what’s driving the expansion of re-staking platforms, characterising it as “really, really speculative, this free money thing.”

Head of research at American cryptocurrency exchange Coinbase, which allows staking but not re-staking, David Duong stated, “It’s very risky.”

“They’re doing this pre-emptively right now, (with the) expectation that they will be rewarded with something but they don’t know what,” Duong said.

According to his academic website, EigenLayer was started last year by Sreeram Kannan, a former assistant professor at the University of Washington in Seattle who was a member of the team that launched the first student-designed microsatellite in India.

EigenLayer markets itself as a platform that connects potential stakers with apps that require staked tokens, acting as a marketplace for validation services.

EtherFi, Renzo, and Kelp DAO are a some of the new re-staking platforms that have surfaced. These services re-stake customers’ tokens on EigenLayer on their behalf and create new tokens to reflect the re-staked assets. These tokens can be used in other contexts, such as as security for loans.

Rather than encouraging more and more cryptocurrency-backed borrowing, Kannan stated that the goal of his platform is to let users decide where to invest their tokens and to support the development of new blockchain services.

“We don’t have any official relationships with any of these players…This is an emergent phenomenon,” he said.

Re-staking, according to Coinbase’s Duong, may have “hidden risks”; if tokens are used for crypto lending, there may be forced liquidations and more volatility during downturns in the market, he said in a note.

After the Terra and Luna token crashes, high-risk financing caused cryptocurrency tokens used as collateral to rapidly lose value, which intensified the 2022 market selloff.

EigenLayer is separated from the hazards by Kannan.

“The lending methods carry more risk than re-staking does. He remarked, “The lending protocols are mispricing risk.”

Some analysts don’t think much of re-staking since the money in re-staking protocols is minuscule compared to the $2.5 trillion in net assets of the entire cryptocurrency sector.

Regulators have been worried for a while that losses in the cryptocurrency space may affect larger financial markets.

According to Andrew O’Neill, S&P Global Ratings’ analytical head for digital assets, “we do not see any meaningful risk of contagion from restaking issues to traditional financial markets at this time.”

Nevertheless, re-staking is gaining traction with institutional investors, and the cryptocurrency sector is becoming more integrated with traditional banking.

Zodia Custody, the cryptocurrency division of Standard Chartered, has observed a considerable amount of institutional interest in staking. However, Chief Risk Officer Anoosh Arevshatian believes that re-staking is excessive as it is hard to provide a “paper trail” of where the assets move and how incentives are distributed.

In an April blog post, Kelp DAO announced that it had teamed up with Laser Digital, Nomura’s cryptocurrency division, to reclaim a portion of its cash. A request for comment from Reuters was not answered by Laser Digital.

A new ecosystem surrounding re-staking is expected to emerge, according to Swiss bank Sygnum, which focuses on cryptocurrency and stakes its clients’ assets in it.

(Adapted from EconomicTimes.com)

Categories: Creativity, Economy & Finance, Regulations & Legal, Strategy, Uncategorized