EigenLayer, Liquid Restaking, and Lessons from Value Investing
The risks of restaking and hyperfinancialization
EigenLayer launched its airdrop (5% of the 15% allocated for airdrops), which has been a controversial topic as seemingly half the world as well as VPN users were blocked from claiming tokens, when they conveniently weren’t blocked from staking their assets. So people are mad. Nonetheless, their points / airdrop initiative got $15B worth of ETH to be staked there currently. The system is not active yet, but plans to go live this year.
But that’s not what I want to discuss. I want to talk about the risks of restaking and hyperfinancialization.
First of all, a quick primer on how EigenLayer and its surrounding ecosystem works.
Quick EigenLayer Primer
EigenLayer is a protocol that allows you to stake your ETH, or liquid staked token (LST) like stETH (from Lido) or cbETH (from Coinbase) to earn more yield by securing other protocols. Innovative concept.
Right now, the ways to do so are by restaking your ETH natively if you’re a validator, depositing your LST (like cbETH) into EigenLayer, or depositing a LP token like a wETH / USDC or stETH / USDC LP token.
Risk 1 - Slashing
Once EigenLayer goes live, and you stake your ETH or liquid staking token version of ETH there, you may earn additional yield, but also increase the risk of getting slashed. That much is a no-brainer. But I want to share a story from a different discipline, traditional value investing, and apply it here.
In 38:55, famed value investor Thomas Russo explains how Berkshire turned a modest 6% yield preferred equity investment of $6 billion into $28 billion via attached warrants. You can do very well by being observant, taking less risk, and still achieve alpha.
“Other people at the same time reached for yield but if it's too high, chances are that you'll get what the yield suggests, which is more risk than you care for.”
That's what happened to me when I tried to get yield from Celsius in 2021. Ended up losing 1.2 BTC, ~$70-80K today.
Likewise, be cautious about the additional yield from restaking on EigenLayer. DYOR. Is it worth potentially losing your staked ETH? This will of course depend on the risk of the specific application you are restaking for (this naturally applies for when EigenLayer goes live. Right now, staking there is simply to earn the airdrop, and doesn’t run any slashing risk).
I know what it's like to be active in defi. But sometimes, the best investments are ones where you can sit on your ass (as said by Charlie Munger). For most people, I advise you to sit on your ETH and BTC, and don't do anything stupid.
Risk 2 - Hyperfinancialization
I mentioned LST above, but EigenLayer brought about a new concept called LRT (liquid restaking token). The biggest example is Ether.fi and pendle finance. Basically, Ether.fi is a middleman where you can deposit your ETH there instead of in Lido or EigenLayer, and Ether.fi will do the work of staking it in something like Lido, and then restaking that into EigenLayer. Hence, liquid “restaking” token.
You also get issued eETH, which is your claim to your deposit in Ether.fi. And with eETH, you can deposit it in pendle finance for even greater yield, as well as potential airdrops from both of these!
I think this is silly. As expected, we are seeing overfinancialization, and it’s clear why. The creators of these overfinancialized products want to issue tokens and cash out, and this is an easy way to do so. In fact, we are already seeing some early investors in these protocols offer OTC deals on these tokens at 50% discounts to cash out.
My warning: learn from value investing, and be cautious as we enter a new cycle hyperfinancialized products in the crypto space.