Ethereum-based liquid staking protocol EigenLayer has seen its total value locked (TVL) surge by $1 billion after it removed its staking cap.
The temporary lifting of the staking cap comes amid a boom in restaking on Ethereum, despite several developers warning it could put the network under considerable strain.
EigenLayer TVL Surges
EigenLayer had a staking cap of 200,000 ETH per protocol. Following the removal of the staking cap, EigenLayer registered a staggering $1 billion in total value locked in just a few hours. The protocol announced the removal of the staking cap on the 5th of February, stating that the removal would continue until the 9th of February. According to the protocol, the removal was done to spur organic demand and pave the way for a future where all staking caps are permanently removed.
“EigenLayer Restaking Reloaded! From NOW until Feb 9th, 12 PM PT, dive back into the world of LST restaking! All pools are fully uncapped, featuring both the existing pools and welcoming new partners @fraxfinance, @liquid_col, & @0xMantle.”
According to data from DeFiLlama, EigenLayer saw inflows of over 1 million ETH within two hours of the restaking protocol lifting its cap on deposits. This, in turn, led to a cumulative TVL of over $3 billion. EigenLayer put its official TVL at $3.2 billion, representing a $1 billion increase from the day prior.
What Is Restaking?
Restaking allows investors to earn additional rewards on ETH they have already staked on the main Ethereum blockchain. The staked tokens are locked in an address on the chain in exchange for a steady stream of interest. EigenLayer allows investors to earn an additional yield on their staked ETH by restaking them to secure other networks. The protocol supports several liquid staking tokens, such as Lido DAO’s staked ETH (stETH), Rocket Pool ETH (rETH), and Swell ETH (swETH).
Lido-staked ETH is currently the most restaked token on the EigenLayer protocol, making up over $1.2 billion worth of the protocol’s TVL. The second most staked token is Swell Staked ETH, which accounts for $392 million of the total TVL.
EigenLayer is widely credited for providing a novel use case for staked ETH tokens. However, market watchers and developers have raised concerns regarding the mechanics of the protocol, and have described high volumes of restaking as being something similar to leverage. This was described by Jae Sik Choi, Portfolio Manager at Greythorn Asset Management, who stated,
“Just like how Terra’s over-leveraged ‘safe’ collateralization of Luna was, there would always be a risk of participants over-leveraging into this new concept, and such a risk won’t be quantifiable until we see more data sets throughout the emergence of this new restaking narrative.”
Others, such as Dan Bar, the Chief Investment Officer at Bitfwd Capital, seemed to agree, stating,
“While moderate schemes of restaking could be beneficial for capital efficiency purposes, any crypto assets manager and finance professional worth their salt knows too well how easily and quickly leverage can turn into a slew of synthetic toxic financial instruments that bring disasters into even the most healthy of ecosystems.”
In fact, Ethereum co-founder Vitalik Buterin has been critical of restaking, warning that a significant increase in restaking and overusing data or price oracles could introduce systemic risks to the Ethereum ecosystem.
“There is a natural urge to try to extend the blockchain’s core with more and more functionality because the blockchain’s core has the largest economic weight and the largest community watching it, but each such extension makes the core itself more fragile.”
Mainnet Launch For Operators
EigenLayer also announced it would soon roll out the mainnet launch for operators, which would allow investors to operate a node. It also announced EigenDA, a decentralized data availability service that will become the first actively validated service built on EigenLayer. EigenLayer launched its testnet on the 7th of April, 2023, and saw a successful mainnet launch on the 14th of June, 2023.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.