Liquid staking (LST) and restaking (LRT) have grown in popularity over the past year, thanks to their value proposition in scaling the utility of staked tokens.
According to DeFi Llama, the LST ecosystem now enjoys a total value locked (TVL) of over $53 billion, up from $7 billion at the onset of 2023. LRT protocols, on the other hand, have grown to a TVL of $14 billion, barely a year since EigenLayer’s restaking service went live on the Ethereum mainnet.
So, why have these two emerging DeFi sectors gotten so much traction, and how can omni-chain synthetic asset protocols, such as the one offered by Sumer.money, enhance their current appeal?
To better understand the fundamentals and potential for growth, let’s first distinguish between LSTs and LRTs.
Liquid Staking vs Liquid Restaking
At their core, LSTs and LRTs were introduced to enable Proof-of-Stake (PoS) validators to generate additional DeFi yield or contribute towards the operations of other blockchain applications using their staked tokens.
Simple, yes? What’s worth noting, however, is that although LSTs and LRTs are related to some extent, the two niches are designed to achieve different objectives in the larger DeFi ecosystem.
Let’s start with LSTs; the best example of a liquid staking platform is Lido Finance. This DeFi LSD protocol enables interested Ethereum validators to stake their ETH through its liquid staking service and in turn issue them with a liquid staking derivative (LSD) token, stETH. The LSD token can then be used to generate extra DeFi yield in chains that support Lido, including the native Ethereum network, Solana, Moonbeam, Moonriver, and Terra Classic.
LRTs on the other hand go beyond the goal of generating more yield; technically, LRT tokens are designed to be used in more secondary blockchain application services.
For example, EigenLayer’s asset restaking introduces Actively Validated Services (AVSs). Initially, DApps required their own consensus resources for on-chain validation which is quite costly and resource wasteful; however, with EigenLayer’s AVS, DApps on Ethereum can now tap into the already staked ETH for their validation mechanism without necessarily increasing the amount of resources (staked tokens).
But despite this value proposition, LSTs and LRTs are nowhere near their full potential. This is because of some inherent challenges; most notably, compossability is still a limitation. While Lido’s stETH can be used across multiple blockchain environments, the process is still not as seamless. Meanwhile, EigenLayer’s smart contracts are built on Ethereum, leaving out validators in other PoS blockchains that could benefit from LRTs as well.
Multi-chain Compossable Synthetic Assets
By definition, synthetic assets are tokenized digital representations of real world assets or other virtual assets. The whole process of tokenization allows for synthetic assets to be used in on-chain economies all while mirroring or tracking the value of the asset they represent.
So, how can this DeFi asset class bridge the compossability gap in LSTs and LRTs? For starters, not all synthetic DeFi assets are designed as multi-chain compatible. However, there are a few examples such as Sumer.money which is taking the game a notch higher with its multi-chain synthetic assets. Think of the credit card experience, you can make a payment through Visa or Mastercard anywhere in the world provided they accept the card.
Well, that has not always been the case for crypto. ETH on Ethereum is not the same as ETH on BNB or ETH on Solana. Omni chain composable synthetic assets are designed to break down this barrier. For instance, with Sumer.money, one can deposit their native BTC, ETH, USDT, USDC and in turn mint SuBTC, SuETH, SuUSDT, or SuUSDC. What stands out about these synthetic assets is that they can be used across multiple blockchain environments.
Similarly, LST and LRT innovations could benefit from adopting omni chain composability synthetic assets to scale their utility across more PoS chains. Here are a few reasons why these novel DeFi protocols should tap into synthetic assets to expand their reach and make the UX more seamless.
- Enhanced Liquidity and Market Depth: By design, compossable synthetic assets can be pooled across several blockchain environments. This will enable more capital to find its way into the LST and LRT ecosystem given that it is mostly limited to ETH stakers at the moment.
- Better Asset Matching and Risk Diversification: With omni chain synthetic assets, LSTs and LRTs will have more capital efficient matching options compared to the current ecosystem where much of the action is limited to a few assets. In addition, stakers will have more flexibility to diversify their risk.
- Simplified UX and Asset Management: Compossable synthetic assets introduce a simpler interaction experience if one were to manage all their assets from a single protocol without having to undergo cumbersome processes anytime they wanted to access more DeFi opportunities.
These are just a few of the reasons why synthetic assets could be a good match for LSTs and LRTs. Of course, it would be ignorant to omit that all these asset classes are closely related, but more importantly, it is crucial to identify the room for growth. While protocol innovation is great, focusing on products that are composable from the get-go might be exactly what DeFi needs to break the fragmentation barrier.
Liquid staking (LST) and restaking (LRT) have grown in popularity over the past year, thanks to their value proposition in scaling the utility of staked tokens.
According to DeFi Llama, the LST ecosystem now enjoys a total value locked (TVL) of over $53 billion, up from $7 billion at the onset of 2023. LRT protocols, on the other hand, have grown to a TVL of $14 billion, barely a year since EigenLayer’s restaking service went live on the Ethereum mainnet.
So, why have these two emerging DeFi sectors gotten so much traction, and how can omni-chain synthetic asset protocols, such as the one offered by Sumer.money, enhance their current appeal?
To better understand the fundamentals and potential for growth, let’s first distinguish between LSTs and LRTs.
Liquid Staking vs Liquid Restaking
At their core, LSTs and LRTs were introduced to enable Proof-of-Stake (PoS) validators to generate additional DeFi yield or contribute towards the operations of other blockchain applications using their staked tokens.
Simple, yes? What’s worth noting, however, is that although LSTs and LRTs are related to some extent, the two niches are designed to achieve different objectives in the larger DeFi ecosystem.
Let’s start with LSTs; the best example of a liquid staking platform is Lido Finance. This DeFi LSD protocol enables interested Ethereum validators to stake their ETH through its liquid staking service and in turn issue them with a liquid staking derivative (LSD) token, stETH. The LSD token can then be used to generate extra DeFi yield in chains that support Lido, including the native Ethereum network, Solana, Moonbeam, Moonriver, and Terra Classic.
LRTs on the other hand go beyond the goal of generating more yield; technically, LRT tokens are designed to be used in more secondary blockchain application services.
For example, EigenLayer’s asset restaking introduces Actively Validated Services (AVSs). Initially, DApps required their own consensus resources for on-chain validation which is quite costly and resource wasteful; however, with EigenLayer’s AVS, DApps on Ethereum can now tap into the already staked ETH for their validation mechanism without necessarily increasing the amount of resources (staked tokens).
But despite this value proposition, LSTs and LRTs are nowhere near their full potential. This is because of some inherent challenges; most notably, compossability is still a limitation. While Lido’s stETH can be used across multiple blockchain environments, the process is still not as seamless. Meanwhile, EigenLayer’s smart contracts are built on Ethereum, leaving out validators in other PoS blockchains that could benefit from LRTs as well.
Multi-chain Compossable Synthetic Assets
By definition, synthetic assets are tokenized digital representations of real world assets or other virtual assets. The whole process of tokenization allows for synthetic assets to be used in on-chain economies all while mirroring or tracking the value of the asset they represent.
So, how can this DeFi asset class bridge the compossability gap in LSTs and LRTs? For starters, not all synthetic DeFi assets are designed as multi-chain compatible. However, there are a few examples such as Sumer.money which is taking the game a notch higher with its multi-chain synthetic assets. Think of the credit card experience, you can make a payment through Visa or Mastercard anywhere in the world provided they accept the card.
Well, that has not always been the case for crypto. ETH on Ethereum is not the same as ETH on BNB or ETH on Solana. Omni chain composable synthetic assets are designed to break down this barrier. For instance, with Sumer.money, one can deposit their native BTC, ETH, USDT, USDC and in turn mint SuBTC, SuETH, SuUSDT, or SuUSDC. What stands out about these synthetic assets is that they can be used across multiple blockchain environments.
Similarly, LST and LRT innovations could benefit from adopting omni chain composability synthetic assets to scale their utility across more PoS chains. Here are a few reasons why these novel DeFi protocols should tap into synthetic assets to expand their reach and make the UX more seamless.
- Enhanced Liquidity and Market Depth: By design, compossable synthetic assets can be pooled across several blockchain environments. This will enable more capital to find its way into the LST and LRT ecosystem given that it is mostly limited to ETH stakers at the moment.
- Better Asset Matching and Risk Diversification: With omni chain synthetic assets, LSTs and LRTs will have more capital efficient matching options compared to the current ecosystem where much of the action is limited to a few assets. In addition, stakers will have more flexibility to diversify their risk.
- Simplified UX and Asset Management: Compossable synthetic assets introduce a simpler interaction experience if one were to manage all their assets from a single protocol without having to undergo cumbersome processes anytime they wanted to access more DeFi opportunities.
These are just a few of the reasons why synthetic assets could be a good match for LSTs and LRTs. Of course, it would be ignorant to omit that all these asset classes are closely related, but more importantly, it is crucial to identify the room for growth. While protocol innovation is great, focusing on products that are composable from the get-go might be exactly what DeFi needs to break the fragmentation barrier.
