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DeFi in Crisis: Restaking Protocols Are Devouring Liquidity

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The DeFi space is expanding, with liquid staking and restaking protocols gaining more and more  attention. These developments allow users to stake and reuse assets multiple times, offering the potential for higher yields. However, as these systems become more complex, they also introduce potential systemic vulnerabilities.

Projects like EigenLayer are pushing the limits of yield maximization, but are these returns sustainable? The question remains whether these innovations are setting DeFi up for lasting success or creating the next wave of risks.

The Growing Influence

Restaking protocols, led by platforms like EigenLayer, have become a major force in the decentralized finance (DeFi) sector. Restaking refers to the process where users take assets staked on one protocol, such as Ethereum’s liquid staking tokens (LSTs), and stake them again on another platform to earn additional yields.

This process has unlocked significant earning potential, driving restaking’s rise. In 2024, liquid restaking tokens (LRTs) saw an enormous 4,900% growth in Total Value Locked (TVL), surpassing $15 billion from a mere $280 million in early 2024​. 

“The push for higher yields is a key to keeping staking attractive, especially as the total amount of ETH staked on the Beacon Chain grows and the average APY (annual percentage yield) declines. This is one of the main reasons DeFi and restaking protocols have been so well-received,” Alon Muroch, CEO and Founder at SSV.Labs, told BeInCrypto in an exclusive interview.

Read more: Ethereum Restaking: What Is it and How Does it Work?

Liquid Restaking Protocols TVL
Liquid Restaking Protocols TVL. Source: DeFiLLama

Restaking protocols offer users opportunities to maximize returns on their staked assets without having to sacrifice liquidity. However, as restaking scales, concerns about liquidity and security risks are emerging.

“Each additional layer in restaking increases both risk and reward, making it a choice that users must make based on their risk tolerance. While it introduces more potential points of failure, it also opens up opportunities for significantly greater returns. Ultimately, the user has the freedom to decide the level of exposure they are comfortable with,” Muroch added.

Balancing the Promise and Peril of Restaking

Although the ability to re-use staked assets has been celebrated as an innovation, it simultaneously introduces new layers of exposure. In essence, restaking involves leveraging staked assets across different protocols, which may sound appealing for yield optimization, but it creates systemic vulnerabilities.

Muroch identified several main problems associated with restaking:

  • Smart Contract Vulnerabilities. The complexity of restaking mechanisms increases the potential for bugs and exploits in the smart contracts governing these protocols. Users may lose funds if a contract is compromised.
  • Complexity and Lack of Understanding. As restaking strategies become more complex, there is a risk that users may not fully understand the risks they are taking on. Some Actively Validated Services (AVSs) have higher risk than others due to more/complex slashing criteria for different AVSs.
  • Slashing Risks. If a validator is found guilty of malicious behavior, a portion of their restaked ETH can be slashed. This risk is compounded because node operators are subject to slashing conditions for both the Ethereum base layer and any additional AVSs.

Moreover, the financial architecture behind restaking has left DeFi exposed to potential liquidity drains. For example, EigenLayer’s current restaking system allows users to restake liquid staking tokens (LSTs) multiple times, amplifying liquidity challenges. These risks were evident in the Ankr exploit, where a hacker minted 6 quadrillion fake aBNBc tokens, crashing the price of liquid staking derivatives across various protocols.

The unclear regulatory frameworks add to the complexity of restaking. Muroch cautions that regulators will likely take a cautious approach to restaking, seeing it as distinct from traditional staking because of its added layers of risk and complexity. They may impose stricter regulations to protect investors and ensure the stability of the financial ecosystem as these protocols gain traction.

The Threat of Over-Restaking

EigenLayer, one of the biggest restaking protocols, has garnered over $19 billion in TVL by mid-2024​. While this impressive expansion demonstrates the market’s appetite for higher yields, it raises questions about the sustainability of these protocols. 

The dominance of EigenLayer also poses a unique threat to Ethereum’s overall security. Since these restaking platforms are handling large quantities of staked ETH, any major failure could directly impact Ethereum’s security model.

Experts, including Ethereum co-founder Vitalik Buterin, have voiced concerns that if a restaking protocol failed, it could lead to calls for a hard fork of Ethereum to “undo” the damage, an outcome that threatens the network’s decentralized consensus​.

Read more: How to Participate in an EigenLayer Airdrop: A Step-by-Step Guide

EigenLayer Restaking Ecosystem
EigenLayer Restaking Ecosystem. Source: staking rewards

Muroch, however, downplayed the severity of the situation, describing it as “theoretically bad, but practically quite unlikely.” 

“If a significant amount of Ether is locked in EigenLayer and a large operator suffers a major slashing event, it could lead to a cascade of slashing damage. In a worst-case scenario, this could compromise the extended security of the Ethereum network. However, it would take the slashed operator not fixing the problem for a long period of time for Ethereum’s security to be threatened,” he explained.

He also highlighted an important upside, noting that restaking raises the cost of corruption for potential attackers. This shift strengthens security by focusing not just on individual protocols but on the total sum of all staked assets.

Hidden Dangers of Yield Optimization

The pursuit of higher yields has led stakers to adopt increasingly complex strategies, which carries both financial and technical risks. Financially, restaking protocols encourage users to stake their assets across multiple platforms, tying up more capital in interconnected systems. This raises systemic financial risks, as vulnerabilities in one protocol could trigger broader consequences across the ecosystem.

Muroch cautions that restaking is still a relatively new concept, making it difficult to predict its long-term effects. The potential for unforeseen issues, especially in volatile markets, adds uncertainty to the future of these strategies.

“Staking rewards have only recently been introduced, meaning it will take some time to fully understand their long-term effects. As always, there are ‘unknown unknowns’ that could arise. In the future, if the value of restaked assets were to drop sharply, the heavy reliance on rehypothecation and complex financial derivatives could trigger a liquidity crisis,” he said.

This would likely cause users to liquidate their positions en masse, worsening market volatility. In such a case, confidence in the underlying protocols might erode further, potentially causing widespread destabilization in the DeFi space.

“At this point it’s really speculative. Looking back to the past in DeFi, trying to milk yields as hard as possible tends to end badly,” Muroch warned.

Ultimately, the success of restaking protocols hinges on their ability to balance maximizing yields with managing the inherent financial and technical risks they introduce. As these systems mature, the sector is beginning to diversify. New competitors are launching their own restaking solutions, which could help decentralize risk currently concentrated in platforms like EigenLayer.

This shift may reduce the systemic vulnerabilities tied to one dominant protocol, leading to a more stable and resilient DeFi ecosystem over time.

“As excitement wanes, the sustainability of these protocols will be tested, and their true value will need to be assessed in a more stable market environment. This transition could reveal whether the innovations are robust or merely speculative trends,” Muroch concluded.

Disclaimer

Following the Trust Project guidelines, this feature article presents opinions and perspectives from industry experts or individuals. BeInCrypto is dedicated to transparent reporting, but the views expressed in this article do not necessarily reflect those of BeInCrypto or its staff. Readers should verify information independently and consult with a professional before making decisions based on this content. Please note that our Terms and ConditionsPrivacy Policy, and Disclaimers have been updated.



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XRP Price Reversal Toward $3.5 In The Works With Short And Long-Term Targets Revealed

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The XRP price is showing signs of a strong bullish reversal, with a crypto analyst predicting a potential rebound toward $3.5 and even higher. After experiencing significant volatility and undergoing a consolidation due to recent price declines, technical indicators now show support for XRP’s bullish outlook. As a result, the analyst has provided a short—and long-term price target for the cryptocurrency. 

XRP Price Projected To Reverse To $3.5

According to ‘Setupsfx’, a crypto analyst on TradingView, XRP is now in a bullish reversal phase, meaning its price is expected to break out of its recent downturn and rise to new highs. Based on the expert’s chart analysis of XRP, the cryptocurrency is predicted to see an explosive increase to $3.5 following the end of its consolidation phase.

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The chart indicates that the price of XRP is expected to rise to $3.5 in the coming months. However, from a fundamental analysis perspective, the analyst believes XRP is not limited to this bullish price target and could potentially surpass it to exceed current all-time highs of $3.84.

XRP
Source: Setupsfx on Tradingview

While the TradingView expert’s analysis of XRP maintains a neutral stance, implying uncertainty in the trend, he has also emphasized the cryptocurrency’s strong potential for growth. Hence, XRP could experience significant upward movement if market conditions align favorably and investor sentiment and confidence strengthen.

For his short-term price target, the crypto analyst forecasts that XRP could rally to a level above $3.5. He advises traders who intend to hold their positions for a short period to aim for this price level, as it could be a strategic exit point before a potential pullback. 

Notably, the analyst’s long-term price target for XRP has been set at $4.0 or higher. Considering XRP’s price is currently trading at $2.09, a surge to $4 would represent an almost 100% increase in its price.

Technical Elements Supporting Bullish Reversal

In his chart analysis, Setupsfx highlights XRP’s price action in a 12-hour time frame, showcasing key movements, trends, and technical elements that support his bullish projection. These elements include liquidity and IMB zones, which are areas where price action is expected due to pending orders. 

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The analyst also highlights an accumulation phase, as XRP has been consolidating at lower levels, signaling the possibility of a potential breakout. The appearance of strong low wicks further indicates that buyers are regaining control of the market. 

Finally, the TradingView analyst has indicated that the altcoin has already undergone a three-point trendline rejection, which means it has tested and rejected a resistance level multiple times. The expert’s price chart also provides an ideal entry point for both short and long-term traders, marked at $1.8. A stop loss has also been placed significantly lower around $1.2 to minimize potential losses.

XRP
XRP trading at $2.1 on the 1D chart | Source: XRPUSDT on Tradingview.com

Featured image from iStock, chart from Tradingview.com



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BNB Price Faces More Downside—Can Bulls Step In?

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Aayush Jindal, a luminary in the world of financial markets, whose expertise spans over 15 illustrious years in the realms of Forex and cryptocurrency trading. Renowned for his unparalleled proficiency in providing technical analysis, Aayush is a trusted advisor and senior market expert to investors worldwide, guiding them through the intricate landscapes of modern finance with his keen insights and astute chart analysis.

From a young age, Aayush exhibited a natural aptitude for deciphering complex systems and unraveling patterns. Fueled by an insatiable curiosity for understanding market dynamics, he embarked on a journey that would lead him to become one of the foremost authorities in the fields of Forex and crypto trading. With a meticulous eye for detail and an unwavering commitment to excellence, Aayush honed his craft over the years, mastering the art of technical analysis and chart interpretation.
As a software engineer, Aayush harnesses the power of technology to optimize trading strategies and develop innovative solutions for navigating the volatile waters of financial markets. His background in software engineering has equipped him with a unique skill set, enabling him to leverage cutting-edge tools and algorithms to gain a competitive edge in an ever-evolving landscape.

In addition to his roles in finance and technology, Aayush serves as the director of a prestigious IT company, where he spearheads initiatives aimed at driving digital innovation and transformation. Under his visionary leadership, the company has flourished, cementing its position as a leader in the tech industry and paving the way for groundbreaking advancements in software development and IT solutions.

Despite his demanding professional commitments, Aayush is a firm believer in the importance of work-life balance. An avid traveler and adventurer, he finds solace in exploring new destinations, immersing himself in different cultures, and forging lasting memories along the way. Whether he’s trekking through the Himalayas, diving in the azure waters of the Maldives, or experiencing the vibrant energy of bustling metropolises, Aayush embraces every opportunity to broaden his horizons and create unforgettable experiences.

Aayush’s journey to success is marked by a relentless pursuit of excellence and a steadfast commitment to continuous learning and growth. His academic achievements are a testament to his dedication and passion for excellence, having completed his software engineering with honors and excelling in every department.

At his core, Aayush is driven by a profound passion for analyzing markets and uncovering profitable opportunities amidst volatility. Whether he’s poring over price charts, identifying key support and resistance levels, or providing insightful analysis to his clients and followers, Aayush’s unwavering dedication to his craft sets him apart as a true industry leader and a beacon of inspiration to aspiring traders around the globe.

In a world where uncertainty reigns supreme, Aayush Jindal stands as a guiding light, illuminating the path to financial success with his unparalleled expertise, unwavering integrity, and boundless enthusiasm for the markets.



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VanEck Sets Stage for BNB ETF with Official Trust Filing

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Global investment management firm VanEck has officially registered a statutory trust in Delaware for Binance’s BNB (BNB) exchange-traded fund (ETF). 

This move marks the first attempt to launch a spot BNB ETF in the United States. It could potentially open new avenues for institutional and retail investors to gain exposure to the asset through a regulated investment vehicle.

VanEck Moves Forward with BNB ETF 

The trust was registered on March 31 under the name “VanEck BNB ETF” with filing number 10148820. It was recorded on Delaware’s official state website.

VanEck BNB ETF Filing
VanEck BNB ETF Filing. Source: State of Delaware Official Website

The proposed BNB ETF would track the price of BNB. It is the native cryptocurrency of the BNB Chain ecosystem, developed by the cryptocurrency exchange Binance.

As per the latest data, BNB ranks as the fifth-largest cryptocurrency by market capitalization at $87.1 billion. Despite its significant market position, both BNB’s price and the broader cryptocurrency market have faced some challenges recently.

Over the past month, the altcoin’s value has declined 2.2%. At the time of writing, BNB was trading at $598. This represented a 1.7% dip in the last 24 hours, according to data from BeInCrypto. 

BNB Price Performance
BNB Price Performance. Source: BeInCrypto

While the trust filing hasn’t yet led to a price uptick, the community remains optimistic about the prospects of BNB, especially with this new development.

“Send BNB to the moon now,” an analyst posted on X (formerly Twitter).

The filing comes just weeks after VanEck made a similar move for Avalanche (AVAX). On March 10, VanEck registered a trust for an AVAX-focused ETF. 

This was quickly followed by the filing of an S-1 registration statement with the US Securities and Exchange Commission (SEC). Given this precedent, a similar S-1 filing for a BNB ETF could follow soon.

“A big step toward bringing BNB to US institutional investors!” another analyst wrote.

Meanwhile, the industry has seen an influx of crypto fund applications at the SEC following the election of a pro-crypto administration. In fact, a recent survey revealed that 71% of ETF investors are bullish on crypto and plan to increase their allocations to cryptocurrency ETFs in the next 12 months. 

“Three-quarters of allocators expect to increase their investment in cryptocurrency-focused ETFs over the next 12 months, with demand highest in Asia (80%), and the US (76%), in contrast to Europe (59%),” the survey revealed.

This growing interest in crypto ETFs could drive further demand for assets like BNB, making the VanEck BNB ETF a potentially significant product in the market.

Disclaimer

In adherence to the Trust Project guidelines, BeInCrypto is committed to unbiased, transparent reporting. This news article aims to provide accurate, timely information. However, readers are advised to verify facts independently and consult with a professional before making any decisions based on this content. Please note that our Terms and ConditionsPrivacy Policy, and Disclaimers have been updated.



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