More than US$18 billion worth of cryptocurrency has moved into a new type of platform that offers investors rewards in exchange for locking up their tokens, in a complex scheme that analysts warn poses a risk for users and the crypto market.
The soaring popularity of so-called “re-staking” is the latest sign of risk-taking in crypto markets as prices rally and traders hunt for yield. Bitcoin, the biggest cryptocurrency, is near all-time highs while ether, the second biggest, is up more than 60 percent this year.
At the heart of the re-staking boom is Seattle-based start-up EigenLayer.
The company, which in February raised US$100 million from US venture capital firm Andreessen Horowitz’s crypto arm, has attracted US$18,8 billion worth of crypto to its platform – up from less than US$400 million six months ago.
EigenLayer invented re-staking to expand a long-standing crypto practice called staking, its founder Sreeram Kannan told Reuters.
Blockchains are a kind of database, which involve many computers in a network checking and confirming who owns which cryptocurrencies. To do this, owners of crypto tokens, such as ether, allow their assets to be locked up as part of the validation process. Holders lose instant access to their tokens for as long as they participate in staking but they earn a yield in return.
Some staking platforms also give users newly-created cryptocurrencies to represent the cryptocurrencies they have staked. Re-staking enables owners to take those new tokens and stake them again with different blockchain-based programmes and applications in the hope of bigger returns.
The crypto world is divided as to how risky re-staking is, with some insiders saying the practice is too nascent to know.
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But others, including analysts, fear that if new tokens representing the re-staked cryptocurrencies are used as collateral in crypto’s vast lending markets, there could be endless loops of borrowing based on a small number of underlying assets. That could destabilise broader crypto markets if everyone tried to exit simultaneously, they say.
“When there’s anything that has collateral on collateral it’s not ideal, it adds a new element of risk that wasn’t there,” said Adam Morgan McCarthy, research analyst at crypto data provider Kaiko.
The appeal for investors is the yield: returns from staking on the Ethereum blockchain are typically in the 3 percent-5 percent range but analysts say returns could be higher for re-staking, as investors can earn multiple yields at once.
Re-staking is the latest development in the risky world of decentralised finance, or DeFi, in which cryptocurrency holders invest in experimental schemes in the hope of generating large returns on their holdings without having to sell them.
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