Brian
To fully understand restaking, we first need to look into the history of liquid staking:
As a Proof-of-Stake (PoS) network, Ethereum requires a broad and distributed set of validators to secure the network. Validators are responsible for proposing and validating blocks, ensuring network consensus. Liquid staking protocols lower the barriers to entry for staking by enabling users to participate without running their own validator nodes (which requires 32 ETH and technical expertise). This increases the total amount of ETH staked, strengthening Ethereum’s security by distributing network control across a larger pool of participants.
Liquid Staking Tokens (LSTs) arose largely out of the desire for capital efficiency. Traditional staking, while necessary for network security and decentralization, introduced significant limitations by locking up capital for extended periods, rendering it inaccessible for other uses. LSTs emerged as a solution to this inefficiency, enabling stakers to maintain liquidity while still participating in network staking.
Before the advent of Liquid Staking Protocols, stakers earned rewards but couldn’t use their staked assets for other opportunities, such as trading or lending. Locked assets in staking also meant users couldn't leverage their capital effectively to participate in other DeFi activities like yield farming, or liquidity provision. Users sought ways to earn staking rewards while simultaneously utilizing their capital for additional returns in DeFi protocols. This desire to "double dip" became a key driver for liquid staking solutions.
In December 2020, Lido launched stETH, which has become the most widely used LST with a TVL of over $38B. Through Lido, users could stake their ETH on Ethereum’s Beacon Chain and receive stETH as a liquid representation of their staked ETH.
Eigenlayer launched in June, 2023, kicking off a move towards even greater capital efficiency through restaking. Restaking allows LSTs to be reused to secure additional networks, protocols, or applications. To explain how this works, let’s say a user stakes their ETH through Lido and receives Lido Staked ETH (stETH). This stETH can now be staked again (restaked) for higher yields, and the user will receive a liquid restaking token (LRT). This is typically done through liquid restaking protocols such as Etherfi, which initiate the restaking process on Eigenlayer on behalf of the user, and give users the protocol’s LRT (eETH in the case of Etherfi).
How do LRTs generate higher yield? On top of the base staking rewards that LSTs generate from securing Ethereum’s PoS network, LRTs also generate yield through EigenLayer's Active Validation Services (AVS). AVS enables restaked Ethereum assets to perform specific functions or provide security for other networks, protocols, or decentralized applications (dApps). This mechanism extends the utility of Ethereum’s staked ETH by allowing validators and their capital to actively contribute to new services while still participating in Ethereum’s Proof-of-Stake (PoS) network.
Each protocol using EigenLayer’s AVS can define its specific validation requirements or security needs, which validators fulfill through AVS. For example, a rollup might require validators to verify transaction batches, or a data availability layer might need validators to attest to the accessibility of stored data. New projects can leverage EigenLayer’s AVS to borrow security from Ethereum’s established validator network, reducing the need for independent validator sets.
Markets are driven by a constant demand for greater capital efficiency. The evolution from LSTs to LRTs, and the continuously developing landscape of LRT protocols illustrate this point. Users can deposit ETH directly into LRT protocols, bypassing the need to first acquire LSTs as LRT protocols will automatically perform this step for users. In a short timespan, most ETH-based derivatives were able to be deposited and used on LRT protocols.
Now, even non ETH-based assets can be restaked. Protocols like Symbiotic and Etherfi have enabled this, allowing for broader participation and a diverse range of assets to participate in securing networks and generating yield. This is a massive step towards capital efficiency, as it allows previously idle assets to be used in a beneficial way and generate yield.
At Tren Finance, we have observed this continuous evolution, and we believe that the next step is recollateralisation.
Recollateralisation is the process of utilizing idle liquidity assets as collateral for DeFi activities, thereby unlocking their liquidity. As we’ve discussed so far, we’re seeing DeFi move continuously towards greater capital efficiency. Imagine if you could take not just LSTs and LRTs, but also LP tokens, money market deposit tokens, and PT tokens as collateral to unlock liquidity. This has the potential to unlock $34B+ in idle liquidity, and we believe this is the next step in DeFi.
So how does recollateralisation work? It’s easier to explain via the use cases below:
Users deposit their LP tokens into Tren Finance's protocol. These LP tokens represent their share of liquidity in the AMM pool and continuously earn trading fees and rewards. Tren Finance evaluates the liquidity and value of these LP tokens. The tokens are then used as collateral to borrow Tren Finance’s synthetic dollar debt token, XY. Borrowed XY can be used to deploy in other DeFi strategies such as impermanent loss hedging, or simply to acquire other assets. Users can also employ a looping leverage strategy, amplifying exposure to the AMM pool and increasing yield potential from trading fees and rewards.
We’ll show an example of how this works with Curve’s 3pool LP token:
Users deposit assets into a money market protocol like Aave or Compound. In return, they receive receipt tokens (e.g. aETH, cUSDC). Users can deposit these receipt tokens into Tren Finance, which are accepted as collateral and can be used to borrow XY. Through this, users gain access to liquidity without having to withdraw their deposits from lending protocols. By using Hooks, users can employ a recursive leverage strategy to leverage their money market deposit tokens, and multiply their yield.
We’ll show an example of how this works with Aave’s aWETH deposit token:
Tren Finance enables liquid staked assets to be used as collateral, such as LSTs and LRTs, but also assets like Pendle’s PT tokens. Similarly to the other use cases, these assets can be used to borrow XY. Users continue to earn yield from their staked positions, while unlocking their liquidity at the same time. If a user feels that the yield from their staked or restaked position isn’t enough, they can use Tren Finance to leverage their positions and multiply their yield.
We’ll show an example of how this works with Pendle’s PT-sUSDe token:
One underestimated use case of Tren Finance is the ability for users to use the protocol as their own custom on-chain market maker. It’s a simple process that any user can use, but opens up a wide range of customisation opportunities without having to rely on external parties. For example, a concentrated liquidity position in UniswapV3 for ETH-USDT within a selected price range to maximize capital efficiency, receiving an LP NFT to represent their position. The user deposits their concentrated LP NFT as collateral in Tren Finance to borrow XY while maintaining liquidity provision rewards. Users can now maintain their liquidity rewards while reducing impermanent loss exposure through hedging. Users can also explore automated position management opportunities through Tren Finance’s Hooks.
We envision that what liquid staking and restaking did for ETH, Tren Finance will do for LP tokens, receipt tokens, and other idle liquidity assets.
There are obvious key differences between restaking and recollateralisation. Restaking is primarily used for securing networks, and enables assets to be used to secure multiple networks simultaneously. Recollateralisation functions more like a lending engine, allowing for the reuse of collateral from various protocols to unlock previously idle liquidity, and optimize asset utilization. Despite these differences, both of them have one overarching goal: maximize the productivity of assets and increase capital efficiency. As we have seen restaking take off this year, we believe that the recollateralisation movement is the next step in DeFi evolution.
Tren Finance is the first Liquidity (re)Enabling Protocol that brings capital efficiency to DeFi through composability. We allow users to (re)collateralise their LP tokens, money market deposits, and (re)staked positions, unlocking billions in idle liquidity across the ecosystem. Built by a team of DeFi veterans with experience from leading protocols like MakerDAO, Ajna, Binance and Venom, Tren is paving the way for a more efficient and interconnected DeFi ecosystem.
