Liquid restaking surge: could this be dangerous?

In this week’s crypto highlights, we explore the price movements of ETH, FIL, FET, and LINK. Additionally, this recap includes other notable industry news items that occurred over the last seven days. Without further ado, let’s dive into the latest market developments.

Market spotlight: Liquid restaking TVL jumped by a factor of 40 in just two months

While various projects are building layer 2 (L2) networks, some “layer 4” development is already happening in the Ethereum staking field. 

The liquid restaking sector recently became one of the hottest topics in crypto, jumping from $100 million to $3.9 billion in terms of total value locked (TVL), over the last two months. Protocols such as Ether.fi, Renzo, Kelp, Puffer, and others have seen a substantial increase in deposits. Puffer attracted over $1 billion in TVL, in just three weeks since its launch. 

Let’s briefly explore what’s behind this hype.

What is liquid restaking?

First of all, don’t confuse liquid staking with liquid restaking. Although they’re similar by design, they offer different reward sources.

Liquid staking is a way to generate rewards by locking crypto in liquid staking protocols such as Lido DAO and Rocket Pool. These platforms lock ETH on users’ behalf, and offer liquid staking tokens (LSTs) that represent users’ deposits and generated rewards. These LSTs can be used in DeFi services, and/or be converted for ETH. So liquid staking offers participants an opportunity to use their crypto in other activities, while their funds are staked. 

The same principle applies to liquid restaking. Essentially, liquid restaking platforms serve as conduits between users and restaking platforms, primarily EigenLayer. The latter offers users an opportunity to lock ETH and LSTs to earn rewards for securing so-called “actively validated services” (AVSs). These AVSs could represent other networks, oracles, etc. 

As a result, with EigenLayer, projects can “borrow” Ethereum’s proof of stake (PoS) mechanism instead of creating their own infrastructure to secure the network. However, restaked tokens (deposited into EigenLayer) can’t be used for DeFi and other on-chain activities. Therefore, they’re illiquid. How do you fix this? Create liquid restaking tokens (LRTs). 

So, liquid restaking protocols allocate users’ funds to EigenLayer, and offer LRTs in exchange. These LRTs represent users’ EigenLayer deposits and generated rewards, which they can move and utilize in DeFi services.

Risks of liquid restaking 

EigenLayer recently experienced a rapid increase in TVL, surpassing Uniswap, and reaching almost $8 billion. However, none of EigenLayer’s AVSs are live yet, meaning depositors aren’t receiving restaking interest on their allocations. Instead, they receive “restaking points,” which represent a somewhat vague accumulation that users anticipate will grant them eligibility for future EigenLayer rewards.

Although there is no clear understanding of what these EigenLayer points could be, the liquid restaking sector essentially revolves around them. There are services that are built up to exchange and lend these points. Furthermore, liquid restaking platforms also offer their own points, which typically don’t have a clear purpose either.

So for now, restaking and liquid restaking exist only on paper. The largest risk is that AVSs might fail to deliver proper services (slashing), and/or satisfy depositors’ anticipations. There is the possibility that speculated airdrops from AVSs may not even happen, potentially rendering accumulated points useless. 

However, some argue that Ethereum staking rewards also became available after almost two years of Beacon chain’s existence. Before Ethereum’s Merge update, which arrived in September 2022, there was an entire liquid staking industry, with thousands of ETH locked, and many established crypto platforms onboard. Now, liquid staking is the largest DeFi sector in terms of TVL. Liquid restaking platforms arguably want to repeat this success.

Other noteworthy market events

Ethena faced controversy due to USDe’s promised yield

While some play with high-risk products, others heavily criticize them.

On February 19, Ethena Labs launched its USDe stablecoin on the public mainnet. After its official debut, USDe saw a more than 20% increase in market cap in just a few days, reaching $340 million. The project is backed by multiple venture capital firms, and major crypto-native platforms.

According to Ethema’s website, USDe offers a 27.6% annual percentage yield (APY). The platform supports USDT, FRAX, DAI, crvUSD, and mkUSD tokens, which can be converted into USDe when deposited. The latter can be locked in Ethereum staking, or deposited in DeFi protocols to receive additional income. The USDe reward is calculated every week depending on the chosen strategy.

The alluring yield opportunity stirred widespread concerns in the crypto community. Many remembered Anchor, which offered a 20% yield in UST stablecoin, and is considered one of the primary factors behind the death spiral of UST and Terra (LUNA). According to 0xngmi, a pseudonymous DefiLlama code contributor, the real concern lies in the potential inversion of yields, rather than just the high stablecoin yield offered by Ethena.

Responding to these concerns, Conor Ryder, Ethena’s Head of Research, stated that the protocol was deployed with settings grounded in historical testing that did not entail any artificially imposed risks.

U.S. banks reportedly want a slice of the Bitcoin ETF action

The fear of missing out (FOMO) doesn’t spare anyone, even big banks.

On February 14, a trade group coalition including the Bank Policy Institute, American Bankers Association, Financial Services Forum, and Securities Industry and Financial Markets Association sent a letter addressed to U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler. The coalition drew attention to the recent approval of spot Bitcoin exchange-traded funds (ETFs) in the U.S., pointing out the absence of U.S. banks as asset custodians for these approved products, despite their involvement with other ETFs.

In their letter, the coalition asked the SEC to consider modifications to its guidance regarding the accounting treatment of crypto asset custody responsibilities. With proposed updates, U.S. banks are seeking to make crypto custody more cost-efficient, and gain permission to participate in certain crypto activities, such as serving as custodians for Bitcoin ETFs.

Decentralized exchange FixedFloat was exploited for $26 million in BTC and ETH

Since February 17, numerous FixedFloat users have reported frozen transactions and missing funds. Initially, the team attributed these significant outflows to “minor technical issues” and transitioned their services into maintenance mode. Subsequent on-chain analysis revealed that over $21 million in Bitcoin and nearly $5 million in Ether were drained from the exchange.

Following this discovery, the platform confirmed that it had fallen victim to a hack. They announced that their team is actively working to address all potential vulnerabilities, enhance security measures, and conduct a thorough investigation into the incident. As of the time of this writing, the FixedFloat website remains under maintenance and is inaccessible.

Operating as a decentralized crypto exchange without requiring user registration or KYC verification, FixedFloat primarily attracts users from the U.S.

One sentence news

• Honduras’ National Banking and Securities Commission (CNBS) issued a ban prohibiting financial institutions in the country from engaging in crypto trading, or holding digital assets.
• Uniswap Foundation tentatively set Uniswap v4’s launch for Q3 2024.
• Circle said it would discontinue minting USDC on the Tron network, “to ensure that USDC remains trusted.”
• Ethereum’s L2 network, Starknet, faced a backlash from its community, due to eligibility criteria for the STRK airdrop.
• VanEck’s spot Bitcoin ETF experienced a 14x jump in daily trading volume.
• Stellar network’s developers initiated a phased rollout of Soroban smart contracts.

Notable price performances

ETH price broke the $3,000 level

The ETH price reached $3,000 for the first time since April 2022, as crypto enthusiasts anticipate potential Ethereum ETF approval in the U.S., as well as the Dencun upgrade. In addition, Ether’s open interest in futures markets increased by over 40% over the last two weeks, according to Coinglass.

The weekly RSI moved to the overbought zone. This event preceded the reach of the asset’s all-time highs in previous cycles. Notably, in both cases, Ethereum formed a bearish divergence (yellow lines) when approaching the cycle’s peak. 

In addition, a lagging span (green line) crossed a downside Ichimoku Cloud on a weekly chart, indicating that upward price movement is likely to follow. The next potential target for bulls could be around $3,650.

FIL price took advantage of Solana’s partnership

In a strategic move aimed at bolstering data scalability and accessibility, Filecoin has announced its integration with the Solana blockchain. According to a post by Filecoin on X, Solana’s integration includes saving its block history using Filecoin’s capabilities. This event helped the FIL price jump by over 30% in a week, reaching the local high near $8. 

The asset’s price movement suggests that a cup and handle pattern could potentially form. This is a longer-term formation that consists of a U-shaped cup, and a handle with a slight downward or sideways slope. The volume decreases in the handle, indicating a period of consolidation before a further breakout. At the time of this writing, Filecoin has been experiencing decreased volume.

As a result, a price correction has a chance to follow, with the $6.50 level as a potential target for the handle formation. If the pattern works out, the asset might then break the $8 resistance level.

FET price approached an all-time high amid boosted AI narrative

AI tokens were some of the best-performing crypto assets over the last week, with some tokens showing a more than 40% increase. The catalyst behind these jumps is considered to be text-to-video generator Sora, which was recently unveiled by OpenAI, and sparked a new wave of interest in AI-related projects.

In addition, the performance of top AI tokens has been correlated with Nvidia’s rise since January 2023. Nvidia’s stock price jumped by over 200% in a year, and the company temporarily became the third-largest in the world by market cap, partly due to its involvement in AI initiatives.

One of the major beneficiaries of the increased AI buzz was Fetch.ai (FET). Its price surged by over 65% in a week, approaching an all-time high. The asset reached the overbought level, which could limit potential upward movement in the short term. In addition, a bearish divergence was arguably formed on lower timeframes, hinting that a price correction, or consolidation, could soon follow.

LINK price wasn’t significantly affected by BlockFi’s selloff

On February 21, bankrupt crypto lender BlockFi reportedly transferred $46 million in LINK to Kraken to sell them, as a part of its liquidation plan. This ignited discussions on how it could impact price performance, considering that whales sometimes use such events to accumulate digital assets. 

That day, whale activity increased by over 175% in 24 hours, suggesting that large token holders used BlockFi’s selloff to buy LINK. The LINK price first experienced a slight decrease, testing the 0.382 Fibonacci point, but then bounced to $19. 

The asset price also moved out of the oversold zone, indicating a potential bearish-to-bullish trend reversal. For that, the asset would need to break a descending RSI resistance line (cyan line).

Tune in next week, and every week, for the latest CEX.IO crypto highlights. For more information, head over to the Exchange to check current prices, or stop by CEX.IO University to continue expanding your crypto knowledge.

Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.