Over $18 billion worth of cryptocurrency has flowed into a new type of platform that rewards investors for locking up their tokens, in a complex scheme that analysts warn could pose risks to users and the crypto market.
The rapid rise of “re-staking” highlights the latest wave of risk-taking in crypto markets as prices surge and traders seek higher yields. Bitcoin, the largest cryptocurrency, is approaching all-time highs, while ether, the second largest, has increased by over 60% this year.
Central to the re-staking trend is Seattle-based start-up EigenLayer. The company, which raised $100 million in February from U.S. venture capital firm Andreessen Horowitz’s crypto arm, has attracted $18.8 billion worth of crypto to its platform, up from less than $400 million six months ago.
Blockchains function as databases where numerous computers in a network verify and confirm ownership of cryptocurrencies. To facilitate this, owners of crypto tokens like ether allow their assets to be locked up as part of the validation process. While participants lose immediate access to their tokens, they earn a yield in return.
Some staking platforms also issue newly-created cryptocurrencies to represent the staked assets. Re-staking allows owners to take these new tokens and stake them again with different blockchain-based programs and applications to seek greater returns.
However, others, including analysts, worry that if the new tokens representing re-staked cryptocurrencies are used as collateral in crypto’s extensive lending markets, it could create endless borrowing loops based on a limited number of underlying assets. This could destabilize the broader crypto markets if everyone tried to exit simultaneously, they caution.
