Ethereum restaking could lead to a ‘cascade of liquidations,’ says JPMorgan

Ethereum’s blockchain is constantly evolving and one of its latest features poses a stability risk, according to analysts at JPMorgan.

Previous upgrades, The Merge and Shanghai, led to an “overall increase in staking activity on the Ethereum network,” analysts at investment bank JPMorgan said in a note on Thursday. One of the major contributors to this increase in staking was the advent of liquid staking providers.

These protocols “made staking accessible to common investors by overcoming barriers such as the high staking requirement of 32 Ether, technical complexities and the illiquidity of the staked Ether,” JPMorgan said.

Liquid staking gives investors access to their staked funds, which would otherwise be locked, in the form of liquidity tokens, like Lido’s stETH. These tokens can also be used for restaking on DeFi platforms.

Investors typically use liquid staking tokens for lending, borrowing, and yield farming, according to JPMorgan. This generates more yield — which is highly desirable since yields on Ethereum have fallen from earlier this year.

In search of yield

Standard staking yields on Ethereum, excluding fees and other rewards, have declined to 3.5% from over 4.3% before the Shanghai upgrade in April.

Additional rewards, which include fees and maximal extractible value, appear to have declined due to lower activity on the Ethereum network, JPMorgan said, down from 3% in April to 2% more recently.

“As a result, the total staking yield has declined from 7.3% before the Shanghai upgrade to around 5.5% currently,” JPMorgan concluded.

With Ethereum yields falling against the backdrop of rising yields in traditional finance, liquid staking offers an exciting prospect, namely through restaking.

Restaking is a blockchain feature that allows users to double-stake their Ether on different protocols, or even chains. It went live on Ethereum in June, through US-based firm EigenLayer, which raised $50 million in a Series A round in March.

The new feature poses a valuable opportunity for investors. It’s not risk-free, though, as JP Morgan and others have pointed out.

Restaking could result in a “cascade of liquidations if a staked asset drops sharply in value,” JPMorgan said, or if that staked asset is “hacked or slashed due to a malicious attack or a protocol error.”

In May, Ethereum’s co-founder Vitalik Buterin raised concerns about “overloading” the network with complex and poorly-designed restaking models, and now analysts have shared their own warning.

“Like AI, restaking has the potential to unlock awesome services and reshape the ecosystem. Also like AI, restaking likely introduces systemic risks that are hard yet essential to tackle,” Justin Drake, a researcher at Ethereum Foundation, told DL News in May.

EigenLayer’s founder Sreeram Kannan told DL News that he “fully agrees” with Drake’s point and said he’s “glad Vitalik is urging caution in restaking protocols so that the low-risk use cases are cultivated without going over to the high-risk ones.”

For now, EigenLayer is the only option for investors that want to restake their funds. The total value locked — a metric that tracks how much crypto is locked up in a DeFi protocol’s smart contracts — on EigenLayer is around $226 million, according to DeFiLlama data.

Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com