By Elizabeth Howcroft

LONDON (Reuters) – More than $18 billion worth of cryptocurrencies have been moved to a new type of platform that offers investors rewards in exchange for locking up their tokens, in a complex scheme that analysts say poses a risk to users and for the cryptocurrency market.

The growing popularity of so-called “re-staking” is the latest sign of risk-taking in cryptocurrency markets as prices rise and traders chase yield. Bitcoin, the largest cryptocurrency, is near all-time highs while Ether, the second largest, is up more than 60% this year.

At the center of the re-staking boom is Seattle-based start-up EigenLayer. The company, which raised $100 million from the crypto arm of US venture capital firm Andreessen Horowitz in February, has attracted $18.8 billion in cryptocurrencies to its platform, up from less than $400 million six months ago .

EigenLayer invented re-staking to expand a long-standing cryptographic practice called staking, its founder Sreeram Kannan told Reuters.

Blockchains are a kind of database, involving many computers in a network that monitor and confirm who owns which cryptocurrencies. To do this, owners of crypto tokens, such as Ether, allow their assets to be locked as part of the validation process. Holders lose immediate access to their tokens as long as they participate in staking, but in exchange they earn a return.

Some staking platforms also offer users newly created cryptocurrencies to represent the cryptocurrencies they have staked. Re-staking allows owners to take those new tokens and re-stake them with different blockchain-based programs and applications in hopes of higher returns.

The cryptocurrency world is divided over how risky re-staking is, with some industry insiders saying the practice is too nascent to know.

But others, including analysts, worry that if new tokens representing re-staking cryptocurrencies are used as collateral in the vast crypto lending markets, there could be endless cycles of lending based on a small number of underlying assets. That could destabilize broader cryptocurrency markets if everyone tries to exit at the same time, they say.

“When you have something that has collateral upon 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 attraction for investors is the yield: returns from staking on the Ethereum blockchain are typically between 3% and 5%, but analysts say returns could be higher for re-staking, as the investors can earn multiple returns at once.

Re-staking is the latest development in the risky world of decentralized 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.

The story continues

However, the EigenLayer platform has yet to pay out staking rewards directly to users, because the mechanism to do so has not been developed. Users join the platform in anticipation of future rewards or other freebies known as airdrops.

For now, EigenLayer has distributed its newly created token to people using the platform. Users hope that this token called “EIGEN” will be worth something in the future.

Kaiko’s Morgan McCarthy said the growth of re-staking platforms has been fueled by users seeking such launches, calling it “really, really speculative, this free money thing.”

“It’s very risky,” said David Duong, head of research at U.S. cryptocurrency exchange Coinbase, which offers staking but not re-staking.

“They’re doing it preemptively right now, (with the) expectation of being rewarded with something but they don’t know what,” Duong said.

ENTER EIGENLAYER

EigenLayer was launched last year by Sreeram Kannan, a former assistant professor at the University of Washington in Seattle and part of a team that launched the first student-designed micro-satellite in India, according to his academic website.

EigenLayer describes itself as a marketplace for validation services, connecting would-be stakers with applications that need staking tokens.

New re-staking platforms have emerged, including EtherFi, Renzo and Kelp DAO, which re-stake customer tokens on EigenLayer for them and generate new tokens to represent those re-staking assets. These tokens can be used elsewhere, for example as collateral in loans.

Kannan said the goal of his platform is to allow users to choose where to stake their tokens and help the growth of new blockchain services, not to increasingly incentivize cryptocurrency-backed loans.

“We have no official relationship with any of these players… This is an emerging phenomenon,” he said.

Coinbase’s Duong says re-staking could pose “hidden risks”: If re-staking tokens were used in crypto lending, there could be forced liquidations and increased volatility during market downturns, he wrote in a note.

The 2022 sell-off in cryptocurrency markets was exacerbated by high-risk lending, as crypto tokens used as collateral rapidly lost their value following the collapse of the Earth and Moon tokens.

Kannan distances EigenLayer from risks.

“The risk is not in the re-staking but rather in the lending protocols. The lending protocols are incorrectly pricing the risk,” he said.

Some experts are not concerned about re-staking, pointing out that the money made from re-staking protocols is tiny compared to the $2.5 trillion in net assets of the global cryptocurrency industry.

Regulators have long been concerned about losses in the cryptocurrency world spilling over into broader financial markets.

“For now, we see no significant risk of contagion from repositioning of issues in traditional financial markets,” said Andrew O’Neill, head of digital asset analysis at S&P Global Ratings.

However, the world of cryptocurrencies is becoming more and more connected to traditional finance and re-staking is gaining traction among institutional investors.

Zodia Custody, a division of Standard Chartered, has seen significant institutional interest in staking, but believes re-staking is a step too far because it is difficult to establish a “paper trail” of where assets go and how rewards are split, Chief Risk Officer Anoosh Arevshatian said.

Nomura’s crypto arm, Laser Digital, has partnered with Kelp DAO to reshare some of its funds, Kelp DAO said in an April blog post. Laser Digital did not respond to a Reuters request for comment.

Cryptocurrency-focused Swiss bank Sygnum said it stakes customers’ crypto assets and expects “a new ecosystem to emerge around re-staking.”

(Reporting by Elizabeth Howcroft; Editing by Tommy Reggiori Wilkes and Sharon Singleton)

Fuente