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Rapid Growth in EigenLayer’s TVL Masks Underlying Risks

Rapid Growth in EigenLayer’s TVL Masks Underlying Risks

Cryptocurrency & Blockchain News

The rapid increase in Total Value Locked (TVL) in EigenLayer, reaching approximately $19.5 billion, may appear impressive, but closer analysis reveals that the actual TVL is only about two-thirds of this reported amount. This discrepancy highlights significant market and technological risks associated with the Renzo liquid restaking protocol.

Leveraged restaking of liquid staking tokens (LSTs) can potentially more than double returns compared to leveraged staking alone. However, this practice is currently highly vulnerable to liquidation on Aave v3, primarily due to the risk of ezETH depegging from ETH. This depegging could occur through supply inflation via manipulation of the Binance oracle price, followed by a rug pull on Balancer’s ezETH/wETH pool. Professional Aave liquidators might manipulate such a depeg to acquire ezETH collateral, benefiting from increased liquidation bonuses.

The liquidity in ezETH DEX pools is relatively low, making them susceptible to significant price manipulations and rug pulls. Such events could trigger a cascade of depegs and subsequent liquidations among leveraged staking-restaking traders. Participants in the Renzo protocol are exposed to substantial credit risks, further aggravated by vulnerabilities in the pegging mechanism of the Ethena stablecoin, which relies on illiquid stETH perpetuals. An intentional depeg of stETH could potentially lead to broader contagion affecting Lido and Aave.

For blockchain regulators, the critical takeaway is the interconnectedness of these risks. Since most staking occurs on Ethereum, any stress events affecting staking and restaking on Ethereum and EigenLayer could disrupt all related protocols. This interconnectedness has the potential to spread credit contagion throughout the decentralized finance (DeFi) ecosystem, possibly triggering another “DeFi winter.”

An interactive Excel spreadsheet, which includes mathematical formulas for rewards from leveraged staking and restaking, is available for download from the Resources page at www.coalexander.com.

This analysis underscores the importance of robust risk management practices and vigilant regulatory oversight in the rapidly evolving DeFi landscape.

Read the full paper:

Leveraged Restaking of Leveraged Staking: What are the Risks? by Carol Alexander :: SSRN