Lido, the Ethereum staking stalwart, has recently been grappling with the frenzy around "restaking," a new trend that threatens to erode the staking platform's grip on decentralized finance (DeFi).
Lido is controlled by the Lido DAO, a consortium of LDO token-holders who vote on protocol strategy and key upgrades.
A new initiative from the DAO will see Lido's partnering with Mellow Finance, a platform that lets users generate yield by depositing into restaking "vaults," and Symbiotic, a permissionless restaking protocol. Under the new initiative, traders will gain access to restaking tools that could help return Lido stETH to center stage.
"The strategy for Lido is to demonstrate to the market that using stETH as the restaking asset of choice is actually the superior way of doing restaking," adcv, the pseudonymous co-founder of Steakhouse Financial and the Lido DAO's finance workstream said in an interview with CoinDesk.
Lido sits at the center of Ethereum's DeFi ecosystem, allowing users to stake cryptocurrency—parking it with the chain to help protect it—in return for rewards. Lido's big innovation when it launched a couple of years ago was that it gave depositors a "liquid staking token" called Lido staked ETH (stETH) that users could trade even as their underlying deposits were technically locked up on Ethereum.
Lido currently ranks as the largest decentralized finance protocol on Ethereum, with $33 billion worth of deposits, according to DefiLlama. StETH, meanwhile, has grown to become one of the most popular assets in DeFi.
But lately, Lido's dominance has fallen as users have moved assets over to EigenLayer, a newer service that allows users to "restake" assets like ether (ETH) and stETH to help secure other networks in exchange for additional rewards.
Lido recently introduced The Lido Alliance—a group of partners and protocols committed to protecting stETH's role in Ethereum DeFi. Lido's head of strategy, Hasu, has also outlined reGOOSE, a multi-pronged strategy to help Lido to address the risks posed to it by restaking.
This new initiative—the launch of four stETH-centric restaking products on Mellow Finance—is the first example of reGOOSE and The Lido Alliance in action. It's also the first hint of how Symbiotic, a startup backed by Lido's co-founders and largest investor, could play a key role in Lido's future plans.
Lido backs Mellow Finance
Lido DAO is throwing its formal endorsement behind Mellow Finance, a DeFi protocol that offers liquid restaking "vaults." Users can deposit assets like stETH into the vaults, and "curators"—which are like crypto underwriters—will deploy those assets across different actively validated services, or AVSs (protocols that are secured by restaked assets), to help users earn extra interest on their funds.
Mellow's new platform is an answer to liquid restaking protocols like Renzo and Ether.Fi, which restake user deposits into EigenLayer (and, soon, other restaking protocols) to help investors earn extra interest.
Like everything else DeFi, liquid restaking exists as a way for people to wring out as much "economic efficiency" (read: yield) as they can from their digital assets. Protocol users earn receipts on their deposits called "liquid restaking tokens," or LRTs, that can be traded, lent and borrowed on other protocols in exchange for additional rewards.
In liquid restaking, "you have players like Renzo and EtherFi that do it top to bottom, but Mellow brings a permissionless quality to it, which we found quite appealing," said adcv.
Whereas traditional liquid restaking protocols take a one-size-fits-all approach to select where they deploy user capital, Mellow lets anyone set up a vault and distribute deposits according to their own risk parameters and investment theses.
"Vaults are an important step in realizing the reGOOSE strategy, offering stakers the power to navigate the varied terrain of the risk/reward landscape," Lido DAO said in a statement shared with CoinDesk.
Mellow curators Steakhouse, P2P Validator, Re7 Labs and MEV Capital are each introducing vaults that accept stETH in tandem with Tuesday's announcement.
For now, the rewards that users receive for depositing into Mellow's vaults will come in the form of loosely-defined "points" that may eventually be tied to future token airdrops. (There are currently no AVSs rewarding interest on Symbiotic or any other restaking protocol.)
For the time being, the vaults are best viewed as proof of concept for why stETH is a useful asset for restaking. "StETH is the best possible asset to use as restaking collateral," insists adcv. "It has all of the network effects. It has all of the liquidity, and it has the ability to abstract away the native staking [...] It earns the native staking yield at all times."
"I personally expect and hope that other LRTs—Renzo, EtherFi, whoever—to recognize that as well and adopt it in turn as their primary collateral," said acdv.
Enter, Symbiotic
It's no coincidence that Mellow Finance is building its restaking vaults using Symbiotic, an up-and-coming competitor to EigenLayer.
Last month, a CoinDesk report first revealed that Symbiotic was quietly being funded by Paradigm, Lido's biggest backer, and cyber•fund, a venture firm led by Lido's co-founders. The report also showed internal company documents detailing how the yet-to-launch Symbiotic protocol might work for the first time.
On a purely technical level, it makes sense that Mellow would choose Symbiotic to build its permissionless vaults: EigenLayer only accepts certain crypto assets (namely, ETH, EIGEN, and certain ETH derivatives), whereas Symbiotic accepts any kind of crypto asset based on Ethereum's ERC-20 token standard.
But there's another reason—beyond Symbiotic's investors or technical details—why Lido DAO might choose to partner with a restaking platform other than EigenLayer. Although EigenLayer accepts deposits of Lido's stETH—meaning it's possible to use Lido and EigenLayer at the same time—it has placed caps on how much stETH one can deposit.
EigenLayer's growth has therefore come at the expense of Lido's, since some users have withdrawn their stake from Lido to funnel more assets into the newer restaking platform.
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"EigenLayer was effectively, on a discretionary basis, limiting the amount of steETH that could go into their middleware—rather arbitrarily, in my view," said adcv. "I expect that this type of restriction will become more and more rare in the future, because from the perspective of a restaking provider, you don't want to put any sort of breaks on your ability to raise capital."
EigenLayer has "had it very easy until now, but with more competition, it will become more difficult to be so selective," he said.
CORRECTION (June 11, 2024 14:12 UTC): Lido deposits number $33 billion, not $27 billion. Mellow's stETH vault curators are not all members of the "Lido Alliance."