InceptionLRT Isolated LRTs vs Basket-Based LRTs

February 15, 2024
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The rise of the restaking narrative is transforming the staking landscape by establishing a dual-layered reward system for Liquid Staking Tokens (LSTs). Emerging solutions, such as Basked Based (bLRTs) and Isolated Liquid Restaking Tokens (iLRTs), offer unique potential and problems, influencing the future of staking and investment strategies in the Defi space.

TL;DR:

  • The recently introduced restaking primitive has been garnering attention by enabling users to restake their native ETH or ETH LSTs, introducing a second layer of rewards for users’ staked assets.
  • There are now two primary methods for restaking LSTs: Isolated LRTs (iLRTs) for individual staking with enhanced transparency and lower risk, and basket-based LRTs (bLRTs) for pooled investment diversification with additional complexity and risk
  • While Isolated LRTs (iLRTs) enable precise control and minimize counterparty risk by isolating exposure to individual LSTs, basket-based LRTs (bLRTs) simplify investing processes but present management challenges and higher systemic risks
  • InceptionLRT recognizes Isolated LRT (iLRTs) solutions due to their transparency, controlled risk exposure, and alignment with the project's vision for a secure, user-centric restaking environment.

The Liquid Restaking Panorama For Liquid Staking Tokens

The recently introduced restaking primitive has been garnering attention for its potential to reshape the staking landscape, introducing a second layer of rewards for users’ staked assets. As a consequence of this dual-layered reward, EigenLayer saw a surge in total value locked (TVL) during the first week of February, where the restaking caps for liquid staking tokens (LSTs) were removed and anyone could restake their LSTs.

Leveraging this uncap, many new protocols operating in the liquid restaking industry started to attract more attention and increase their TVL rapidly. However, it’s important to understand the nuances of all these protocols and how each is creating its liquid restaking tokens (LRT).

Looking at the current panorama, there are 2 clear processes identified for restaking of LSTs:

Basket-based LRTs (bLRTs):

  • Consolidated Restaking Power: This option allows users to pool their investments from various LSTs into a single basket-based LRT, streamlining the diversification process.
  • Despite its convenience, the basket-based approach adds layers of complexity and risk in managing the assorted LSTs, including the need to balance the weights within the basket.

Isolated LRTs (iLRTs):

  • Dedicated LRTs per LST: Offering a unique LRT for each deposited LST, this category provides clear visibility and manageable risk exposure to individual LSTs. Users can trust the LRT protocol to generate restaking rewards by delegating LSTs to EigenLayer node operators who oversee infrastructure for AVSs.
  • Each category is designed with distinct user preferences and risk management strategies in mind, showing the sophistication and customization in the LRT sector.

LSTs_on_EigenLayer.png Different LSTs Integrated into EigenLayer (Source)

Considerations of Basket-based LRTs

When considering bLRTs, a few critical factors come to the forefront, shaping their appeal and operational dynamics within the broader landscape. Consolidating the restaking power under a single umbrella does simplify the process for investors that have their investments spread between different LSTs, creating a swift solution to restake all their investments.

However, the allure of bLRTs is accompanied by a set of complexities and heightened risks. The very nature of combining multiple LSTs under one umbrella introduces a layered management challenge. This aggregation not only complicates the decision-making process but also heightens the systemic risks inherent to the restaking ecosystem.

Each LST within the basket carries its own set of variables and performance metrics, making the task of managing these assets a nuanced endeavor. The performance and reliability of these tokens are intricately linked to the prowess and strategic insight of those at the helm. This dependency injects a degree of uncertainty into the investment, as the success of bLRTs is tethered to the skill with which underlying assets are selected, balanced, and adjusted in response to changing market conditions.

Central to the discourse on bLRTs is the issue of counterparty risk. This type of risk is particularly relevant within the basket-based framework, where the complexity of overseeing a varied portfolio of LSTs magnifies the potential for mismanagement and the consequent exposure to failing strategies or underperforming assets.

Considerations of Isolated LRTs

Isolated LRTs (iLRTs) distinguish themselves through a specialized restaking approach that assigns a distinct LRT for every deposited LST. This system is lauded for its exceptional clarity and limited risk exposure, providing users with the capability to meticulously oversee their involvement with particular LSTs. Hence, this is the ideal system for individuals who value precise control and aim to reduce the broader risks prevalent in the fluctuating staking market, iLRTs deliver a solution that is both transparent and secure.

One of the primary benefits of iLRTs is their ability to offer enhanced transparency and control. This feature allows investors to be fully aware of their exposure to specific LSTs, facilitating the development of a restaking strategy that is directly aligned with their personal risk tolerance. Such a level of detail ensures that users can make informed decisions tailored to their investment preferences.

Moreover, iLRTs play a crucial role in minimizing counterparty risk. By segregating exposure to individual LSTs, these tokens significantly reduce the complexities and potential vulnerabilities inherent in managing a portfolio of multiple staking tokens such as mismanagement or underperformance of any single LST.

Furthermore, the streamlined restaking process presented by iLRTs eliminates the need to navigate the complexities associated with basket management. Users benefit from a transparent and user-friendly experience where they understand the direct performance of each of their investments.

InceptionLRT Considerations To Deliver a Better Product

As the market for LRTs continues to develop, the decision between opting for iLRTs versus bLRTs becomes increasingly significant, hinging on an investor's individual risk appetite and investment strategy.

From the InceptionLRT perspective, iLRTs emerge as the superior choice for those prioritizing clarity in their investments, controlled risk exposure, and a reduction in counterparty risk. This preference aligns with our core values, where our dedication to building an iLRT solution is rooted in our commitment to offering a more secure and transparent restaking option for our users.

iLRTs are designed with the precise management of investment risks in mind, providing a clear view of where and how assets are reinvested. This level of transparency ensures that investors can tailor their restaking activities to match their specific risk tolerance, with a direct line of sight to their underlying assets. By offering a unique LRT for each LST deposited, iLRTs facilitate a degree of control and oversight that is unmatched by their basket-based counterparts.

For InceptionLRT, the choice to focus on isolated LRT solutions stems from a deliberate intention to circumvent these challenges, providing a safer and more manageable restaking alternative that aligns with our vision for a transparent and investor-centric restaking ecosystem.

Restake With InceptionLRT

The InceptionLRT restaking platform is already live and early users are already accruing Inception Totems, which will highly reward their active participation in our protocol! We extend an invitation to all users interested in restaking to leverage InceptionLRT early bird incentives to accrue more rewards on their assets.

InceptionLRT_ dashboard.png InceptionLRT Dashboard. (Source)

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