Restaking Protocols & LRT Tokenomics Explained (2024)

If you’ve spent any time in DeFi over the past year, you’ve probably heard the whispers, then the shouts, about ‘restaking’. It’s being touted as the next major evolution for Ethereum, a new frontier for yield, and a fundamental shift in crypto-economic security. But beyond the buzz, what really makes this ecosystem tick? The answer lies in the intricate and rapidly evolving world of restaking protocols tokenomics. This isn’t just about another token; it’s about a whole new economic model being built on top of Ethereum’s foundation, with Liquid Restaking Tokens (LRTs) at its very core. Understanding this is key to navigating what might be the most significant DeFi narrative of the year.

We’re going to break it all down. No jargon, just a straight-up look at how these protocols are designed, how you earn yield, what the mysterious ‘points’ are all about, and what the future holds for the tokens that will eventually govern these powerful new platforms.

Key Takeaways

• Restaking 101: Restaking, pioneered by EigenLayer, allows users to reuse their staked ETH (or LSTs) to secure other networks, called Actively Validated Services (AVSs), in exchange for additional rewards.
• LRTs Unleash Liquidity: Liquid Restaking Tokens (LRTs) are liquid wrappers for restaked positions. They allow you to remain liquid and use your capital in DeFi while still earning restaking rewards.
• The ‘Points’ Meta: Currently, the primary ‘yield’ from many restaking protocols comes in the form of points (e.g., EigenLayer Points, Puffer Points). These are non-transferable markers that are widely expected to determine a user’s share in future token airdrops.
• Complex Tokenomics: The full tokenomics involve multiple layers of yield (ETH staking + AVS rewards), governance rights via a future protocol token, and the speculative value of points leading up to a Token Generation Event (TGE).
• Risks are Real: While the rewards are enticing, restaking introduces new risk vectors, including smart contract vulnerabilities, operator collusion, and the potential for compounded slashing penalties.

First, What Exactly is Restaking? A Quick Refresher

Before we dive into the tokenomics, let’s get on the same page. Think of Ethereum’s Proof-of-Stake security as a massive, trusted fortress. Validators stake 32 ETH to help secure this fortress and get paid for their work. It’s a robust system with billions of dollars securing it.

EigenLayer, the protocol at the center of this revolution, had a brilliant idea: what if we could ‘rent’ out that security? Instead of new projects (like bridges, oracles, or data availability layers) having to build their own expensive fortresses from scratch, they could tap into Ethereum’s existing security pool. This is restaking. Users who have staked ETH can ‘opt-in’ to also validate for these other networks—Actively Validated Services (AVSs)—and earn extra rewards for taking on that extra responsibility. It’s a way to leverage existing capital for greater capital efficiency and to extend Ethereum’s security to the broader ecosystem.

The problem? If you restake your ETH directly with EigenLayer, it’s locked up. You can’t use it anywhere else. And in the fast-paced world of DeFi, illiquidity is a major buzzkill. This is where LRTs come in.

Enter the Heroes: Liquid Restaking Tokens (LRTs)

Liquid Restaking Tokens are the answer to the liquidity problem. Protocols like Puffer Finance, Kelp DAO, Ether.fi, and Swell act as intermediaries. Here’s how it works, simplified:

1. You take your ETH or a Liquid Staking Token (LST) like stETH or rETH.
2. You deposit it into a liquid restaking protocol (e.g., Puffer).
3. In return, the protocol gives you an LRT (e.g., pufETH). This LRT is a receipt that represents your underlying, restaked position.
4. The protocol takes your original deposit and restakes it with EigenLayer on your behalf, managing the complex relationships with node operators and AVSs.

Suddenly, you have the best of both worlds. Your capital is earning both the base ETH staking yield AND the future restaking rewards from AVSs, but you also have a liquid token (the LRT) that you can trade, use as collateral in lending markets, or provide as liquidity in DEX pools. It’s the same magic that LSTs brought to staking, but supercharged for the restaking era.

The Heart of the Matter: Restaking Protocols Tokenomics

Okay, with the fundamentals covered, let’s get to the juicy part. The restaking protocols tokenomics model is a multi-layered beast, especially in this pre-token, pre-AVS-rewards phase we’re currently in. It’s a fascinating mix of promised future utility, speculative fervor, and clever user acquisition strategies.

The ‘Points’ Meta: The Elephant in the Room

You can’t talk about restaking in its current state without talking about points. Right now, if you use a restaking protocol, you’re likely earning two types of points:

• EigenLayer Points: These are awarded by EigenLayer itself for restaking ETH. The calculation is based on the amount of ETH staked over time. They are the foundational ‘reward’ in the ecosystem.
• Protocol Points: Each LRT protocol (Puffer, Kelp, etc.) has its own points system to incentivize users to choose their platform over competitors. They might call them Puffer Points, Kelp Miles, or something similar.

So what are these points? They are non-transferable, off-chain (or sometimes on-chain but non-tradable) accounting units. They have no direct monetary value… yet. The universally accepted speculation is that these points will be the primary criterion for a future airdrop of both the EigenLayer token (EIGEN) and the native tokens of the LRT protocols. Think of them as a leaderboard for a future token distribution. The more points you accumulate, the larger your eventual airdrop is expected to be.

This has created a gamified environment where users are ‘farming’ points. Protocols offer points multipliers for early users, for holding specific LSTs, or for participating in other parts of their ecosystem. It’s a massive, capital-intensive race to accumulate as many points as possible before the inevitable Token Generation Events (TGEs).

Dual (or Triple) Yield Streams

Beyond the speculative points game, the long-term value proposition of LRTs is the yield. An LRT is designed to accrue value from multiple sources:

1. Base Staking Yield: The underlying ETH is still staked on the Ethereum Beacon Chain, so it’s earning the standard ~3-4% APY from consensus rewards.
2. AVS Rewards: This is the new layer. The restaked ETH is securing AVSs, which will pay rewards for this service. These rewards could be in ETH, USDC, or the AVS’s native token. This is the ‘real’ restaking yield, though it’s not fully live for most AVSs yet.
3. Protocol Incentives: LRT protocols will eventually have their own governance tokens. It’s highly likely these tokens will be used to further incentivize LRT holders, perhaps through fee-sharing or liquidity mining programs, adding a third layer of potential return.

The dream scenario is that an LRT like pufETH or rswETH will be a single, composable asset that captures all three of these yield streams, making it an incredibly powerful and capital-efficient token to hold in DeFi.

Governance, Utility, and the Future Native Token

The points we’re farming now will one day convert into governance tokens. What will these tokens actually do? This is where the long-term tokenomics come into play.

• Protocol Governance: The most obvious utility is governing the protocol. Token holders will vote on key parameters, such as which node operators to delegate stake to, which AVSs to support, how fees are structured, and how to manage the protocol’s treasury.
• Operator/AVS Curation: This is huge. An LRT protocol’s reputation hinges on its ability to select reliable, high-performing node operators and profitable, secure AVSs. Token holders will likely have a say in this curation process, effectively directing the flow of billions of dollars in staked assets.
• Fee Sharing & Value Accrual: A successful protocol will generate fees. These could come from a small percentage of the total yield earned. The tokenomics will determine how these fees are used. Are they distributed back to token holders? Are they used to buy back and burn the token, making it more scarce? This mechanism is critical for the token’s long-term value.
• Incentive Alignment: The token will be used to align incentives between all participants: LRT holders, node operators, and the protocol’s core team.

Risks and Rewards: A Sobering Look

The potential upside is enormous, but it would be irresponsible not to talk about the risks. This is cutting-edge technology, and with great innovation comes great risk.

The Compounding Risks

The most significant concern in restaking is the compounding of risk. Your capital is now exposed to multiple potential points of failure.

A key concept to understand is ‘slashing correlation.’ If a single major node operator acts maliciously or incompetently while validating for both Ethereum and multiple AVSs, they could be slashed (penalized) across all those systems simultaneously. This could lead to a significant loss of principal for the users who delegated stake to them, a risk that doesn’t exist in traditional staking.

Other risks include:

• Smart Contract Risk: You are trusting the smart contracts of the LRT protocol, EigenLayer, AND every AVS your capital is securing. A bug in any one of these could lead to a loss of funds.
• AVS/Operator Risk: The AVSs being secured might be poorly designed or malicious. The node operators chosen by your LRT protocol might be unreliable. Diligence here is paramount.
• Centralization Worries: There’s a risk that capital consolidates around a few dominant AVSs or LRTs, creating new centralization vectors for Ethereum.

The Unprecedented Rewards

On the flip side, the rewards are equally compelling. We’re not just talking about yield. We’re talking about ownership in the foundational infrastructure of the next generation of decentralized applications. The airdrops from EigenLayer and the top LRT protocols could be among the largest in crypto history, rewarding early adopters for taking on risk and bootstrapping this new security marketplace.

The long-term, sustainable yield from securing a dozen different AVSs with a single, liquid asset could redefine what a ‘risk-free rate’ looks like in DeFi. It’s a paradigm shift, and we are right at the beginning of it.

Conclusion: An Evolving Economic Experiment

The tokenomics of restaking protocols are not set in stone. They are a living, breathing experiment in crypto-economic design. The current points-driven phase is a temporary, albeit crucial, step in the journey. It’s a mechanism to attract liquidity, distribute ownership, and bootstrap a network effect before the real, sustainable yield from AVSs kicks in.

As we move past the initial TGEs, the focus will shift from farming points to evaluating the fundamental strengths of each LRT protocol. Which one has the best risk management? The most robust set of node operators? The most lucrative partnerships with AVSs? Which token has the best value accrual mechanism? These are the questions that will determine the long-term winners. For now, we’re all participants in one of the most exciting and potentially lucrative economic games DeFi has ever seen.