IntoTheBlock, a leading market intelligence platform, has recently highlighted the emerging trend of leveraged restaking within the decentralized finance (DeFi) ecosystem, particularly on the Linea network.
Leveraged restaking, which combines the benefits of traditional staking with leverage, allows users to maximize their potential rewards through airdrops and staking returns.
This method has gained traction as Layer 2 solutions and other blockchain protocols increasingly incorporate Leveraged Restaking Tokens (LRTs) to enhance their offerings.
Leveraged Restaking On Linea🧵
Leveraged restaking has become a popular strategy to earn airdrops from LRTs on top of leveraged staking rewards. L2s and their protocols have taken advantage of this by quickly onboarding LRTs into their ecosystem. pic.twitter.com/8JZT4fvfRV
— IntoTheBlock (@intotheblock) July 18, 2024
Understanding Economic Indicators in Leveraged Restaking
IntoTheBlock recently wrote an in-depth look into leverage restaking, focusing on the heavily used asset across these strategies (Ethereum – WETH). Specifically, they identify a number of important economic indicators that help to manage such investments given the volatility and risks related with using digital assets as collateral.
Available liquidity: A really important metric that says how big a position size you can open without crashing the market. This is important as it provides a metric on how much liquidity there still left to the borrower which in turn drives this decision of position size.
As an example, if a vast liquidity amount is already flicked away and after borrowing the application of additional estimated price could drive up borrow costs significantly, due to changes in Yield rate model.
Another important factor is the Whale Exit Simulation that analyses what occurs in a situation where big investors, or “whales,” quickly leave they money. This situation is critical to predicting potential future borrow rate moves, which as we have seen can effect all participants (and perhaps especially those over-levered).
According to the analysis of IntoTheBlock, lending markets in these platforms have been relatively stable with cheap liquidity available so the withdrawals from big players would not affect borrowing rates too much.
Collateral Distribution and Risk Management
And collateral distribution is an additional important variable of concern. This indicator measures investors’ sensitivity to certain types of assets in the ecosystem as well, giving clues on how other players might react when (collateral) values are diminishing.
This is particularly important for leveraged restakers, as having some degree of certainty around the stability of their collateral (i.e. to restore the $ezETH peg in Mendi Finance or trade out Zerolend) can help control risks and prevent liquidations if/when fixed-income markets move against them abruptly.
Finally, the status of open liquidations provides a good overview on how healthy is one protocol or another. In an ideal world, the higher number of open liquidations is bad – it implies a market that is not healthy or functioning correctly.
Consistently high liquidations potentially start to signal fundamentals like bad debt that could deter new investments and withdrawal of current capitol. IntoTheBlock observes a stable trend of both MendiFinance and Zerolend, with very few open liquidations evidencing that users are appropriately managing their debts and have no massive stop losses.