Restaking in Crypto: The Next Big Thing or a Risky Gamble?

The cryptocurrency market has recently been witnessing a significant shift towards restaking, a process where crypto assets are locked up to earn additional rewards. In fact, it has become the second-largest sector in DeFi, with over $18 billion worth of crypto moving towards such platforms by the end of May 2024.  

However, as restaking gains popularity, it is also not without its risks, which leaves many in the crypto community wondering about its viability. Is it going to be the next big thing in crypto, or does it pose too many risks to be sustainable in the long term?

Well, let’s take a look.

Why is Restaking Gaining Such Momentum? 

Restaking offers multiple advantages, compelling enough to explain why this phenomenon has garnered so much attention.

By earning interest on previously earned interest, restaking holds the power to increase returns over time — this is why investors choose this strategy to grow their portfolios. For instance, if you earn a steady 3% every month, you would typically expect a 36% return over a year. But with compounding, that number increases to 42.58% for the year, giving you an extra 18.27% compared to the usual method.

Restaking also allows you to grow your investments with minimal effort. Once assets are staked, the process requires little to no active management, allowing investors to earn returns without the need for constant market monitoring and active trading. Given how unpredictable the crypto market can be, this is particularly appealing, as this method allows for a more stable and reliable income than you would get otherwise.

Furthermore, this method encourages holding assets for extended periods, helping investors ride out market volatility and avoid the temptation to sell during downturns. This is why restaking might be a good fit for investors with a more long-term approach to their strategies.

As an additional benefit, investors in restaking protocols often gain the ability to participate in governance and decision-making processes within blockchain networks, giving them a say in the platform's future.

Above all, by restaking, investors contribute to the security and stability of the blockchain network. The more assets that are staked, the more secure the network becomes, as it is less vulnerable to attacks, and the power is more decentralized.

Proceed with Caution: What Risks Does Restaking Hold?

Despite all the impressive things outlined above, restaking is not without its drawbacks, and those who consider it a risky venture to indulge in are not entirely incorrect.

Firstly, staked assets are typically locked in for a set period, limiting investors' ability to sell and potentially causing them to miss out on trading opportunities.

Then there are smart contract vulnerabilities to consider. Staked assets are managed via smart contracts, and if they have any flaws it could lead to exploitation by bad actors, resulting in a loss of funds.

Finally, market volatility is also a factor to keep in mind. Even though you're earning interest through restaking, the actual value of the crypto you've staked can still go up and down. So, if the market takes a downturn, you could face losses bigger than the yield you get.

With all this in mind, there is no clear way of determining whether restaking is good or bad as a method of earning income – it depends vastly on your preferred approach. For investors with a long-term strategy who are comfortable with crypto's volatility and do not need immediate liquidity, the benefits of restaking might outweigh the risks. 

However, those who need more liquid investments or are less tolerant of high-risk environments may find the risks overshadow the potential returns. For those, it would be better to look for less volatile investment opportunities

Why Does Restaking Attract Institutional Investors?

Despite the risks, restaking has proven attractive to institutional investors. And the reason for that, to my mind, lies in the fact that these investors are bound by stringent regulatory standards and compliance requirements. In their eyes, restaking via reputable, compliant platforms is a viable entry point into the cryptocurrency market, one that adheres to regulatory expectations. 

Moreover, the governance features of certain staking protocols, which allow stakeholders to vote on various proposals, also align with the institutional need of being able to maintain oversight and exert influence over their investments.

Besides that, institutional investors prioritize long-term capital appreciation over short-term profitability. Re-staking aligns seamlessly with this investment ethos by offering continuous growth through the reinvestment of accrued interest. This strategy not only supports their overarching investment philosophy but also ensures sustained value enhancement of their portfolios, providing a robust framework for achieving long-term financial objectives.

What Can We Expect the Future of Restaking To Be Like?

Looking ahead, I expect that the restaking sector is going to expand further, offering a wider array of products and services to both retail and institutional investors. These offerings will feature adjustable lock-up durations, diversified risk profiles, and variable return potentials to better accommodate different investor preferences and risk tolerances.

As more capital flows into the restaking scene, governance within cryptocurrency frameworks will become increasingly important. Active stakeholder participation in governance processes will be pivotal in shaping the strategic direction and policies of crypto projects, fostering more democratic and decentralized ecosystems.