Bessie Liu

In an interview with Blockworks, Stader Labs cofounder Dheeraj Borra said the staking service is planning to launch Ethereum mainnet’s first liquid restaked token, rsETH, in the coming weeks. 



With rsETH, users will be able to “restake” liquid staked tokens such as Coinbase’s wrapped staked ETH (cbETH), Lido’s staked ETH (stETH) and Rocket Pool’s rETH on multiple different networks, minting a liquid token to represent their share in a restaking contract.&nbsp;



Restaking, as Borra described, is effectively borrowing the economic security of staked assets. For instance, ether (<a href="http://blockworks.co/price/eth">ETH</a>) staked via Rocket Pool’s rETH could simultaneously be used as a validator for the Ethereum network as well as additional blockchains and applications. 



Read more: <a href="https://blockworks.co/news/lido-launch-wsteth-staked-ether-cosmos-liquid-staking">Lidos’ wrapped staked ETH is coming to Cosmos</a>



Stader launched rsETH soon after <a href="https://blockworks.co/news/eigenlayer-deploys-on-ethereum-mainnet">EigenLayer deployed its restaking protocol</a> on Ethereum mainnet. EigenLayer currently accounts for 173,800 ETH restaked, and rsETH will be built on top of EigenLayer.



Borra claims Stader’s rsETH is designed to simplify onboarding to the restaking ecosystem.



With rsETH, users can deposit their liquid-staked ETH tokens to the restaking contract, but also mint liquid rsETH. This means that users can create decentralized exchange liquidity pools that will allow them to enter and exit rsETH positions representing their restaked assets. Currently, no other such liquid token exists for EigenLayer, which additionally has a <a href="https://docs.eigenlayer.xyz/overview/readme/mainnet-launch">7-day</a> withdrawal period. 



The launch of a liquid restaking token could be a boon for the emerging vertical. Liquid staked tokens account for 45.4% of the 27.1 million ETH currently staked.&nbsp;



“What we hope to do is to provide a space for users to continue getting exposure to staking according to your risk-reward profile, giving users the ability to use their tokens in DeFi and earn and accomplish whatever objectives, effectively the same thing that liquid staking has brought to the market, but this time for restaking,” Borra said.



rsETH contracts have so far only been released on Ethereum testnet as of Sept. 21, with a reported 800 testnet users, Borra said. The product is not yet available on mainnet, but could be in the coming weeks.  



“We are hoping to launch mainnet at the end of October or the first or second week of November, that’s the timeline we’re working towards,” Borra said.



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Stader Labs

Stader Labs preps liquid restaking token launch

Simon Harman

Technological evolution is a cruel process, and history is littered with discarded innovations.&nbsp;



Just as landlines gave way to mobile phones and email replaced fax machines, it seems to be only a matter of time before wrapped tokens end up in a metaphorical blockchain technology museum.&nbsp;



They were only ever really intended as a band-aid solution to cross-chain interoperability, yet we’ve had to accept their existence as part and parcel of interacting with the DeFi world for far too long. Internet chatter in the DeFi summer talked of a brilliant future where composability truly extended across chains, though this is not what has occurred.&nbsp;



In my view, if we were to keep on relying on wrapped tokens, we risk undermining rather than advancing the mass adoption of DeFi.&nbsp;



<h2 class="wp-block-heading">When wrapped tokens began</h2>



Before we resign wrapped tokens to history, let&#8217;s take a look at the role they’ve played.&nbsp;



Wrapped tokens were unarguably helpful in the early days of DeFi, providing holders of these assets access to borrowing, lending and trading opportunities in a brand new ecosystem of tools released at first only on Ethereum.



But using wrapped tokens introduces a level of counterparty risk that really shouldn’t be there in a truly decentralized financial system.&nbsp;



Every time a wrapped token is minted, it means placing long-term trust in a third-party custodian or protocol that isn’t related to the underlying blockchain. If ever these services fail, not only do individual users lose out, but this could potentially have devastating consequences for entire ecosystems.&nbsp;



We also have to trust any issuer’s ability to maintain the peg between the original asset and its wrapped token representation. As we have seen with the likes of TerraUSD, things can unravel incredibly quickly, which adds a further layer of unnecessary risk. The successive implosion of FTX could not have been a more dramatic reminder of the existential risks at play.



Asides from systematic concerns, wrapped tokens have also proven to have significant security challenges. By relying on bridges to move assets across blockchains, we are exposing users’ funds to unnecessary levels of risk. We only need to look at the <a href="https://blockworks.co/news/sky-mavis-ronin-network-bridge-exploited-for-over-600m" target="_blank" rel="noreferrer noopener">Ronin bridge</a> exploit to remember the scale of loss that can occur in <a href="https://blockworks.co/news/cross-chain-bridge-thefts-top-1b-in-2022" target="_blank" rel="noreferrer noopener">bridge hacks</a>.&nbsp;



We have to move away from wrapped tokens to stop the erosion of users’ trust, which ultimately sets DeFi adoption back.



<h2 class="wp-block-heading">Putting trust on the table</h2>



Even if the assumptions of trust needed for wrapped tokens don’t seem to bother most everyday users, I would argue that the additional trust layer gives rise to a side effect that is even worse.&nbsp;



As each representation of any given asset is issued on an alternative chain, each of these assets are non-interchangeable. As an example, WBTC and TBTC can’t be deployed together as BTC liquidity in a single pool. Instead, having both just causes fragmentation, hurting each other’s chances at achieving sufficient levels of liquidity to be competitive.&nbsp;



Every wrapped token for each asset is more liquidity and users being diluted across that chain’s markets. We have too many stablecoins, bridges and wrapping services. Contrary to promises of saving users money, this fragmentation actually makes everything less efficient and more expensive for users, thus undermining true composability.



But slowly, we are seeing this wrapped token trend reverse. USDC and USDT are both natively issued on dozens of chains now, which has dramatically improved USD denominated markets across all of these ecosystems. As this continues, we will see the popularity and utility of wrapped USD tokens fade away forever.&nbsp;



In the ever-evolving landscape of blockchain technology, the obsolescence of wrapped tokens appears inevitable. While they served a useful purpose in the early days of bridging ecosystems and instigating interest and growth of DeFi, their days are now numbered.&nbsp;



Any focus on wrapped tokens has diverted attention and resources exactly at the time when it would have been more expedient to focus on developing more user-friendly and native cross-chain approaches. To create a more inclusive, secure and robust financial system for all, we must look toward decentralization — like making decentralized cross-chain swapping solutions the core of our DeFi ecosystem.&nbsp;&nbsp;



It’s clear to me that the continued use of wrapped tokens has directly contributed to a delay in unlocking DeFi access for the masses. The industry needs to shift toward true decentralization, upending the DeFi ecosystem for the better and making wrapped tokens obsolete.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Simon Harman is the Berlin-based founder and CEO of Chainflip, a cross-chain decentralized exchange set to launch in mid-2023. He is also a board member of the Oxen Foundation. Prior to Chainflip, Simon led teams that produced products including Session, a messaging app based on the Signal protocol. Simon has been a cryptocurrency enthusiast since 2014.
</div>


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decentralization

That’s a Wrap: DeFi Needs to Move Past Wrapped Tokens

John Gilbert

<div id="highlights-block_62a7ad30cd549" class="highlights">
 <ul>
 <li>Wrapped crypto tokens are smart contracts representing locked collateral of the original asset on a separate blockchain</li>
 <li>They provide liquidity to a growing DeFi ecosystem</li>
 </ul>
 
</div>



Wrapped crypto tokens such as wrapped bitcoin (wBTC) are smart contracts representing locked collateral of the original asset (i.e., BTC) on a separate blockchain. They are used to provide liquidity to a growing DeFi ecosystem.&nbsp;



Think of wrapped bitcoin like an IOU briefcase. But instead of paper representing a promise to pay your BTC back, inside is a live feed to a vault containing every bitcoin and outstanding wrapped bitcoin.&nbsp;



<h4 class="wp-block-heading">Quick facts</h4>



<ul class="wp-block-list"><li>DeFi needs cross-chain liquidity for global adoption.</li><li>Wrapped tokens offer a solution.&nbsp;</li><li>The mechanism of wrapping a crypto token requires 3 parties: merchant, custodian and investor.</li><li>Wrapped tokens carry inherent liquidity- and market-contagion risks.&nbsp;</li><li>The value of wrapped tokens is not necessarily equal to that of their original counterparts.</li></ul>



<h3 class="wp-block-heading">Why wrapped tokens are important to DeFi</h3>



Wrapped tokens offer a solution to a critical problem in DeFi: cross-chain liquidity. Think of each blockchain and its native token as a silo. Demand for that specific token is contingent on the applications built on that network.



DeFi (decentralized finance) and its complex credit and lending ecosystem needs immediate settlement technology that works across all blockchains. Without this technology, blockchains can&#8217;t benefit from the entire industry&#8217;s growth.&nbsp;



Wrapped tokens break down those silos by offering native tokens utility outside their blockchain. This innovation unlocks a flood of capital efficiency that enables diverse investment instruments across most chains. 



<h3 class="wp-block-heading">How wrapped bitcoin works</h3>



All users access wBTC through third-party merchants such as <a href="https://aave.com/" target="_blank" rel="noreferrer noopener">AAVE</a> and <a href="https://makerdao.com/en/" target="_blank" rel="noreferrer noopener">Maker</a>. When a user requests wBTC in exchange, the merchant takes their BTC and sends it to BitGo, a custodian managed by the <a href="https://wbtc.network/" target="_blank" rel="noreferrer noopener">wBTC DAO</a> (a <a href="https://cms.blockworks.co/the-investors-guide-to-daos/" target="_blank" rel="noreferrer noopener">decentralized autonomous organization</a>). 



In the previous analogy, the vault containing every bitcoin and wrapped bitcoin represents the custodian. Once BitGo receives the bitcoin from the merchant, it then mints the equivalent in wBTC — an ERC-20 token on the Ethereum blockchain. This token is a smart contract representation, or IOU briefcase, of the original bitcoin. 



The custodian then sends the wBTC to the merchant, where the user finalizes the transaction. Typically, there aren&#8217;t any merchant fees in this transfer because they only charge fees for exchanging wBTC for BTC. The user will be responsible for any gas fees used in transferring wBTC on the Ethereum blockchain.&nbsp;



Because this exchange requires trust from multiple parties, BitGo partnered with Chainlink to provide an automated auditing system — similar to the direct live feed from the previous analogy. This auditing system is called <a href="https://www.bitgo.com/newsroom/press-releases/bitgo-adopts-chainlink-enable-on-chain-auditing-for-wbtc">proof of reserve</a>.



Other dApps (decentralized applications) in the Ethereum ecosystem use this protocol to monitor BitGo&#8217;s balance sheet when accepting wBTC as collateral or exchange equivalency. If BitGo were to mint more wBTC than the BTC it holds in reserve, every application using Chainlink&#8217;s protocol would stop receiving wBTC.



<h3 class="wp-block-heading">What is the difference between a pegged and wrapped token?</h3>



The value of a pegged token or currency can be linked to that of another asset — digital or physical — using a variety of approaches. Because custodians link wrapped tokens to the value of other crypto assets, they fall under the pegged currency classification.&nbsp;&nbsp;



But they do not classify stablecoins such as USDT as a wrapped token because it pegs its value to the US dollar in off-chain cash reserves. And unlike wrapped tokens, these reserves are not audited through an automated protocol.&nbsp;



<h3 class="wp-block-heading">Is a wrapped token fundamentally the same as the original?</h3>



No: wBTC should not be considered a fundamental equivalent to BTC. This common misconception is why many lose money in liquidation crisis events. In the analogy, the value of the briefcase IOU depends on three things: the quality of the livesteam and the integrity of the vault and the briefcase holding it together. 



Wrapped tokens, in this way, require three layers of trust that the original token doesn&#8217;t need. So, it may seem that the two have the equivalent value for a time. But in bearish markets, the perceived value of the wrapped tokens can drop faster than that of the originals. This is how wrapped tokens can lose their peg even though their balance is still 1:1.



<h3 class="wp-block-heading">The market-contagion risk of wrapped tokens&nbsp;</h3>



A crypto market contagion is a financial crisis spreading from one protocol or crypto sector to another. Contagion is more likely when participants distribute credit risks across institutions and markets.&nbsp;



So with wrapped crypto, increased capital efficiency also comes with an increased risk of contagion. For example, if one protocol managing collateral vaults fails, every other application using their wrapped token or &#8216;IOU briefcase&#8217; is exposed to a potential liquidity crisis. This type of credit contagion has happened multiple times throughout the crypto cycles. They have been mainly associated with the collateral requirement failures of pegged stablecoins such as USDT and UST. Despite these previous episodes, we have yet to see a failure of a wrapped token vault audited by a proof-of-reserve protocol.



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