Risks to Overcome

EigenLayer Risks:

  • Slashing Risk: The foremost concern for users is the potential for slashing on the consensus layer, which can amount to up to 50% of staked ETH. Moreover, any new slashing conditions imposed by the protocol could impact the remaining 50% of staked ETH. This means that if users engage in malicious behavior, they risk losing up to 100% of their staked ETH. While this serves as an incentive for honest behavior, it presents a substantial risk.

  • Centralization Risk: EigenLayer may attract ETH stakers seeking higher yields, potentially redirecting their withdrawal credentials to the platform. This shift towards EigenLayer creates centralization risks, as it concentrates staking activity. In the event of an exploitation or vulnerability within EigenLayer, it poses a systemic risk to the broader Ethereum network.

  • Yield Risk: As restaking gains more traction, protocols may use Ethereum for enhanced security. However, EigenLayer stakers may prioritize maximizing their returns by seeking the highest yield available. This can lead to a competitive race among protocols to offer higher yields to attract stakers. While this benefits stakers, it may result in lower yields for users of these protocols, creating a potential yield risk.

Liquid Staking Risks

  • Security Risks: The primary concern with liquid staking is security. Staked assets are typically held in smart contracts, which may have vulnerabilities and be susceptible to hacking or cyber-attacks. This means your original assets are in the hands of a third party, increasing counterparty risk.

  • Low Liquidity & De-Pegging: Liquid staking tokens rely on liquidity pools to maintain their peg to the underlying assets. If liquidity in these pools decreases significantly, it can lead to a loss of peg, resulting in high slippage when swapping between assets. Investors may find it challenging to sell their staked assets promptly.

  • Hacks: Smart contract vulnerabilities can expose your original assets to theft if the protocol gets hacked. For instance, if you mint liquid-staked assets using your cryptocurrency, a hack on the protocol could jeopardize your initial holdings.

  • Validator Slashing & Counterparty Risk: Liquid staking providers manage the staking process, including selecting validators. If unreliable validators are chosen, there's a risk of asset slashing. Operational issues like system downtime or network outages can also impact the safety of staked assets. To mitigate this, it's crucial to select reputable and trusted providers.

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