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Liquid Restaking Tokens Are Stacking Risks Most DeFi Users Miss
- 3 days ago
- 7 min read
From the Ethereum validator to a leveraged loop, every step adds a failure mode
By early 2026, liquid restaking tokens held more than $14 billion in deposits on Ethereum, according to DeFiLlama. The category did not exist 24 months earlier. Most holders see one yield number on a dashboard. What they rarely see is the chain of obligations underneath that yield: an ETH validator, a restaking middleware layer, a basket of actively validated services, a wrapper token, and, in many cases, a leveraged loop stacked on top. Each layer adds a small return. Each layer also adds a failure mode. The question is whether the yield justifies the risk most users cannot see.
How restaking grew so fast
Restaking entered DeFi as a simple idea. Validators staking ETH on Ethereum could pledge that same stake to secure additional protocols. The original validator job did not change. The staked ETH could now serve as collateral for services that needed economic security and could not afford to bootstrap their own validator set.
EigenLayer launched the first version of this design on the Ethereum mainnet in June 2023. By the end of 2024, the protocol had attracted billions in restaked ETH. By Q1 2026, EigenLayer alone secured more than $12 billion in restaked deposits according to DeFiLlama, making it one of the largest sources of pooled economic security in DeFi.
Other restaking platforms followed. Symbiotic, Karak, and a handful of smaller projects built variants of the same model. Some focused on Ethereum. Some pushed restaking onto Bitcoin or Solana. The category broadened quickly, but EigenLayer remained dominant on Ethereum.
Liquid restaking tokens emerged on top of this base layer. Instead of asking users to lock ETH directly into a restaking platform and accept the multi-day withdrawal cycle, LRT issuers offered a wrapper. Users deposited ETH or LSTs, such as stETH. They received a single token that represented their position. That token moved freely across DeFi. Lenders accepted it as collateral. Liquidity pools paired it against ETH. Looping strategies borrowed against it to buy more of the same wrapper.
The growth that followed was striking. Ether.fi, Renzo, Kelp, Puffer, and Swell each crossed $1 billion in TVL during 2024 and into 2025. By the end of 2025, more than 30 LRT protocols will have competed for deposits. Yields ranged from low single digits on the base layer to double digits on leveraged loops.
The appeal was obvious. Users earned standard ETH staking yield, restaking yield, protocol points, and the ability to keep their capital productive elsewhere in DeFi. For users who had spent years parking ETH in lending markets at 2% to 4%, the math looked good.
The hidden cost is what most dashboards do not display. Each yield source above the base ETH staking layer comes from a different protocol, with different code, operators, and slashing conditions. To see the real risk, we have to walk down the stack.
What sits underneath an LRT
At the bottom sits the Ethereum validator. This is the most secure layer in the stack. The validator runs Ethereum consensus, follows protocol rules, and earns issuance plus priority fees. Slashing on this layer is rare and tied to clear violations, such as double-signing or extended downtime.
Above the validator sits a liquid staking token. Most LRTs use stETH, ETHx, or a similar token as the underlying asset rather than raw ETH. That layer adds smart contract risk and operator risk from the LST issuer. Lido, Rocket Pool, and others have spent years hardening these systems, but they remain a real point of failure. A bug in the LST contract or a coordinated operator failure flows directly into every LRT built on top of it.
Above the LST sits the restaking platform itself, EigenLayer or one of its competitors. This layer takes the LST and points it at one or more actively validated services, called AVSs. An AVS could be an oracle network, a data availability layer, a cross-chain bridge, or an L2 sequencer. Each AVS sets its own slashing conditions. Each AVS can punish the staker for failures unrelated to Ethereum consensus. By Q1 2026, more than 25 AVSs were live or in testnet on EigenLayer, with new ones launching regularly.
Higher up sits the LRT issuer. This protocol holds the user’s deposit, decides which AVSs to opt into, manages the operator set, and mints the wrapper token. The wrapper is the asset the user holds. The issuer’s decisions about AVS selection and operator delegation determine how much slashing risk the user takes.
At the top of the stack sits DeFi composability. Money markets like Aave and Morpho accept the wrapper as collateral. DEX liquidity pools pair it against ETH or USDC. Leveraged loop strategies borrow against the wrapper to buy more of the same wrapper, repeating the cycle several times. Each composability step adds liquidation risk, oracle risk, and price discovery risk to the position.
A user who deposits ETH into an LRT and then loops it twice on a lending market has now stacked at least seven distinct risk layers on top of one another. The dashboard shows one number. The position has seven failure modes.
Five protocols hold most of today's deposits, and their designs differ in ways that matter.
The protocols holding most of the deposits
Ether.fi positioned itself as a non-custodial issuer. Users keep their ETH in a smart contract they can exit, and the protocol delegates to a curated operator set. Ether.fi crossed $5 billion in TVL in mid-2025 according to DeFiLlama, making it the largest single LRT issuer. Its scale brings benefits: deeper liquidity, better integrations, and more attention from auditors. Its scale also concentrates risk if the issuer contract carries a flaw.
Renzo took a different approach. It pooled deposits and used an actively managed AVS basket. The model promised higher yield through diversification across services. It also concentrated decision-making in the protocol team, which selected which AVSs to opt into and reweighted the basket over time. Renzo crossed $2 billion in TVL in 2024 and faced a notable depeg event in April 2024 when the price of ezETH on secondary markets fell below the underlying value during a market drawdown. The episode forced a number of leveraged positions into liquidation.
Kelp focused on the speed of integration with money markets. The rsETH token was shipped early on Aave, Compound, and Morpho, making looping strategies easy to set up. That ease drove adoption. It also drove leverage. By late 2025, leveraged positions held a meaningful share of the rsETH supply rather than spot wallets.
Puffer Finance is built around an anti-slashing technology called Secure Signer. The pitch was that operators using Puffer could not double-sign even if compromised. The system added complexity but reduced one of the worst classes of slashing risk. Puffer also experimented with permissionless operator entry, which differs from the curated operator sets used by most LRT issuers.
Swell pursued a hybrid path. The protocol ran its own L2 and offered restaking, an LRT, and a chain-level token economy in one stack. That integration was a feature for some users. For others, it added another protocol to the failure stack and another team whose code had to keep working.
Each of these protocols has shipped real code, attracted real deposits, and paid real yield. None has suffered a catastrophic failure as of early 2026. That track record is reassuring. It is also short. The category is younger than most of the underlying smart contracts it builds upon.
For a DeFi user choosing between LRTs, the right question is not which one has the highest yield. The right question is which operator set, which AVS basket, and which exit mechanism the user trusts. Three risk classes deserve more attention than dashboards give them.
The risks the dashboards do not show
Slashing concentration is the first. Most LRT issuers point deposits at overlapping AVS sets. If a popular AVS misconfigures its slashing logic and punishes a large operator group, multiple LRTs can incur losses simultaneously. This is the opposite of diversification. It is a correlated failure, hidden by the appearance of holding different wrapper tokens.
Depeg risk is the second. LRT wrapper tokens are not redeemable for the underlying ETH on demand. Withdrawals run on epoch cycles that can stretch from days to weeks. In a stress event, the secondary market price of the wrapper can fall well below the redemption value as holders rush for the door. We saw this in early 2024, when several LRT tokens traded at discounts of 5% to 7% during a market drawdown. Users in leveraged loops faced forced liquidations they had not planned for. The wrappers eventually recovered. Many of the leveraged positions did not.
Smart contract risk is the third. Each layer in the stack runs its own codebase, and each codebase does different work: the LRT issuer’s contract holds user funds, the restaking platform enforces slashing, the AVS contracts define failure conditions, and the lending market sets liquidation thresholds. A single exploit at any layer can drain the position. Users typically understand the risk at a single level. Few audit the full stack.
A useful mental model is to ask: for any LRT position, how many distinct teams must keep their code working correctly for the position to retain value? The answer is rarely fewer than four. It is often more than seven. For users still inclined to hold an LRT, four practical checks make the difference between an informed position and a blind one.
The takeaway
Restaking solves a real problem in Ethereum security. LRTs make that primitive accessible to ordinary DeFi users. They also stack risks in ways that single-number dashboards do not communicate. Before holding any LRT, count the layers between your deposit and your yield. If you cannot name every team, every contract, and every slashing condition in the stack, you are not measuring the position you hold.
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