Re-stake ( ReStaking ) and In-depth Report on Hong Kong Virtual Asset ETF Depth Analysis

Summary

re-stake

Since the launch of Ethereum's POS-based Beacon Chain on December 1, 2020, the Ethereum staking track has officially begun. So far, Ethereum staking has gone through six development stages, namely: Native staking → Staking as a Service → Joint staking → Liquid staking → Decentralized staking → Re-staking. According to the "division of labor" in this track, we can roughly distinguish two roles in Ethereum staking: the validators who put in the money and the operators who do the work.

Liquidity staking token ( LST ) allows Ethereum holders to stake across multiple DeFi protocols to earn rewards. While this mechanism can increase investment flexibility and potential returns, it also brings higher complexity and risks. Once LST is locked in a specific staking protocol, it cannot be used for trading or as collateral for other DeFi operations. To address this liquidity issue, liquidity re-staking token ( LRT ) was born.

LRT unlocks the liquidity of LST through the re-staking process and increases potential benefits by introducing a leverage mechanism. In addition, users can choose to participate in specific liquidity re-staking protocols instead of directly depositing LST, thereby maintaining greater flexibility.

The implementation of re-staking not only requires a high level of technical expertise, but also needs to consider the security of funds, the transparency of operations, and the stability of the system. Through these technical means, re-staking can improve capital utilization efficiency while contributing to the security and decentralization of blockchain networks.

Regulatory agencies have a reserved attitude towards cryptocurrency stake activities.

Currently, cryptocurrency staking faces multiple regulatory challenges. Firstly, due to the different legal statuses of crypto assets in various countries, regulators find it difficult to directly apply existing financial regulations to staking activities, increasing risks related to legality, taxation, and compliance. Secondly, investor protection issues are significant; cryptocurrency staking involves high risks, and ordinary investors may suffer substantial losses due to a lack of expertise. Coupled with the high volatility of the market, investors' capital can evaporate rapidly, hence there is a need to provide adequate risk warnings and protective measures. In addition, staking activities may be used for money laundering and other financial crimes; the anonymity of cryptocurrencies makes fund tracking difficult, hindering efforts to combat money laundering and terrorist financing. The staking mechanism may also affect the supply and demand relationship of crypto assets, leading to market price manipulation and harming the fairness and integrity of the market. Finally, staking relies on complex technologies and operational processes; vulnerabilities or failures in smart contracts can lead to fund losses or erroneous transactions. Regulators need to ensure that staking platforms implement appropriate technical measures to safeguard system security and reliability.

Comparison of Bitcoin ETFs between Hong Kong and the United States

The Bitcoin ETFs in the United States and Hong Kong have significant differences in regulatory environment, investment targets, market participants, and issuance procedures.

The Bitcoin ETF in the United States includes both spot Bitcoin ETFs and futures Bitcoin ETFs. The spot ETF holds Bitcoin assets through custodial service providers, while the futures ETF holds positions through futures contracts; regulation is strict, mainly attracting institutional and professional investors.

The Bitcoin ETF in Hong Kong is mainly a spot Bitcoin ETF, which holds Bitcoin assets through compliant custodial service providers, supporting physical and cash subscriptions; at the same time, the regulatory environment is relatively lenient, attracting not only institutional investors but also high-net-worth individual investors, leading to a more diversified market participation.

Introduction to Ethereum Staking

Since the launch of the Ethereum proof-of-stake beacon chain on December 1, 2020, the Ethereum staking track has officially begun, and the Paris upgrade was completed on September 15, 2022, merging the beacon chain with the main chain and ushering in the PoS era of Ethereum.

Even if we transition from PoW to PoS, it does not mean that there is no need to "work" to run nodes. It is just that previously, the work did not require permission to enter, but now you have to first spend money to "purchase" the qualification to operate a node. Staking means you need to deposit 32 ETH to start the validator, thereby qualifying to run a node and participate in network consensus.

So Ethereum staking can be roughly divided into two roles: the validators who provide the funds and the operators who do the work.

Six Development Stages of Ethereum Stake

Native staking → Staking as a Service → Joint staking → Liquidity staking → Decentralized staking → Re-staking

Native staking: Use your own money, operate the node yourself, and be responsible for all the hardware and software maintenance and costs for the clients.

• Benefits:

1. More secure and decentralized for the Ethereum network.

2. Earn 100% stake rewards, no intermediaries.

• Disadvantages:

1. Technical threshold, requires understanding technology to install and run the client yourself.

2. Hardware requirements: a computer with good performance is needed, with at least a 10MB network.

3. Capital threshold, requires staking 32 ETH.

4. Penalty issues: If there are problems with the software, hardware, or network that lead to node instability, the staked amount will be confiscated.

5. Risk issues, it is necessary to manage the security of private keys and mnemonics on your own, and periodically upgrade nodes.

Stake as a Service: Just pay to become a validator, with a third party responsible for running the node work.

• Benefits: eliminates the technical barrier, just invest money without exerting effort.

• Disadvantages:

1. Funding threshold, requires staking 32 ETH.

2. Penalty issue: If there is a problem with the third-party software, hardware, or network, the staked funds will be forfeited, while the third party will not.

3. Risk issues, you may need to delegate your private key and mnemonic phrase.

4. Give a little profit to a third party.

5. Centralization poses a threat to the security of Ethereum.

Joint Stake: Multiple individuals pool together 32 ETH to collectively purchase validator qualifications, with a third party responsible for running the node operations, which is essentially a mining pool. Correspondingly, the income generated from operating the nodes is also distributed based on the proportion of the staked funds contributed by the group.

• Benefits:

1. Eliminates the technical barrier, just invest money without putting in effort.

2. Reduced the threshold to 32 ETH.

• Disadvantages:

1. Although the investment threshold has decreased, the funds are still staked and locked in liquidity.

2. Penalty and confiscation issues: If there is a problem with the third-party software, hardware, or network, the staked funds will be confiscated, but the third party will not.

3. Risk issues, it may be necessary to entrust the private key and mnemonic phrase.

4. Give a little profit to the third party.

5. Centralization poses a threat to the security of Ethereum.

The development of Ethereum staking has reached a point where the three major threshold issues of technology, hardware, and capital have basically been resolved, and it seems to be nearing saturation. However, in reality, there is still a significant problem that has not been solved, which is the liquidity issue. Essentially, no matter which staking method is used, it occupies the validator's capital, and as a node of Ethereum, daily entry and exit requires queuing, making it impossible to access funds on demand, especially in the case of joint staking. Therefore, this effectively locks up the validator's liquidity.

Liquid Stake ( LST ): Multiple individuals pool together 32 ETH to collectively purchase validator qualifications, with a third party responsible for running the nodes, and the platform will provide 1:1 stETH to release liquidity, representing the projects Lido, SSV, Puffer.

• Benefits:

1. Eliminates technical barriers, just invest money without effort.

2. Reduced the threshold to 32 ETH.

3. No need to lock liquidity, improving capital utilization.

• Disadvantages:

1. Penalty issue: If there are problems with the third-party software, hardware, or network, the staked deposit will be confiscated, while the third party will not.

2. Risk issue, it may be necessary to outsource the custody of private keys and mnemonic phrases.

3. Give a little profit to a third party.

4. Centralization poses a threat to Ethereum's security. ( The issue of centralization can easily bring unrest and anxiety to the entire industry, so solving the centralization problem has become the next direction for the staking track ).

Decentralized Staking: Achieve permissionless access for third-party operators through technologies like DVT and remote signing.

• Benefits:

1. Eliminates the technical barrier, just invest money without any effort.

2. Reduced the threshold to 32 ETH.

3. No need for locked liquidity, improving capital utilization.

4. Improve the degree of decentralization of operators, reduce the risk of users' stake being confiscated, and enhance the security of Ethereum.

• Disadvantages: Giving up a bit of profit to a third party.

Introduction to Stake Again

The concept of re-staking has gradually developed with the popularization of the PoS( proof of stake) mechanism. In PoS systems, staked funds are used for network security and consensus, focusing more on the locking of capital rather than computational power compared to traditional PoW( proof of work). With the rise of DeFi, the market's demand for capital efficiency has been increasing, thus giving rise to the need for re-staking.

The purpose of staking is to allow users to deposit a certain amount of funds as collateral to become a node, in order to maintain the security of a certain project and earn profits. If a node acts maliciously, the collateral will be forfeited. Therefore, it is not only POS chains that require staking to ensure security; cross-chain bridges, oracles, DA, ZKP, etc., also require staking to ensure the safety of participants, a professional term known as AVS (Active Verification Service).

For project parties, the purpose of staking ( is to ensure security, while for users, the purpose of staking is to earn returns. Therefore, the relationship between funds and projects is 1:1, meaning that for every new project launched, it must find ways to have users invest real money to stake in order to ensure safety. However, the money in users' hands is limited, and project parties have to compete for the limited staking funds in the market for their own security, while users can only choose from the limited projects to stake their limited funds and earn limited returns.

ReStaking ) essentially establishes a shared staking pool, allowing a single fund to provide staking guarantees for multiple projects simultaneously, achieving the effect of one fish for multiple eats, transforming the relationship between funds and projects from 1:1 to 1:N, thus enabling users to obtain excess returns while alleviating the pressure on projects competing for staking funds. For example, people now choose to stake their funds in Ethereum, reaching 30 million, and Ethereum already possesses strong security; however, other projects still need to establish their own AVS, so ways can be found to allow other applications to inherit and share Ethereum's security.

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) The technical principles of re-staking

When discussing the principles of re-staking technology, we need to understand how it is implemented in the blockchain network. Re-staking technology is based on a smart contract system that can program and manage the status and permissions of staked assets. At the technical level, re-staking involves several key components:

- Staking Proof Mechanism(Staking Proof Mechanism)

This is a mechanism that verifies that users have staked assets, usually through a tokenized approach, such as creating a token corresponding to the original asset ### like stETH(. The staking proof mechanism provides a starting point for the entire re-staking process, ensuring that the staking status of user assets can be verified and tracked on-chain through tokenized staking proof.

- Cross-Protocol Interoperability)

Re-staking requires circulating staked assets between different protocols and platforms, which necessitates strong interoperability support to ensure that assets can move safely and effectively across various systems. Cross-protocol interoperability ensures that staked assets can flow freely between different blockchain protocols. This is crucial for realizing re-staking of assets across multiple projects, relying on robust technical support to ensure the security and efficiency of asset transfers.

- Consensus Algorithm Extension(Consensus Algorithm Extension)

In a POS system, re-staking may require modifications or extensions to the existing consensus algorithm to support new staking and validation mechanisms. The expansion of the consensus algorithm provides the necessary network security guarantees for re-staking. By adjusting or extending the existing consensus algorithm, new staking and re-staking activities can be supported while maintaining the decentralization and security of the network.

- On-chain Governance and Automated Execution(

Smart contracts also allow for on-chain governance, which means executing contract terms automatically through code, managing various conditions and rules during the staking process. On-chain governance and automated execution are managed automatically through smart contracts.