Staking, or participating in the verification and creation of blocks on the blockchain network by freezing one’s funds, has become an important aspect of the cryptocurrency ecosystem. However, beyond the simple act of granting tokens in exchange for network support, more and more advanced practices are emerging, such as re-staking.
In this article, we’ll take a closer look at what re-staking does, how it works, and what benefits it brings to investors.
What is Re-staking?
Re-staking is a process in which an investor who already participates in staking chooses to redirect their rewards (i.e., staking tokens) back into the same staking process, instead of cashing them out and realizing the profits. In short, instead of reaping the rewards, the investor chooses to reinvest them to increase their share of the staking.
To delve into the process of re-staking, let’s use the example of Ethereum. In the case of ETH, re-staking involves betting on the same ETH on Ethereum and other platforms. Re-staking tokens enables users to maximize their staking tokens (stETH, frETH, rETH) and ETH itself. In practice, this is because these assets can interact with other ETH applications and gain additional rewards, rather than just profiting from staking ETH. Interestingly, protocols that enable ETH re-staking simultaneously secure many other networks using the capital of the staked ETH.
In a financial context, this new functionality allows us to reinvest the rewards resulting from participating in ETH staking or holding liquid ETH. This process generates compound interest on our initial investment, leading to an increase in total returns over the long run. For example, if an investor receives a 6% annual return on ETH from participating in staking or a 5.5% return on ETH from depositing in an LSD protocol, automatic reinvestment of rewards can generate an additional 2-4% interest per year.
Although re-staking can yield more favorable returns compared to traditional staking, there are risks associated with this method that require attention, such as market volatility and potential price fluctuations. This risk directly affects investors, as they take long positions every time they reinvest in any asset. Therefore, it is crucial to conduct a thorough analysis of market trends and short- and medium-term price behavior.
How does Re-staking work in practice?
The re-staking process is usually simple and automated. After earning rewards from the staking process, the investor has the option to automatically redirect those rewards back to the staking process, instead of transferring them to a portfolio or exchange. This way, instead of taking profits out, the investor increases their stakes, enhancing the potential to earn more rewards in the future.
Advantages of re-staking
First and foremost, increasing profit. Re-staking allows investors to boost their capital by reinvesting the rewards they earn. This enables profits to grow over time.
Impact on the network. Re-staking delegation helps increase investor participation in the verification and maintenance process of the blockchain network, contributing to its security and efficiency.
Moreover, for those who prefer passive investment strategies, re-staking provides an attractive option. Investors can maintain their involvement in the cryptocurrency ecosystem while benefiting from stable returns.
Optimizing passive income. Re-staking allows investors to optimize their passive income by focusing on the long-term value growth of their staking commitment.
Summary
Re-staking is an advanced strategy that enables investors to maximize their profits and impact on the blockchain network. By automatically reinvesting rewards, participants in staking can increase their exposure to the cryptocurrency ecosystem while reaping the benefits of increasing returns.
However, as with any investment, it is important to understand both the benefits and potential risks of re-staking before making an investment decision and reinvesting your funds.