In-depth Analysis Report on Re-staking and Hong Kong Virtual Asset ETF

Summary

re-stake

Since the launch of the Ethereum 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: 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: validators who put in money and operators who do the work.

The liquid staking token ( LST ) allows Ethereum holders to stake across multiple DeFi protocols to earn rewards. This mechanism, while increasing investment flexibility and potential returns, 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, the liquid re-staking token ( LRT ) has emerged.

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 use 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 enhance the efficiency of capital utilization while contributing to the security and decentralization of the blockchain network.

Regulatory authorities hold a reserved attitude towards cryptocurrency stake activities.

Currently, cryptocurrency staking faces multiple regulatory challenges. First, due to the differing legal status of crypto assets in various countries, regulators find it difficult to directly apply existing financial regulations to staking activities, increasing risks related to legitimacy, 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 quickly evaporate, hence there is a need for adequate risk warnings and protective measures. Furthermore, staking activities may be used for money laundering and other financial crimes, and the anonymity of cryptocurrencies makes it difficult to trace funds, hindering anti-money laundering and counter-terrorism financing efforts. 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 may lead to fund losses or erroneous transactions, and 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

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

The Bitcoin ETFs in the United States include both spot Bitcoin ETFs and futures Bitcoin ETFs. Spot ETFs hold Bitcoin assets through custodial service institutions, while futures ETFs maintain positions through futures contracts; regulation is strict, primarily attracting institutional and professional investors.

The Bitcoin ETF in Hong Kong is primarily a spot Bitcoin ETF, which stores Bitcoin assets through compliant custody service institutions, supporting physical and cash subscriptions; at the same time, the regulatory environment is relatively relaxed, attracting not only institutional investors but also high-net-worth individual investors, resulting in a more diverse group of market participants.

Introduction to Ethereum Stake

Since the launch of the Ethereum POS-based 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 it transitions 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 for access, whereas now you need to first "purchase" the qualification to operate a node with money. Staking means you need to deposit 32 ETH to activate the validator, which qualifies you to participate in network consensus.

So we can roughly divide Ethereum staking into two roles: the validators who put in money and the operators who do the work.

Six Development Stages of Ethereum Stake

Native Stake → Stake as a Service → Joint Stake → Liquid Stake → Decentralized Stake → Re-stake

Native stake: Use your own money, operate your own nodes, and be responsible for all client software and hardware maintenance and costs.

• Benefits:

1. More secure and decentralized for the Ethereum network.

2. Earn 100% stake rewards with no intermediaries.

• Disadvantages:

1. Technical barrier, need to understand technology to install and execute the client by oneself.

2. Hardware threshold, a decent computer is required, with at least a 10MB network.

3. Funding threshold, requires staking 32 ETH.

4. Penalty issue: If there are problems with the software, hardware, or network that cause node instability, the staked amount will be forfeited.

5. Risk issues, you need to manage the security of your private keys and mnemonic phrases yourself, and periodically upgrade the nodes.

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

• Benefits: Eliminates technical barriers; just invest money without putting in effort.

• Disadvantages:

1. Capital threshold, requires staking 32 ETH.

2. Penalty issue: If there are problems with third-party software, hardware, or networks, the staked amount will be confiscated, but the third party will not.

3. Risk issues may require entrusting private keys and mnemonic phrases.

4. Give a little profit to the third party.

5. Centralization poses a threat to Ethereum's security.

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 akin to a mining pool. Correspondingly, the earnings generated from operating the node are distributed based on the proportion of the pooled staked funds.

• 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 lowered, the funds are still staked and locked in liquidity.

2. Penalty issue, if there are problems with third-party software, hardware, or networks, the staked funds will be confiscated, but the third party will not.

3. Risk issues may require outsourcing the private key and mnemonic phrase.

4. Allocate a portion of the profit to a third party.

5. Centralization poses a threat to Ethereum's security.

The development of Ethereum staking has reached this point, and the three major threshold issues of technology, hardware, and funding have basically been resolved, appearing to be close to saturation. However, in reality, there is still a significant issue that has not been addressed, which is the liquidity problem. Essentially, regardless of the staking method mentioned above, it occupies the funds of the validators, and as a node of Ethereum, daily entry and exit require queuing, making it impossible to access funds on demand, especially in joint staking. Therefore, this essentially locks up the liquidity of the validators.

Liquidity Stake ( LST ): A group of individuals gathers 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.

• Benefits:

1. Eliminates the technical barrier, only investing money without putting in effort.

2. Reduced the threshold of 32 ETH.

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

• Disadvantages:

1. Regarding the confiscation issue, if there are problems with the third-party software, hardware, or network, the stake will be confiscated, while the third party will not.

2. Risk issues, you may need to entrust your private keys and mnemonic phrases.

3. Give a little profit to a third party.

4. Centralization poses a threat to the security of Ethereum. ( The issue of centralization can easily bring unrest and anxiety to the entire industry, so addressing the problem of centralization 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, only investing money without putting in effort.

2. Reduced the threshold to 32 ETH.

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

4. Improve the decentralization level of operators, reduce the risk of user stakes being confiscated, and enhance the security of Ethereum.

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

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) Re-staking Introduction

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 achieving consensus, with PoS placing more emphasis 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, which helps maintain the security of a specific project, thereby earning profits. If a node acts maliciously, the collateral will be forfeited. Therefore, it is not only Proof of Stake (POS) chains that require staking to ensure security; cross-chain bridges, oracles, DA, ZKP, etc., also require staking to ensure the security of participants. The professional term for this is Active Verification Service (AVS).

For project parties, the purpose of staking ) is to ensure security, while for users, the purpose of staking is to earn returns. Therefore, there is a 1:1 relationship between funds and projects. That is to say, every new project launched needs to find ways to get users to spend real money on staking from scratch to ensure security. However, the money in users' hands is limited, and project parties need to compete for the limited staking funds available in the market for their own security. Meanwhile, users can only choose to stake their limited funds in a limited number of projects to obtain 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 meals. This transforms the relationship between funds and projects from 1:1 to 1:N, enabling users to gain excess returns while alleviating the pressure on projects competing for staking funds. For example, people are currently choosing to stake funds in Ethereum, reaching 30 million, which already has strong security. However, other projects still need to establish their own AVS. Therefore, it is possible to find ways for other applications to inherit and share Ethereum's security.

![ReStaking ) and Hong Kong Virtual Asset ETF Depth Analysis Report] ( https://img-cdn.gateio.im/webp-social/moments-bff3b84fc8563233050437835ab846df.webp)

( The technical principle 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, which allows for the programming and management of the state and permissions of staked assets. On a technical level, re-staking involves several key components:

- Staking Proof Mechanism)Staking Proof Mechanism(

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

- 跨协议互操作性(Cross-Protocol Interoperability)

Re-staking requires the movement of staked assets between different protocols and platforms, which necessitates strong interoperability support to ensure that assets can move safely and efficiently across various systems. Cross-protocol interoperability ensures that staked assets can flow freely between different blockchain protocols. This is crucial for enabling the 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 verification mechanisms. The extension 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.