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

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, which are: native staking → staking as a service → pooled staking → liquid staking → decentralized staking → re-staking. According to the "division of labor" in this track, two roles can be roughly distinguished in Ethereum staking: the validators who put in money and the operators who do the work.

Liquid staking tokens ( LST ) allow Ethereum holders to stake across multiple DeFi protocols to earn rewards. While this mechanism increases investment flexibility and potential returns, it also introduces higher complexity and risk. Once LSTs are locked in a specific staking protocol, they cannot be used for trading or as collateral for other DeFi operations. To address this liquidity issue, liquid restaking tokens ( LRT ) have emerged.

LRT unlocks the liquidity of LST through the re-staking process and increases potential benefits by introducing a leverage mechanism. Additionally, users can choose to maintain greater flexibility by using specific liquidity re-staking protocols instead of directly depositing LST.

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

Regulatory bodies hold a reserved attitude towards cryptocurrency staking activities

Currently, cryptocurrency staking faces multiple regulatory challenges. Firstly, due to the differing legal statuses of crypto assets in various countries, regulators find it difficult to directly apply existing financial regulations to staking activities, which increases risks related to legitimacy, taxation, and compliance. Secondly, there are significant investor protection issues, as cryptocurrency staking involves high risks; ordinary investors may suffer significant losses due to lack of expertise, and coupled with high market volatility, investors' capital can quickly evaporate, hence the 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 tracking funds difficult, hindering efforts to combat money laundering and terrorism financing. The staking mechanism may also affect the supply and demand relationship of crypto assets, leading to market price manipulation and undermining the fairness and integrity of the market. Finally, staking relies on complex technologies and operational processes; vulnerabilities or failures in smart contracts may result in fund losses or erroneous trades, and regulators need to ensure that staking platforms adopt appropriate technical measures to safeguard system security and reliability.

Comparison of Bitcoin ETFs in Hong Kong and the United States

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

In the United States, there are both spot Bitcoin ETFs and futures Bitcoin ETFs. The spot ETFs hold Bitcoin assets through custodial service providers, while the futures ETFs hold positions through futures contracts. The regulation is strict, mainly attracting institutional and professional investors.

The Bitcoin ETF in Hong Kong is mainly a spot Bitcoin ETF, which stores Bitcoin assets through compliant custodial service agencies, supporting both 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, resulting in a more diversified market participation.

Introduction to Ethereum staking

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

Even though the transition from PoW to PoS does not mean that there is no need to "work" to run nodes, it is just that previously work did not require permission, while now you must first spend money to "purchase" the qualification to operate a node. Staking means you need to deposit 32 ETH in order to activate a validator, which qualifies you to participate in network consensus.

So we can roughly divide Ethereum staking into two roles: the validators who contribute funds and the operators who perform the work.

Six Development Stages of Ethereum Stake

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

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Native staking: Pay for yourself, operate the node yourself, 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 income with no intermediaries.

• Disadvantages:

1. Technical threshold, you need to understand the technology to install and execute the client yourself.

2. Hardware threshold, you need a computer with good performance and at least a 10MB network.

3. Funding 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, you need to manage the security of your private keys and mnemonic phrases by yourself, and periodically upgrade the nodes.

Stake as a Service: Simply invest money to become a validator, while a third party is 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 issues, if there are problems with the third-party software, hardware, or network, the stake will be forfeited, but the third party will not.

3. Risk issues, you may need to outsource the custody of your private keys and mnemonic phrases.

4. Give a little profit to third parties.

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

Joint Stake: Multiple individuals pool together 32 ETH to jointly purchase validator qualifications, with a third party responsible for running the node operations, which is essentially akin to a mining pool. Accordingly, the earnings generated from operating the node are distributed proportionately based on the staked funds of the participants.

• Benefits:

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

2. Reduced the threshold to 32 ETH.

• Disadvantages:

1. Although the investment threshold has been lowered, the funds are still locked in with limited liquidity.

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

3. Risk issues, may need to entrust the private key and mnemonic phrase.

4. Give a little profit to a third party.

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

With the development of Ethereum staking to this point, the three major threshold issues of technology, hardware, and funding have basically been resolved, and it seems to be nearing saturation. However, in reality, there is still a significant issue that has not been addressed, which is the liquidity problem. Essentially, regardless of which staking method is used, it occupies the funds of the validators, and as a node of Ethereum, daily entries and exits require queuing, making it impossible to have funds available for immediate use, especially in the case of pooled staking. Therefore, this effectively locks up the liquidity of the validators.

Liquid Staking ) LST (: Multiple individuals pool together 32 ETH to jointly 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 technical barriers, only requires investment without effort.

2. Reduced the threshold to 32 ETH.

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

• Disadvantages:

1. Penalty issues, if there are problems with the third-party software, hardware, or network, the staked amount will be confiscated, while the third party will not.

2. Risk issues may require outsourcing private keys and mnemonics.

3. Give a little profit to the 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 addressing the centralization problem has become the next direction for the staking sector.

Decentralized staking: Achieve permissionless access for third-party operators through technologies such as DVT and remote signing.

• Benefits:

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

2. Reduced the threshold to 32 ETH.

3. No need to lock liquidity, improving the utilization rate of funds.

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

• Disadvantages: Give a little profit to a third party.

) Re-staking Introduction

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

The purpose of staking is to allow users to put down 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 behaves 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. The technical term for this is AVS (Active Verification Service).

For project parties, the purpose of staking ) Staking ( is to ensure security. For users, the purpose of staking is to earn returns, so the relationship between funds and projects is 1:1. That is, each new project launched needs to find a way to get users to spend real money to stake in it 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. At the same time, users can only choose from limited projects to stake their limited funds and obtain limited returns.

ReStaking ) essentially establishes a shared staking pool, allowing a single fund to achieve the effect of staking for multiple projects simultaneously to ensure security, enabling users to get more than one benefit from their investment. This transforms the relationship between funds and projects from a 1:1 to a 1:N relationship, thus allowing users to obtain excess returns, while also 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 has strong security. However, other projects still need to establish their own AVS, and there are ways to allow other applications to inherit and share Ethereum's security.

( 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. 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, typically 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.

- 跨协议互操作性(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 securely and effectively 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 the POS system, re-staking may require modifications or extensions to the existing consensus algorithm to support new staking and validation mechanisms. The extension of the consensus algorithm provides the necessary network security for re-staking.