Ethereum yet to recover as Coinbase says restaking carries "hidden risks"

Ethereum yet to recover as Coinbase says restaking carries “hidden risks”

  • Ethereum’s price has been consolidating since the recent crypto market correction weakened the bullish sentiments of traders.
  • Coinbase analysts have warned of the risks that restaking protocols carry.
  • Ethereum Foundation developers have been the target of criticism after a recent article on ETH’s issuance curve.

Ethereum’s price has been consolidating on Wednesday following its recent crash. The recent price movement follows Coinbase analysts raising concerns about “hidden risks” in restaking protocols and criticism labeled at the Ethereum Foundation after an article recommending adjustments to the ETH issuance curve.

Also read: Ethereum drops further as Bitcoin’s decline, uncertainty over ETF weigh

Daily digest market movers: Coinbase says restaking introduces risks to Ethereum amid criticisms at developers

Ethereum (ETH) has seen over $84 million in liquidations in the past 24 hours. As ETH price cools off, several interesting factors are playing out within its ecosystem:

  • Coinbase analysts David Duong and David Han highlighted the hidden risks in liquid restaking protocols and their tokens in a research report released on April 2. These protocols became popular following the launch of the Eigenlayer restaking protocol on Ethereum.
  • Eigenlayer allows protocols to maximize yields through a restaking process where users receive extra yields in liquid restaking tokens (LRTs) for restaking the derivative tokens they earned from staking Ethereum in protocols like Lido Finance. This is similar to repurposing collateral from a DeFi loan to earn extra yields on other protocols.
  • The analysts warned that while leveraging staked tokens in several protocols at the same time earns good yields, “it can also compound risks” from a financial and security perspective. They noted that pursuing capital efficiency may expose restakers to high risk. “LRTs may be incentivized to maximize their yields to gain market share, but these could come at the cost of a higher (albeit hidden) risk profile,” Coinbase analysts said.
  • The analysts also noted that LRT DAOs may expose themselves to too many risks as the restaking structure incentivizes them to “maximally restake multiple times to remain competitive.” This follows a jump in the total value locked (TVL) of restaking protocols like Etherfi, Renzo, Kelp, etc.
  • Some members of the crypto community have also labeled criticisms at Ethereum developers after a recent document published on March 30 by Ethereum Foundation researcher Michael Neuder proposed a change in the issuance curve of the largest altcoin.
  • Eric Conner, co-author of the Ethereum Improvement Proposal 1559 (EIP-1559), said in an X post on March 30, “The current push to tweak it is a completely over reaction to centralization concerns that are unfounded.” He added, “I’ll fight this idea with anything I have.”
  • Another X user made similar remarks voicing against Ethereum’s monetary policy being tampered every year. Meanwhile, community member @post_polar_ also took to X, saying Ethereum developers appear to have “an outsized power” and aren’t engaging “the wider set of stakeholders.” However, Ethereum developer Tim Beiko responded to his criticism in another X post saying that this polemic is engaging.
  • The US Security and Exchange Commission (SEC) filed Fidelity’s Ethereum ETF application on Tuesday but Bloomberg analyst James Seyffart said in an X post that this doesn’t improve the odds of an approval. He also mentioned that “silence from the SEC isn’t a good thing.”

Read more: Ethereum consolidates above $3,500 as Bitwise CIO says ETF delay would be positive

Technical analysis: ETH bulls show weak hands

Ethereum price is yet to recover losses incurred from its sharp decline on Monday. Current price movements indicate uncertainty after the decline weakened bullish sentiments.

However, ETH could rise to around $3,493 to fill up liquidity voids from Monday’s sharp decline. If Bitcoin’s price also recovers, ETH’s price could resume bullish momentum and target $3,517.42, $3,570.58, and $3,655.32.

ETH/USDT 1-hour chart

Also read: US Dollar strength could be one of the reasons why Bitcoin could crash more

This thesis would be invalidated if the bears prevail to send its price below the $3,204.54 support.

 

Ethereum FAQs

Ethereum is a decentralized open-source blockchain with smart contracts functionality. Serving as the basal network for the Ether (ETH) cryptocurrency, it is the second largest crypto and largest altcoin by market capitalization. The Ethereum network is tailored for scalability, programmability, security, and decentralization, attributes that make it popular among developers.

Ethereum uses decentralized blockchain technology, where developers can build and deploy applications that are independent of the central authority. To make this easier, the network has a programming language in place, which helps users create self-executing smart contracts. A smart contract is basically a code that can be verified and allows inter-user transactions.

Staking is a process where investors grow their portfolios by locking their assets for a specified duration instead of selling them. It is used by most blockchains, especially the ones that employ Proof-of-Stake (PoS) mechanism, with users earning rewards as an incentive for committing their tokens. For most long-term cryptocurrency holders, staking is a strategy to make passive income from your assets, putting them to work in exchange for reward generation.

Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) mechanism in an event christened “The Merge.” The transformation came as the network wanted to achieve more security, cut down on energy consumption by 99.95%, and execute new scaling solutions with a possible threshold of 100,000 transactions per second. With PoS, there are less entry barriers for miners considering the reduced energy demands.

 




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