Prior to the Binance Launchpool debut, Renzo, a liquid restaking protocol built on top of Eigenlayer, released its tokenomics this week. Its details, however, have disappointed many stakeholders, including the ETH stakers within the protocol and holders of ezETH, Renzo’s liquid restaking token. This has resulted in a brief price drop of ezETH to approximately $700, followed by a cascade of liquidations among leverage restaking farmers.
To give some context, Renzo, along with other similar protocols, functions on top of Eigenlayer. Eigenlayer enables users to re-stake their liquid staked Ethereum (such as Lido’s stETH), thereby earning extra rewards. This arrangement permits other networks to utilize Ethereum’s security infrastructure instead of developing their own validation protocols. The success of Eigenlayer is highlighted by its total value locked (TVL), which has surpassed $15 billion.
However, when users deposit their ETH or stETH into Eigenlayer, it becomes locked, prompting the development of liquid restaking protocols like Renzo. These protocols issue liquid tokens that represent the underlying deposits in Eigenlayer, providing users with restaking rewards while maintaining liquidity through tradable tokens. This model resembles Lido’s stETH but differs in that the tokens are deposited into the Eigenlayer. Currently, over $3 billion in ETH is staked on Eigenlayer through Renzo.
Interestingly, neither Eigenlayer nor Renzo has issued a token yet. Both, however, operate a points system that rewards users who stake with them. For example, ETH stakers with Renzo earn points from both Eigenlayer and Renzo, which are expected to convert into tokens. This anticipation has fueled excitement among airdrop farmers, significantly inflating the TVL for Renzo and other restaking protocols.
The excitement could be tempered without the use of leverage. Protocols like Gearbox and Morpho allow users to leverage their point farming. Essentially, users can deposit 1 ETH and gain exposure as if they were holding 9 ETH in Renzo. For this system to function effectively, the price of Renzo’s liquid restaked ETH, ezETH, must be pegged to the ETH price to prevent the liquidation of leverage point farmers.
However, the announcement of Renzo’s tokenomics led to widespread disappointment due to a large portion of tokens being allocated to investors and the team, with only about 5% going to liquidity providers in the initial airdrop. Additionally, Binance Launchpool was slated to receive 2.5% of the tokens two days before ezETH holders, giving them ample time to sell their shares before the airdrop recipients.
This led to many ezETH holders starting to unwind their positions, which resulted in a depegging event. Traders, unable to withdraw their underlying assets directly, were forced to sell through a $200 million liquidity pool on Blast.
The limited liquidity of this pool exacerbated the depeg of ezETH, causing difficulties for leveraged points farmers on platforms like Gearbox and Morpho. The automatic unwinding of leveraged positions that used ezETH as collateral on DeFi lending platforms led to a further drop in ezETH price, creating a feedback loop and triggering more liquidations.
Although the price has since stabilized, the damage was significant, with liquidations across platforms like Morpho and Gearbox totaling over $65 million.
In response to the backlash, Renzo adjusted its initial tokenomics by increasing the community allocation by 2% and pulling forward the timing for community members to claim tokens ahead of Launchpool participants.
Despite these changes, many stakeholders remain dissatisfied with the situation and continue to signal their intent to sell the governance token and unstake their ETH from the protocol as opportunities arise.
The project is expected to launch its governance token on April 30th, with a subsequent listing on Binance.
