Why Cyclic AI?

Why DeFi needs a Credit Hub for Restaking.

Product-Market Fit

Yield has become Ethereum’s defining feature since its adoption of Proof-of-Stake. Tens of billions of dollars have flown into liquid staking tokens since the fall of 2022, and in recent months, the allure of re-staking via Eigenlayer has further drawn in capital. Underpinning this hunt for crypto-native yield has been a dynamic DeFi lending landscape allowing users to leverage up their exposure by borrowing against those staked and restaked positions. As restaking goes live in the coming months and Ethereum achieves its institutional ascendancy with an ETF, it is likely that the demand for credit will only increase going forward.

A quick scan of the lending avenues facilitating the ETH carry trade (i.e., borrowing for cheaper than the yield earned on leveraged collateral), however, shows that there are still opportunities for optimization. Users tend to go about it in one of two ways:

• Borrow dollars against ETH-denominated collateral

• Borrow ETH against ETH-denominated collateral

In the case of the former, borrowers are limited in the leverage they can take on because DeFi lending platforms need to protect against bad debt risk with conservative loan-to-value ratios and a limited offer of only LSTs that are accepted as collateral. Users who want to borrow dollars wind up getting 70 to 80% of their collateral value as a result.

Platforms that facilitate the borrowing of ETH against ETH-denominated liquid staking tokens (LSTs) or liquid restakings tokens (LRTs) are able to offer a much higher loan-to-value ratio as there is not as stark of an asset-liability mismatch, though collateral depegs are of course possible. That said, In the world of utilization based interest rates, this quickly leads to an unattractive cost of capital.