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

Since the launch of the Ethereum POS-based Beacon Chain on December 1, 2020, the Ethereum staking track has officially commenced. To date, Ethereum staking has undergone six development stages, namely: native staking → staking as a service → pooled staking → liquid staking → decentralized staking → restaking. According to the "division of labor" in this track, two roles can be roughly distinguished in Ethereum staking: the validators who invest money and the operators who perform the work.

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Liquidity staking tokens ) LST ( allow Ethereum holders to stake across multiple DeFi protocols to earn rewards. While this mechanism can enhance investment flexibility and potential returns, it also introduces higher complexity and risk. 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, liquidity re-staking 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 consider the safety of funds, the transparency of operations, and the 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.

Currently, cryptocurrency staking faces multiple regulatory challenges. Firstly, due to the varying legal status of crypto assets in different countries, regulatory bodies find it difficult to directly apply existing financial regulations to staking activities, increasing risks related to legitimacy, taxation, and compliance. Secondly, the issue of investor protection is significant; cryptocurrency staking involves high risks, and ordinary investors may suffer substantial losses due to a lack of expertise, compounded by the market's high volatility, which can cause investors' capital to evaporate quickly. Therefore, adequate risk warnings and protective measures need to be provided. Furthermore, staking activities may be used for money laundering and other financial crimes, as the anonymity of cryptocurrencies makes tracking funds difficult, hindering efforts to combat money laundering and terrorist financing. The staking mechanism could 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 could lead to loss of funds or erroneous transactions, and regulators need to ensure that staking platforms implement appropriate technical measures to safeguard system security and reliability.

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

The Bitcoin ETFs in the United States include both spot Bitcoin ETFs and futures Bitcoin ETFs. The spot ETFs hold Bitcoin assets through custodial service institutions, while the futures ETFs maintain positions through futures contracts; they are strictly regulated and mainly attract institutional and professional investors.

The Bitcoin ETF in Hong Kong is mainly a spot Bitcoin ETF, which uses compliant custody service providers to store Bitcoin assets, supporting both 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, making the market participants more diverse.

Introduction to Ethereum Stake

Since the launch of the Ethereum POS-based Beacon Chain on December 1, 2020, the Ethereum staking track has officially started, 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 you switch from PoW to PoS, it doesn't mean that you no longer need to "work" to run nodes. Previously, the work required no permission for access, but now you need to first spend money to "purchase" the qualification to operate a node. To stake, 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 funding validators and the working operators.

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)# Six Development Stages of Ethereum Stake

Native staking → Staking as a Service → Joint staking → Liquid staking → Decentralized staking → Re-staking

Native staking: pay for it 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 rewards, no intermediaries.

• Disadvantages:

1. Technical threshold, requires understanding of technology to install and execute the client by oneself.

2. Hardware requirements, you need a fairly good computer and at least a 10MB network.

3. Funding threshold, requires staking 32 ETH.

4. Penalty for forfeiture: If there are issues with the software, hardware, or network that lead to node instability, the staked amount may be forfeited.

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

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

• Benefits: Eliminates technical barriers, only requires investment without effort.

• Disadvantages:

1. Capital threshold, requires staking 32 ETH.

2. Penalty issue: If there are problems with the third-party software, hardware, or network, 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 a third party.

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

Joint staking: Multiple individuals gather 32 ETH to collectively purchase validator qualifications, with a third party responsible for running the nodes, which is essentially similar to a mining pool. Accordingly, the income generated by operating the nodes is also distributed based on the proportion of the staked funds from the participants.

• Benefits:

1. Eliminates the technical threshold, only requires investment without effort.

2. Reduced the threshold to 32 ETH.

• Disadvantages:

1. Although the investment threshold has been lowered, the funds are still locked up in a stake, restricting liquidity.

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

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

4. Give a little profit to a third party.

5. Centralization poses a threat to the security of Ethereum.

The development of Ethereum staking has reached this point, having basically resolved the three major threshold issues of technology, hardware, and funding, and it seems to be approaching saturation. However, in reality, there is still a significant problem that has not been solved, which is the liquidity issue. Because essentially, regardless of which staking method mentioned above is used, it occupies the funds of the validators, and as a node of Ethereum, daily entry and exit require queuing, making it impossible to have funds available for use at any time, especially in the case of joint staking. Therefore, this effectively locks the liquidity of the validators.

Liquid staking ### LST (: Multiple individuals pool together 32 ETH to purchase validator qualifications, with a third party responsible for running the nodes, and the platform will provide 1:1 stETH to release liquidity, representing the projects Lido, SSV, and Puffer.

• 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.

• Disadvantages:

1. Regarding the confiscation issue, if there are problems with the software, hardware, or network of a third party, the staked funds will be confiscated, but the third party will not.

2. Risk issues, you may need to outsource the custody of 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 unease and anxiety to the entire industry, thus solving the centralization problem has become the next direction for the staking sector (.

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

• Benefits:

1. Eliminates the technical barriers, just investing money without effort.

2. Reduced the threshold to 32 ETH.

3. No need for locked liquidity, improving capital utilization.

4. Improve the degree of decentralization of operators, reduce the risk of users' stake being confiscated, and enhance the security of Ethereum.

• Disadvantage: Give up some profit to a third party.

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

)# 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 consensus, focusing more 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 increased, thereby giving rise to the need for re-staking.

The purpose of staking is to allow users to put a certain amount of funds as collateral to become nodes, maintaining the security of a certain project, thereby earning profits. If a node acts 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 need staking to ensure the safety of participants, a professional term known as AVS (Active Verification Service).

For the project party, the purpose of staking ) is to ensure safety, while for users, the purpose of staking is to earn profits. Therefore, the relationship between funds and projects is 1:1, meaning that every new project launched needs to start from scratch to find ways for users to spend real money staking on it to ensure safety. However, the money in users' hands is limited, and the project party needs to compete for the limited staking funds available in the market for their own safety. Users can only choose to stake their limited funds in a limited number of projects to obtain limited rewards.

ReStaking ( essentially establishes a shared staking pool, allowing a single fund to stake for multiple projects simultaneously, achieving a "one fish, multiple eats" effect, transforming the relationship between funds and projects from 1:1 to 1:N. This enables users to obtain excess returns and alleviates the pressure on projects competing for staking funds. For example, people are currently choosing to stake their funds in Ethereum, reaching 30 million, and Ethereum already possesses strong security. However, other projects still need to establish their own AVS, so ways can be found to allow other applications to inherit and share Ethereum's security.

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)# 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, which 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 to verify 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 re-staking process, ensuring that the staking status of user assets can be verified and tracked on-chain through the tokenized staking proof.

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

Re-staking requires the circulation of staked assets between different protocols and platforms, which necessitates strong interoperability support to ensure that assets can move safely and effectively across various systems. Cross-protocol interoperability ensures that staked assets can flow freely between different blockchain protocols. This is crucial for achieving re-staking of assets across multiple projects, relying on robust technical support to ensure the security and efficiency of asset transfers.

• Consensus Algorithm Extension)

In the POS system, re-staking may require modifications or expansions to the existing consensus algorithm to support new staking and validation mechanisms. The expansion of the consensus algorithm provides the necessary network security guarantees for re-staking. By adjusting or expanding the existing consensus algorithm, new staking and re-staking activities can be supported, while ensuring