Mellow Finance to Help Lido Hold On to its Place as Largest DeFi Protocol

Restaking wars are heating up as Mellow Finance’s launch this week is helping the pioneering liquid staking protocol, Lido Finance, wrestle market share from rising giant, EigenLayer.

Mellow Finance is the liquid restaking protocol for Symbiotic, an EigenLayer competitor, and is now a part of the Lido Alliance, an initiative designed to establish stETH as a foundational restaking asset.

Mellow’s total value locked grew to $115 million just one day after its June 11 launch. The restaking service raised a $5.8 million seed round from venture capital firm Paradigm and the Lido founders' investment firm Cyber.Fund.

Mellow Finance introduces a “modular infrastructure” for creating Liquid Restaking Tokens (LRTs), offering depositors a range of permissionless vault options. This setup allows users to choose their own risk levels when restaking.

Within 5 hours of its launch, which was also on Tuesday, Symbiotic depositors reached the platform’s initial cap of 41,290 wstETH, or $173 million.

"Mellow enables depositors more flexibility regarding their desired level of exposure to risk while still benefiting from the liquidity of staked assets,” read the documentation.

Lido's DeFi Breakthrough

Launched in December 2020, Lido was the breakout sensation in decentralized finance (DeFi), allowing users to stake cryptocurrency on Ethereum, while receiving a tradable token called stETH, representing their deposits.

This proved extremely popular and propelled Lido to become the largest DeFi protocol on Ethereum, currently holding $33 billion worth of deposits.

However, Lido has faced challenges with a declining market share as many users have shifted assets over to EigenLayer, a protocol that allows users to restake Ethereum's native ETH token to help secure other networks. EigenLayer amassed $18 billion worth of deposits since opening to investors last year.

Lido’s TVL has declined 13% after peaking at $39.8 billion in March, while EigenLayer’s TVL has almost doubled in that time to $19 billion.

EigenLayer attracted users with its restaking model that allows them to use staked ETH to secure other protocols, increasing investors’ staking yields.

What Are Restaking Vaults?

Mellow Finance is building its restaking vaults using Symbiotic, which accepts any crypto asset based on Ethereum's ERC-20 token standard.

EigenLayer only accepts certain assets like ETH, EIGEN, and select ETH derivatives. And while EigenLayer accepts deposits of Lido's stETH, it has placed caps on the amount of stETH one can deposit.

Curators

Mellow Finance will offer customizable vaults managed by curators who distribute assets across various validated services. Curators such as Steakhouse Financial, P2P Validator, Re7 Labs, and MEV Capital will introduce vaults accepting stETH. Initially, users will earn "points" for their deposits, which could potentially convert to token airdrops later.

This is similar to EigenLayer’s restaked points system, which allows users to accumulate points based on the quantity of their staked assets and the duration for which they are staked.

What’s Next

As Symbiotic wstETH limits have been capped for now, new deposits into Mellow vaults don’t get restaked into Symbiotic. This means even as more ETH gets into Mellow vaults, the amount of Symbiotic points shared among those ETH stakers remains the same, leading to potential dilution.

To address this, Mellow Finance has proposed that depositors who contributed before hitting the Symbiotic limit will receive 1x Symbiotic and 1x Mellow points. Those who deposited afterward will get 1.5x Mellow points until their deposits can be restaked into Symbiotic, at which point they will also begin to accumulate Symbiotic points.