Crypto Rehypothecation: The High-Risk, High-Reward Strategy That Can Pay Off Big

Rewards are common in the crypto world, and there are several ways to put your assets to work for more. Liquidity mining is a widely popular method, but that’s just the beginning. Over the years, numerous financial instruments and techniques from traditional spheres have been adapted to cryptocurrencies and tokens. One of those techniques is rehypothecation.

This concept traditionally refers to financial institutions using client assets (e.g., securities posted as collateral) for their own transactions, often leveraging them for additional trades or loans. That’s why the name: ‘hypothecated’ assets (assets offered as a guarantee for a debt) are re-used as a way for more financial gain. Customers aren’t always aware of this risky practice, but, if they are, they can be compensated with lower fees.

The concept has been loosely adapted into some specific types of tokens and methods in crypto. Here, rehypothecated assets imply that the same cryptocurrency is reused in multiple places, usually to earn extra rewards, secure several networks at the same time, or provide more liquidity in different protocols. Let’s see some of the methods.

Restaking & Liquid Staking

Restaking is a way to reuse staked assets to secure multiple Proof-of-Stake (PoS) crypto networks at once. In traditional staking, users lock up their crypto to help maintain a network and are compensated for it. Restaking builds on this by letting the same staked tokens be used to support additional protocols, increasing potential earnings.

For instance, you can stake ETH on Ethereum, get staking rewards, then use a restaking protocol to secure another network with the same ETH, earning extra rewards. However, this also raises the risk of slashing—a penalty imposed when a “validator” misbehaves—since the assets are committed to multiple networks simultaneously. Despite these risks, restaking is seen as a way to improve capital efficiency in PoS security.

On the other hand,liquid staking solves a major limitation of traditional staking: the inability to access locked funds. When users stake their assets, they usually can’t use them elsewhere. Liquid staking platforms create a solution by issuing tokens that represent the staked assets, allowing them to be traded or used in decentralized finance (DeFi) applications. For example, a user who stakes ETH through a liquid staking provider might receive a token like stETH, which can be used in lending or trading. This process boosts liquidity but also introduces risks, such as smart contract vulnerabilities and price fluctuations in the secondary market.

Wrapped Tokens

It’s important to remember that every crypto network is natively isolated from the others —they’re not connected and, therefore, their internal assets can’t be used outside of it without extra help. That’s why wrapped tokens were built: they’re coins that represent another asset on a different network. They’re often created by locking the original asset in a digital vault and minting an equivalent token on the new chain. This way, they enable different coins to move between different chains.

For example, Bitcoin can’t natively operate on Ethereum-like networks, but wrapping it into WBTC (Wrapped Bitcoin) allows it to be used on numerous DeFi platforms. While wrapped tokens themselves are not directly a form of rehypothecation, they can be further used in staking, lending, and trading, effectively multiplying their presence across multiple platforms. This increases liquidity but also raises concerns about centralization and asset custody.

All of these methods contribute to rehypothecation by allowing the same assets to be utilized in multiple ways, often for additional rewards. While this can create more opportunities for users, it also comes with risks such as potential losses from slashing, smart contract failures, and reduced transparency in asset ownership. As with any financial decision, crypto holders should carefully consider the benefits and dangers before participating in these systems.

Rehypothecation in Obyte

Obyte isn’t a PoS network, using instead a Directed Acyclic Graph (DAG) and a system of Order Providers (OPs) to ensure decentralization and total autonomy of users. However, it offers a secure and neutral, interference-free environment for these kinds of activities due to its features, framed in a censorship-resistant and unstoppable crypto network.

One of such features is customized assets: tokens you can create on Obyte to represent anything of value, like staked coins or wrapped tokens from other chains. These tokens can be used across different applications, such as staking, lending, or trading, without needing intermediaries. Obyte’s Autonomous Agents (AAs) and various apps, including the Counterstake Bridge, can automate these processes, making it easy to reuse your assets while keeping everything decentralized and secure. Wrapped Bitcoin, for instance, can be used through Counterstake.

Besides, Obyte’s public ledger ensures you can always see how your assets are being used. This, combined with its potential features and decentralized applications, makes Obyte a great platform for maximizing the use cases of your crypto assets while minimizing risks. Whether you’re staking, lending, or trading, Obyte provides the framework to safely and efficiently reuse your assets for greater rewards.

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