When the market is highly volatile, the most important thing for a restaking protocol is not high yield or large TVL, but the ability to separate risks to protect users.
This is the point where most first-generation LRT models have failed: they lump all types of risks into one 'basket', from AVS risk, oracle risk, liquidity risk, backing risk to market risk.
Once volatility appears, the entire structure collapses at once. Lorenzo takes a different approach.
Instead of trying to increase yield by any means, they separate each layer of risk into independent tiers, making incidents in one layer not spill over into another layer. This approach makes Lorenzo one of the best-performing restaking models in handling volatility during the 2024–2026 cycle.
The first point in how Lorenzo separates risk lies in limiting backing assets.
Many LRT protocols use a mixed asset portfolio, including highly volatile tokens or long-term assets that are difficult to value. When the market drops, these tokens lose value much faster than ETH or native staking assets, causing backing to decrease and triggering panic.
Lorenzo only uses deep liquidity assets with transparent value as backing, which means that any market shock only affects the underlying asset price layer, without pulling in additional side-effect risk layers.
Being conservative in asset selection helps the system have a natural buffer against cascading effects.
The second layer of risk separation is controlling AVS exposure. Restaking 1.0 made mistakes by allocating assets to too many AVS without thoroughly analyzing the operational risks of each network. Lorenzo chooses an AVS mechanism based on the 'low-risk first, expand later' model. This means they only allocate to AVS that have proven stability, clear activity, and do not require high-risk levels during execution.
When the market is volatile, long-tail AVS often encounter issues, but Lorenzo does not expose itself to this group. As a result, AVS risk — which is the hardest type of risk to predict in restaking — is separated from market price risk, helping users avoid unexpected incidents.
One of the most important mechanisms for Lorenzo to reduce user risk is to separate the backing asset value from the trading price of LRT. If an LRT's price is entirely dependent on liquidity on a DEX, when the market drops sharply, thin liquidity leads to deep depeg. Lorenzo separates these two factors by maintaining a direct redeem mechanism based on the value of backing assets. This creates a natural price floor for LRT: even if the market trades at lower levels, the redeem mechanism still ensures users can exchange for the corresponding assets. When a price floor exists, panic selling decreases sharply. This is how to separate liquidity risk from market price risk.
A more subtle form of risk separation lies in how Lorenzo handles oracles. Slow or erroneous oracles are a leading cause of many restaking protocols losing their peg during strong dumps. Lorenzo uses oracles updated per block of Injective, with low latency and no congestion during active market periods. But more importantly, they do not use a single oracle source for the entire system. Internal pricing layers are separated, so if the on-chain oracle is out of sync for a short time, the system does not execute liquidation actions or assess risks too early. This prevents oracle risk from spilling over into operational risk.
Another layer of protection comes from Lorenzo not mixing liquidity risk with staking risk. Other LRTs allow users to stake assets into multiple strategies below, causing when mass withdrawals occur, the protocol must remove many layers of liquidity at once. Lorenzo uses a single-backing model: backing assets can be withdrawn through a clear process without needing to dismantle multiple strategy layers. This makes capital withdrawal during strong volatility smoother, reducing the likelihood of selling pressure and decreasing the chance of depeg.
Lorenzo's risk system also separates market risk from user behavior risk. This may sound abstract, but it is actually very important. The yield design protocol aims for stability, making the majority of users a 'safe - long-term' group, not the 'farm and withdraw' group. When the market drops, the users who panic are often the farming group, while long-term users exhibit more stable behavior. Attracting the right user group from the beginning helps Lorenzo reduce behavioral risk — a form of non-technical risk that is crucial for maintaining the peg.
Lorenzo also has a dedicated risk separation layer for extreme volatility, through a risk engine per block. This engine monitors backing status, AVS stress levels, price volatility, capital withdrawal demand, and market liquidity. When there is a signal beyond the threshold, the system switches to safety mode, limiting activations that could add risk, such as opening new positions or allocating AVS. This is a 'minimizing activity' layer very similar to the design of banks in the traditional system. It separates operational risk from market risk, preventing small risks from turning into large risks.
One form of ultimate risk separation — and the most important — comes from the Injective infrastructure itself. Lorenzo does not operate on a chain with a congested mempool or fluctuating fees. When the market drops sharply, many protocols cannot process transactions because the network is clogged. This prevents risk protection measures from being activated at the right time. Injective has a fixed block time, is not congested, and does not increase fees. As a result, Lorenzo's risk control layers can operate as designed. This infrastructure creates the final layer of risk separation: separating systemic risk from network risk.
When putting all layers together — low-risk backing, limiting long-tail AVS, redeem mechanism creating price floor, separate oracles, unblended liquidity, a safe user community, proactive risk engine, and stable Injective infrastructure — it can be seen that Lorenzo does not aim to eliminate risk, but to separate it to prevent ever experiencing a 'failure cascade'. This is how traditional financial institutions design stress-resilient systems. And Lorenzo is bringing that standard into restaking.
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