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Just Another Restaking Explainer

What is Restaking

At its core, restaking helps developers build secure infrastructure projects (like oracles, bridges, or DA solutions) by tapping into the massive amount of value already secured within the Ethereum network. It allows developers to design their own proof of stake systems inside smart contracts. These smart contracts determine how much cryptocurrency participants must stake, the rewards for running the project correctly, and the penalties for misbehavior. 

Think of restaking like a miniature version of Ethereum built within a smart contract. Just like Ethereum needs to update its ledger and stay secure, so do projects built on it. This is achieved through PoS: participants lock up cryptocurrency as a guarantee of good behavior. This limits the number of participants who can update the project and provides strong security. Those misbehaving risk losing their stake (slashing), while those who help the project run smoothly earn rewards. The total amount of cryptocurrency staked determines the project's economic security, making it costly for anyone to attack.

Restaking applies the same security principles as PoS blockchains to other kinds of projects. Developers set requirements within smart contracts, such as how much cryptocurrency must be staked, the rewards for good behavior, and penalties for acting maliciously. This allows them to tap into the existing security of Ethereum, which includes both staked ETH and the ability to opt into these projects while still validating Ethereum. Without restaking, developers would need to bootstrap their own economic security, a slow process. This usually involves launching their own tokens, attracting users to buy and stake them, and gradually building up a substantial value locked to deter attacks. It's a challenging path, especially when dealing with a new and potentially volatile token. Some projects, like Chainlink, rely on the reputation of their node operators to ensure security. While this can be effective to a degree, it ultimately relies on trust rather than verifiable economic incentives.

Restaking changes the game entirely. It lets developers leverage the value secured on Ethereum right from the start. This means tapping into not only the ~$100bn of staked ETH securing the Ethereum network itself, but also ERC20 assets within the Ethereum ecosystem, worth hundreds of billions more. This is a seismic shift. Projects that previously could only dream of achieving robust security levels can now access it practically overnight. It's like going from building a small neighborhood watch to having the entire national guard at your disposal.

Consider the example of oracle networks. Before restaking, Chainlink had a dominant position due to its established reputation and network of node operators. However, restaking enables the creation of oracle networks where nodes have both their reputation and significant capital on the line. This poses a real threat to incumbents like Chainlink, as new projects can quickly achieve greater levels of security, disrupting the existing landscape and fostering greater competition. An application's security is only as secure as its weakest link. In many cases that link is its price oracle. This drastically increases the economic security of the oracle, and as a result, the security of the entire app.

If a developer wants to build restaking services they need to code the node software to run these services as well as design the PoS consensus and encode it into an Ethereum smart contract. Users can then decide via the economic incentives if they want to run that particular service. If they decide they do they simply send coins, or "restake" their Beacon Chain ETH, to the restaking staking smart contract and run the node of the service.

Restaking could also run more like delegated PoS (this is how EigenLayer works) where there's a separation between stakers (who provide tokens to lock up) and operators (who run the technical side of things). On the system's UI you'll see a list of professional node operators, how much is currently delegated to them, and their fees. You simply click on an operator, choose how much to delegate, and they run the software on your behalf.

EigenLayer interface for the operator P2P.org. It shows the total value of delegated assets, the services they are registered to operate nodes for, and an option for users to delegate their assets to them.

Users evaluate restaking services, considering the economic incentives (potential rewards vs. slashing risks) and the technical requirements (node software, hardware) to decide if they want to run them. If interested, they can either directly "restake" their Beacon Chain ETH or stake their ERC20s into the service's smart contract and run the node themselves, or delegate their stake to a professional operator, depending on the restaking platform's design.

This restaking ecosystem functions much like a marketplace, mirroring how node operators choose which blockchains to support. Just as operators evaluate different blockchains based on factors like the staking token's potential, rewards, slashing risks, and node requirements, they now have the same choices with restaking services. The key difference is that restaking happens entirely through smart contracts on Ethereum and can be managed through a single user interface. Also, depending on the design of the restaking service, you might not even need to buy their native token. Instead, you can often use ETH or other ERC20 tokens directly.

To "restake" your Beacon Chain ETH, you need to set this up when you initially become a validator. Instead of using a standard withdrawal address, you create a specialized restaking contract and link it to your validator. This allows you to allocate portions of your staked ETH to other restaking services. When you decide to withdraw your ETH from being a validator on the Beacon Chain, the restaking smart contract will assess your performance. If you've acted honestly, you'll receive additional rewards. However, if you've engaged in malicious behavior, you could face slashing penalties.

Is it Risky?

You might be wondering how you can use the same 32 ETH that's securing Ethereum to secure other things. Isn't that spreading yourself too thin or even worse, recreating the financial instruments that caused the 2008 financial crisis, where the same underlying assets were repackaged and resold multiple times, amplifying risk? The key difference is that restaking doesn't involve creating new financial products or hiding risk. Your ETH remains on the Beacon Chain, securing the Ethereum network. By opting into restaking, you simply take on additional responsibilities, such as running nodes for oracles or data availability solutions. You're not removing your ETH from its core duty, you're extending its usefulness. While there might be some overlap between Ethereum validators and restaking operators, restaking itself doesn't add to your Ethereum validator tasks.

The risks of restaking are primarily managed through slashing. If you don't meet the requirements of the restaking service you're supporting, you could lose some of your staked ETH. In a worst-case scenario, if slashing reduces your ETH below the validator threshold, you'll be removed as a validator. Think of it like this: you're already working hard to secure Ethereum. Restaking lets you make your ETH even more productive, earning extra rewards while contributing to other vital services. It's a way to increase your impact, but it comes with the responsibility to maintain high performance across all your roles.

Restaking isn't without risks. A major concern is the potential for a mass slashing event on the restaking layer. If many validators get slashed simultaneously, they could be ejected from the Beacon Chain, significantly reducing Ethereum's overall security and potentially creating pressure for a social layer fork to resolve the issue. Additionally, there's a risk of collusion among restaking operators. We'll discuss how EigenLayer and the community are actively working to mitigate these risks later.

State of Restaking

EigenLayer, the first live restaking platform on Ethereum, launched deposits on December 19th, 2023. While native ETH restaking (ETH also used for Ethereum validation) was uncapped, Liquid Staking Token deposits initially had limits to ensure system stability. These limits have been gradually lifted and removed entirely as of April 16th, 2024. Despite these early limits, demand remains high, and the system is cautiously scaling. Current TVL is ~$15bn.

Token Terminal EigenLayer Dashboard

Before exploring EigenLayer further, let's define a few key terms: 

  • Operators: Entities that handle the technical aspects of Actively Validated Services (AVSs), which are infrastructure projects built on EigenLayer. 

  • Delegators (or Restakers): Individuals who choose to stake their cryptocurrency (ETH or LSTs) to support specific AVSs. In doing so, they can potentially earn rewards or have their coins be slashed depending on if the operator is malicious.

EigenLayer launched on mainnet on April 9th, 2024, with EigenDA (an AVS developed by Eigen Labs) as the first AVS. At launch, payments to operators and slashing are not live. They planned to be implemented later this year once the protocol is more mature. Once slashing is live, if a service is run incorrectly, anyone can submit proof, and the smart contract will slash the staked currency. A veto committee, composed of stakers, operators, and AVS developers, will serve as a safeguard during the early stages of slashing. They will be able to reverse slashing decisions from non-malicious errors. This helps reduce risk for stakers and operators while AVSs are being refined.

Over 61.1% of EigenLayer's TVL comes from native ETH used for Ethereum validation. LSTs make up the remainder, led by Lido's stETH at 21.5% of the total TVL.

Some Current Eligible AVSs to Receive Stake

  • EigenDA: A data availability solution for Ethereum rollups and other applications. 

  • Brevis coChain: Allows smart contracts to access onchain historical data and customizable trustless computations, enabling data-driven DeFi, zkBridges, and more.

  • AltLayer MACH: Provides fast finality for rollups on Optimism and Arbitrum, improving transaction confirmation times.

  • Xterio Mach: Supports Web3 game development, offering player-driven experiences built on decentralized infrastructure.

  • eoracle: A oracle network, enabling offchain data feeds for smart contracts. 

  • Lagrange State Committees: Introduces ZK light clients to optimistic rollups, improving their security and efficiency.

Risks

Restaking introduces several potential risks to the Ethereum ecosystem, including:

  • Compromised Neutrality: Adding responsibilities to Ethereum validators could jeopardize Ethereum's core principle as a neutral base layer. Pressure to intervene in external service failures might lead to social layer forks, undermining trust in Ethereum.

  • "Too Big to Fail" Dynamics: Reliance on forks to resolve issues could favor large projects, as they have more leverage to influence such decisions. This risks centralizing the ecosystem and harming innovation.

  • Increased Staking Pool Centralization: EigenLayer's rewards structure may further incentivize staking pools, potentially leading to a few pools controlling significant portions of staked ETH. This weakens decentralization.

  • Complex Risk for Delegators: Assessing the risks of AVSs and operators is difficult for delegators. This could lead to uninformed decisions, increasing the potential for both centralization and slashing events.

  • Collusion Potential: Coordinated attacks by colluding operators could target several AVSs simultaneously and undermine the system's security model.

EigenLayer and the Ethereum community are mitigating these risks by:

  • Prioritizing Contained AVSs: Supporting AVSs designed to minimize the impact on the broader Ethereum ecosystem.

  • User-Friendly Risk Tools: Developing tools and education to help delegators properly assess risks.

  • Collusion Monitoring: Monitoring restaking patterns to identify collusion attempts.

  • Veto Committee: Temporary safety against unintended slashing in early-stage AVSs.

Liquid Restaking Protocols

Instead of delegating directly through EigenLayer's UI, users can opt to use LRT (Liquid Restaking Token) protocols. These protocols simplify restaking. You deposit your ETH or supported LSTs into an LRT protocol. The protocol pools these deposits and, upon reaching increments of 32 ETH, uses them to spin up new validators. These validators then participate in both Ethereum validation and opt into restaking on EigenLayer. As these validators earn rewards from both traditional staking (Beacon Chain ETH and LSTs) and securing AVSs, the value of your LRT (representing your stake in the pool) increases. LRTs can also often be used within DeFi protocols while your underlying stake continues to earn rewards. EigenLayer currently has a 7 day withdrawal window to ensure accurate rewards and/or slashing calculations. LRT protocols may offer immediate withdrawal options, assuming there's sufficient liquidity available within the protocol's pool. It's also typically much cheaper (gas wise) to deposit your tokens into an LRT protocol rather than directly through EigenLayer.

DeFi Llama Liquid Restating Dashboard

There's currently $10.6bn of value locked in Liquid Restaking protocols, with different protocols choosing to support different AVSs on top of their Ethereum validation duties. Some LRT protocols are even building their own AVSs. One LST provider predicts an additional 0.5% yield from running AVSs on top of traditional staking rewards, “would be nice”. For more on the specifics of each LRT protocol, I'd recommend this Bankless episode.

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