Key Points

Restaking is a mechanism designed to boost returns by freeing up liquidity and increasing leverage, primarily based on Ethereum’s security framework. It can provide additional income for stakers and improve capital efficiency, but it also comes with risks such as forfeiture, liquidity issues, centralization, contract risks, and smart contract vulnerabilities. EigenLayer is the pioneer in this area, but with the entry of competitors like Symbiotic, Karak Network, Babylon, BounceBit, and Solayer, the market is becoming more dispersed, potentially facing more challenges in the future. Users should carefully weigh the risks and rewards of participating in restaking protocols and set up appropriate contract monitoring to protect their assets.

An In-Depth Look at the Restaking Landscape

Background

Staking and Liquid Staking

In Ethereum, staking involves locking ETH to support the network’s operations and security. In Ethereum 2.0, staking is part of the Proof of Stake (PoS) consensus mechanism, replacing the previous Proof of Work (PoW) system. Stakers become validators by staking ETH, participating in block creation and confirmation, and earning staking rewards in return.

Liquid Staking Derivatives (LSDs) were introduced to address liquidity issues in traditional staking. They allow users to receive liquidity tokens representing their staked shares (like Lido’s stETH or Rocket Pool’s rETH) while their tokens are staked. These liquidity tokens can be traded, lent, or used for other financial activities on different platforms, allowing users to earn staking rewards while maintaining capital flexibility.

Breakdown of the Trust Network

The Bitcoin network introduced the concept of decentralized trust, designed as a peer-to-peer digital currency system based on UTXO and script language. However, its ability to build various applications is limited. Ethereum later introduced a highly programmable virtual machine (EVM) and a modular blockchain concept, allowing developers to build decentralized applications (DApps) on its consensus layer, providing trust and security for all DApps. However, many protocols or middleware fail to fully leverage Ethereum’s trust network.

For example, Rollup improves Ethereum’s performance by separating transaction execution from the EVM and only returning to Ethereum during transaction settlement. However, these transactions are not deployed and verified on the EVM, so they cannot fully rely on Ethereum’s trust network. Other systems based on new consensus protocols like sidechains, data availability layers, new virtual machines, oracles, and cross-chain bridges face similar challenges and need to establish their trust layer to ensure security and prevent malicious behavior, known as Active Verification Services (AVS).

Liquidity Fragmentation

As the largest PoS blockchain, many projects rely on staking for security, such as cross-chain bridges, oracles, data availability layers, and zero-knowledge proofs. Each new project requires users to lock funds, leading to competition for limited capital. As staking yields rise, project risks increase, creating a vicious cycle. Users can only stake limited funds in projects, resulting in low capital utilization. As public chains, applications, and projects increase, liquidity becomes more fragmented.

Market Demand for Staking Services

With the approval of Bitcoin spot ETFs and the successful Cancun upgrade of Ethereum, Ethereum is revitalized. As of July 15, 2024, more than $111 billion worth of ETH is staked, accounting for 28% of the total supply. The amount of staked ETH is called Ethereum’s “security budget” because these assets are penalized by the network in the event of double-spending attacks or other protocol violations. Users who stake ETH contribute to Ethereum’s security and receive rewards through protocol issuance, priority fees, and MEV. Users can easily stake ETH through liquid staking pools without sacrificing liquidity, leading to increased demand for staking.

In this context, the demand for shared security has arisen, requiring a platform that can use staked assets to secure multiple projects. This is the background for the emergence of restocking.

What is Restaking?

Today, modular blockchain expansion has led to many new protocols and supporting middleware. Each network needs its security mechanism, usually adopting a variant of the PoS consensus, but this approach isolates each security pool.

Restaking uses one blockchain’s economic and computational resources to protect multiple blockchains. In PoS blockchains, restaking allows one chain’s staking weight and validator set to be used on any other chains. This means using liquidity staking tokens already staked on Ethereum for validators on other blockchains to earn more rewards and improve the security and decentralization of new networks. The result is a more unified and efficient security system that multiple blockchain ecosystems can share. This concept extends Ethereum’s economic trust to protect other distributed systems like oracles, bridges, or sidechains.

The concept of restaking has existed for years. The Polkadot ecosystem tried it in 2020. In May 2023, Cosmos launched a restaking model called “replicated security”; in June of the same year, Ethereum introduced a similar model through EigenLayer. The main value of restaking protocols comes from the staked funds locked on Ethereum, making it the highest in economic security as a PoS blockchain.

A key difference between restaking and liquid staking is that while both mechanisms help staked ETH earn more rewards, restaking fully inherits the trust consensus of staking and expands it, enabling validators to make trustworthy commitments for more applications, infrastructure, or distributed networks, thus improving the overall economic security of the Ethereum ecosystem.

How Does Restaking Work?

Restaking leverages liquid staking token (LST) assets for staking in validators on other blockchains. This generates additional rewards while creating a shared security pool to enhance the security and decentralization of new networks. Specifically, Liquid Staking Tokens (LST) represent tokenized staked ETH and its rewards, while Liquid Restaked Tokens (LRT) represent tokenized restaked ETH and its rewards. Built on Ethereum’s security framework, restaking aims to optimize fund utilization in the cryptocurrency ecosystem. Stakers not only support the security of one network but also provide validation services for multiple networks, earning extra rewards.

Liquidity is a major issue for restaking, similar to PoS staking, as assets become locked in nodes, restricting liquidity. To address this, Liquid Restaked Tokens (LRT) were introduced. LRTs are synthetic tokens issued for restaked ETH or other LSTs, utilized by multiple Active Verification Services (AVS) to ensure the security of applications and networks and to distribute various types of additional rewards. This enables staked assets to provide security support across multiple services, offering stakers extra rewards and returns. Although restaking involves some risks, it brings significant liquidity and benefits to stakers and DeFi.

Competitive Landscape

Case Study

EigenLayer

EigenLayer leads the restaking sector with no large-scale direct competitors yet. As an innovative concept, the market has few direct competitors. However, EigenLayer may face potential competition and challenges from:

• Other LSD protocols like Lido Finance and Rocket Pool developing their restaking features.
• Data availability and governance service protocols like The Graph and Aragon adding LSD features.
• Layer 2 or cross-chain protocols like Polygon and Cosmos develop their security and trust networks.
• LSDFi projects in the market compete for the LSD market share, as EigenLayer mainly uses LSD as collateral.

Karak Network

Karak Network operates similarly to EigenLayer, but its AVS service is called Distributed Security Service (DSS), and it has launched its Layer 2 network K2. Unlike EigenLayer, Karak supports restaking of any assets. The platform supports restaking of ETH, various LSTs and LRTs, and stablecoins like USDT, USDC, DAI, and USDe. Karak has been deployed on Ethereum, Arbitrum, BSC, Blast, and Mantle, allowing users to choose restaking based on their asset distribution.

Babylon

Babylon is a Bitcoin-based restaking protocol introducing staking to Bitcoin, allowing BTC holders to trustlessly stake their assets in other protocols or services needing security and trust, earning PoS staking rewards and governance rights. Babylon has two main functions: BTC holders can stake BTC to provide security and credibility for other protocols and earn rewards; PoS chains or new protocols in the Bitcoin ecosystem can use BTC stakers as validator nodes to enhance security and efficiency.

Solayer

Solayer is a restaking protocol within the Solana ecosystem, supporting SOL holders to stake their assets into protocols or DApp services within the Solana ecosystem needing security and trust, earning more PoS staking rewards. Solayer has completed a builder round of financing, with investors including Solana Labs co-founder Anatoly Yakovenko, Solend founder Rooter, Tensor co-founder Richard Wu, and Polygon co-founder Sandeep Nailwal. Solayer supports users to deposit native SOL, mSOL, JitoSOL, and other assets. As of July 15, 2024, the total locked value (TVL) on the Solayer platform exceeded $105 million, with SOL accounting for about 60%.

Picasso

Picasso is a universal restaking blockchain built on the Cosmos SDK. It connects the base chain through the IBC protocol, processes the details of deposited assets, and allocates funds to AVS. Picasso’s restaking solution is similar to EigenLayer, allowing a subset of the network to join to protect AVS weights. This architecture has been replicated on multiple base chains and unified into Picasso. Picasso’s node operators are selected through a governance mechanism. Currently, Picasso’s restaking layer only accepts assets deposited from Solana via SOL LST and native SOL as restaking collateral. Picasso’s roadmap plans to expand to the Cosmos chain and other assets after launching AVS on Solana. Picasso currently supports restaking products including SOL, JitoSOL, mSOL, and bSOL LST assets.

Universal Restaking Protocol

Universal restaking centralizes the restaking of native assets across multiple chains. This method is asset and base-chain agnostic, allowing many staking assets to be centralized across multiple chains. Universal restaking relies on an additional layer between the economic security source chain and AVS or a series of contracts across multiple blockchains.

Summary

The restaking sector is rapidly evolving. While EigenLayer is a pioneer, more competitors, and innovators are entering the field, expanding the application scenarios and technological boundaries of restaking. This process introduces new revenue models and enhances the blockchain ecosystem’s security and liquidity.

Market Size

As of July 21, 2024, the global ETH liquid staking market’s total value locked (TVL) was $47.599 billion, according to DeFiLlama. Lido dominates this space, holding a substantial 72.31% market share. Lido offers a liquid staking solution that lets users stake ETH on the Ethereum 2.0 network and receive equivalent stETH tokens, which can be used in the DeFi market or for additional staking. Major restaking protocols include EigenLayer and Tenet.

Source: defillama.com/lsd

By June 25, 2024, the global restaking market’s TVL reached $20.14 billion. Most restaking protocols are deployed on the Ethereum chain, with restaked ETH and its derivatives accounting for $19.4 billion. Additionally, restaking protocols on Solana, such as Picasso and Solayer, have staked assets worth $58.5 million. Protocols like Pell Network and Karak, deployed across various chains (including Bitlayer, Merlin, and BSC), have restaked $223.3 million worth of BTC.

The chart below illustrates the TVL of leading restaking solutions (EigenLayer, Karak, Symbiotic, Solayer, Picasso, and Pell Network). Overall, the total value of restaked assets exceeds $20 billion, predominantly from native restaked ETH and ETH LST. The top three categories of restaked assets by TVL are all centered around ETH.

Source: x.com/ZackPokorny_

Key Competitive Factors

Asset Scale

Asset scale is the total amount of assets staked on a platform. A robust staking platform should have a large asset scale to demonstrate its stability and credibility. For instance, EigenLayer has 5,842,593 ETH staked, with a TVL exceeding $18 billion, making it the largest protocol in the restaking field.

Source: dune.com/hahahash/eigenlayer

Yield

Restaking projects need to offer higher yields than single staking to attract users. This involves optimizing staking strategies, reasonably distributing income and rewards, and leveraging compound interest to boost users’ capital efficiency and returns. EigenLayer’s restaking scheme, for example, allows liquidity tokens to earn yields from staking Ethereum and other cross-chain bridges, oracles, and LP staking.

• Yields from staking Ethereum through liquid staking protocols like Lido to get stETH;
• Token rewards for constructing and validating nodes for partner projects;
• LP rewards for staking liquidity tokens in DeFi.

Liquidity

Restaking projects must address the liquidity issues of staked assets, enabling users to easily join or exit staking or transfer assets to other protocols or platforms. Therefore, services like liquid staking tokens, liquidity mining, and lending markets are crucial to enhancing users’ liquidity and flexibility.

Security

Protecting user assets is the primary goal of staking projects. Restaking projects must ensure user assets are not compromised due to smart contract vulnerabilities, validator misconduct, or hacker attacks. High-level security measures and risk management mechanisms, including multi-signatures, firewalls, insurance, and penalty mechanisms, are essential. EigenLayer, for instance, secures Ethereum-related staked assets through validator nodes and employs forfeiture mechanisms to leverage the main net’s security.

Ecosystem

Restaking projects need to build a robust ecosystem that supports validation services for various PoS networks and protocols. This will enhance network security and decentralization while providing users with more choices and opportunities. Achieving this requires cooperation and integration with other blockchain platforms, DeFi applications, and Layer 2 protocols.

Risks of Restaking

Forfeiture Risk

In Ethereum’s staking mechanism and restaking protocols, there is a 50% risk of forfeiture. This means users’ funds could be forfeited, although this risk is distributed across multiple nodes.

Liquidity Risk

Many restaking protocols lock a significant portion of Liquid Staking Tokens (LST). If most LSTs are locked in restaking pools, it could lead to increased price volatility of LSTs relative to ETH. This increases users’ risk exposure because the security of AVS is directly tied to LST liquidity. When a specific type of LST is overly concentrated in AVS, liquidity risk escalates.

Centralization Risk

Centralization risk can lead to DAO hacker attacks. For instance, if one-third of ETH is concentrated in a single AVS, surpassing the traditional Byzantine fault tolerance threshold, this portion of ETH could be forfeited not due to double signing or technical issues but due to failure to submit fraud proofs. Centralization increases the system’s coupling, heightening its overall vulnerability.

Contract Risk

Participating in restaking involves interacting with project contracts, exposing users to the risk of contract attacks. Project funds are stored in protocols like EigenLayer’s contracts, and if these contracts are compromised, users’ funds could be lost.

LST Risk

LST tokens may face de-pegging or value deviations due to contract upgrades or attacks.

Exit Risk

Most mainstream restaking protocols, except EigenLayer, do not currently support withdrawals. If projects fail to implement withdrawal logic through contract upgrades, users will not be able to withdraw assets and will have to rely on the secondary market for liquidity exits.

How to Mitigate These Risks

Restaking is a new concept that has not undergone extensive testing at the contract or protocol level. In addition to the risks mentioned, there may be other unknown risks. Hence, mitigating risks is crucial.

Fund Allocation

For users with large funds participating in restaking, directly participating in EigenLayer’s native ETH restaking is ideal. In native ETH restaking, users’ deposited ETH assets are stored in Beacon chain contracts, not EigenLayer contracts. Even in a contract attack scenario, attackers cannot immediately access users’ assets.

Source: x.com/ZackPokorny_

For users with large funds who do not want to wait for long redemption times, relatively stable stETH can be used as the participation asset, directly invested in EigenLayer.

Users looking to earn additional returns can allocate some funds to projects built on EigenLayer, such as Puffer, KelpDAO, Eigenpie, and Renzo, based on their risk tolerance. However, these projects have not yet implemented withdrawal logic, so participants must consider exit risks and monitor the liquidity of related LRTs in the secondary market.

Monitoring Configuration

These projects have contract upgrade and suspension capabilities, and the project parties’ multi-signature wallets can perform high-risk operations. Advanced users are advised to configure contract monitoring systems to track contract upgrades and the execution of sensitive operations by project parties.

Optimizing Parameters

Optimize restaking parameters (TVL limit, slashing amount, fee distribution, minimum TVL, etc.) and ensure fund diversification among AVS. Restaking protocols allow users to choose different risk scenarios when depositing for restaking. Ideally, users should assess and choose which AVS to restake to, without delegating this process to the DAO.

Source：https://docs.google.com/presentation/d/1iIVu6ywaCqlTwJJbbj5dX07ReSELRJlA/edit?pli=1#slide=id.p23

Challenges Faced

From the application chain perspective, restaking applications like EigenLayer can meet the needs of small and medium-sized application chains to reduce node deployment costs. However, these chains cannot fully meet their security requirements, and the sustainability of their demand is relatively weak.

From a competitive standpoint, while the restaking track has significant capital, as more restaking applications launch, market funds will become dispersed. If profits from restaking applications like EigenLayer decrease, such as during a bear market, the demand from application chains may sharply decline, potentially leading to a liquidity crunch.

From the partners’ perspective, EigenLayer initially developed 14 AVS partners. While early AVS might be attracted by potential returns, the security risks of the restaking mechanism might affect the willingness of subsequent AVS operators to join.

From the user’s perspective, short-term users may not receive substantial staking returns. The uncertainty of staking yields could negatively impact the growth of future user numbers.