Forwarded Original Title’系统理解EigenLayer：LST、LRT和Restaking的原理是什么’

Introduction: Restaking and Layer2 are important narratives in the current cycle of the Ethereum ecosystem, both aiming to address existing Ethereum issues, but with different approaches. Compared to complex technical means like ZK and fraud proofs, Restaking mainly empowers downstream projects economically, seemingly just asking people to stake assets and earn rewards, but its principle is not as simple as imagined. It can be said that Restaking is like a double-edged sword, empowering the Ethereum ecosystem while also bringing huge risks. People’s attitudes towards Restaking are varied; some say it brings innovation and liquidity to Ethereum, while others argue it is too utilitarian and accelerates the collapse of the crypto market. Undoubtedly, to determine whether Restaking is a panacea or a poison, one must understand what it is doing, why it is doing it, and how it is done, to draw objective and clear conclusions, which is also important for determining the value of its token. When it comes to Restaking, Eigenlayer is an inevitable case.

Understanding what Eigenlayer is doing clarifies what Restaking is doing. This article will use Eigenlayer as an example to explain its business logic and technical implementation in the clearest and most understandable language, analyzing the impact of Restaking on the Ethereum ecosystem in both technical and economic aspects, as well as its significance for the entire Web3.

Explanation of Restaking and Related Terms

We all know that Restaking refers to “staking again,” which originated in the Ethereum ecosystem and became popular after Ethereum transitioned to POS in 2022. But what exactly is “restaking”? Let’s first introduce the background of Restaking, namely PoS, LSD, and Restaking, so that we can have a clearer understanding of Restaking.

1. POS（Proof of Stake）

PoS (Proof of Stake) is a mechanism that probabilistically allocates the right to record transactions based on the amount of assets staked. Unlike Proof of Work (PoW), which allocates the right to record transactions based on the computational power of network participants, PoS is generally considered more decentralized and closer to permissionless. The Paris upgrade, launched on September 15, 2022, marked Ethereum’s official transition from PoW to PoS, completing the merger of the mainnet and the beacon chain. The Shanghai upgrade in April 2023 allowed PoS validators to redeem their assets, confirming the maturation of the Staking model.

2. LSD (Liquid Staking Derivatives Protocol)

As we all know, the interest rate for Ethereum PoS staking is quite attractive, but retail investors find it difficult to access this part of the income. Apart from the requirements for hardware equipment, there are two reasons for this: first, the staking assets of validators must be 32 ETH or multiples thereof, making it unattainable for retail investors. Second, prior to the Shanghai upgrade in April 2023, users could not withdraw staked assets, resulting in inefficient use of funds. To address these two issues, Lido emerged. It adopts a staking model called collective staking, where users deposit their ETH on the Lido platform, which aggregates them as assets staked for running Ethereum Validators, thereby solving the stubborn problem of insufficient funds for retail investors. Additionally, when users stake their ETH on Lido, they receive stETH tokens pegged 1:1 to ETH. stETH can be swapped back to ETH at any time and can also be used as a derivative token equivalent to ETH on mainstream DeFi platforms like Uniswap and Compound, enabling participation in various financial activities. This addresses the low capital utilization issue of PoS Ethereum.

Because PoS involves staking highly liquid assets for mining, products led by Lido are referred to as “Liquid Staking Derivatives” (LSD), commonly known as “LSD.” Tokens like stETH mentioned above are known as Liquid Stake Tokens (LST). It’s easy to see that ETH staked in PoS protocols is the true native asset, whereas tokens like stETH are artificially created. Essentially, stETH represents a leveraged position, similar to the concept of “financial leverage” in economics, where one unit of asset is effectively multiplied into two. The role of financial leverage in the entire economic ecosystem is not inherently good or bad; it requires specific analysis based on the cycle and environment. It’s important to remember that LSD adds the first layer of leverage to the ETH ecosystem.

3. Restaking

Restaking, as the name suggests, uses LST tokens as staking assets to participate in more POS network/public chain staking activities in order to obtain profits and at the same time help more POS networks improve security. After the LST asset is staked, a 1:1 staking certificate will be obtained for circulation, which is called LRT (Liquid Restaking Token). If you stake stETH, you can obtain rstETH, which can also be used to participate in DeFi and other on-chain activities. In other words, LST tokens such as stETH generated out of thin air in LSD are staked again, and a new asset is generated out of thin air, that is, the LRT asset that appears after Restaking, adding a second layer of leverage to the ETH ecosystem. The above is the background of the Restaking track. By this point, a question arises: the more leverage there is, the more unstable the economic system becomes. The concept of LSD can be understood, as it addresses the issues of retail investors’ inability to participate in PoS and enhances capital utilization efficiency. However, what is the necessity of the leverage introduced by Restaking? Why stake the LST, which is already artificially created? This involves both technical and economic aspects. To address this question, the following sections will provide a brief overview of Eigenlayer’s technical structure, followed by an analysis of the economic impact of the Restaking track, and finally, a comprehensive evaluation from both technical and economic perspectives. (So far, this article has introduced many English abbreviations, among which LSD, LST, and LRT are core concepts that will be mentioned multiple times later. Let’s reinforce our memory: ETH staked in Ethereum PoS is the native asset, stETH pegged to the staked ETH is LST, and rstETH obtained by staking stETH again on the Restaking platform is LRT.)

Eigenlayer Product Features

First, let’s clarify the core issue EigenLayer aims to address in terms of product features: providing economic security from Ethereum to some underlying security-based POS platforms. Ethereum has high security due to its considerable amount of staked assets. However, for services executed off-chain, such as Rollup sequencers or Rollup verification services, their off-chain executions are not under Ethereum’s control and cannot directly obtain Ethereum’s security. To achieve sufficient security, they need to build their own AVS (Actively Validated Services). AVS acts as “middleware” that provides data or verification services for terminal products such as DeFi, games, and wallets. Typical examples include “oracle” services that provide data quotes and “data availability layers” that can consistently provide users with the latest data status. However, building new AVSs is quite challenging because: 1) The cost of building a new AVS is high and requires a long time. 2) The staking of a new AVS often uses the project’s own native tokens, which have far less consensus than ETH. 3) Participating in staking for a new network AVS causes stakers to miss out on stable returns from staking on the Ethereum chain, resulting in opportunity costs. 4) The security of a new AVS is much lower than that of the Ethereum network, and the economic cost of attacks is low. If there is a platform that allows startup projects to directly lease economic security from Ethereum, the above problems can be solved.

Eigenlayer is such a platform. Eigenlayer’s whitepaper is titled “The Restaking Collective,” featuring “Pooled Security” and “free market” characteristics. In addition to ETH staking, EigenLayer collects Ethereum staking vouchers to form a security leasing pool, attracting stakers who want to earn additional returns to restake. Then, it provides the economic security provided by these staked funds to some POS network projects, which is called “Pooled Security.” Compared to the unstable and potentially fluctuating APY in traditional DeFi systems, Eigenlayer transparently displays staking rewards and penalty rules through smart contracts, allowing stakers to freely select them. The process of earning rewards is no longer an uncertain gamble but a transparent market transaction, which is the “free market.” In this process, projects can lease Ethereum security instead of building their own AVS, while stakers receive stable APY. In other words, Eigenlayer not only improves the security of the ecosystem but also provides benefits to users in the ecosystem.

The security process provided by Eigenlayer involves three roles:

Secure Lender - Staker (Validator): Stakes funds to provide security.

Secure Intermediary - Operator (Node Operator): Responsible for assisting Stakers in managing funds while helping AVS (Actively Validated Services) execute tasks.

Secure Recipient - AVS (Actively Validated Services) of middleware such as oracles.

(Photo source: Twitter @punk2898)

Someone has made an analogy of Eigenlayer: comparing it to the upstream and downstream of shared bicycles. The shared bicycle company is equivalent to Eigenlayer, providing market services for LSD and LRT assets, similar to how a shared bicycle company manages bicycles. The bicycle is equivalent to LSD assets because they are both assets that can be leased. The rider is comparable to the middleware (AVS) that requires additional verification. Just as the rider rents a bicycle, AVS rents LSD and other assets to obtain network verification services to ensure security. In the shared bicycle model, deposits and default responsibilities are required to constrain users to pay deposits to prevent malicious bicycle damage. Similarly, Eigenlayer prevents malicious behaviour by participating validators through staking and penalty mechanisms.

EigenLayer interaction process from the perspective of smart contracts

Eigenlayer provides security with two core ideas: staking and slashing. Staking provides the basic security for AVS, and the penalty increases the cost of doing evil for any subject. The interactive process of staking is shown in the figure below.

In Eigenlayer, the main interaction with stakers is the TokenPool contract. There are two operations that stakers can perform through TokenPool:

Stake——Staker can stake assets into the TokenPool contract and specify a specific Operator to manage the staked funds.

Redemption——Staker can redeem assets from TokenPool.

Staker needs to go through three steps to redeem funds: 1) Staker adds the redemption request to the request queue and needs to call the queueWithdrawal method. 2) Strategy Manager checks whether the Operator specified by Staker is in a frozen state. 3) If the Operator is not frozen (described in detail later), Staker can initiate the complete withdrawal process. It should be noted here that EigenLayer gives Staker full freedom. Staker can realize the staking and transfer it back to his own account, or turn it into a staking share and re-stake it. According to whether Staker can personally run node facilities to participate in the AVS network, Staker can be divided into ordinary stakers and Operators. Ordinary stakers provide POS assets for each AVS network, while Operators are responsible for managing the staked assets in TokenPool and participating in different AVS networks to ensure the security of each AVS. This is actually a bit like Lido’s routine. Staker and AVS seem to be separated from the security supply side and demand side. Staker often does not understand the products of AVS project parties, cannot trust them, or does not have the energy to directly run equipment to participate in the AVS network; similarly, AVS project parties often cannot directly contact Staker. Although the two parties are in a supply-and-demand relationship, they lack an intermediary to connect them. This is the role of Operator. On the one hand, Operator helps stakers manage funds, and stakers often have trust assumptions about Operator. EigenLayer officially explains that this trust is similar to Staker staking on the LSD platform or Binance; on the other hand, Operator helps the AVS project operate nodes. If the Operator violates the restriction terms, he will be slashed for committing evil, making the cost of doing evil far exceed the profit of doing evil. In this way, AVS can build trust in the Operator. As a result, the Operator forms a trusted intermediary between stakers and AVS.

Operator must first call the optIntoSlashing function of the Slasher contract to be onboarded to the Eigenlayer platform, allowing the Slasher contract to impose constraints or penalties on the Operator. Subsequently, the Operator must register through the Registry contract, which will invoke relevant functions of the Service Manager to record the Operator’s initial registration behavior, and finally transmit the message back to the Slasher contract. Only then is the initialization registration of the Operator completed. Now, let’s take a look at the contract design related to penalties. Among Restaker, Operator, and AVS, only the Operator will be the direct target of penalties. As mentioned earlier, for an Operator to join the Eigenlayer platform, registration in the Slasher contract is mandatory, authorizing the Slasher to execute penalty actions against the Operator. Besides the Operator, the penalty process involves several other roles:

1. AVS (Actively Validated Services): In addition to accepting commissions from AVS operations, the Operator must also accept the triggering conditions and penalty standards proposed by AVS. Two important contract components to emphasize here are the dispute resolution contract and the Slasher contract. The dispute resolution contract is established to resolve challenges from challengers; the Slasher contract will freeze the Operator and execute penalty actions after the challenge window ends.

2. Challenger: Anyone onboarded to the Eigenlayer platform can become a challenger. If they believe that an Operator’s behavior triggers penalty conditions, they will initiate a process similar to an OP fraud proof.

3. Staker: Penalties against Operators also result in losses for corresponding Stakers.

The process for executing penalties against Operators is as follows: 1) The challenger calls the challenge function in the Dispute Resolution contract separately established by AVS to initiate a challenge; 2) If the challenge is successful, the Dispute Resolution contract will call the freezeOperator function of the Service Manager, triggering the OperatorFrozen event in the Slasher Contract, changing the specified Operator’s status from unfrozen to frozen, and then entering the penalty process. If the challenge fails, the challenger will receive a certain punishment to prevent malicious challenges against the Operator. 3) After the penalty process ends, the Operator’s status will be reset to unfrozen, and operations will resume. Throughout the penalty execution process, the Operator’s status remains in a frozen “inactive” state. In this state, the Operator cannot manage the funds staked by Stakers, and Stakers who have staked funds with this Operator cannot withdraw them. This is akin to being under arrest and unable to escape punishment. Only when the current penalty or conflict is resolved, and the Operator is not frozen by the Slasher, can new interactions take place. Eigenlayer’s contracts adhere to the above freezing principle. When Stakers stake funds with an Operator, the isFrozen() function is used to check the Operator’s status. When a Staker requests to redeem their staked funds, the isFrozen function of the Slasher contract is still used to check the Operator’s status. This ensures the security of AVS and protects the interests of Stakers.

Finally, it should be noted that AVS within Eigenlayer does not unconditionally obtain Ethereum security. Although it is much simpler for project teams to obtain security on Eigenlayer than to build their own AVS, attracting Operators on Eigenlayer to provide services and attracting more Stakers to provide assets for their POS systems is still a challenge that may require efforts in terms of APY.

The economic impact of restaking on the crypto market

There is no doubt that Restaking is one of the hottest narratives in the current Ethereum ecosystem, and Ethereum dominates a significant portion of Web3. Coupled with various Restaking projects accumulating a high Total Value Locked (TVL), its impact on the crypto market is significant and may continue throughout the entire cycle. We can analyze this from both micro and macro perspectives.

Micro impact

We must recognize that Restaking does not have a single impact on various roles in the Ethereum ecosystem, and brings both benefits and risks.The income can be divided into the following points:(1) Restaking has indeed enhanced the underlying security of downstream projects in the Ethereum ecosystem, which is beneficial to the latter’s long-term construction and development; (2) Restaking liberates the liquidity of ETH and LST, making the economic circulation of the ETH ecosystem smoother , with a higher degree of prosperity; (3) The high yield of Restaking attracts staking of ETH and LST, which reduces active circulation and is beneficial to token prices; (4) The high yield of Restaking also attracts more funds into Ethereum ecosystem. At the same time, Restaking also brings huge risks:(1) In Restaking, an IOU (I owe you, financial claim) is used as a stake in multiple projects. If there is no appropriate coordination mechanism between these projects, the value of the IOU may be over-amplified, thereby causing credit risks. If at a certain moment, multiple projects require the redemption of the same IOU at the same time, then this IOU cannot meet the redemption requirements of all projects. In this case, if there is a problem with one of the projects, it may trigger a chain reaction and affect the economic security of other projects. (2) A considerable part of LST liquidity is locked. If the price of LST fluctuates more compared to ETH, and stakers cannot withdraw LST in time, they may suffer economic losses; at the same time, the security of AVS also comes from TVL, LST High price fluctuations will also pose risks to the security of AVS. (3) The staked funds of the Restaking project are ultimately stored in the smart contract, and the amount is very large, which leads to excessive concentration of funds. If the contract is attacked, huge losses will occur. Microeconomic risks can be mitigated by adjusting parameters, changing rules, etc. Due to space limitations, we will not go into details here.

Macro impact

First and foremost, it must be emphasized that Restaking is essentially a form of leverage. The impact of Restaking on the cryptocurrency market is closely related to market cycles. To understand the macro impact of Restaking on the crypto field, one must first understand the relationship between leverage and market cycles. Restaking adds two layers of leverage to the Ethereum ecosystem, as mentioned earlier: the first layer: LSD doubles the value of staked ETH assets and their derivatives out of thin air. The second layer: Restaking does not stake only ETH but also LST and LP Tokens. Both LST and LP Tokens are tokenized assets, not the actual ETH, meaning that the LRT generated by Restaking is an asset built on top of leverage, akin to the second layer of leverage. So, is leverage beneficial or harmful to an economic system? In conclusion: leverage must be discussed within the context of market cycles. In the upward phase, leverage accelerates development; in the downward phase, it accelerates collapse.

The development of the socio-economic landscape follows the pattern illustrated above: what goes up must come down, and what goes down must come up. Each rise and fall constitutes a cycle, wherein the economic aggregate spirals upward in this cyclic pattern, with each cycle’s bottom surpassing the previous one, leading to an overall increase in the total volume. The current cycle in the cryptocurrency market is quite evident, as it is currently in the four-year halving period of Bitcoin. In the 2-3 years following the halving, it is highly likely to be in a bull market, followed by 1-2 years typically characterized by a bear market. However, while the Bitcoin halving cycle roughly aligns with the bull and bear cycles of the crypto economy, the former is not the fundamental cause of the latter. The true cause of the bull and bear cycles in the crypto economy is the accumulation and rupture of leverage in this market. The Bitcoin halving merely serves as a catalyst for capital inflows into the crypto market and the emergence of leverage. So, how does the process of leverage accumulation and rupture lead to the replacement of crypto market cycles? If everyone knows that leverage will inevitably rupture, why leverage up during the upswing? In fact, the underlying rules of the cryptocurrency market are similar to those of the traditional economy. Let’s start by seeking patterns in the development of the real economy. In the development of modern economic systems, leverage is bound to appear and must appear. The fundamental reason is that during the upswing phase, the rapid development of social productivity leads to an excessive accumulation of material wealth. To circulate the surplus products in the economic system, there must be a sufficient amount of currency. While currency can be increased, it cannot be increased arbitrarily and infinitely; otherwise, the economic order will collapse. However, if the quantity of currency cannot meet the circulation needs of the surplus after material accumulation, it can easily lead to stagnation in economic growth. What can be done at this point? Since unlimited currency issuance is not viable, the utilization rate of unit funds in the economic system must be increased. The role of leverage is to increase the utilization rate of unit funds. Here’s an example: Suppose $1 million can buy a house, and $100,000 can buy a car. If the house can be mortgaged for a loan with a 60% loan-to-value ratio, meaning that mortgaging the house can secure a loan of $600,000. If you have $1 million without leverage and borrowing is not allowed, you can only choose to buy one house or ten cars. With leverage allowed, you can buy one house and six cars, thereby making your $1 million equivalent to $1.6 million.

From the perspective of the entire economic system, without leverage, the amount of currency in circulation remains limited, restraining everyone’s spending power. As a result, market demand cannot grow rapidly, and the supply side naturally does not generate significant profits. Consequently, productivity may not develop as quickly or might even regress. However, with the introduction of leverage, the issues surrounding currency volume and spending power are rapidly addressed. Therefore, within the upswing phase, leverage accelerates the overall economic development. Some may argue that this resembles a bubble. However, during the upswing phase, a large amount of off-market funds and commodities enter the market, mitigating the risk of a bubble burst. This is akin to engaging in long positions using contracts during a bull market, where there is often no risk of liquidation. What about during the downswing phase? Funds within the economic system continue to be absorbed by leverage, inevitably leading to depletion. This marks the transition into the downswing phase, where prices decline, resulting in the devaluation of mortgaged assets. From the perspective of the entire economic system, assets face liquidation, and the sudden shrinkage of the money supply, which was previously boosted by leverage, leads to rapid economic decline. To illustrate further using the example of contracts, in a down market, asset values may only shrink without leverage, but with leveraged contracts, the outcome could be total loss. Therefore, during the downswing phase, leverage tends to precipitate a faster collapse compared to a scenario without leverage. From a macro perspective, even though it will eventually rupture, the emergence of leverage is inevitable. Furthermore, leverage is neither entirely good nor entirely bad; its impact depends on the specific phase of the cycle. Returning to the macro impact of Restaking, leverage within the Ethereum ecosystem plays a crucial role in influencing bull and bear cycles. Its presence is inevitable, and in every cycle, leverage will manifest in some form. In the previous cycle, the so-called DeFi Summer, largely driven by LP token yield farming, significantly fueled the bull market of 2021. In this current cycle, Restaking may serve as the catalyst, albeit with a different mechanism, yet fundamentally addressing the same economic need of absorbing significant capital inflows and meeting the demand for currency circulation. In accordance with the discussion on the interaction between leverage and cycles earlier, this multi-layered leverage of Restaking may accelerate the speed of the current bull market phase and lead to a higher peak, while also intensifying the downturn of the current cycle’s bear market, resulting in broader and more profound repercussions.

Summary

Restaking is a secondary derivative of the Proof of Stake (PoS) mechanism. From a technical perspective, Eigenlayer utilizes the value of restaking to maintain the economic security of AVS, achieving a mechanism of “borrowing and repaying, not difficult to borrow again” through staking and slashing mechanisms. The redemption window for staked funds not only provides ample time to verify the reliability of Operator behavior but also prevents the collapse of the market and system due to the sudden withdrawal of a large amount of funds. When analyzing the impact on the market, it is necessary to consider both macro and micro perspectives.

From a micro perspective, Restaking provides liquidity and returns to the Ethereum ecosystem but also introduces some risks, which can be mitigated through parameter adjustments and rule flexibility. From a macro perspective, Restaking is essentially a multi-layered leverage, exacerbating the overall economic evolution of cryptocurrencies within cycles and leading to significant bubbles. This makes both the upward and downward movements of cryptocurrencies more rapid and intense. Moreover, it is very likely to be a crucial factor for the collapse of leverage in this cycle and transiting to a bear market. This macroeconomic impact conforms to underlying economic principles and cannot be altered but must be accommodated. It is essential to understand the impact of Restaking on the entire cryptocurrency field and leverage its benefits during the upswing phase while preparing psychologically for the collapse of leverage and market downturn in the downward cycle.

Disclaimer：

1. This article is reprinted from [极客 Web3]. Forward the Original Title‘系统理解EigenLayer：LST、LRT和Restaking的原理是什么’. All copyrights belong to the original author [白丁 & Jomosis，极客web3]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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