Experts are alarmed by the rise of restaking, a controversial practice promising maximized returns. Traders have moved over $18 billion worth of crypto to such platforms, but the risk of “blowing up” exists. Let’s delve into how restaking works and why the cons outweigh the pros — for now.
Restaking vs. staking
Proof-of-stake blockchains, such as Ethereum, do not need miners’ computing power to validate blocks. Instead, they reward those who lock up their crypto to support network security. These stakes, deposited to a smart contract, are the cornerstone of streamlined operations.
Validators commit a specific amount of tokens to qualify. As of June 10, 2024, there are over 1.14 million Ethereum validators, each staking 32 ETH. With the Pectra upgrade in Q1 2025, this limit will be raised to 2,048 ETH.
The slashing mechanism deters misbehavior. If a validator acts against the network’s interests, their stake is confiscated partially or fully. Thus, the more crypto locked on a blockchain, the more secure it is. Over $100 billion worth of ETH is now staked on Ethereum.
The process of staking varies from one blockchain to another, but restaking applies the same core principles more broadly. Redistribution of staked tokens across PoS blockchains gives users a chance to maximize returns. The aim is to support smaller blockchain apps that lack the resources for their own PoS security.
Overview of restaking opportunities
At the heart of the restaking boom is a startup led by Sreeram Kannan, an affiliate associate professor at Seattle’s University of Washington. EigenLayer was launched in 2021 and became the first restaking protocol on Ethereum’s mainnet.
In February 2024, EigenLayer secured $100 million from A16z Crypto, affiliated with Andreessen Horowitz, despite a downturn in crypto venture funding. By May 31, the value of tokens restaked through its platform shot up to $18.8 billion — a spectacular surge from just $400 million six months before.
Aside from the juggernaut, users can restake tokens on other blockchains. The alternatives include:
- Babylon on Bitcoin
- Picasso on Solana
- Octopus 2.0 on Near
Restaking on EigenLayer
EigenLayer’s smart contracts let Ethereum validators reallocate assets to secure other, smaller protocols. Restaking is an opt-in service.
The protocols, called modules or Actively Validated Services (AVSs), connect with validators through an open marketplace. Users select apps based on their sector, resource requirements, reward size, perceived risk, and other factors. For example, oracle-based applications attract oracle enthusiasts.
The slashing conditions are multi-layered. Apart from Ethereum’s default terms, all member modules have additional rules to ensure the validators pursue their best interests.
EigenLayer is yet to finalize its payout mechanism. For now, restakers anticipate the first airdrop of the native EIGEN token, designed to deliver Season 1, Phase 1 rewards.
The tokens will only become transferable and sellable in September 2024, and the deadline for claiming them is September 7. Users who miss that date will not be eligible for any EIGEN.
Benefits for blockchains
For PoS blockchain apps, restaking is a way to ensure security despite limited resources and small communities. Restakers’ tokens are redeployed across multiple protocols simultaneously, providing shared security.
Thus, attacking any one of them becomes more costly. As Kannan pointed out, 100 protocols independently secured by $1 billion each are less protected than 100 collectively secured by $100 billion. In the latter case, a single attack would cost $100 billion, not $1 billion, providing a significant deterrent to potential threats.
Benefits for users
For validators, the key attraction of restaking is the incremental yield. Currently, Ethereum validation yields between 3% and 5%.
Restaking lets users earn multiple yields simultaneously, as their tokens are redistributed across various protocols. With EigenLayer, this additional yield may bring the total to 10%, as shown below.
Delegated restaking
Similarly to staking, restaking supports delegation. Users who do not have the time or equipment required by the AVSs may still benefit. They pick registered operators to stake on their behalf for a portion of the rewards.
Why restaking is not ideal
These services represent a new frontier in blockchain technology, and as such, they require thorough diligence. Industry experts warn of potential slashing losses, smart contract flaws, operator risk, and other pitfalls. Users should be aware of these downsides and conduct their own research.
Restaking is also unsuitable for institutions as it leaves no “paper trail.” Determining where specific assets go and how the rewards are dispersed is challenging. Here are the top concerns.
1. Smart contract flaws
Imperfect coding may render contracts vulnerable to exploitation by malicious actors. Security breaches, bugs, and backdoors may all lead to financial loss for restakers.
2. Slashing risks
As mentioned above, every module adds unique slashing conditions on top of Ethereum’s requirements. Thus, validators’ stakes may be slashed without prior warning. Although EigenLayer plans to integrate an insurance program — “attributable security” — its details remain unclear.
3. Rogue operators
The counterparty risk is high. Delegating restakers entrust third parties with their assets and may have their stakes slashed — through no fault of their own and without compensation.
4. Endless borrowing
Some crypto lenders let users pledge crypto representing restaked assets. By accepting such collateral, they risk triggering perpetual borrowing based on a limited number of underlying tokens. Liquidations and exits en masse could destabilize the broader crypto market.
5. Unclear payout schemes
While EigenLayer accepts deposits, its payout system is still being developed. Users have yet to discover exactly how they will get their rewards, and scheduled airdrops do not guarantee that EIGEN will have any value.
6. Collateralizing trust
Restaking protocols promote the hypothecation of trust. Users stake tokens, liquid staking tokens, and liquid restaking tokens (see below). Some analysts warn of a ticking time bomb.
Liquid restaking removes operators and AVSs from the equation, simplifying entry and exit. Platforms like Renzo, Ether.fi, and Puffer act as middlemen, depositing tokens into EigenLayer and the like. Users receive liquid restaking tokens (LRTs), which accrue interest and may be traded in DeFi.
Thus, participants do not have to spin an operator and hand-pick modules. Furthermore, they can enhance their leverage by reinvesting tokens into DeFi protocols.
Speculative frenzy fueled by restaking protocols
Without clear payout rules, restaking airdrops are “a really, really speculative, this free money thing,” as Kaiko’s Morgan McCarthy put it. The contagion risks are real: one depegging or slashing event may trigger a domino effect, toppling many cryptocurrencies.
However, restaking protocols hold a modest amount of crypto compared to the total market cap — $18 billion versus $2.67 trillion as of June 10, 2024. Hence, it is unlikely that losses would spill over to traditional markets, but the industry is growing fast.
EigenLayer’s founder has tried to distance his invention from some risks. Referring to perpetual borrowing, he said, “The risk isn’t in re-staking, but rather it’s in the lending protocols. The lending protocols are mispricing risk.”
Wrapping up
Restaking protocols promise to magnify users’ rewards with unclear payout procedures, counterparty risk, and the danger of triggering borrowing loops. At press time, the cons outweigh the pros despite a significant advancement in blockchain technology.
The promised benefits and possible risks make restaking a trend worth watching. Supporters include investors, developers, and venture firms, but users should be cautious. Even the behemoth — EigenLayer — is still in limited beta.
Without finalized key features, users accrue points, also tracked by liquid restaking protocols. Expecting them to be tied to future airdrops, they buy and sell these points in a speculative frenzy. Currently, the sector is too small to impact the broader markets, but liquid services exacerbate the scope of the potential “blowup.”
