What is Restaking?
Ethereum’s transition to PoS (Proof-of-Stake) has transformed the landscape of staking, where validators commit their ETH as collateral to participate in securing the network, offering a straightforward and secure means to yield profits within the crypto world.
As the volume of staked ETH grows, so does Ethereum’s security, fostering an atmosphere of trust and dependability. Yet, imagine if this trust could extend beyond Ethereum’s confines. What if other protocols or applications could tap into Ethereum’s economic security rather than constructing their own from scratch?
The concept of restaking
The Essence of Restaking Restaking stands as an innovative crypto concept pioneered by EigenLayer, a protocol decentralizing and commodifying Ethereum’s unparalleled trust. Essentially, restaking empowers users to delegate their staked ETH, either in its native form or as liquid staked tokens (LSTs), to designated Operators who manage validator nodes on various platforms termed Actively Validated Services (AVSs).
This approach allows new protocols or AVSs to forgo establishing their security infrastructure and instead leverage Ethereum’s security via staked ETH. Through EigenLayer, ETH holders can go beyond merely staking and safeguarding the Ethereum network; they can concurrently restake their staked ETH to secure other protocols. This strategy enables them to garner yields from multiple protocols in addition to Ethereum.
There are 2 types of Restaking
- Native Restaking: Native restaking involves linking an Ethereum validator with EigenLayer’s protocol to extend the economic security furnished by staked ETH beyond Ethereum and into other protocols or AVSs. Though operationally demanding, requiring the operation of an Ethereum validator, native restaking offers unparalleled flexibility. Validators can distribute varying amounts of ETH to different protocols based on their preferences and needs.
- LSTs Restaking: EigenLayer offers an alternative to running Ethereum validators by allowing users to deposit their liquid staking tokens (LSTs), such as stETH (Lido), into the protocol’s smart contracts. These tokens are then delegated to Operators managing various AVSs. This mechanism simplifies the restaking process, broadening its accessibility.
There are three subtypes of liquid restaking:
- Basket-based Liquid Restaking (bLRT): This approach enables the diversification of staked assets akin to creating an investment basket, mitigating risks associated with individual Operators/AVSs while enhancing portfolio robustness.
- Isolated Liquid Restaking (iLRT): Unlike the former model, iLRT isolates each asset for more controlled risk exposure, affording greater independence and precision in risk management, catering to users with calculated risk appetites.
- Superfluid Restaking: Still nascent, superfluid restaking holds promise by allowing liquidity providers to restake their LP (Liquidity Provider) positions. This innovation bolsters the synergy between restaking and DeFi, enabling users to restake not just ETH but also LP positions, which could include both ETH LP or LST LP positions.
Navigating the Risks
As with any emerging crypto concept, restaking carries inherent risks. These include heightened slashing risks, where the risk of slashing escalates with each additional AVS secured by the same underlying staked ETH collateral, along with risks of Operator collisions, computation centralization, and smart contract vulnerabilities. Therefore, restakers/restaking protocols must adopt robust risk management strategies to safeguard the safety and productivity of their capital.
We’ll cover these in another blog post.
Conclusion
EigenLayer’s emergence undeniably heralds a new epoch of yield generation on Ethereum. Should restaking attain a level of popularity akin to liquid staking, Ethereum could emerge as the preeminent security anchor or exporter in the crypto sphere, elevating ETH to one of the most productive assets therein. The impending surge of the restaking industry promises more advancements on the horizon. This is just the beginning!
TLDR:
- With the rising popularity of proof-of-stake (POS) blockchains, staking has emerged as a prominent DeFi strategy for investors
- Liquid staking tokens (LSTs) have gained significant traction in the market, offering a solution to the traditional staking dilemma of illiquidity
- EigenLayer’s innovative restaking mechanism introduces a fresh perspective to this structure by enabling the redeployment of both natively staked ETH and ETH LSTs for validating a new array of smart contracts for Active Validated Services (AVS’s)
- Liquid Restaking Tokens (LRTs) represent the accrued value from restaking rewards while enabling liquidity
- As the landscape of LRTs matures, three distinct types are emerging to cater to varying user preferences and risk appetites
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