Pros and Cons of Restaking

TL;DR

Restaking is a growing concept in DeFi. Initially pioneered by EigenLayer on Ethereum, this process is now expanding to other ecosystems; for instance, the Picasso Network is bringing restaking to Solana for the first time. As restaking becomes increasingly commonplace, it is important to understand its benefits and risks so that you can make an informed decision about participating. In this article, we first describe staking, lay out its pros and cons, and explain how its downsides can be mitigated. Overall, we show that the landscape of restaking has many benefits to users, protocols, and ecosystems alike, and that risks can be kept to a minimum.

Understanding Restaking

Before delving into the benefits and downsides of restaking, we must first establish a concrete definition for this process. Restaking has been described as a new primitive in crypto-economic security that enables the reuse of a previously staked token by effectively staking it again on the consensus layer.

Typically, such as with Picasso’s Generalized Restaking Layer, the process of restaking involves a user staking a layer 1 (L1) chain’s native asset with a liquid staked derivative provider (e.g. a protocol that provides a liquid staked token or LST representing the user’s stake). They then “restake” this LST in another vault for restaking, which pools security from all the LSTs deposited. This pooled security can then be used by Actively Validated Services (AVSes), which are protocols and projects tapping into this type of security.

This general flow of restaking is depicted below:

Restaking Benefits

Restaking delivers a number of well-demonstrated benefits to various stakeholders in blockchain ecosystems:

Pooled Security

Pooled security, also called shared security, is the main objective (and benefit) of restaking. Pooled security is the result of multiple parties combining their resources to provide enhanced security for a system. With restaking, such pooled security is achieved via the staking of assets in a manner such that the resulting security is applied to all participating platforms (e.g. AVSes) within the system. For example, consider $500 million in tokens is (re)staked for 50 protocols/applications. If these funds are restaked, all $500 million in security is applicable to all 50 AVSes. If this is instead $500 million that is traditionally staked evenly across all protocols/applications, each only has around $10 million in security.

Pooled security can be used as the sole mechanism for security of an AVS, or it can be used to enhance that AVS’s existing security systems. Either way, the more assets that are restaked, the greater the security of the AVS is, with the service becoming more resistant to attacks.

Capital Efficiency with Additional Yield

An additional benefit from restaking is that it enables restakers to enhance their capital efficiency; with the same amount of initial capital, users are able to provide twice the security and receive more yield when restaking. Thus, restaking makes liquid staked tokens more liquid by providing this additional use case.

Moreover, assets representative of restaked assets can be used for further purposes as well. For example these tokens can be mortgaged, sold, lent, etc. providing users with additional flexibility and opportunities.

Reduced Protocol Start-Up Costs

The start-up costs for effectively bootstrapping the security of a new protocol can be quite large. This process can also be quite intensive. By using existing security from restaking protocols, novel applications avoid these complications.

Middleware and similar applications can especially benefit from this; while many large chains use PoS to secure the main chain, this security largely does not extend to middleware and apps built atop these chains using a separate consensus protocol or execution layer. To secure themselves, middleware must implement their own trust and security networks. This is risky and incredibly intensive.

As a result, many middleware providers are suboptimally secure. This makes them more likely targets of attack as the “weakest links” compared to the main chain. Moreover, dApps powered by these middlewares inherit the lack of security of the middleware. dApps often use a number of middleware services like oracles and bridges. Therefore, dApps often may have their security being compromised by a number of external factors that are not immediately apparent to users.

If middleware protocols such as oracles and sidechains instead participate in restaking, they will not need to devote time and resources to their own security models, and can instead focus on their respective roles/services. Importantly, the security delivered is significant, so that the cost of corrupting a middleware service equals the aggregate amount of all restaked assets via a particular restaking protocol such as that on the Picasso Network. This means middleware services using restaking can avoid being the “weakest link” when it comes to security, making them less likely targets.

Cross-Chain Capability/Generalization

Picasso expands upon the concept of restaking to deliver Generalized Restaking: restaking of diverse assets on multiple Proof of Stake (PoS) networks to establish cross-ecosystem pooled security. In other words, Generalized Restaking is a mechanism for restaking an asset from a starting location on any chain, such that the cryptoeconomic security provided can be used by Actively Validated Services on any other chain. This is made possible by Picasso’s IBC connections (to Cosmos/the Interchain, Polkadot, Kusama, Ethereum, and soon Solana) and the flexible architecture of Generalized Restaking Layer on Picasso.

Restaking Risks & How to Mitigate Them

Every transaction/financial process comes with some risk, with restaking-specific risks described below. Restaking involves effectively using the same underlying asset twice, exposing it to risks both times over. Risk exposure can be even greater if the asset representing a user’s restaking position is again used in another transaction such as lending, mortgaging, or use in a liquid restaking protocol. However, these risks can be kept to a minimum by limiting the number of times that the asset is continually reused, and by implementing the risk mitigations found in the following sections:

Slashing

Any time assets are staked, they are exposed to the slashing conditions of the network upon which they are staked. Thus, restaking assets effectively doubles the exposure to slashing risks. If the validator with which your assets are staked is slashed, your rewards are typically cut for that period of time. Depending on the network and its particular slashing conditions, user funds may also be lost or frozen, but this is becoming increasingly rare.

In order to help avoid these risks, users should review the slashing conditions of any protocols/networks they stake with, as well as the performance of the validator that they are (re)staking with. Many platforms, such as the Picasso Network, allow users to select which validator(s) they restake with so that they can make the best choices for themselves and protect against these risks.

Rehypothecation

Rehypothecation involves an entity reusing collateral that it does not own as its own collateral. For example, this could involve a bank using collateral from loans it has given out as its own collateral to receive a loan itself. In rehypothecation, depositors lose direct control over their assets and how these assets are used, subjecting them to liquidity and counterparty risks.

Restaking does not inherently involve rehypothecation. In fact, leaders in restaking like EigenLayer and Picasso do not rehypothecate tokens, as stakers retain full control over their tokens. Moreover, stakers can choose which AVSes they wish to validate. However, users should look out for other restaking protocols that may engage in rehypothecation, as this comes with its own risks.

Centralization

Restaking protocols like EigenLayer may increase centralization pressure on the validator set of the base blockchain. That is because these protocols can impose computational demands on these base chain validators, which is a force that increases centralization.

However, EigenLayer for example is working to protect against this risk and “discourages the increase in node requirements for Ethereum validators and promotes the use of lightweight AVSs, such as EigenDA” (source). Moreover, EigenLayer is implementing additional steps and performing ongoing research into mechanisms to reduce the computational load on Ethereum validators in a trust-minimized manner. The Picasso Network similarly prioritizes the minimization of computational demands on its validators.

Principal-Agent Problem

The Principal-Agent problem occurs when there is misalignment between the interests of the principal and the agent. In proof-of-stake systems, this occurs in the form of the actions of the validator (the agent) affecting the capital of the delegator (the principal), with these parties having somewhat competing interests (source). Specifically, validators have some incentive to misbehave, such as in the instance where validating an incorrect block promotes their own interests to a greater extent than the likely slashing that will occur subsequent to this misbehavior hurts their interests. However, delegators hope that validators will always behave, as this will enable them to earn the greatest (re)staking rewards.

This problem exists in PoS systems, and extends to restaking as well. However, restaking protocols like EigenLayer take steps to minimize this issue by decreasing validators’ capacity to perform actions that harm restakers.

Liquid Restaking Protocols

As restaking has begun to become more popular, liquid restaking protocols have emerged to take the role of middlemen between users and restaking platforms. These protocols restake user deposits with restaking protocols, providing users liquid restaking tokens (LRTs) in exchange. LRTs can be used in DeFi processes, which allows users to gain additional use out of their restaking positions. Liquid restaking protocols also often have points systems that allow users to gain points towards earning future token airdrops.

Because of these benefits, liquid restaking protocols have attracted significant traffic. For example, in recent months, Ethereum-based protocols like Ether.Fi and Puffer have seen over $2 billion in liquid restaking (source).

However, liquid restaking remains somewhat controversial, particularly given the novelty of this process. Some detractors worry that liquid restaking protocols will not be able to deliver upon the rewards they promise. Others have expressed concerns about the transparency of the points systems of these protocols.

However, users do not have to participate in liquid restaking protocols even if they participate in restaking, avoiding any associated risks. Moreover, users should always do their own research on any individual projects they interact with, to make their own evaluations of the risks that these protocols might have.

Key Takeaways

Restaking provides a new and promising opportunity for users to enhance the rewards and security generated by their stake. Yet, as a relatively novel practice, restaking still has a number of risks that it is working to overcome.

In this document, we have demonstrated the benefits and downsides of restaking, in addition to outlining ways in which these risks can be mitigated. Indeed, minimizing risk is a developmental and research priority for restaking platforms like the Picasso Network. As always, users should make their own assessments of whether or not any financial actions are right for them. We hope that the current article will be helpful to users when making informed decisions regarding restaking.