An insight into Re-staking

Re-staking

Background

In the Ethereum ecosystem today, numerous middleware solutions play crucial roles. From an application standpoint, certain dApps rely on these intermediaries for smooth operation. For instance, DeFi derivatives hinge on oracles for price data, while cross-chain asset transfers necessitate the use of cross-chain bridges as intermediary relays. These middleware solutions operate independently within Ethereum’s framework and maintain validator networks, with users able to contribute by staking tokens and hardware resources. Taking a modular approach, various middleware solutions cater to different functionalities. For instance, in Rollup implementations, establishing a Sequencer network is essential, while off-chain data availability is facilitated by solutions like DAC, Polygon Avail, and Celestia’s DA-Purpose Layer1.

Our confidence in these middleware solutions is founded on economic security principles. Essentially, honest participation yields rewards, while any malicious behavior incurs penalties such as the slashing of staked tokens. This level of trust is intricately linked to the value of the assets being staked. As the volume of staked assets increases, so does the bolstering of economic security upon which middleware relies. If we were to visualize all the protocols/middleware in the Ethereum ecosystem that rely on economic security as a cake, it would appear as though funds are apportioned into varying-sized slices atop the cake, reflecting the scale of the staking network.

However, there are still some problems with the current economic security:

1. Validators of middleware need to invest money to keep the network running, which costs them. They usually have to stake the middleware’s own tokens to earn rewards. But because token prices can change a lot, validators are unsure about the risks involved.
2. The security of middleware depends on how much value is staked. If token prices drop a lot, it becomes cheaper to attack the network. This is especially risky for protocols with tokens that aren’t worth much.
3. DApps that rely on middleware (like derivatives using oracle price feeds) are only as secure as the trust we put in Ethereum and the middleware. But sometimes, mistakes in oracle price feeds can lead to losing assets, showing that this trust isn’t always well-placed.

This brings up another problem called the “bucket effect”:

1. In DeFi app A, where the total locked value is billions of dollars, oracle B relies on assets worth only hundreds of millions. If there’s an issue, due to how protocols are connected, a mistake by the oracle could lead to big losses for app A.
2. Modular blockchain C uses different schemes like data availability scheme D and execution layer scheme F. If any part of it goes wrong or gets attacked, it could affect the whole chain C, even if other parts are fine. This wider risk is also a big concern.

In August last year, EigenLayer, an Ethereum protocol, emerged to tackle these issues. It allows users to re-stake Ethereum that’s already staked on PoS nodes. Through EigenLayer, these assets can support other protocols like middleware, oracles, and sidechains, reducing their costs and sharing Ethereum’s network security.

EigenLayer aims to become a central security hub in the PoS era by introducing staked assets to all protocols. It encourages more nodes to join, boosting network decentralization and security.

Eigenlayer

EigenLayer provides several options for users to increase their earnings. Users can re-stake their ETH from the Ethereum mainnet for additional profits in other protocols. In EigenLayer, ETH holders can re-stake in three ways:

1. Directly re-staking ETH from the PoS chain through EigenLayer. This allows users to earn staking rewards on the PoS chain and additional earnings from other protocols on the EigenLayer platform simultaneously.
2. Re-staking LP tokens containing ETH through EigenLayer. These LP tokens are rewards earned from providing liquidity by pairing ETH with other tokens. Users can re-stake LP tokens on the EigenLayer platform to earn extra profits.
3. Re-staking LP tokens containing stETH through EigenLayer. stETH is a synthetic asset representing staked ETH on the Ethereum mainnet, providing higher liquidity through alternative blockchains. Users can re-stake LP tokens containing stETH on EigenLayer to earn more profits.

Through these re-staking options, ETH holders can maximize their earnings by participating in various protocols on the EigenLayer platform, in addition to earning staking rewards on the PoS chain.

EigenLayer brings additional benefits to protocols in terms of security and economics:

1. Security: EigenLayer enhances protocol governance security by providing more staked assets. The staking mechanism in PoS protocols is vital, and EigenLayer boosts it by requiring more assets to be staked. This lowers the likelihood of governance attacks, as the cost of attacking increases. For instance, in EigenLayer, nodes need over 50% of re-staked ETH and the protocol’s native tokens for block validation. Moreover, the dual-staking model (ETH + protocol’s native tokens) helps mitigate the risk of value drops in the protocol’s tokens by providing effective support through re-staked ETH.
2. Economics: EigenLayer facilitates blockchain node validation services for protocols through re-staking. By using EigenLayer’s re-staking validation platform, protocols eliminate the need to establish their own validation platforms and node pools. This allows them to focus more on developing core functionalities and enhancing user experience. It’s akin to early internet companies building their server rooms, but with professional cloud services available, companies can concentrate on function development, thereby saving costs and improving efficiency.

The modular blockchain concept divides the consensus layer, data availability layer, and transaction execution layer. In Ethereum, the consensus layer ensures security, while protocols at the application layer can innovate freely. However, creating a new consensus protocol (like a data availability protocol) or other middleware, oracles, or layer 2 networks on Ethereum still requires setting up one’s own validation node service. EigenLayer addresses this challenge by offering a unified staking platform. Other protocols can seamlessly integrate with it, eliminating the need to establish their own validation platforms and node pools. This allows more resources to be directed towards developing core protocol functionalities and enhancing user experience.

Risks

Using EigenLayer carries the following risks:

1. Security Vulnerabilities: Re-staking exposes assets to potential flaws in the re-staking protocol, leading to losses if underlying protocols have security issues.
2. Native Token Devaluation: Relying on EigenLayer for staking may diminish the governance value of a protocol’s native token.
3. High Dependency: Protocols relying on EigenLayer’s staking platform become heavily reliant on its stable operation.
4. Centralization Concerns: If EigenLayer becomes dominant, it may lead to worries about over-centralization, compromising security and decentralization.

LEGO!

Currently, EigenLayer’s re-staking system faces challenges due to high fees on the mainnet, lack of liquidity, and limited support for Layered Staking Derivatives (LSDs). In response, the new protocol, Inception LST, moves re-staking to Layer 2, reducing fees and increasing liquidity and LSD variety.

Users interact with Inception LST, which then interacts with EigenLayer for ETH staking.Through a common nesting approach: User → Inception LST → EigenLayer → ETH Staking

Inception LST boosts liquidity for LRT and enhances DeFi flexibility, allowing users to earn higher returns with similar risk levels to EigenLayer. It also grows Layer 2 TVL and integrates the ve model into its system.

Overall, re-staking protocols aim to bolster PoS ecosystem security and offer better returns by pooling staked assets and sharing Ethereum’s network security.

Reference

• Inception LST website: https://www.inceptionlst.com/
• Inception LST deck: https://docsend.com/view/6qbh7b39gh86qf4k

By Jason & Lizzie Lu

About ZMQ

ZMQ is a Leading Global Quantitative Market Maker and liquidity provider in Digital Assets. Since jumping into the crypto market in 2018, ZMQ has been focusing on providing liquidity globally for token projects and exchanges, institutional crypto investments and consulting services to bring better price discovery, trading executions, transparency to investors and efficient pricing to the market.

If you have any new ideas about crypto market making and liquidity service, please reach out to us at biz@zmquant.com!

Website: www.zmquant.com

Twitter: @zmquant_com