What Is Restaking? How Does EigenLayer Work?
Staking refers to locking cryptocurrency in a smart contract as collateral to secure a proof-of-stake blockchain. For example, the Ethereum blockchain is secured by 34 million staked ETH. In exchange for helping to secure the chain, stakers earn a yield paid in ETH. Restaking allows this capital to be used more efficiently by using the same staked assets to secure more than one protocol.
Restaking benefits stakers with greater yields while also helping to secure new protocols that may have trouble reaching a critical mass otherwise. However, the concept is relatively new and invites some skepticism. In this guide, we’ll explain how restaking works, including its benefits and risks. Let’s dive in.
What Is Restaking in Crypto?
Restaking refers to using a single asset to secure multiple proof-of-stake (PoS) protocols. For example, staked ETH can be used to secure additional protocols through platforms like EigenLayer.
Currently, about $130 billion of staked ETH secures the Ethereum network. This staked ETH acts as collateral to ensure validators follow the rules. In the past, this value was locked, and there was no way to access the value other than to unstake the ETH.
Liquid staking protocols like Lido changed that by providing a staked-equivalent token that can held, traded, or used as collateral.
Restaking offers yet another way to access the value in staked tokens to earn additional yields. In this case, staked tokens provide security for additional protocols. In effect, the tokens perform double duty, securing a Layer 1 blockchain, such as Ethereum, while also securing one or more additional protocols called Actively Validated Services (AVSs).
Stakers enjoy higher overall yields due to multiple income streams without a need to invest more capital. Smaller or start-up protocols attract stakes to secure their platforms. Without restaking, smaller protocols often face challenges in attracting sufficient capital for security, leaving them more vulnerable. Restaking promises to solve this problem by reusing staked assets to secure multiple networks.
What Is EigenLayer?
EigenLayer started the restaking craze with its easy-to-use platform that connects stakers with infrastructure developers. Stakers can use staked ETH or one of several liquid staking tokens (LSTs) to restake, securing any of the 17 Actively Validated Services currently supported.
The strategy enables better capital efficiency. Rather than committing capital to more than one protocol to earn fees, EigenLayer allows ETH stakers to use their liquid staking tokens to earn from additional protocols.
The protocol also supports several additional assets, including wrapped Bitcoin (WBTC). However, only two of these offer yields at press time.
EigenLayer is the most prominent player in the restaking ecosystem, with more than $12.3 billion in total value locked (TVL). This represents over 80% of the total TVL, which is currently about $15.2 billion TVL.
Individual Ethereum validators must elect to participate in the EigenLayer ecosystem and then choose which AVSs they want to support. The validator commits staked ETH to an Eigenpod. However, not all Ethereum validators support EigenLayer, as it’s a separate protocol from native ETH staking.
Stakers choose a validator, called an operator, and send staked ETH to a smart contract that supports staking with yields from multiple protocols. EigenLayer provides a user interface that simplifies the process to a few clicks.
How Does Restaking Work?
The process uses smart contracts to secure additional protocols with native staked tokens or liquid staked tokens. While EigenLayer centers on Ethereum, several other protocols have emerged for Ethereum and other PoS chains like Solana. The screenshot below shows the steps to restake Lido Staked ETH (stETH).
Regardless of the blockchain, the process follows a similar structure.
- Validators elect to participate in restaking by committing staked tokens to a smart contract.
- Validators choose which AVSs to support.
- Stakers deposit tokens into a smart contract and then delegate them to a validator (called an operator) that supports the AVSs they want to use for restaking.
- Stakers earn yields from two or more protocols, with the validator taking a percentage of the yield as a fee.
Restaking vs. Traditional Staking: What Is the Difference?
Let’s start with traditional staking. In traditional staking, ETH or another PoS token secures the blockchain by locking tokens in a smart contract that will be used as collateral.
If the validator breaks protocol by acting maliciously or dishonestly, a portion of the staked tokens may be slashed. Slashed tokens are burned by sending them to an unrecoverable wallet address.
In exchange for helping to secure the network, stakers earn staking rewards paid in the same token. Staking ETH earns a yield paid in ETH. However, the staked tokens are locked in the contract and can’t be reused for other purposes. Liquid staking tokens solve this liquidity problem by providing an equivalent token representing the staked tokens.
Restaking uses the value of the staked tokens to secure additional protocols called Actively Validated Services. These smaller protocols may have trouble attracting sufficient capital to secure them. Restaking allows these protocols to ride the coattails of larger protocols, tapping into massive amounts of capital to secure them.
Types of Restaking
Most users will use liquid staking tokens for restaking, but there are two types of staking supported: native restaking and liquid restaking. Let’s discuss both briefly.
Native Restaking
Native restaking refers to connecting a validator to a restaking protocol. For example, an operator can connect an Ethereum validator to a protocol like EigenLayer. This allows the validator to earn additional revenue through AVSs.
Running a validator for proof-of-stake blockchains requires specialized knowledge and often means a significant financial investment, so native restaking is less commonly used. However, native restaking often represents a significant amount of the TVL due to the larger commitments by validator node operators. For example, operating an ETH node requires 32 ETH, about $75,000 at today’s ETH price.
Operators can also connect more than one validator if needed.
Liquid Restaking
Liquid restaking makes this type of staking available to a much broader audience. With liquid restaking, users lock liquid staking tokens in a smart contract, choosing a validator that supports the AVSs they want to support with their staked ETH.
Some operators only support a handful of additional protocols, whereas others support a wide range. For example, P2P.org supports all AVSs on EigenLayer. This operator also promises to evaluate all AVSs before enabling slashing.
EigenLayer’s delegation system lets the market decide which AVSs to support. Similar protocols, such as Symbiotic Restaking, follow a parallel roadmap. However, Symbiotic hasn’t yet enabled delegation.
Solayer, which offers Solana restaking, also supports delegation allowing you to restake selected AVSs. However, slashing risks are reduced compared to EigenLayer.
Benefits of Restaking
Restaking brings several benefits for users as well as for the crypto ecosystem as a whole. Users benefit from higher yields without committing more capital. Newer projects benefit from enhanced security, which also benefits users by making promising new protocols viable.
1. Maximizing Yield and Capital Efficiency
With traditional staking, if you stake $1,000, you can earn 3% to 5% ($30 to $50 annually without compounding), depending on the blockchain and the percentage of supply staked. Restaking allows you to use that same $1,000 to earn additional yields.
However, these yields will vary, and some aren’t yet live on the largest restaking platform, EigenLayer. Yields and slashing are expected to go live in late 2024. Yields may also be affected by the TVL. More stakers competing for yields will force yields down. In the interim, users can earn “points” on several restaking protocols, which may help qualify for airdrops or other incentives.
2. Enhanced Blockchain Security
Restaking makes smaller protocols that may have trouble attracting capital viable. This enhances security across more protocols, encouraging innovation while rewarding stakers with greater yields. However, restaking doesn’t guarantee a seat at the table. Operators decide which AVSs to support and stakers decide choose an operator based on supported AVSs among other factors.
3. Additional Incentives and Airdrops
EigenLayer airdropped 5% of its token supply in early 2024, part of a 15% allocation for community members. Early participation also influences future airdrops. Point systems may help users qualify for airdrops. However, rules and eligibility factors often aren’t announced until after the airdrop snapshot date to prevent gaming.
4. Decreased Risk of Token Slashing
Token slashing isn’t yet enabled in EigenLayer, and similar protocols like Symbiotic have yet to allow delegation. However, because of the free market nature of delegation based on supported AVSs, stakers can reduce their slashing risk by choosing operators that support low-risk protocols. Expect operators to specialize in the future, allowing stakers to select low-risk protocols or diversify with a wider range of projects.
Risks and Drawbacks of Restaking
Although restaking promises several advantages, this corner of the crypto world isn’t without its controversy and potential drawbacks. Topping the list, smart contract vulnerabilities expose staked tokens to additional risks. Locked tokens also remove the ability to react quickly if market conditions change.
1. Smart Contract Vulnerabilities
Smart contracts are just computer programs. If this happens, then do that. However, if the unexpected happens, these contracts may behave in unintended ways. Retaking strings multiple smart contracts together. While smart contracts for native staking on major blockchains offer battle-tested safety, other contracts in the chain may be less secure. A hack or exploit could put your staked assets at risk.
2. Market Volatility and Liquidity Risks
Liquid staking tokens have become immensely popular because they bring liquidity to staked assets. Now, you can sell staked ETH LSTs, use them for collateral, or even lend to earn additional yields. However, locking these tokens in a restaking contract removes that flexibility. If the market for the underlying asset changes, you lose the ability to cut losses or take profits on a spike.
3. Potential Centralization Concerns
Not all validators support restaking. This means restaking will center on a core group of operators, possibly leading to risks such as collusion. Centralization also raises censorship concerns. EigenLayer has proposed an open-source solution to censorship concerns with MEV-Boost, as shown in the diagram below.
How to Restake: Step-by-Step Guide
Restaking with liquid staking tokens offers a straightforward process. Let’s look at the basic steps to restake using EigenLayer.
1) Buy Eligible Tokens
EigenLayer supports popular LSTs like stETH, mETH, and cbETH. You may be able to buy these on a centralized exchange like Coinbase. In other cases, you’ll need to buy ETH and use a decentralized exchange to swap ETH for LSTs. Alternatively, you can stake your ETH on a platform like Lido to get eligible staking tokens.
2) Visit EigenLayer and Connect Your Wallet
Point your browser to app.eigenlayer.xyz and connect your Ethereum-compatible wallet. Select the Ethereum blockchain in your wallet settings.
3) Deposit Liquid Staking Tokens
Choose Restake from the menu and choose your token from the list. For example, if you have stETH, choose Lido Staked Ether. Then, look for the Restake button next to the token name. This opens a dialogue for depositing your tokens. If everything looks right, confirm the transaction using your crypto wallet.
4) Delegate Your Restaked Tokens
Choose an operator from the list that supports the AVSs you want to support. Follow the prompts to delegate to the operator and confirm the transaction using your crypto wallet.
Conclusion – Is Restaking Worth it?
Despite the impressive TVL, restaking is still in its infancy. In many cases, no additional yields will be paid at all – yet. However, some platforms offer points that may play a role in future airdrops. As these platforms mature, restaking promises enhanced yields without additional capital. The risk/reward balance may not be there for many yield-conscious investors because we’re still learning how restaking fits into the broader ecosystem. Protocols are also still finding ways to mitigate risk. However, if the concept lives up to the hype, restaking will offer a powerful way to improve security for a broad range of projects while offering stakers enhanced yields.
FAQs
Why is restaking important?
Restaking allows promising new protocols to secure their networks using popular staked tokens like ETH or SOL.
Is restaking relevant to the average crypto investor?
The real benefit to restaking for most investors is that allows newer protocols to secure their apps. Without restaking, some promising protocols may never reach adoption.
Which cryptocurrencies does restaking apply to?
Restaking is most commonly used with ETH liquid staking tokens. Solana restaking is also growing.
What are the most popular restaking platforms?
EigenLayer is the most popular restaking platform by far. Other restaking protocols with high TVLs include Symbiotic, Karak, Pell Network, and Solayer.
References
- EigenLayer (defillama.com)
- Restaking TVL Rankings (defillama.com)
- Create Eigenpod (eigenlayer.xyz)
- EigenLayer vs Solayer: A Comprehensive Comparison (solayer.org)
- EigenLayer ETH Restaking (crypto.com)
- EigenLayer on the brink of potential yield crisis (cointelegraph.com)
- Introducing the Eigen Foundation, EIGEN token and Season 1 stakedrop (eigenfoundation.org)
- EigenLayer Dashboard (eigenlayer.xyz)
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