Understanding Restaking
What is restaking?
To understand restaking, it is essential to first grasp the concept of Proof-of-Stake (PoS), a blockchain consensus mechanism that validates and authenticates transactions while maintaining blockchain integrity. In PoS, validators are selected to create new blocks based on the tokens they hold, which they lock up as collateral.
The staked cryptocurrency incentivizes validators to act in the network's best interest, as any misconduct may lead to a portion of their staked assets being confiscated—a process called slashing.
Ref: https://bsc.news/post/cryptonomics-whats-the-difference-between-proof-of-work-and-proof-of-stake
In traditional staking, assets that are staked are locked within one protocol. For instance, when Ethereum (ETH) is staked, it stays inactive on the Ethereum network. To ensure the liquidity of ETH while it is staked, liquid staking derivatives have been developed. These derivatives convert staked ETH into tokens usable in DeFi (Decentralized Finance), enabling smaller holders to participate without needing the 32 ETH minimum staking requirement.
Restaking takes this concept further by enabling other decentralized protocols to use staked assets on Ethereum. Validators and the assets they manage earn rewards from the Ethereum network and the protocol they are restaked into, thus creating multiple income sources.
How does restaking work?
In the context of the Ethereum ecosystem, there are two primary methods for restaking: native restaking and liquid restaking.
1. Native restaking: This method is exclusive to users who operate an Ethereum validator node. Validators utilize specialized smart contracts to manage their staked assets and interactions with restaking protocols. By engaging in native restaking, validators commit to meeting additional security requirements established by the restaking platform.
Ref: https://ukonudennis.medium.com/native-delegation-b1d1c710550c
2. Liquid restaking： Liquid restaking utilizes liquid staking tokens (LSTs). In this method, users stake their assets with a validator and receive LSTs in return. The staker can then stake LSTs on the restaking protocol. Like DeFi, this method allows smaller holders to participate without the 32 ETH minimum staking requirement.
Benefits of restaking
1. Improved rewards for stakers: Restaking enables stakers to earn from multiple income sources. Validators and participants can receive rewards from the primary blockchain network (like Ethereum) and the additional protocols that they support.
2. Increased security for new projects: By utilizing the existing validators from established blockchains, new projects can enhance their security. Validators bring their experience, reputation, and infrastructure to the new project, which can include robust validation processes and secure network operations. This collaboration provides an added layer of security, helping to mitigate risks and instill confidence among users and investors in the new project's operations and reliability.
3. Reduced selling pressure: Restaking promotes long-term token holding by locking them in staking and restaking protocols, which increases rewards. This decreases the risk of sudden selling, helping stabilize prices and foster a healthier market environment.
4. Scalable security: Restaking facilitates scalable security solutions by utilizing assets already secured within established networks, such as Ethereum. When these assets are restaked to support additional protocols or networks, they bring the security measures and validation processes from their original network. This approach allows new projects or protocols to benefit from the robust security infrastructure already in place, thereby scaling their security capabilities without needing to build them from scratch.
As the ecosystem expands and more assets are restaked, the security infrastructure can grow organically, adapting to meet the heightened demand for secure transactions and operations within decentralized networks. This scalable approach ensures that the overall security of the blockchain ecosystem can keep pace with its growth and development over time.
Possible risks of restaking
1. Slashing: Validators involved in restaking are subject to additional slashing conditions if they fail to meet the security requirements of the protocols they support. This increases the risk of losing staked assets.
2. Yield risk: The returns from restaking can be highly volatile, depending on the performance of the primary and secondary protocols. There is a risk that the expected yields will not materialize.
3. Protocol safety risk: Restaking generally enhances security by leveraging established networks' security features. However, like any technology, restaking protocols or smart contracts can potentially have vulnerabilities. These vulnerabilities could expose staked assets to risks like hacks or exploitation if not properly secured. Ensuring the security of these protocols and smart contracts is crucial to mitigating such risks and maintaining the safety of staked assets.
4. Liquidity concern during volatile times: In periods of high market volatility, the liquidity of restaked assets may become a concern. When many participants simultaneously attempt to withdraw or sell their staked tokens, it can strain the availability of liquidity. A liquidity crunch may lead to potential losses or challenges in accessing funds promptly.
During volatile market conditions, sudden fluctuations in demand for liquidity can affect the availability of tokens that are locked up in staking or restaking protocols. This issue underscores the importance of considering liquidity risks and ensuring that mechanisms are in place to manage withdrawals and redemptions effectively, especially during turbulent market periods.
The Restaking Wars: Eigenlayer vs Symbiotic
Eigenlayer is recognized for its contributions to restaking, being an early adopter of the concept, and establishing foundational principles. According to Defi Llama, Eigenlayer's Total Value Locked (TVL) has reached $18.85 billion. This protocol enhances security for decentralized applications by enabling staked assets to support multiple networks, thereby increasing their utility and security. Eigenlayer also provides stakers with opportunities to earn higher rewards.
Ref: https://defillama.com/protocol/eigenlayer#information
A new competitor in the space, Symbiotic, launched on June 11th and is backed by Paradigm, known for successful investments in projects like Uniswap, Compound, MakerDAO, and Chainalysis. It offers a flexible, permissionless, and modular approach to restaking, supporting a diverse range of assets with customizable parameters. Within ten days, Symbiotic has achieved a Total Value Locked (TVL) of $243.09 million, showcasing strong market potential and innovative design.
Ref: https://defillama.com/protocol/symbiotic#information
“Emerging trends can wait, but high-yield farming opportunities cannot,” said IGNAS, Symbiotic in his DeFi Research blog.
It's been suggested that Paradigm considered investing in Eigenlayer before ultimately backing Symbiotic after Eigenlayer chose a16z instead. This competition is set to stimulate innovation and attract more users and capital. The future of restaking holds immense potential, and as we proceed thoughtfully, we anticipate further advancements and opportunities ahead.
Disclaimer
The information provided in this article is for general informational purposes only and does not constitute financial, investment, legal, or professional advice of any kind. While we have made every effort to ensure that the information contained herein is accurate and up-to-date, we make no guarantees as to its completeness or accuracy. The content is based on information available at the time of writing and may be subject to change.
Please note that this article includes references to third-party websites and data, which are provided solely for convenience and informational purposes. We do not endorse or assume any responsibility for the content, accuracy, or reliability of any information, products, or services offered by third parties.
Cryptocurrencies, staking, and restaking involve significant risk and may not be suitable for all investors. The value of digital currencies can be extremely volatile, and you should carefully consider your investment objectives, level of experience, and risk appetite before participating in any staking or investment activities.
We strongly recommend that you seek independent advice from a qualified professional before making any investment or financial decisions related to cryptocurrencies or staking. We shall in NO case be liable for any loss or damage arising directly or indirectly from the use of or reliance on the information contained in this article.
