What is Ethereum Restaking?

In the evolving finance landscape, traditional practices are often mirrored in the digital realm, offering a bridge for understanding complex new concepts. One such parallel exists between rehypothecation in traditional finance and restaking in the Ethereum ecosystem. Rehypothecation refers to the practice where banks and brokers use assets that have been posted as collateral by their clients for their own purposes. For example, when securities are rehypothecated, they might be used by a financial institution to secure its borrowings, creating a chain of dependency and risk.

Similarly, restaking in the Ethereum ecosystem allows validators to use their staked ETH, a form of collateral, to participate in additional financial activities, thereby amplifying their potential rewards. Just as rehypothecation increases liquidity and leverage in the traditional financial system, restaking enhances the capital efficiency within the Ethereum network, offering validators more opportunities to earn rewards.

This article will explore the intricacies of restaking in Ethereum. Readers will learn the answer to what is Ethereum restaking, the mechanics of restaking, its benefits, and the risks involved. By the end of this article, readers will gain a comprehensive understanding of restaking, empowering them with the knowledge to navigate this aspect of decentralized finance with confidence.

Restaking builds over several foundational concepts in decentralized finance (DeFi) and blockchain, and a thorough understanding of these basics is essential to understanding restaking and having enough confidence to participate in restaking protocols. You must be familiar with the mechanics of the Ethereum network and Proof of Stake consensus. If not, these resources will help you out:

• Read the Ethereum 101 piece to know everything about Ethereum.
• Proof of Work vs Proof of Stake on Coin Bureau will give you a granular understanding of PoS.

With the basics out of the way, let’s delve into restaking!

Premise: Invigorating Dormant Ether

When Ethereum transitioned to a Proof of Stake (PoS) mechanism, a significant shift occurred in how the network is secured and ETH is utilized. This transition required users to deposit ETH into the Ethereum Beacon Chain staking contract, marking their commitment to network security through PoS. As the leading platform for smart contracts, Ethereum sits at the heart of DeFi, with its underlying asset, ETH, being one of the most valuable in the PoS arena.

As of January 2024, the staking figures are staggering — over 29.5 million ETH staked, translating to more than $88 billion locked up (valuing ETH at $3,000), serving a singular purpose: securing the Ethereum network. This is in the context of Ethereum operating on an expansive network of over 9 million active nodes, per Etherscan data.

This backdrop sets the stage for the concept of restaking and liquid staking. While the staked ETH is instrumental in network security, there’s a growing narrative that this vast pool of capital is underutilized. This has spurred the development of liquid staking platforms and restaking protocols, which aim to rehypothecate this idle capital.

These protocols interface between the Ethereum consensus layer and ETH holders. Instead of directly staking on Ethereum, holders deposit their ETH into these protocols, which issue synthetic tokens representing the staked ETH. These tokens are a proxy for Ether locked in Ethereum staking contract and can be leveraged across various DeFi applications.

Restaking and liquid staking protocols offer a novel avenue for ETH holders to capitalize on their assets, providing security to the Ethereum blockchain and liquidity to DeFi, underpinning the innovative ways blockchain technology is evolving financial paradigms.

What is Restaking?

Restaking represents a groundbreaking innovation in the blockchain space, fundamentally redefining the utility of staked assets. At its core, restaking involves the rehypothecation of Ether (ETH) within a middle-layer infrastructure, enabling ETH staked on Ethereum to be utilized further without being unstaked from the original network. This process amplifies the efficiency and functionality of staked assets, offering a dual utility that extends beyond the primary purpose of network security.

The concept of cryptoeconomic security is central to understanding the value of restaking. Establishing and scaling this form of security is a daunting challenge, particularly for emerging Layer 1 blockchains. Security needs to be robust at inception and capable of scaling in tandem with the network's growth. This necessity makes cryptoeconomic security a substantial barrier to entry for new protocols, requiring significant resources and innovation to achieve and maintain.

Restaking serves as a critical solution to this challenge. It allows Ether to be staked concurrently on the Ethereum network and used to bolster the security of new Layer 1 networks. This is achieved by introducing additional slashing conditions on the restaked ETH to extend the cryptoeconomic security of the Ethereum network to other networks. Such a system permits these nascent blockchains to "rent" the established security of Ethereum, circumventing the arduous process of building their security infrastructure from scratch.

Middleware projects like EigenLayer play a pivotal role in facilitating restaking. They act as intermediaries that connect users' staked ETH with new blockchain protocols, enabling the rehypothecation process. Through restaking, users gain the opportunity to earn extra revenue by exposing their stake to additional risks associated with the extra slashing conditions while also contributing to the security and viability of emerging blockchains.

In essence, restaking is a transformative primitive in the blockchain ecosystem. It not only enhances the utility of staked ETH but also offers a sustainable and innovative approach for new blockchains to secure their networks, leveraging the established strength of Ethereum's cryptoeconomic model.

How Does Restaking Work?

Restaking is a novel concept in the blockchain realm, functioning as a mechanism to amplify the utility and efficiency of staked assets. It operates by allowing staked ETH to be leveraged further, providing additional security to emerging blockchain protocols while offering stakers the opportunity to earn extra rewards. To demystify how restaking works, we'll delve into its two main components: Pooling staked Ether from users and providing pooled security to protocols.

Pooling Funds from Users

At the heart of restaking is the process of pooling funds from users, which can be done in two main ways. The first method involves users setting up their Ethereum validator nodes and configuring withdrawal credentials to a restaking protocol. However, this approach is complex and resource-intensive, making it less appealing to the average user. The more accessible and widely adopted method involves liquid staking. Here's a step-by-step breakdown:

• Liquid Staking: Users start by engaging with a liquid staking protocol, such as Lido, where they stake their ETH and receive liquid staking tokens (LSTs) in return. These LSTs represent the user's staked ETH in a liquid and transferable form.
• Depositing LSTs: The next step involves users depositing their LSTs into a restaking protocol. These LSTs are the fuel that powers a data availability layer, which new blockchain protocols can tap into for enhanced security.

Providing Pooled Security

The crux of restaking lies in its ability to offer pooled security, a crucial aspect for any blockchain protocol, especially new layer 1 blockchains that require a robust and reliable security infrastructure.

• Actively Validated System (AVS): Establishing a trusted network, or AVS, is vital for a blockchain's security. This network, composed of a decentralized array of nodes scattered globally (preferably), runs the blockchain's virtual machine. However, setting up and maintaining an AVS as the network grows is resource-intensive, requiring significant infrastructure and an incentive system to ensure validators' honest participation.
• Restaking Protocols' Role: Restaking protocols alleviate the burden of bootstrapping an AVS by providing a shared security layer. When users deposit their LSTs into a restaking protocol, they contribute to a collective security pool. This pool is then utilized to secure new blockchain protocols, which can leverage the pooled resources without establishing their AVS from scratch.
• Slashing Conditions: Users' staked assets in a restaking protocol are subject to two slashing conditions. The first is imposed by the Ethereum mainnet and managed by the liquid staking provider, ensuring the maintenance of the Ethereum network. The second set, imposed by the restaking protocol, aims to secure the new blockchain protocols utilizing pooled security. This dual layer of incentives and risks ensures that stakers are compensated for their additional risk, as their staked ETH provides security beyond just the Ethereum network.

In summary, restaking represents a sophisticated interplay between liquid staking, user participation, and blockchain security. It allows staked ETH to serve a dual purpose: securing Ethereum and bolstering the security of new blockchain protocols. Through this innovative approach, restaking enhances the utility of staked assets and facilitates a more interconnected and secure blockchain ecosystem.

Benefits of Restaking

Restaking introduces a suite of benefits to the blockchain ecosystem, enhancing security, efficiency, and incentivization across various layers. Here's a detailed look at the advantages it brings:

• Pooled Security: Traditionally, blockchains like Ethereum, Solana, and Cosmos operate with separate validator networks, each securing its own ecosystem. This fragmentation can lead to inefficient resource use, as each network must independently establish and maintain its security infrastructure. Restaking introduces pooled security, where connected blockchains share a common security network. This not only leads to more efficient hardware utilization but also enhances the overall security posture by leveraging a larger, more robust validator network.
• Efficient Resource Utilization: By connecting to a restaking protocol, blockchain networks can "rent" security, adjusting the amount of pooled LSTs based on their specific security needs. This scalability allows for more cost-effective resource allocation, reducing the marginal cost of establishing validator services and scaling it as the blockchain grows.
• Additional Rewards: Ethereum stakers typically lock their funds, limiting their utility elsewhere. Restaking opens a new avenue for these funds to generate additional rewards, as staked assets can secure multiple networks. The protocols renting security from restaking platforms distribute extra rewards to stakers, compelling users to engage in restaking.
• Increases On-chain Honesty: With restaking, validators are subject to additional slashing conditions, heightening the stakes for maintaining honest behaviour. This dual-layer risk mechanism reinforces the integrity of the network, as dishonest actions could result in more significant penalties.
• Ethereum’s Extended Security: The fifth benefit of restaking is its ability to extend Ethereum's security without mandating EVM (Ethereum Virtual Machine) compatibility for other networks. Typically, for a blockchain to leverage Ethereum's security features, it needs to integrate via a rollup architecture, which often requires adherence to EVM standards. This can limit the diversity and innovation of new blockchain projects, as they must conform to specific technical constraints to benefit from Ethereum's established security. 
  Restaking, however, changes this dynamic. It allows various blockchain protocols to access Ethereum's robust security by utilizing pooled ETH-backed liquid staking tokens (LSTs) without the need for EVM equivalence. This opens the door for a plethora of blockchain architectures and consensus mechanisms to thrive, leveraging Ethereum's security without being tethered to its specific computational model. Consequently, restaking fosters a more vibrant and diverse blockchain ecosystem, enabling innovation and reducing entry barriers for emerging networks, all while maintaining a high standard of security underpinned by Ethereum's proven infrastructure.
• Improved Incentives for Ethereum Staking: Integrating liquid staking and restaking protocols makes the Ethereum staking process more accessible and rewarding. These protocols encourage broader participation in Ethereum staking by lowering entry barriers and enhancing reward structures. This strengthens the network's security and supports Ethereum's value by reducing circulating supply through increased staking.

Risks and Concerns About Restaking

Restaking introduces several risks that stakeholders should be aware of, as it involves more complex interactions between different protocols and networks. Here are some of the key risks associated with restaking:

• Smart Contract Risks: As with any DeFi protocol, restaking relies on smart contracts. These contracts could have vulnerabilities or bugs that could be exploited, potentially leading to the loss of staked assets.
• Additional Slashing Risks: Restaking involves subjecting the staked assets to additional slashing conditions. If the validators on the new network behave maliciously or incompetently, it could result in the staked assets being slashed, not just on the new network but also potentially affecting their status on the original network.
• Liquidity Risks: While liquid staking tokens provide liquidity, there could be scenarios where the market for these tokens becomes illiquid, impacting the ability to trade or use them effectively.
• Complexity and Integration Risks: Restaking involves interacting with multiple protocols and layers, increasing the complexity and potential for integration-related issues or unforeseen interactions between protocols that could affect the security and accessibility of staked assets.
• Regulatory Risks: The regulatory environment for crypto assets is still evolving, and there could be future regulations that impact the viability or operation of restaking protocols.
• Counterparty Risks: In some restaking models, there might be counterparty risks associated with the platforms or validators involved in the restaking process.
• Network Risks: The security and stability of the restaked assets are also dependent on the underlying networks involved. Any security breaches or failures in these networks could potentially impact the restaked assets.
• Market Risks: The value of the liquid staking tokens and the underlying staked assets can be volatile, and market downturns could affect the overall value of assets engaged in restaking.
• Governance Risks: Changes in the governance of the liquid staking or restaking protocols could lead to decisions that are not in the best interest of all participants, potentially impacting the security or value of staked assets.
• Interoperability Risks: The need for seamless interoperability between different blockchains and protocols adds a layer of risk, as any incompatibility or failure in these interactions could lead to loss of funds or reduced security.

Understanding these risks is crucial for anyone considering engaging in restaking, as it involves a complex interplay of factors that could impact the security and value of their staked assets.

Liquid Staking vs. Restaking

The choice between liquid staking and restaking strategies involves an interplay between user intention, skills and preferences.

Liquid Staking

Liquid staking allows users to stake their cryptocurrencies and receive a liquid token in return, representing their staked assets. This token can be used in various DeFi activities without the need to unstake the original assets.

• Utility: Provides liquidity to staked assets, allowing users to participate in other DeFi activities while still earning staking rewards.
• Risk: Involves standard risks associated with staking, including smart contracts and slashing risks if the validating nodes behave dishonestly or inefficiently. Liquid staking strategies are also subject to market risks like impermanent loss in DeFi, which can lead to amplified loss if you don’t have enough LSTs to withdraw your initial capital.
• Rewards: Users earn staking rewards from Ethereum as well as rewards from DeFi, which is completely subject to their DeFi strategies and skills.
• Accessibility: This makes staking more accessible to users who may not have the technical expertise or resources to run a validator node.
• Interoperability: Primarily focused on enhancing the utility of assets within the ecosystem of the staked blockchain.

Restaking

Restaking involves leveraging already staked assets (often through liquid staking tokens) to provide additional security to other networks or protocols, essentially allowing the staked assets to be staked again.

• Utility: Extends the use of staked assets beyond the original blockchain, contributing to the security of multiple networks and enabling users to earn additional rewards.
• Risk: Introduces additional risks, including those associated with the new networks being secured, and potentially higher slashing risks due to the added complexity and additional slashing conditions.
• Rewards: Offers the opportunity to earn extra rewards from multiple networks, increasing the potential return on staked assets.
• Accessibility: Facilitates a broader use of staked assets, providing users with opportunities to leverage their holdings for additional gains.
• Interoperability: Enhances the interconnectedness of various blockchain ecosystems by allowing staked assets to secure multiple networks, promoting a more integrated and robust blockchain infrastructure.

In summary, opting between restaking and liquid staking comes down to user skills and preference. Liquid staking is a more hands-on and active approach, requiring skilful DeFi strategies to earn additional rewards which can potentially produce greater returns than restaking. Restaking is a more passive approach, where you trust your restaking protocol in managing risk and reward while choosing the best protocols to lend security.

Top ETH Restaking Protocols

Let's delve into an introduction of some notable restaking protocols in the blockchain space:

1. EigenLayer: EigenLayer is a significant player in the restaking domain, having launched its protocol on the Ethereum mainnet. It allows users to stake and restake liquid staking tokens (LSTs) within its network, aiming to extend Ethereum's security to various software modules. With a design that enables stakers to choose which actively validated services (AVSs) to validate for, it introduces an innovative approach to utilizing staked assets. Recently, EigenLayer has attracted significant investment, including a $100 million Series B funding round from Andreessen Horowitz, showcasing strong industry confidence in its potential​​​.
2. Kelp DAO: Kelp DAO, emerging within the EigenLayer ecosystem, is designed to enhance liquidity and optimize capital utilization efficiency. By enabling users to hold rsETH, a synthetic token derived from ETH LSTs, Kelp DAO presents an attractive proposition for users seeking to engage in DeFi activities while leveraging increased yield opportunities.
3. Renzo Protocol: Positioned within the EigenLayer ecosystem as well, Renzo Protocol offers a streamlined operation for restaking users. It allows users to earn ezETH, providing a mechanism for effective capital usage and rewarding users with a combination of Eigen Points and Renzo Points, adding a unique layer to the restaking incentives.
4. etherFi: As a non-custodial decentralized ETH staking protocol, etherFi stands out by offering users control over their private keys while engaging in staking across various blockchains. It facilitates a Node service marketplace, enhancing ecosystem efficiency and providing a unique service in the restaking landscape.
5. Puffer Finance: Merging Ethereum's liquid staking with the native restaking features of EigenLayer, Puffer Finance introduces a native liquid restaking protocol that lowers entry barriers and addresses decentralization challenges. It allows users to enter with a minimal bond, presenting a novel approach to staking on Ethereum​.

How to Choose the Right Ethereum Restaking Protocol

When choosing the right restaking protocol, consider the following aspects:

• Security and Trust: Evaluate the protocol's security measures and its track record to ensure your assets are safe.
• Supported Assets: Check which assets the protocol supports for restaking to align with your investment strategy.
• Yield Opportunities: Compare the potential rewards and additional earnings the protocol offers.
• User Experience: Consider the ease of use and accessibility of the protocol's platform.
• Community and Support: A strong community and responsive support can be crucial for navigating any issues that arise.

By thoroughly researching and considering these factors, you can make an informed decision that aligns with your staking goals and risk tolerance.

What is Ethereum Restaking: Closing Thoughts

Restaking represents a transformative leap in blockchain technology, enhancing the utility and efficacy of staked assets.

By enabling the rehypothecation of staked ETH, restaking protocols like EigenLayer, Kelp DAO, Renzo Protocol, etherFi, and Puffer Finance are not only fortifying blockchain security but also opening new avenues for yield generation. These platforms offer a symbiotic ecosystem where validators and stakers can amplify their contributions and rewards, fostering a more interconnected and resilient blockchain landscape.

However, as with any innovative financial mechanism, restaking comes with its own set of risks and complexities, necessitating thorough due diligence by participants. As the blockchain ecosystem evolves, restaking stands out as a pivotal development, promising enhanced security, efficiency, and inclusivity in the decentralized world.