What Is Restaking?

Restaking was devised to allow staked assets in Proof-of-Stake blockchains to be reused for additional rewards, enhancing utility and liquidity. Key protocols like Eigenlayer offer restaking, with risks including centralization and compounded slashing.

Decentralized Finance (DeFi) is experiencing a resurgence, thanks to a new type of asset called “liquid restaking tokens” or LRTs. The concept of “restaking” has piqued the interest of crypto enthusiasts globally, with billions of dollars being poured into this sector.

This guide will delve into restaking, how it works, its benefits, and potential risks.

What Is Restaking?

Staking plays a crucial role in securing a Proof-of-Stake blockchain. Validators on the network can stake a certain amount of the blockchain’s native token to support network security and earn a passive income. 

So that was staking. But what is restaking?

Restaking allows previously staked assets to be staked again on a different platform or program, enhancing the asset's utility and potential for rewards. This process enables staked assets to be leveraged by other decentralized protocols, offering additional reward opportunities to both validators and nominator stakers.

Restaking protocols have been highly popular over the past year. Since the beginning of 2024, the TVL locked up in these protocols has jumped from $1.01B to ~$8B- as per DeFiLlama. EigenLayer accounts for the lion’s share of this TVL.

What is Eigenlayer?

Eigenlayer is a restaking protocol that where Ethereum validators can stake their Ether on additional services within the Eigenlayer ecosystem, known as Actively Validated Services (AVS).

This restaking process allows Ethereum validators to contribute to the security and operation of various decentralized services while potentially earning additional rewards.

How does Eigenlayer restaking work?

• Actively Validated Services: These are decentralized services within the Eigenlayer ecosystem. They can be anything from data oracles to layer-2 scaling solutions, and they're secured by the validators participating in the Eigenlayer network. Validators can choose which AVS to support based on their preferences, risk tolerance, and the rewards offered by each service.
  
• Restaking strategies: A restaking strategy is the approach a validator takes in deciding which AVS to support and secure. Validators can choose to secure one, some, or all available AVS, and each choice comes with its own set of rewards and risks. The strategy involves balancing the potential rewards from the fees or incentives provided by the AVS with the risks, including the risk of slashing if the service is compromised or does not perform as expected.
  
• Exponential growth of strategies: As the number of AVS in the Eigenlayer ecosystem grows, the number of possible restaking strategies increases exponentially. This is because each AVS adds new potential combinations for restaking. As more AVS are added, the number of strategies grows rapidly, offering validators a wide range of choices but also requiring careful consideration to optimize their restaking approach.
  
• Ethereum's security as a foundation: The security and trustworthiness of Ethereum are extended to the services built on Eigenlayer.

Types of Restaking

Two types of restaking options are available to users:

• Native
• Liquid

Native restaking

Native restaking involves using smart contracts to manage assets under a validator's node, enhancing the crypto-economic security of the assets. Validators participating in native restaking programs must adopt additional node software specific to the restaking module, allowing them to securely offer their staked assets for further utilization within the restaking ecosystem. This process ensures that assets remain secure while allowing validators to acquire additional reward opportunities.

Liquid restaking

The second option is liquid restaking, which utilizes Liquid Staking Tokens (LSTs). In this type of restaking, users stake their assets in an app in exchange for an LP (liquidity provider) token. The user can then stake their LP in a staking protocol.

What Are the Benefits of Restaking?

Some of the main benefits of restaking include:

Flexibility

Restaking grants traders increased flexibility by allowing the use of staked assets in various financial activities without the need to unstake, thereby providing access to liquidity while maintaining the potential for rewards. This flexibility leads to more efficient capital allocation and maximizes the utility of staked assets. 

Mitigates shortcomings of traditional staking

Restaking addresses the opportunity cost associated with traditional staking, where assets are locked and inaccessible. It enables token holders to derive liquidity from their assets without foregoing potential rewards, making staking more appealing for those seeking liquidity and flexibility. 

Scalable security

Restaking allows protocols to achieve a degree of flexibility regarding security, depending on the network’s demands. Thanks to restaking, protocols can scale up their security when required by contracting validators present in a restaking protocol. Once the security demands are met and the network returns to normalcy, protocols can scale down the security. This allows protocols to take a cost-effective approach to network security scaling.

Security for new protocols

New protocols and networks need help in developing an adequate security system. This is particularly true during the early stages of the protocol. Restaking gives these protocols access to a large set of validators at the beginning of their development, allowing them to strengthen their security significantly. 

What Are the Risks Associated With Restaking?

Not everyone in the crypto ecosystem is too pleased about the concept and has voiced concerns about potential issues associated with restaking. 

Centralization

One major concern is that restaking could result in stake centralization. This is because validators utilizing restaking services can offer higher APY. As they can offer higher APY, it could attract more delegation to specific validators, leading to a few validators controlling the stake. This could lead to a potential loss of neutrality.

Compounded slashing

Another risk associated with restaking is slashing. Slashing is a punitive measure in proof-of-stake blockchains that penalizes dishonest validators for misconduct by reducing their staked assets and excluding them from the network for a particular amount of time.

This is because restaking terms include extra slash conditions in exchange for the potential of increased rewards. Each protocol has different terms for slashing, and depending on these terms, a validator could lose a significant percentage of their staked assets to slashing.

In Closing

Restaking aims to provide more value to stakers and other protocols. Before the advent of restaking, tokens were locked into a single protocol and were committed to a single cause. Restaking upends this, allowing stakers to provide more services with a single stake and earn greater rewards. This is because restaking protocols turn staked assets into flexible assets capable of committing to other protocols. As restaking continues to evolve, we will continue to see more use cases for staked assets through restaking come to the fore.

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