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Key Takeaways
- Restaking allows Ethereum stakers to earn multiple rewards by participating in security for both the main staking network and additional protocols they are restaked to through EigenLayer.
- EigenLayer pioneered the restaking concept and has seen rapid growth, with a TVL of US$8.35 billion and a growing ecosystem of projects using it like EigenDA, AltLayer, and Lagrange.
- Liquid restaking protocols (such as ether.fi and Puffer) have also gained significant adoption with over US$4 billion in TVL.
- Restaking currently lacks a track record and faces risks around smart contract reliance and potential depegging issues that could impact long-term sustainability.
What Is Restaking?
Restaking allows native staked ETH and liquid staking tokens (LST) to be staked with validators in other networks. Users utilise restaking to secure not only Ethereum but other networks or protocols and earn extra rewards by putting their staked ETH at risk for additional slashing conditions.
Liquid staking eliminates the 32 ETH minimum staking requirement and allows small-stake holders to pool their assets with other users, potentially enabling them to benefit from staking rewards.
Restaking protocols allow other dapps to reuse assets staked on Ethereum for their own security. Restakers can earn multiple rewards: once from the main Ethereum network, as well as from the protocols they are restaked to.
EigenLayer
EigenLayer is the pioneer in restaking, aiming to solve the issues of fragmented trust networks by enabling users who have locked their ETH in staking to ‘restake’ it in a separate smart contract. This essentially means putting up the same capital for additional slashing risk. This restaked capital is then used to secure any new application or middleware created with EigenLayer. Ethereum’s trust network allows dapps to be built on it due to the Ethereum Virtual Machine (EVM)’s programmability, which provides collective security to all dapps.
However, modules that can’t be deployed or validated on the EVM can’t leverage Ethereum’s pooled trust, as these modules process inputs derived outside Ethereum and can’t be validated within its network. EigenLayer refers to these as actively validated services (AVSs). Examples include sidechains, data availability layers, new VMs, oracle networks, and bridges. Typically, AVSs are either secured by their own token or permissioned. EigenLayer enables these AVSs to achieve the same level of security as Ethereum, which is a significant advancement, as it extends the trust and security of Ethereum to a wider range of applications and services.
Our previous report, Restaking: EigenLayer, exclusive to Private members, introduced the EigenLayer protocol. Since then, EigenLayer and the restaking ecosystem has seen rapid growth and developments. EigenLayer’s TVL has seen rapid growth and is currently at US$8.35 billion (as of 26 Feb. 2024), ranking fourth amongst DeFi protocols tracked by DefiLlama.
The ecosystem of projects using EigenLayer is also growing. Some of the projects are highlighted below:
Additionally, EigenLayer introduced a restaked points programme. The points measure the contribution of users to the shared security of the EigenLayer ecosystem and are based on staking participation equal to the time-integrated amount staked in units of ETH x hours. Calculation details can be found in EigenLayer docs, and the example given is: a user who stakes 1 stETH (an LST of Lido) for 10 days should accrue 240 restaking points over this time period (1 ETH x 10 days x 24 hours/day). In the community, this points programme is speculated to be for a possible EigenLayer native token airdrop.
On the capital-raising front, prominent crypto venture capital firm a16z recently announced a US$100 million funding round for EigenLayer.
EigenLayer is currently in Stage 2 testnet, aiming to learn, iterate, and improve the user experience for restakers, operators, and AVS and rollup developers. It expects Stage 2 mainnet to launch in the first half of 2024.
Liquid Restaking
Restaking has led to the development of liquid restaking, which recently gained significant traction. Liquid staking protocols (e.g., Lido) allow people to stake their ETH and, in return, give them LSTs. Further, users can stake the LST via EigenLayer, which enables AVSs to gain the same level of security as Ethereum. To maintain liquidity, people receive liquid restaking tokens (LRTs) that can accrue additional rewards and be used in DeFi. This process can be achieved via liquid restaking protocols that interact with EigenLayer (for Ethereum).
Multiple liquid restaking protocols have emerged, amassing a total TVL of close to US$4 billion (as of 25 Feb 2024). Ether.fi and Puffer are currently the two largest protocols, accounting for 72% of the total TVL (as of 25 Feb 2024).
Risks
While the current configuration of liquid staking may appear promising, it raises significant concerns regarding its long-term sustainability. The continuous cycle of staking ETH to obtain LSTs, then restaking for LRTs, and so forth, seems to have the potential to persist indefinitely. This ongoing restaking process effectively amplifies the risk associated with the original asset, ETH. The restaking model employed by EigenLayer lacks an established track record, and the following is an overview of the risks associated with its current implementation.
- Smart contract risk: There is a risk associated with engaging in project contracts. When projects are integrated with the EigenLayer protocol, they essentially entrust funds to EigenLayer’s contract system. Consequently, if the EigenLayer contract becomes a target of an attack, the funds associated with the project could potentially be compromised.
- Slashing risk: All LST/LRT protocols are exposed to potential slashing risks, although the likelihood of such risks is low, and node operators are generally experienced professionals. Nevertheless, there is a possibility of capital loss resulting from slashing, a risk that can be amplified by LRT protocols. The level of slashing risk is contingent upon the number of services operated by a validator. In the event of unintended slashing resulting from bugs, there is a possibility of cascading slashing affecting multiple services and validators.
- Depeg risk: While Beacon Chain withdrawals have significantly reduced depeg risks, there remains a potential for exploitation in the underlying LST/LRT token contract. A depeg event can trigger widespread liquidations. A notable example occurred when stETH depegged in May 2022, causing leveraged stETH positions to undergo cascading liquidations, resulting in a sharp decline in the price of ETH. Depegging of LST tokens can exacerbate losses for liquidity providers due to impermanent loss in Automated Market Makers (AMMs).
- Liquidity risk: Like staking, restaking protocols may also encounter service fees and long waiting times when users want to withdraw their staked tokens.
Conclusion
Restaking has emerged as an innovative concept that allows Ethereum stakers to obtain additional rewards while improving security for other projects. Protocols like EigenLayer have helped pioneer this model and foster rapid growth of the restaking ecosystem. However, the complex risks involved with smart contract reliance and potential de-pegging issues underline that long-term sustainability depends on continuing to address such concerns.
Authors
Crypto.com Research and Insights team
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