Key Takeaways:
- Restaking allows users to simultaneously stake tokens on both the main blockchain and other protocols, securing multiple networks and potentially earning additional rewards.
- Traders who restake can potentially increase their rewards, receiving them from both the original and the restaking network.
- There are different restaking options, including native restaking on EigenLayer for Ethereum and liquid restaking, allowing users to stake assets on both the main network and other protocols.
- Restaking networks like EigenLayer accept various assets beyond their native token, enhancing network security and tapping into DeFi market liquidity, which can generate revenue for the users and the protocol.
- Users opting for restaking should be aware of associated risks, including slashing and yield risks.
With restaking, users can stake the same tokens on the main blockchain and other protocols, securing multiple networks at once and more potential rewards while also accepting higher slashing risk. Here’s how it all works.
What Is Restaking?
Restaking allows liquid staking tokens to be staked with validators in other networks. This allows users to earn more rewards while helping to improve security on the staking network through the Proof of Stake (PoS) consensus mechanism.
Restaking was devised to improve the utility of staked tokens, which are usually lying dormant on PoS blockchains. Now, restaking protocols put these tokens to use. One of the best-known examples is EigenLayer, which lets protocols leverage Ethereum’s trust network without needing to establish their own validator sets.
Besides liquid staking, restaking can also apply as redepositing rewards earned from staking into the same node in order to increase future profits; however, this article focuses on staking of liquid staking tokens.
New to staking and liquid staking? Learn the basics here.
How Restaking Works
Restaking, as the name suggests, involves staking an asset once again after the initial staking period. This process allows the staked asset to be used in another staking programme or platform, enhancing its utility and providing the holder with an additional set of rewards, although with increased slashing risks.
Let’s look at an example from the Ethereum ecosystem.
The Ethereum network is known for its high-security PoS consensus, thanks to numerous validators and widespread distribution. However, staked ETH lays dormant on Ethereum, which sparked the development of liquid staking derivatives. Liquid staking transforms staked ETH into liquid tokens, which can be used in decentralised finance (DeFi).
Since liquid staking eliminates the 32 ETH minimum staking requirement, it allows small-stake holders to pool their assets with other users and potentially enables them to benefit from staking rewards.
Restaking takes this concept one step further. These protocols allow other decentralised protocols to use assets staked on Ethereum for their own security. Both validator and nominator stakers can earn multiple rewards: once from the main Ethereum network, and additionally from the protocol they are restaked to.
How to Restake Your Tokens
Below is a brief overview of different types of restaking:
EigenLayer
Exclusive to users operating an Ethereum validator node, EigenLayer‘s native restaking is facilitated through a series of smart contracts. These contracts manage the assets staked under a validator’s node, ensuring the crypto-economic security provided by restaking protocols.
Validators opting for participation in the restaking programme must download and run additional node software specific to the restaking module. By doing so, validators commit to EigenLayer’s restaking terms, which include adherence to an additional slash condition.
Liquid Restaking
Liquid restaking, another form of restaking, involves the use of liquid staking tokens. In this process, a staker initially stakes their assets with a validator, then receives a token representing their stake with that validator. At that point, the staker can stake the liquid staking token on the restaking protocol.
Here’s how to liquid stake with Crypto.com.
Once tokens are deposited into the restaking protocol, users have the flexibility to explore available decentralised applications (dapps) to restake their tokens. These dapps, referred to as Actively Validated Services (AVS) on EigenLayer, use liquid staking to enhance their security infrastructure through the process of restaking.
Benefits of Restaking
- Improved Rewards: Stakers can potentially increase their earnings by staking assets on two networks.
- Increased Security: The more assets staked, the higher a network’s value, enhancing its resilience against attacks. This increased security makes it a reliable hub for dapps, protocols, and platforms.
- Reduced Dumping: Restaking makes the original token more versatile, which discourages dumping. The increased utility helps avoid value loss for the project and its investors, fostering a more stable and sustainable ecosystem.
Cons of Restaking
- Slashing: Restaking introduces additional slash conditions in exchange for heightened rewards. Depending on the protocol’s terms, slashing poses the risk of significant asset loss for validators who may breach the rules. Stakers opting in are bound by the contract rules and face slash penalties for malicious behaviour.
- Yield Risks: While EigenLayer aims to let protocols leverage Ethereum’s decentralised trust network for security, restakers are primarily motivated by the reward system. This might lead restakers to choose protocols with the highest yield, potentially impacting the Layer-1 network. There’s also concern that users may perceive restaking as a quick, highly leveraged financial product.
- Impact on Layer-1 Blockchains: As highlighted by Ethereum co-founder Vitalik Buterin, restaking poses a risk to Layer-1 blockchains. Protocols relying on Ethereum’s social consensus for a fork or reorganisation (in the case of major losses) may lead to conflicts over the canonical version of Layer-1. EigenLayer’s founder, Sreeram Kannan, suggests that applications reusing Ethereum’s validator set should not be rescued by Layer-1’s social consensus.
Conclusion: Is Restaking Worth It?
Restaking promises enhanced capital efficiency and potential double profits for users willing to take the associated risks. EigenLayer and other projects offer the chance to restake and unlock the potential of staked tokens across multiple networks and tap into the DeFi market. The possible benefits of restaking range from improved rewards and increased network security to mitigating the risk of asset dumping and bolstering the native network’s decentralisation.
However, these potential gains are not without their caveats. The risks include smart contract vulnerabilities, fraudulent behaviour by validators, and increased exposure to slashing — all of which demand careful consideration by prospective restakers.
Moreover, the impact of restaking on Layer-1 blockchains, highlighted by Ethereum’s co-founder, Vitalik Buterin, underscores the need for a cautious approach. The reliance on social consensus and potential conflicts in the event of significant losses raises questions about the long-term effects of staking on the broader blockchain ecosystem.
Due Diligence and Do Your Own Research
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