In PoS blockchains like Ethereum, the security of the network depends on the number of validators actively participating, the proportion of tokens held by them as stakes, and how those tokens are distributed among them. Restaking mechanisms encourage token holders to stake their tokens instead of keeping them idle, thereby enhancing the performance and effectiveness of the blockchain.
In this piece, we delve into the concept of restaking, explaining its definition, identifying various forms, elucidating the functionality of liquid restaking, and addressing the shared security aspect involving staked Ether, as well as the associated concerns.
What is restaking
In simpler terms, Restaking offers a fresh idea for Ethereum (ETH) stakeholders by letting them utilize their ETH in the validation process multiple times. This results in higher rewards and enhances the security of the staking network as it enables the distribution of liquid staking tokens among validators across various networks.
On Proof of Stake (PoS) blockchains, your staked tokens typically remain inactive. However, by activating them through the process of restaking, you can earn increased rewards. This can be done with Ethereum or other cryptocurrencies, as well as with liquid staking tokens (LSTs). By employing a restaking platform like EigenLayer, you can boost your staking returns on these tokens.
On Ethereum’s PoS consensus mechanism, the large number of validators sets it apart. However, ETH that is staked remains inactive. By using liquid staking protocols, this idle ETH can be transformed into tradeable tokens, allowing stakers to utilize it in DeFi platforms. The system maintains a minimum requirement of 32 ETH for staking, enabling smaller stakeholders to still earn rewards.
Types of restaking
Restaking can broadly be segregated into native and liquid restaking. Native restaking is available to users who run an Ethereum validator node. It functions through a set of smart contracts that supervise the management of assets staked inside a validator’s node.
Validators have the opportunity to enhance the security of their cryptocurrency holdings through the use of staking protocols. By staking their tokens with these protocols, validators can take advantage of the economic safeguards they provide. To join a staking program, validators must install and operate extra node software specifically designed for the staking feature.
In the process of liquid staking, users make use of liquid staking tokens (LST). When a user deposits their assets with a validator in this method, they receive a token as proof of their stake. Users can then reinvest these tokens to collect extra rewards.
How liquid restaking works
Using the instance of EigenLayer for clarification, we can explain how liquid staking functions. With a TVL (Total Value Locked) surpassing $250 million, EigenLayer serves as a connector between Ethereum and other blockchain projects. It provides pooled security and hosts a marketplace for this functionality.
Restaking through smart contracts
EigenLayer serves as the base structure for the process of restaking. Those who have previously staked their ETH, either directly or through intermediary liquid staking solutions, can interact with EigenLayer’s smart contracts. This enables them to reinvest their assets and help secure multiple platforms, resulting in a robust security system built on Ethereum.
Process to restake on EigenLayer
Here is the process to restake on EigenLayer
Step 1: Click “Restake” at the right of the top menu on the EigenLayer website.
The EigenLayer app will appear in the next tab, where the user can complete the restaking process.
Step 2: In the upper part of the screen, find the “Connect Wallet” button located in the middle. From this point, users have the flexibility to choose among MetaMask, Coinbase Wallet, WalletConnect, or OKX Wallet as their preferred option.
In the upper right corner, you’ll find an icon representing three parallel lines. By clicking on this symbol, users have easy access to various resources such as support articles, blogs, Discord channels, and forums.
Step 3: In the section “Liquid Restaking,” click on the chosen LST.
If a user chooses Ethereum from Rocket Pool, they’ll encounter a window where they can make deposits or withdrawals. Currently, deposits are not allowed.
Collective security using staked ETH
Normally, starting a new protocol entails building a new foundation of trust for security reasons, involving the creation of a network of validators and the introduction of a homegrown cryptocurrency.
Paraphrasing: Re-staking transforms the development process by enabling protocols or active validator sets (AVS) to tap into Ethereum’s staker community for enhanced security, thereby streamlining the development experience. The AVS, often referred to as EigenLayer modules, span a variety of applications, including sidechains, bridges, oracle networks, keeper networks, and data availability layers.
Previously, an intruder might have been able to undermine the security of one of these AVS (Automated Verification Systems), leading to disruptions. But with EigenLayer’s approach to pooled security, any attempt to breach the system would necessitate targeting the entire collective stake, worth billions of dollars. By engaging in EigenLayer’s smart contracts, though, you take on extra risks, such as harsher penalties for a user if they are found to have slashed their staked ETH.
For Ethereum stakers, this model presents an opportunity to earn greater rewards by helping secure various AVS using their restaked ETH, all without having to deal with different tokens. EigenLayer simplifies this process via a marketplace where AVS can attract validation from Ethereum network nodes. These validators can then choose which modules to support based on the incentives offered.
Concerns regarding restaking
A common concern about restaking is about the allocation of funds repeatedly to similar validators, increasing both yield and risk. Developers have warned that excessive leverage could result in the instability of projects. According to them, if more financial risk is embedded into the blockchain itself, it would only destabilize the whole ecosystem. Vitalik Buterin, a co-founder of Ethereum, has cautioned that restaking protocols could expose the blockchain to significant systemic risk.
The rapid growth of restaking protocols means the associated risks are also escalating, demanding immediate attention. A voluminous failure could undermine the security of the underlying blockchain. In 2022, Ankr, a restaking protocol built on the BNB network, was exploited, and it should serve as a preview of a possible catastrophe for a blockchain network.
Despite the potential dangers of restaking, it can be utilized in situations involving minor misconducts, such as double signing, while maintaining Ethereum’s central tenets of decentralization.
Emergence of staking as a DeFi component
As restaking develops further, it’s anticipated to become a major player in Ethereum’s DeFi scene, attracting more liquidity and users to Ethereum staking. Ethereum staking has traditionally lagged behind other Proof of Stake networks. However, the collaboration between Liquid Staking Tokens (LST) and restaking could lead to substantial expansion in Ethereum’s staking community.
The risks associated with restaking on layer-1 blockchains necessitate a careful approach when building and releasing staking platforms. Addressing any potential conflicts arising from restaking is crucial to mitigate adverse consequences. Considering both the immediate and long-term impacts of restaking within the Ethereum network could lead to beneficial outcomes for all stakeholders.
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2024-04-13 13:33