An Early Look at Ethereum’s Restaking Landscape
With the total value locked (TVL) on EigenLayer rising from $1bn as of Dec23 to $9.5bn in two months, and TVL in liquid restaking tokens (LRTs) increasing from $152m at the start of the year to over $4bn as of Feb24, restaking is gaining significant momentum.
The community is particularly enthusiastic, anticipating potential airdrops through farming EigenLayer points and earning additional restaking rewards with the same ETH staked.
In this article, we will recap on Ethereum staking and compare it to restaking. We will examine use cases, as well as outline some benefits and concerns associated with restaking for those who wish to get a piece of the action.
Proof-of-Stake (PoS) Ethereum and Security
Ethereum underwent The Merge that transitioned its security model to the PoS consensus mechanism. To secure Ethereum under PoS, anyone can participate as a validator by depositing 32 ETH onto the Beacon Chain, granting them the right to attest to new blocks and occasionally propose new blocks. Validators earn rewards for honest work, but dishonest work risks the slashing of some or all of their staked ETH.
At the time of writing, over 25% of the ETH supply (31,061,263 ETH out of 120,142,088.89 ETH) is staked. ETH total market cap is $400bn while the total value of staked ETH is $100bn. This implies that executing a 51% attack on Ethereum, where the attacker would control the majority of validators, would require deploying capital upwards of $100bn (assuming current network validators are all honest) to successfully influence Ethereum in their favor.
Besides, the validator churn limit prevents new validators from entering the network simultaneously. At current limit of 15 per epoch, the attack could take more than 6 months to be executed. Additionally, the current supply of ETH on exchanges, 13,735,858.547 ETH (~11.43%), is less than half of total ETH staked, making it increasingly difficult to purchase enough ETH for attacking the network.
Liquid Staking Protocols enable more users to participate in PoS by letting users delegate their ETH to node operators instead of running validator clients themselves. Users get liquid staking tokens (LST) in return, which they can freely use in DeFi activities, unlike native staking where you have to lock up ETH on the Beacon Chain. LSTs represent a promise to exchange it back for the delegated ETH and rewards earned.
New ETH stakes are predominantly directed towards liquid staking protocols, even prompting discussions on changing staking issuance.
Restaking and Its Use Cases
To put things into perspective, Ethereum took over three years to establish its cryptoeconomic security with more than 25% of all ETH staked. The staked ETH is now valued at over $100 billion, surpassing the total market cap of next major networks like BSC ($62bn) and Solana ($59bn) (both figures at the time of writing).
New protocols seeking to establish a robust cryptoeconomic security would need to invest additional time and resources to achieve a similar feat. They’d have to look for fresh capital that isn’t already securing existing blockchain protocols. This will also further dilute capital among various blockchain protocols and lead to security fragmentation.
The concept of restaking, introduced by EigenLayer, involves ETH validators/stakers opting to secure additional protocols (or Actively Validated Services) with their staked ETH. This approach allows developers to bootstrap new protocols quicker by tapping into Ethereum’s security.
Since its stage 1 launch on the Ethereum mainnet in Jun23, EigenLayer has amassed a Total Value Locked (TVL) of over $9.5bn, making it the second-largest protocol on Ethereum in terms of TVL. Its liquid restaking token (LRT) counterpart, similar to how LSTs are to staked ETH, now boasts a TVL of over $4bn.
According to EigenLayer’s website, there are currently 13 AVS projects building in its ecosystem, leveraging restaked ETH to enhance their project’s security. The first of these AVSs, EigenDA (developed by EigenLabs), is undergoing testing on the testnet and will hit mainnet in first half of 2024.
For a market overview on restaking in February 2024, read the blog here.
What are some Benefits & Concerns of Restaking?
As Actively Validated Services are still undergoing rigorous testing and yet to launch on the mainnet, the full range of benefits and concerns are yet to unfold.
Nevertheless, here’s the preliminary benefits and concerns of restaking as gathered from the community:
Benefits
- Shared Security
Protocols building on EigenLayer can benefit from Pooled Security without incurring additional startup costs to assemble their validator base, especially in PoS networks.
EigenLayer’s founder, Sreeram Kannan, said Shared Security has hardening at scale. If $1bn of stake is being restaked and shared across all protocols, the cost to attack any of them is $1bn.
This begs the question, if EigenLayer is a permissionless protocol that lets anyone to build on top of it, wouldn’t Pooled Security incentivize people to take on more risk with security that’s being subsidized by other people?
An upcoming change to the Shared Security model might introduce Attributable Security, allowing AVSs to purchase a claim on a certain amount of pooled (restaked) capital. In case something goes wrong with the AVS, the claim can be redistributed to AVS users, making them whole. This is akin to insurance.
- Capital Efficiency
ETH that is restaked will enjoy more rewards validating AVSs than Ethereum alone.
Concerns
Validators tapping into AVSs will be able to offer a higher APY to their delegators, on top of vanilla ETH staking yields. Validators need to understand the risks of securing additional AVSs and not blindly tap into each one for promised yields.
Restakers may naturally gravitate towards delegating their ETH to validators sustaining greater yields with minimized slashing risks. This may develop into a feedback loop, ensuring that validators providing sustainably higher yields continue to attract capital in the long term, further strengthening their position.
- Stretching Ethereum’s Consensus
Ethereum, like other blockchain communities, has a fragile social consensus. If the social consensus is used unsparingly, it could have a high risk of dividing the community and causing chain splits.
Restaking should preserve Ethereum’s minimalism by refraining from introducing unnecessary “scope” to extend the role of Ethereum consensus. If a restaked AVS becomes too big to fail, it could trigger a social consensus fork.
Conclusion
Restaking has quickly become a hot topic within the community, offering additional incentives for farming EigenLayer points and potential airdrop opportunities. It is also a promising technology that enables more useful protocols to be secured by Ethereum.
The team behind EigenLayer is also not rushing the process as they consider multiple perspectives from the community and core developers, gradually making informed updates to the protocol.
