Restaking in Proof-of-Stake (PoS) blockchains, such as Ethereum, plays a crucial role in enhancing network security. It incentivizes the activation of staked tokens, which would otherwise remain idle, leading to improved blockchain functionality. This article explores the concept of restaking, different types of restaking, the functioning of liquid restaking, the use of staked Ether for collective security, and concerns associated with restaking.
Restaking involves using Ether (ETH) in the consensus layer multiple times, allowing stakers to increase their rewards while strengthening the security of the staking network. By deploying liquid staking tokens with validators across multiple networks, restakers can activate their staked tokens and earn higher rewards. Whether staking Ethereum directly or using a liquid staking token (LST) like EigenLayer, restakers can utilize a restaking protocol to receive additional rewards.
In the Ethereum network, a large number of validators participate in the PoS consensus mechanism. However, the staked ETH remains dormant. Liquid staking protocols convert the staked ETH into fungible tokens, enabling stakers to use them in decentralized finance (DeFi) applications. This mechanism removes the minimum 32 ETH staking cap, allowing users with smaller holdings to earn staking rewards.
Restaking can be categorized into native and liquid restaking. Native restaking is available to users running an Ethereum validator node, where smart contracts manage the staked assets. Validators can stake their tokens with restaking protocols to benefit from the crypto-economic security they offer. Liquid restaking involves using LST, where stakers receive a token representing their stake from the validator, and they can restake the LST to earn additional rewards.
To understand how liquid restaking works, let’s take the example of EigenLayer. EigenLayer acts as a bridge between Ethereum and other blockchain applications, offering pooled security and a marketplace for it. Users who have already staked their ETH can engage with EigenLayer’s smart contracts to restake their holdings and contribute to the security of various platforms. The restaking process on EigenLayer involves connecting the wallet, selecting the desired LST, and depositing or unstaking the LST.
Restaking enables the establishment of a collective security mechanism powered by Ethereum. It allows protocols or active validator sets (AVS) to leverage the collective security provided by Ethereum’s stakers, making development more efficient. AVS can range from sidechains, bridges, oracle networks, keeper networks, to data availability layers. EigenLayer’s pooled security model requires any attacker to challenge the entire collective stake, valued at billions of dollars, reducing the risk of disruption.
However, participating in EigenLayer’s smart contracts introduces additional risks, including the possibility of increased slashing conditions for a user’s staked ETH. Concerns about restaking include the allocation of funds repeatedly to similar validators, which increases both yield and risk. Excessive leverage could lead to project instability and systemic risks for the blockchain. Vitalik Buterin, a co-founder of Ethereum, has cautioned about the significant systemic risk posed by restaking protocols.
While the growth of restaking protocols presents risks, it can also serve as a key component of DeFi, attracting liquidity and users to Ethereum staking. It is crucial to approach the development and deployment of staking services cautiously, considering the potential risks to layer-1 blockchains. Resolving conflicts that may arise after restaking is essential to prevent negative effects. By carefully considering the long and short-term effects of restaking, the Ethereum ecosystem can benefit both stakers and the network as a whole.