Restaking: The Future of Staking on Ethereum that You Should Know

"Restaking" is a new technology taking center stage in the bustling Ethereum ecosystem. With a total value locked (TVL) of over $12 billion, Restaking applies the security of the Ethereum network to safeguard other blockchains built on the Ethereum Virtual Machine (EVM). This article explores the origins, applications and benefits of Restaking.

What is Restaking?

Restaking is the process of  taking the rewards earned from staking to continually staking on other Proof-of-Stake (PoS) services on Blockchain
For example, if you're staking ETH (Ethereum) on the Ethereum network, you can take the rewards you earn from staking and use them to stake on another PoS platform with different staking mechanisms or rewards rates

Ethereum's Crucial Transition: From Proof of Work to Proof of Stake

In September 2022, Ethereum underwent a massive upgrade known as "The Merge." The transformation shifted the network's operation from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) model. In simpler terms, PoS allows Ethereum (ETH) holders to contribute to network security instead of relying on high-performance computers. These individuals, known as Validators, must stake a minimum of 32 ETH to be able to participate and receive rewards for accurate work. However, if they make mistakes, they risk losing a portion of their staked ETH through a process called Slashing.

The Challenges of Traditional Staking

Typically, users earn rewards for staking their ETH to validate transactions on the Ethereum network. Although the new Proof of Stake system offers advantages, it still presents certain complications. Running a validating node on the Ethereum network requires a minimum stake of 32 ETH, an extremely high amount that poses a barrier for many individuals within the community, barring them from direct participation in network validation.

Emerging Solutions for Proof of Stake Validation on Ethereum

There are emerging solutions addressing the high staking costs on Ethereum. For instance, 'Lido Finance' offers a solution called "Liquid Staking." which allows individuals to pool their ETH together to stake collectively and manage a group of Validators. The rewards are then distributed among participants. Additionally, participants receive Liquid Staking Tokens (LSTs), such as Lido Staked ETH (stETH), which can be exchanged for staking on ETH. These tokens can also be utilized in other services while still earning rewards from the staked ETH.

Ethereum's Expanding Horizons as New Projects and Security Needs Arise

The Ethereum ecosystem has evolved beyond just Smart Contracts and Staking, there are also Bridges, Oracles and many such other elements that rely on Ethereum's security. Creating new PoS networks from scratch is difficult to achieve, and even successful networks may not match Ethereum's level of security. These factors, among others, have paved the way for a new approach: "Restaking."

Delving into the New Paradigm: From Staking to Restaking

Restaking is a method to apply staking on Ethereum for validating other networks as well. Imagine all staked ETH forming a massive security pool, but Instead of each new project establishing its own security validation system, these projects can utilize this existing pool by Restaking together. This allows Validators to safeguard other services simultaneously (known as Actively Validated Services or AVSs), potentially earning additional rewards for Stakers.

EigenLayer: The Leading Restaking Platform

EigenLayer is a protocol built on Ethereum, offers Restaking services, aiming to establish a new standard for securing the digital asset economy.

EigenLayer stands as a key player in the Restaking landscape, acting as a marketplace where projects can create Validators. This dynamic system enables Validators to maximize their reward opportunities while projects benefit from Ethereum's robust security.

Users can generate Liquid Restaking Tokens (LRTs) from their staked ETH. LRTs can be used as tokens for securing other EVM-based networks and can also be used as collateral in DeFi protocols.

How Does EigenLayer Work? What Are the Risks?

• Enhanced Rewards for Validating Other Networks: Restaking enables users to earn rewards for validating security on networks beyond Ethereum.

• Convenient Participation: Users can seamlessly participate in Restaking by sending their ETH to operators who handle the technical aspects.

• Alternative Pools for Smaller Participants: For those unable to stake individually due to high costs, Staking Pools offer a solution, functioning like communal funds managed by third parties.

• Potential ETH Losses for Malicious Validators: However, associated risks still exist, and Validators may lose their staked ETH if they engage in malicious behavior.

Restaking: Incentives with Accompanying Risks

Restaking attracts Ethereum users with higher returns and users can lock their ETH for staking while maintaining liquidity elsewhere through Liquid Restaking Tokens (LRTs), allowing them to earn rewards from both staking and DeFi protocols.

However, Restaking comes with various challenges and considerations, including:

• Increased Complexity: The multi-layered smart contracts and blockchains involved in Restaking introduce higher complexity, potentially leading to misunderstandings and errors.

• Technical Risks: Restaking protocols are still in their early stages, potentially containing bugs or coding errors.

• Security Vulnerabilities: A large-scale Restaking attack could steal LRTs and prevent users from accessing their staked ETH. This risk is significant considering the high value of staked assets.

• Slashing Penalties: Validators face penalties for improper behavior that jeopardizes the network, impacting their overall reward earnings.

• Regulatory Risks: The regulatory landscape surrounding digital assets remains ambiguous.

Despite its risks and challenges, users are drawn to Restaking's potential, particularly for the higher returns compared to traditional staking.

Why Restaking Is Worth Considering Despite the Risks

• Enhanced Security: Restaking protocols prioritize security through thorough multi-layer audits and rigorous code testing before deployment. This reduces the likelihood of large-scale attacks. The Restaking industry has also remained resilient against hacks and scams, compared to DeFi's struggles in recent years.

• Positive Impact on the DeFi Industry: Many industry experts believe this sector's security focus can minimize system failure risks. Especially for the teams that are launching their own Layer 2 EVM networks or building protocols on Layer 2 networks will find Restaking particularly appealing, especially with its ability to provide liquidity, a crucial aspect of every DeFi project.

Additional Restaking Use Cases:

• Layer 2 EVM network projects can utilize Restaking to secure their networks.

• DeFi protocols can apply Restaking to enhance liquidity.

• General Ethereum users can employ Restaking to earn additional rewards from their staked ETH.

Summary and Future Outlook for Restaking

Restaking, an emerging and evolving concept which holds immense potential to positively impact the Ethereum ecosystem. Its benefits include increased security for new projects and services, increased opportunities for developing innovative Restaking protocols. Nevertheless, potential users should conduct thorough research before engaging in Restaking, particularly understanding the associated risks and selecting a reputable Restaking protocol as the practice involves various technical complexities and inherent risks.