What is ETH Restaking? How Does It Work, and Are There Risks?
In this article, we provides a comprehensive overview of Ethereum restaking, how it works, and potential risks involved.
What is Ethereum Restaking?
Ethereum restaking involves using ETH that is already staked on Ethereum to simultaneously secure other decentralized protocols. Similar to regular staking, restaking rewards users from the protocols they help secure.
However, the primary purpose of restaking is to enable less established protocols to leverage Ethereum’s robust validator community, which would otherwise be resource-intensive and costly.
Notably, restaking is not an Ethereum Improvement Proposal (EIP) or part of Ethereum’s roadmap. Instead, it was introduced by a third-party protocol, EigenLayer.
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EigenLayer: The Origin of ETH Restaking
Founded in 2021, EigenLayer is an Ethereum middleware platform, facilitating interactions between the layer-1 network and other applications. Currently, EigenLayer is the only decentralized protocol offering ETH restaking.
EigenLayer uses Ethereum smart contracts to allow users to restake their ETH on compatible protocols. It also serves as a staking marketplace, bringing together stakers, network validators, and protocols.
Since its initial launch in June 2023, EigenLayer has seen significant growth, with over $10 billion in ETH restaked, surpassing major DeFi platforms like Aave, Rocket Pool, and Uniswap in total value locked (TVL).
The rapid rise of EigenLayer highlights the demand for restaking and the additional rewards it offers users. To understand how these rewards are earned, let’s examine how Ethereum restaking works.
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How Does ETH Restaking Work?
Currently, EigenLayer is the sole platform for restaking ETH. Here’s how it operates:
Smart Contracts: EigenPod
Restaking on EigenLayer involves smart contracts that impose additional slashing conditions on staked ETH, extending Ethereum’s security to protocols in its ecosystem, called Actively Validated Services (AVS).
If a restaker fails to fulfill their AVS duties, they risk having their ETH slashed.This is managed through on-chain slashing contracts and specific smart contracts known as EigenPods. Think of EigenPods as intermediary accounts between a restaker’s wallet and their stake.
Withdrawals and staking rewards pass through EigenPods before reaching a validator’s account, allowing EigenLayer to penalize validators who misbehave.
Native vs. Liquid Restaking
Native restaking resembles native ETH staking, available to those running or intending to run an Ethereum validation node, with the only difference being that an EigenPod becomes the withdrawal address for the stake.
Liquid restaking involves locking tokens in a smart contract and receiving liquid staking tokens (LSTs) in return. These LSTs can be used like any other token in DeFi applications. Liquid restaking occurs when users deposit LSTs into EigenLayer contracts.
EigenLayer supports staking for 12 LSTs, including popular options like Rocket Pool Ether (rETH), Lido Staked Ether (stETH), and Coinbase Staked Ether (cbETH).
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Extended Liquid Restaking Utility
Some platforms further enhance the utility of liquid restaking. For instance, Renzo and EtherFi act as liquid restaking platforms for EigenLayer, accepting LSTs and providing liquid restaking tokens (LRTs) in return.
Several liquid restaking platforms have recently emerged, aiming to expand the use of liquid restaking. Users restake their LSTs on these platforms and receive LRTs in return.
Delegation
After staking your ETH or depositing your LSTs, you need to delegate your stake. Entities you delegate to, which help run AVS on EigenLayer, are called operators.
Similar to ETH staking, there are two options: self-delegation (acting as an operator) or delegating to an existing operator.
While delegating to an operator is simpler, self-delegation offers more control and responsibility. Note that restakers cannot dictate which AVS operators run.
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Benefits and Risks of ETH Restaking
Benefits of ETH Restaking
1. Increased Rewards for ETH Stakers
The most apparent benefit of ETH restaking is the potential for higher rewards. While staking rewards vary by platform and over time, ETH stakers can typically expect an annual return of about 3%.
Restaking allows investors to augment these rewards with additional returns from various other protocols.
The exact rate of these additional rewards depends on the specific Actively Validated Services (AVS) their staked ETH is securing.
2. Reduced Costs for New Protocols
Restaking significantly lowers the costs for new protocols built on Ethereum. Previously, these protocols had to develop their own validator networks, a costly process.
Restaking allows them to leverage Ethereum’s well-established validator network, a concept known as shared security, making it more economical to launch new projects.
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3. Avoids Layer 2 Constraints
High costs of launching new protocols on Ethereum have historically pushed projects toward Layer 2 blockchains. While these can reduce costs, they also impose certain architectural constraints on customization and transaction types.
By using Ethereum’s shared security through restaking, protocols can avoid these limitations and build architectures that best suit their needs.
This benefits both individual protocols and the overall Ethereum ecosystem by fostering innovation without diverting liquidity to other chains.
Risks of ETH Restaking
1. Increased Slashing Risk
Slashing is a critical component of proof-of-stake systems that ensures participant honesty. However, slashing can also negatively impact stakeholders, even if they don’t directly harm the network.
For instance, many ETH stakers delegate their stakes to validators. If a delegated validator misbehaves, the staker can still lose their stake.
2. Liquidity Issues
While restaking keeps more ETH within the ecosystem, staked ETH is not liquid. Even when withdrawing restaked ETH, users may experience longer waiting periods compared to regular staking.
3. Centralization Concerns
If protocols like EigenLayer attract a significant number of users with the promise of higher rewards, it could lead to a decline in independent stakers and an increase in centralized staking via these protocols. This could result in a centralization of staking over time.
4. Concerns with Liquid Restaking Tokens (LRTs)
The rise of restaking has introduced liquid restaking tokens (LRTs), which carry their own risks. LRTs add complexity as they represent a staked token, which represents another staked token.
This raises concerns about how losses and gains are distributed. Additionally, the novelty of this asset class means there might be initial missteps as platforms seek to attract users with promises of high returns and unproven tokenomics.
Potential Impact on Ethereum’s Social Consensus
Some concerns using Ethereum’s validator network as a foundation for shared security might destabilize the core network.
Ethereum co-founder Vitalik Buterin highlighted this in a May 2023 blog post, warning that certain use cases of leveraging Ethereum’s validator network could introduce systemic risks.
Buterin stressed that while leveraging the validator set alone is low risk, relying on Ethereum’s social consensus to resolve protocol issues might lead to unrealistic expectations of network forks as bailout mechanisms.
EigenLayer’s founder, Sreeram Kannan, agreed, emphasizing that Ethereum forks should not be considered solutions to protocol problems.
The Future of Ethereum Restaking and Shared Blockchain Security
Overall, Ethereum restaking is a highly exciting proposition that has brought the concept of shared security to the forefront of blockchain innovation.
Not only can it enhance the benefits of Ethereum staking, but it also opens up exciting opportunities for emerging blockchain protocols.