Author: Snow
Translator: Paine
审校： KOWEI 、 Wayne 、 Elisa 、 Ashley 、 Joyce
Report highlights
Restaking is a mechanism to increase yields by releasing liquidity and increasing leverage, mainly based on Ethereum's security framework. Although it can provide additional returns to stakers and improve the efficiency of fund use, it also brings a series of risks, including fines, liquidity, centralization, contracts, and smart contract risks. EigenLayer is a pioneer in this field, but with the participation of more and more competitors such as Symbiotic, Karak Network, Babylon, BounceBit and Solayer, market funds are dispersed and may face more challenges in the future. Users need to carefully consider the risks and benefits of participating in the restaking agreement and configure corresponding contract monitoring to ensure the safety of assets.
background
Staking and Liquidity Staking
Ethereum staking refers to users locking their ETH in the Ethereum network to support the operation and security of the network. In Ethereum 2.0, this staking mechanism is part of the Proof of Stake (PoS) consensus algorithm, replacing the previous Proof of Work (PoW) mechanism. Stakers become validators by staking ETH and participate in the creation and confirmation of blocks. In return, they can receive staking rewards.
Liquid Staking Derivatives (LSD) was created to solve the liquidity problem in traditional staking. It allows users to obtain liquidity tokens representing their staked shares (such as Lido's stETH or Rocket Pool's rETH) while staking tokens. These liquidity tokens can be traded, loaned, or used for other financial activities on other platforms, allowing users to participate in staking to obtain rewards while maintaining the flexibility of funds.
Broken web of trust
The Bitcoin network introduced the concept of decentralized trust since its inception, and was designed to be a peer-to-peer digital currency system based on UTXO and scripting language. However, its ability to build various applications on the network was limited. Later, Ethereum, through a highly programmable virtual machine (EVM) and modular blockchain concepts, allowed developers to build permissionless decentralized applications (DApps) on its consensus layer, providing trust and security for all DApps built on it. However, there are still many protocols or middleware that fail to fully utilize Ethereum's trust network.
For example, Rollup effectively improves Ethereum's performance by separating transaction execution from the EVM and returning to Ethereum only when the transaction is settled. However, these transactions are not deployed and verified on the EVM, so they cannot fully rely on Ethereum's trust network. In addition to Rollup, other systems such as sidechains, data availability layers, new virtual machines, oracles, and cross-chain bridges based on new consensus protocols also face similar challenges and need to build their own trust layer to ensure security and prevent malicious behavior, namely the Active Verification Service (AVS).
Liquidity fragmentation
Ethereum is the largest proof-of-stake (PoS) blockchain, and many projects rely on staking to ensure their security, such as cross-chain bridges, oracles, data availability layers, and zero-knowledge proofs. Therefore, every time a new project is launched, users must lock up a certain amount of funds, which will cause different projects to compete for a limited pool of funds. As the staking yields offered by different projects continue to rise, the risks borne by the projects themselves also increase accordingly, forming a vicious circle. On the other hand, users can only stake limited funds to limited projects and obtain limited returns, resulting in low capital utilization. With the increase in public chains, applications, and various projects, liquidity is becoming more and more fragmented.
Market demand for staking services
With the passage of the Bitcoin spot ETF and the successful Ethereum Cancun upgrade, Ethereum has regained new vitality. As of July 15, 2024, more than $111 billion of Ethereum (ETH) has been staked, accounting for 28% of the total supply. The amount of staked ETH is called Ethereum's "security budget" because these assets are punished by the network in the event of double-spending attacks and other violations of protocol rules. Users who stake ETH contribute to enhancing the security of Ethereum and are rewarded through protocol issuance, priority tips, and MEV. Users can easily stake ETH through liquid staking pools without sacrificing the liquidity of assets, which leads to an increasing demand for staking.
In this context, the market demand for shared security emerged. A platform is needed to use users' pledged assets for the security of multiple projects. This is the background for the emergence of restaking.
What is re-pledge?
Today, the modular expansion of blockchains has led to the birth of many new protocols and supporting middleware. However, each network needs to build its own security mechanism, usually using a variant of the Proof of Stake (PoS) consensus, but this approach will result in each security pool becoming an isolated individual.
Restaking is the process of leveraging the economic and computational resources of one blockchain to secure multiple blockchains. In PoS blockchains, restaking allows the staked weight and validator set of one chain to be used on any number of other chains. Liquid staked tokens that have already been staked on Ethereum are used to stake again with validators on other blockchains to earn more and increase the security and decentralization of the new network. The result is a more unified and efficient security system that can be shared by multiple blockchain ecosystems. This concept extends Ethereum's existing economic trust to protect other distributed systems, such as oracles, bridges, or sidechains.
The concept of restaking has been around in the industry for years, and the Polkadot ecosystem experimented with it in 2020. Cosmos launched a restaking model called "Replication Security" in May 2023, and Ethereum introduced a similar model through EigenLayer in June of the same year. The main value of the restaking protocol comes from the staked funds locked on Ethereum, making Ethereum the most economically secure PoS blockchain.
An important difference between the re-staking mechanism and liquidity staking is that although both mechanisms can help ETH staked on Ethereum gain more returns, the re-staking mechanism fully inherits the trust consensus of the staking mechanism and expands it, enabling validators to make credible commitments to more applications, infrastructure or distributed networks, thereby improving the overall economic security of the Ethereum ecosystem.
How re-staking works
The core of re-staking is to use the assets of Liquidity Staking Tokens to stake on validators of other blockchains, gain more benefits, and establish a shared security pool to improve the security and decentralization of the new network. Specifically, Liquidity Staking Tokens (LST) represent the tokenized form of staked ETH and accumulated rewards, while Liquidity Re-staking Tokens (LRT) represent the tokenized form of re-staking ETH and accumulated rewards. Re-staking is built on the security framework of Ethereum and aims to optimize the utilization efficiency of funds in the cryptocurrency ecosystem. Not only can stakers support the security of one network, but they can also provide verification services for multiple networks, thereby obtaining additional rewards.
The main problem facing re-staking is still liquidity. Similar to PoS staking, the re-staking assets are locked in the node, resulting in limited liquidity. To solve this problem, Liquid Restaked Token (LRT) was introduced. LRT is a synthetic token issued for re-staking ETH or other LST, used by multiple active verification services (AVS) to ensure the security of applications and networks, and distribute multiple different types of additional rewards. It enables the staked assets to provide security support in multiple services while bringing additional rewards and returns to stakers. Therefore, although there are some detailed risks in the re-staking process, it brings important liquidity and benefits to stakers and DeFi.
Track Analysis
Competition Project
EigenLayer
EigenLayer is a leader in the re-staking space and currently has no direct competitors of scale. As an innovative concept, there are relatively few direct competitors in the market. However, EigenLayer may face the following potential competition and challenges:
Other LSD protocols may develop their own re-staking capabilities, such as Lido Finance and Rocket Pool.
Other data availability and governance service protocols may develop their own LSD capabilities, such as The Graph and Aragon.
Other Layer 2 or cross-chain protocols may develop their own security and trust networks, such as Polygon and Cosmos.
Since EigenLayer mainly uses LSD as collateral, LSD Fi projects on the market may also compete for LSD's market share.
Karak Network
Karak Network operates similarly to the Eigen Layer protocol, but its AVS service is called Distributed Security Service (DSS), and it has launched its own Layer 2 network K2. Unlike Eigen Layer, Karak aims to support re-pledge of any asset. Currently, the re-pledge assets supported on the platform include ETH, various LST and LRT assets, and stablecoins such as USDT, USDC, DAI, and USDe. In addition, Karak has been deployed on Ethereum, Arbitrum, BSC, Blast, and Mantle, and users can choose to re-pledge according to their own asset distribution.
Babylon
Babylon is a Bitcoin-based re-staking protocol that introduces a staking function to Bitcoin, enabling BTC holders to trustlessly stake their assets to other protocols or services that require security and trust, and to obtain PoS staking benefits and governance rights. Babylon covers two aspects: first, BTC holders can stake BTC to provide security and credibility for other protocols and gain benefits from them; second, new protocols in the PoS chain or Bitcoin ecosystem can use BTC stakers as verification nodes to improve security and efficiency.
Solayer
Solayer is a re-staking protocol for the Solana ecosystem, which supports SOL holders to stake their assets in protocols or DApp services that require security and trust within the Solana ecosystem to obtain more PoS staking income. Solayer has completed the builder round of financing, and investors include Solana Labs co-founder Anatoly Yakovenko, Solend founder Rooter, Tensor co-founder Richard Wu, Polygon co-founder Sandeep Nailwal, etc. Solayer supports users to deposit assets such as native SOL, m SOL, Jito SOL, etc. As of July 15, 2024, the total locked value (TVL) on the Solayer platform exceeded US$105 million, of which SOL accounted for about 60%.
Picasso
Picasso is a general-purpose re-staking blockchain built on the Cosmos SDK. It connects to the base chain through the IBC protocol and handles the details of the deposited assets before allocating the funds to AVS. Picasso's re-staking solution is similar to EigenLayer, which allows subsets of the network to join to protect AVS weight. This architecture has been replicated on multiple base chains and unified on Picasso. Picasso's node operators are selected by a governance mechanism. Currently, Picasso's re-staking layer only accepts assets deposited from Solana via SOL LST and native SOL as re-staking collateral. Picasso's roadmap plans to expand to Cosmos chains and other assets after launching AVS on Solana. Currently, the re-staking products supported on Picasso include LST assets such as SOL, Jito SOL, m SOL, and b SOL.
Universal Re-Pledge Protocol
Universal re-staking is a system that enables the centralization of native assets on multiple chains for re-staking. This approach is agnostic to specific assets and underlying chains, allowing many staked assets to be centralized across multiple chains. Universal re-staking relies on an additional layer or a series of contracts across multiple blockchains that sits between the economic security source chain and AVS.
Overview
The re-staking space is developing rapidly. Although EigenLayer is a pioneer in this field, more and more competitors and innovators are joining in, constantly expanding the application scenarios and technical boundaries of re-staking. Re-staking not only brings new revenue models, but also promotes the security and liquidity of the blockchain ecosystem.
Market size
According to DeFi Llama, as of July 21, 2024, the total locked value of the global ETH liquidity staking market is $47.599 billion. Lido is the largest player, accounting for 72.31% of the locked value. Lido provides a liquidity staking solution that allows users to stake ETH to the Ethereum 2.0 network and receive an equivalent value of st ETH tokens, which can be used in the DeFi market or re-staked. Major re-staking protocols include EigenLayer and Tenet, etc.
Source: https://defillama.com/lsd
As of June 25, 2024, the total locked value of assets in the global re-staking market has reached $20.14 billion. Currently, most re-staking protocols are deployed on the Ethereum chain, with a total locked value of $19.4 billion in ETH and derivative assets re-staking; in addition, through re-staking protocols on the Solana chain, for example: Picasso and Solayer have pledged assets worth $58.5 million; through Pell Network and Karak on various chains (including Bitlayer, Merlin and BSC, etc.) 223.3 million US dollars of BTC have been re-staking.
The chart below shows the total locked value of re-staked assets for the leading re-staked solutions (EigenLayer, Karak, Symbiotic, Solayer, Picasso, and Pell Network) by total locked value. Overall, the total amount of assets re-staked is over $20 billion. Most of it comes from natively re-staked ETH and ETH LST, and the top three categories of re-staked assets by TVL are all centered around ETH.
Source: https://x.com/ZackPokorny_
Core competitive factors
Asset size
Asset size refers to the total amount of pledged assets in a staking platform. A high-quality staking platform should have large-scale assets to demonstrate its stability and credibility. For example, EigenLayer currently has 5,842,593 Ethereum pledged, with a total TVL of more than $18 billion, making it the largest protocol in the re-staking field.
Source: https://dune.com/hahahash/eigenlayer
Yield
Re-staking projects should provide higher returns than single staking to attract users to participate. To this end, it is necessary to optimize staking strategies, reasonably allocate income and rewards, and use compound interest effects to improve users' capital efficiency and rate of return. For example, in the re-staking solution proposed by Eigenlayer, in addition to staking Ethereum to obtain returns, liquidity tokens can also obtain returns in other cross-chain bridges, oracles, LP staking, etc.
Profits from staking Ethereum. For example, stETH obtained through liquidity staking protocols such as Lido;
Token rewards for node construction and verification by partner projects;
LP rewards for staking DeFi with liquidity tokens.
Liquidity
Re-staking projects need to solve the liquidity problem of pledged assets, allowing users to easily join or exit staking, or transfer assets to other protocols or platforms. Therefore, services such as liquid staking tokens, liquidity mining, and lending markets need to be provided to enhance user liquidity and flexibility.
Security
Protecting the security of user assets is the primary goal of staking projects. Re-staking projects must ensure that user assets will not be damaged due to smart contract vulnerabilities, validator misconduct, or hacker attacks. Therefore, high-level security measures and risk management mechanisms are essential, such as multi-signatures, firewalls, insurance, and penalty mechanisms. For example, EigenLayer becomes a verification node by staking Ethereum-related assets, and borrows the security of the main network through a penalty mechanism.
Ecosystem
Restaking projects need to build a strong ecosystem that supports verification services for multiple PoS networks and protocols, thereby enhancing the security and decentralization of the network and providing users with more choices and opportunities. To achieve this goal, cooperation and integration with other blockchain platforms, DeFi applications, and Layer 2 protocols are required.
What risks does re-pledging bring?
Risk of slashing
In Ethereum’s staking mechanism, as well as in the re-staking protocol, there is a 50% slashing risk, which means that users’ funds may be at risk of being slashed, although this risk will be spread across multiple nodes.
Liquidity Risk
Many re-staking protocols lock up a large amount of liquid re-staking tokens (LST). If a large portion of LST is locked in the re-staking pool, it may lead to increased volatility in the price of LST relative to ETH. This situation increases users' risk exposure because the security of AVS is directly related to the liquidity of LST. When a certain type of LST is too concentrated in AVS, liquidity risk will be further increased.
Concentration Risk
Centralization risk may cause DAO hacker attacks. For example, if one-third of ETH is concentrated in a single AVS, exceeding the traditional Byzantine fault tolerance security threshold, this part of ETH may be fined for not submitting fraud proofs, rather than for technical problems such as double signing. Centralization risk means that the degree of coupling in the system increases, increasing the overall vulnerability of the system.
Contract Risk
Participating in re-staking requires interaction with the project's contract, so users need to bear the risk of contract attacks. Project funds are ultimately stored in contracts of protocols such as EigenLayer. If the contract is attacked, the user's funds will also suffer losses.
LST Risks
There is a possibility that the LST token will be decoupled, or its value may deviate due to LST contract upgrades or attacks.
Exit Risk
Currently, except for EigenLayer, most of the mainstream re-staking protocols on the market do not support withdrawals. If the project fails to implement the corresponding withdrawal logic through contract upgrades, users will not be able to withdraw assets and can only exit liquidity through the secondary market.
How can these risks be mitigated?
Re-pledge is an emerging concept. It has not been tested by time either at the contract level or the protocol level. In addition to the risks listed above, there may be other unknown risks. It is particularly important to reduce the risks.
Funding Allocation
For users who use large amounts of funds to participate in re-staking, directly participating in EigenLayer's Native ETH re-staking is an ideal choice. Because in Native ETH re-staking, the ETH assets recharged by users are not stored in the EigenLayer contract, but in the Beacon chain contract. Even if the worst contract attack occurs, the attacker cannot immediately obtain the user's assets.
Source: https://x.com/ZackPokorny
(There are currently 33.4 million ETH staked on the Beacon Chain (including ETH in the entry/exit queue).)
For users who want to participate with large amounts of funds but are unwilling to wait for a long redemption time, they can choose the relatively safe stETH as a participating asset and invest directly in EigenLayer.
For users who want to earn extra income, they can invest part of their funds in projects built on EigenLayer, such as Puffer, KelpDAO, Eigenpie, and Renzo, according to their own risk tolerance. However, it should be noted that these projects have not yet implemented the corresponding withdrawal logic. Participants need to consider the exit risk at the same time and pay attention to the liquidity of the relevant LRT in the secondary market during the investment process.
Monitoring Configuration
The projects mentioned here all have the ability to upgrade and suspend contracts, and the multi-signature wallets of the project owners can perform high-risk operations. For advanced users, it is recommended to configure the corresponding contract monitoring system to monitor the upgrade of related contracts and the execution of sensitive operations by the project owners.
Optimization parameters
Optimize re-pledge parameters (TVL cap, slashing amount, fee distribution, minimum TVL, etc.) and ensure diversification of funds between AVS. The re-pledge protocol allows users to choose different risk profiles when re-pledge their deposits. Ideally, each user will be able to evaluate and choose which AVS to re-pledge without delegating this process to a DAO.
Website: https://d ocs. Google . com / presentation / d / 1iIVu6 ywaCqlTwJJbbj5 d X07 ReSELRJlA /e d it? pli =#slid e=id p2
Challenges
From the perspective of application chains, re-staking applications represented by EigenLayer can meet the needs of small and medium-sized application chains to reduce node deployment costs. However, these application chains cannot fully meet their security requirements, and the sustainability of their needs is relatively weak.
From a competitive perspective, although the re-staking track has a huge amount of funds, as more and more re-staking applications are launched, market funds will be dispersed. If the profits of re-staking applications such as EigenLayer decline, for example, in a bear market downturn, the demand for application chains will drop sharply, will it lead to a run on funds?
From the perspective of partners, EigenLayer initially developed 14 AVS partners. Although AVS may be attracted by potential benefits in the early stage, the security risks of the re-staking mechanism may affect the willingness of subsequent AVS operators to join.
From the user's perspective, users may not be able to obtain rich staking returns in the short term. The uncertainty of staking returns may have a negative impact on the growth of the number of users in the future.
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