Restaking 101
Last updated
Last updated
Let’s go back to the history to understand the current state of blockchain and how we got here.
In the beginning, there was Bitcoin, an immutable store of value. It created a distributed and decentralized ledger to record transactions and incentivize accurate record-keeping through the economic incentive of mining. This system aligns the goals of individuals with those of the network, creating cryptoeconomic security for trustless operations.
Then came Ethereum, which added programmability to Bitcoin’s decentralized money. This programmability unlocked a wide range of new use cases, including decentralized finance (DeFi).
As the crypto ecosystem continued to grow, blockchains have become increasingly interconnected over time and we entered the era of independent infrastructure. We have seen the rise of numerous Layer 2 solutions and we’re living in a rollup-centric world. On top of that, there are so many sovereign Layer 1 chains have emerged, each requiring its own infrastructure and security systems.
Independent infrastructure layers must bootstrap their own security networks, often relying on high inflationary incentives to reward their security providers—primarily node operators and stakers in Proof-of-Stake systems. This fragmentation also lowers the cost of potential attacks.
Today, one of the primary challenges in today’s blockchain ecosystem is the fragmented nature of crypto-economic security across many independent blockchain systems. The challenge is also known as shared security challenge. With security, a smaller, less secure blockchain will use a larger, more established blockchain for its security.
Restaking is a concept of extending the functionality of traditional staking, where users lock up their cryptocurrencies to support network operations, such as transaction validation on blockchain networks. To simply put, it allows users toto restake their already staked tokens on other chains, securing multiple networks and potentially earning additional rewards. Fundamentally, it solves the fragmented security and trust issues among various blockchain networks.
It is not a new concept and it has a long history. Polkadot emerged in 2020 with their shared security architecture. Cosmos launched its interchain security, also known as replicated security in 2023. More recently, EigenLayer introduced the restaking concept in June 2023.
Restaking has introduced a new concept of pooled security model, in which AVSs rely on the same pool of capital. Sharing the cost to access that security across every AVS makes it more affordable and ensures that attacking any single AVS would require a massive amount of capital.
Restaking, as the name suggests, involves staking an asset once again after the initial staking. This process allows the staked asset to be used in another staking program or protocol, enhancing its utility and providing the holder with an additional set of rewards, although with increased slashing risks.
Let’s look at the above diagram. It is a simple diagram that illustartes how restaking processes. Stakers bring their assets and restake. Then they delegate their restaked assets to an operator. Operators choose which Actively Validated Services (AVSs) to opt in and AVSs borrow crypto economic security from the pool.
Improved Rewards
Stakers can potentially increase their earnings by staking assets on two protocols.
Increased Security
The more assets restaked, the higher a network’s value, enhancing its resilience against attacks. This increased security makes it a reliable hub for dapps, protocols, and platforms.
Reduced Dumping
Restaking makes the original token more versatile, which discourages dumping. The increased utility helps avoid value loss for the project and its investors, fostering a more stable and sustainable ecosystem.
Services or applications that require trust and utilize the network's security by leveraging restaking. AVSs play a crucial role in accelerating open innovation by enabling developers to launch a diverse range of blockchain systems. These include fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, AI inference/training mechanisms, and committees for trusted execution environments.
Asset holders who deposit their assets to provide economic security to the network and typically receive rewards in return. Restakers pledge their assets to the ecosystem, and in return receive rewards for their commitment.
Operators are essential for maintaining and managing decentralized trust networks through node operations, ensuring nodes are operational and adhering to consensus protocols to uphold network security and integrity. They also play a critical role in supporting AVSs by providing the necessary infrastructure and security assurances for their operations.
Slashing
Restaking introduces additional slash conditions in exchange for additional rewards. Depending on the protocol’s terms, slashing poses the risk of significant asset loss for validators who may breach the rules. Stakers opting in are bound by the contract rules and face slash penalties for malicious behaviour.
Yield Risks
While restaking protocol aims to offer protocols to leverage underlying blockchain protocol’s decentralised trust network for security, restakers are primarily motivated by the reward system. This might lead restakers to choose protocols with the highest yield, potentially impacting the underlying protocol (L1). There’s also concern that users may perceive restaking as a quick, highly leveraged financial product.
Restaking is a new mechanism that uses “pooled security” model that solves fragmented security and trust issues among various blockchain networks. It offers a great opportunity for stakers to potentially increase their earnings by staking assets on two protocols. Thereby, it enhances capital efficiency and potential double profits for users willing to take the associated risks. Restaking will play a pivotal role in the current blockchain era and contribute to fostering the broader networks.
