restaking and liquid restaking

Restaking is a major phenomenon in DeFi, and 2024 is shaping up to be its breakout year. Since EigenLayer first burst onto the scene and attracted billions in Ethereum deposits, the restaking ecosystem has exploded, sparking innovation and competition across multiple blockchains. But what exactly is restaking? 

In essence, restaking is a way to use your staked assets to secure other networks and applications, earning you additional rewards in the process. It's like getting double the bang for your buck and DeFi natives have adopted it at scale.  However, as with any new technology, there are risks involved, and some critics are sounding the alarm. In this article, we'll dive into the world of restaking, exploring its benefits, risks, and the top projects leading the charge.

Restaking is an advancement in the staking mechanism within Proof-of-Stake (PoS) blockchains, where validators commit native tokens to secure the network and earn passive income.

Restaking enables these pre-staked assets to be re-staked on alternative platforms thereby increasing their utility and potential for additional rewards. For example, imagine you have already staked your ETH to help secure the Ethereum network and earn rewards. With restaking, you can take the same staked ETH and use it to support a DeFi protocol like EigenLayer, earning additional rewards from both platforms simultaneously. 

Smart contracts are essential in restaking, managing the relationship between original staked assets and their derivatives. They automate issuing, managing, and retiring these derivative tokens, ensuring transactions follow predefined rules. This automation maintains security and integrity without manual intervention.

The process of restaking not only enhances the earning potential of staked assets but also improves the overall liquidity and efficiency of the blockchain ecosystem. Moreover, restaking contributes to the security of smaller blockchain applications that might otherwise lack the necessary resources to sustain their own PoS security systems. 

Since the beginning of 2024, restaking protocols have experienced substantial growth, with TVL rising from $1.01 billion to approximately $9 billion, with EigenLayer comprising the majority of this TVL.

> enhanced security: Restaking creates a network effect where the security of multiple platforms is intertwined. This pooled security model makes it much harder for attackers to target individual protocols, as they would have to compromise the entire network.

> increased yield opportunities: Restaking allows you to earn rewards from multiple platforms simultaneously, maximizing the yield on your staked assets. It's like having your cake and eating it too!

> reduced costs for new projects: For new blockchain projects, bootstrapping security can be a major hurdle, often requiring significant time and resources to attract enough validators to secure the network. Restaking eliminates this barrier by allowing them to leverage the existing security infrastructure of established networks like Ethereum. This not only reduces costs but also accelerates the launch and adoption of new projects.

> cross-chain compatibility: Restaking is breaking down the barriers between different blockchains. With generalized cross-chain restaking, your staked assets on one chain can secure services on multiple other chains. For example, with Picasso, assets staked on Ethereum can be used to secure applications on Cosmos or Solana, creating a more interconnected and secure ecosystem.

> slashing: When you stake your assets, you're essentially putting them up as collateral to secure the network. If the validator you've delegated your stake to misbehaves, a portion of your stake can be "slashed" or taken away as a penalty. Restaking doubles this risk, as your assets are exposed to slashing on multiple platforms.

> rehypothecation: This is the practice of reusing collateral that an entity doesn't own. While not all restaking protocols engage in this practice, some do, and it can expose users to additional risks.

> operator collision (EigenLayer): This risk is specific to EigenLayer and occurs when multiple operators stake in the same Actively Validated Service (AVS), a decentralized service within the EigenLayer ecosystem. This concentration of staking power can make the system more vulnerable to attacks, as compromising a few operators could jeopardize the security of the entire AVS.

> centralization: Some restaking protocols may inadvertently increase centralization pressures on the underlying blockchain's validators due to increased computational demands.

> principal-agent problem: In Proof-of-Stake (PoS) systems, validators (agents) are entrusted to act in the best interests of delegators (principals). However, there's always the risk that validators may prioritize their own interests, potentially harming delegators.

> Eigenlayer - the origin of ETH restaking

EigenLayer is a protocol built on Ethereum that allows users to restake their ETH to support additional decentralized services while earning extra rewards. Founded in 2021, it acts as a middleware platform, sitting between the Ethereum network and other applications, enabling them to interact. 

EigenLayer's core innovation lies in its ability to extend Ethereum's security to other protocols through restaking. Users who have already staked their ETH on Ethereum can opt to restake it on EigenLayer, allowing them to secure other decentralized services without needing to stake additional funds. 

These services, known as Actively Validated Services (AVS), include data oracles, bridges, and layer-2 scaling solutions. EigenLayer uses smart contracts called EigenPods to manage the restaking process and enforce slashing conditions, ensuring validators uphold their responsibilities. By participating in restaking, validators not only contribute to the security of the broader ecosystem but also earn additional rewards from the AVS they support.

Since its launch in June 2023, EigenLayer has grown rapidly, with over $17 billion in TVL becoming one of the largest blockchain protocols. 

> Symbiotic - Permissionless Restaking for Crypto

The newly launched Symbiotic is a restaking protocol designed to enhance blockchain security and flexibility. It allows users to deposit their assets to secure third-party networks, using a shared security model similar to EigenLayer. 

With a recent $5.8 million funding boost from Paradigm and CyberFund, Symbiotic aims to become a key player in the restaking space. Here’s how it works:

> shared security model: Symbiotic employs a shared security model through restaking, allowing assets staked on one network to secure multiple protocols. This flexible, permissionless approach supports diverse assets and enables developers to control their restaking setup. For instance, staked ETH can be used to provide security across various networks via IBC, enhancing overall security and efficiency.

> flexible and modular design: The protocol is highly adaptable, supporting various tokens as collateral and allowing customizable slashing and reward mechanisms. This flexibility means networks can tailor their staking implementation to their specific needs.

> key components:

• collateral: Represents the various assets securing the network

• vaults: Manage the delegation of collateral to operators

• operators: Run the network infrastructure and receive support from vaults

• resolvers: Handle penalties for operators who do not perform their duties

• networks: Use distributed operators for services like transaction sequencing

Symbiotic has quickly become a key player in the DeFi ecosystem, forming strategic partnerships with several prominent projects. Notably, Ethena Labs is utilizing Symbiotic to bolster the security of cross-chain assets through LayerZero's Decentralized Verifier Network. 

Additionally, Lido Finance and Mellow Protocol have chosen Symbiotic as the platform to launch their liquid restaked tokens, while Chainbound (Bolt) is employing Symbiotic's restaking and slashing mechanisms to enhance the security of Ethereum block confirmations. Furthermore, Hyperlane is actively exploring the integration of an Interchain Security Module powered by Symbiotic, showcasing the protocol's versatility and potential for widespread adoption.

Liquid staking is an innovative advancement in the restaking landscape. It introduces Liquid Restaking Tokens (LRTs), which are derivative tokens received when users stake their PoS tokens. These LRTs can be seamlessly traded or utilized across various DeFi platforms, offering a new dimension of flexibility and utility for staked assets.

Unlike traditional restaking methods, where assets are typically locked, liquid restaking empowers investors to redeploy their LRTs into additional yield-generating opportunities without the need to unstake their original assets. This is made possible through intermediary liquid restaking services such as Puffer, Ether.fi, and Renzo, which handle the technical complexities and issue LRTs to users.

The advantages of liquid restaking are manifold. It transforms otherwise illiquid staked positions into liquid assets that can be readily traded or used in other DeFi protocols. Users gain the flexibility to exit their positions at any time, and they can gain exposure to multiple protocols, potentially increasing their yield. Additionally, liquid restaking simplifies the management process, making it more accessible to a wider range of users.

Furthermore, users may receive additional tokens from protocols that leverage restaking, further incentivizing participation. While liquid restaking presents a promising new avenue for yield generation, it's important to acknowledge the inherent risks associated with protocol security and the potential volatility of LRT market values. However, for those willing to navigate these risks, the potential for higher returns makes liquid restaking an attractive option.

> Etherfi: Etherfi (ETHFI) is the largest liquid restaking protocol with a TVL of more than $6 billion. It allows users to stake ETH and receive eETH, enhancing security across networks. Partnering with EigenLayer, Etherfi promotes decentralized validation.

> Picasso’s Solana: Picasso’s Solana will accept staking of Solana’s native SOL token and restaking of various receipt tokens from SOL staking platforms. Users can stake through trustless.zone, with assets delegated to validators supporting the IBC and Solana connection, enhancing security.

> Puffer Finance: With $1.654 billion TVL, Puffer Finance, a native liquid restaking protocol (nLRP) leveraging EigenLayer, focuses on PoS validation. It allows users to deposit ETH and receive pufETH, earning both PoS and restaking rewards.

> Renzo Protocol: Renzo Protocol, with a TVL of $3.39 billion, is a LRT and Strategy Manager for EigenLayer. It simplifies restaking, promising higher yields than traditional Ethereum staking and facilitating collaboration between users and EigenLayer node operators. Renzo plans to introduce a DAO and ezETH, attracting over 2,000 users and $20 million in deposits.

Restaking is a major play in the DeFi landscape by unlocking new possibilities for both users and developers. The ability to utilize staked assets across multiple protocols is not only enhancing rewards but also fostering a more interconnected and secure blockchain ecosystem. 

As this technology continues to mature, we can expect to see further innovation in smart contracts, interoperability, and the development of new financial instruments. 

While the risks associated with restaking cannot be ignored, restaking is poised to play a pivotal role in shaping DeFi’s future. Whether you're a seasoned investor or a newcomer to the world of crypto, restaking is a trend worth watching closely.

Lido is introducing ‘Restaking Vaults’ in collaboration with Symbiotic and Mellow Finance to counter the rising popularity of EigenLayer. 

S&P Global Ratings recently reported that Ethereum restaking services, which offer additional yield, could evolve into a robust “internet bond” market.

Ether restaking’s biggest risk is the lack of understanding around asset looping, according to Jeff Owens, CEO of Haven1. 

Top DeFi Tweets

According to @akshayynft, restaking is the latest craze in the crypto community,promising benefits like multiple rewards and enhanced network security but comes with risks.

@CurveCap highlights intense Ethereum restaking competition, noting Ether.fi’s weETH/ETH pool with 500% utilization and high APY, Renzo Protocol’s ezETH pool with $20 million TVL, and Puffer Finance’s dominant pufETH/wstETH pool with $200 million TVL and active leverage opportunities.

According to @pyorxyz, restaking is the latest buzz in Web 3.0, offering a two-for-one deal: boosting user rewards and beefing up ecosystem security. 

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