What is Restaking? An easy introduction

The primary strength of blockchain technology has always been its crypto-economic utility, which has taken several innovative dimensions since the launch of Bitcoin in 2009. One of the most exciting trends in the DeFi community in 2024 is restaking, a mechanism that has become increasingly popular since Ethereum transitioned from a Proof of Work to a Proof of Stake Mechanism in 2022.

Restaking, debuted by the decentralised trust marketplace, EigenLayer in the same year, introduces a new layer of utility and security not just to Ethereum, but potentially across the broader blockchain ecosystem. In this article, we explore what restaking means, how it works, and what opportunities it provides individuals in the crypto space, as well as possible challenges.

The Background of Restaking

Since the Proof of Stake (PoS) debuted with Peercoin in 2012, it has become the consensus mechanism of choice for altcoins, especially Ethereum, which switched to PoS in late 2022. In PoS, validators participate in the network by staking and locking up some of their coins. This ensures the security of the network and enhances its efficiency. Besides being able to contribute to the governance of the protocol, validators also earn rewards from their stake.

However, staked tokens are typically locked up on a staking contract and can’t be used for anything else: trading, spending, lending, borrowing, or any other activity that requires liquidity. This entails limited capital efficiency and increases the risk of centralization, which goes against the ethos of blockchain architecture. In comes restaking.

Platforms such as Flagship Vaults already enable users to securely invest in a portfolio of multiple assets via a single transaction. Restaking, though, is a relatively new approach that aims to make staked tokens more versatile and productive by allowing individuals to stake the same tokens on multiple protocols. As such, staked tokens are no longer idle; their potentials are unlocked for more rewards.

How Restaking Works: Three Approaches

Presently, there are three primary methods when it comes to restaking. Each is discussed below:

1. Native Restaking: this method involves users staking their native tokens directly on the main blockchain and on a secondary network. You directly integrate your staked tokens with the core infrastructure of a blockchain protocol. EigenLayer, for instance, enables native restaking via ETH tokens by using smart contracts to direct withdrawal credentials. This approach offers the most rewards since individuals don’t need additional tokens. Yet, it can be highly complex and pose greater risks too.
2. Liquid Restaking: this is a more flexible approach, where Liquid Staking Tokens (LSTs) are used to represent your staked assets on a secondary network. Users don’t need to run a validator node in this method, which is more liquid and accessible but also offers lower rewards. There are two main kinds of LST restaking:
3. Basket-based LSTs offer diversification but are susceptible to potential performance risks associated with combining various staking assets into a single pool (basket).

Isolated LSTs, on the other hand, are more transparent and more secure, but they come with additional complexity because each staked asset must be managed separately.

3. Superfluid Restaking: this novel approach is still emerging, and hasn’t been fully implemented. It comes with a perpetual liquidity provider feature that allows users to stream a portion of their staked tokens from a decentralized exchange. This ensures more flexible capital allocation and promises higher rewards than other kinds of staking. It is more complex though and has technical drawbacks hindering its full implementation.

EigenLayer and Actively Validated Services

EigenLayer is a platform that emerged as the primary means of carrying out restaking transactions. It is a middleware protocol built on top of Ethereum and has features such as decentralized sequencers, light node bridges, and others.

EigenLayer operates an open marketplace where restakers can delegate their restaked ETH to operators, who are developers who run the infrastructure for Actively Validated Services (AVS).

AVSs, which are distributed protocols can include sidechains, data availability layers, virtual machines, keeper networks, oracle networks, bridges, and so on. Restakers can always earn additional rewards from both Ethereum and their preferred AVSs, provided they are open to taking on more risks, while operators earn fees for the services they provide. Examples of AVSs include EigenDA, Espresso Systems, Lagrange, Omni Network, Blockless, Hyperlane, etc.

Benefits of Restaking

Restaking introduces a new narrative in crypto-economic utility, and it’s no surprise why there is so much excitement surrounding it. Let’s explore some of its potential benefits.

1. Leveraging staked tokens across multiple platforms enables individuals to earn additional rewards from the different protocols they are involved in. This amplifies your return on investment and makes investing in crypto more profitable in the long run.
2. Restaking offers you more rewards in exchange for more risks, but it also allows you to hedge your risks across different platforms, rather than relying on a single platform. This gives you more control over your assets since you can access more flexible staking options, such as lower entry barriers for smaller holders, shorter lock-up periods, and so on.
3. Restaking makes for a more secure ecosystem. For instance, ‘renting’ coins staked on Ethereum for other protocols allows those platforms, especially the smaller ones, to benefit from the security model of the main protocol, Ethereum. This also fosters interoperability and innovation.
4. Overall, restaking enhances the energy efficiency of blockchain technology. While it doesn’t directly impact energy consumption, it can engender a more environment-friendly ecosystem by encouraging participation in PoS staking. PoS is already more eco-friendly than the Proof-of-Work approach, but this offers an even greater opportunity to achieve more.
5. By allowing smaller holders to participate and earn rewards that are in fair proportion to their stake, restaking makes for a more equitable DeFi ecosystem and fosters broader participation. Expanding the user base will then drive further innovation.

Challenges of Restaking

Restaking is not without its own challenges and risks. One thing that should be noted, though, is that this method is still in its infancy and it is expected that more challenges will be addressed as time goes on. However, as it stands, here are some of the major areas of concern:

1. Traditional staking might keep your tokens idle, but they at least limit your risk exposure. Restaking amplifies your overall risk profile due to the possible volatility and uncertainty of the secondary networks.
2. With restaking, there is a greater risk of losing money to slashing penalties as a result of inadequately keeping up with the requirements of two different networks. Investing via Flagship, for instance, keeps you assured that someone else is watching and securing your asset positions.
3. Crypto and blockchain as a whole suffer from regulatory uncertainty and confusion. And every novel innovation is first approached with suspicion. Restaking is still early in the game and the evolving regulatory landscape might lead to restrictions or limitations that might impact its functionality.
4. One of the promises of restaking is to address centralization concerns, but it may end up suffering the same fate. Overly dominant restaking platforms might centralize power and influence. Currently, EigenLayer is the main player in the game and this has brought about key concerns.

Conclusion

The reactions to the restaking narrative have been generally positive, even though reservations and criticisms are expressed too. As restaking gains momentum, we are ushered into an era that further challenges how blockchains and cryptocurrencies are to be utilized.