What is Restaking and Why You Need to Know It?
Staking is a way of earning money while you hold on to a few cryptocurrencies. This term might sound confusing to some people, but it only means having a stake in some cryptocurrency from which you wish to earn big money. Restaking is the redeploying of cryptocurrencies across other proof-of-stake based services. In simpler words, restaking means trying to earn from other cryptocurrencies by using the current currencies to purchase them. So if you are thinking of buying Ethereum using Solana, you are restaking Solana, as you will be manipulating the higher value of this currency to invest in Ethereum, which will give you more rewards.
The world of cryptocurrency staking is constantly evolving, and restaking presents a novel concept that unlocks new possibilities for Ethereum stakers. This comprehensive guide is to give you an insight of core principles of restaking, explores its various forms, and examines both the potential benefits and inherent risks associated with this innovative practice.
Staking Explained In Detail
Before diving into restaking, let’s revisit the concept of staking in Proof-of-Stake (PoS) blockchains like Ethereum. Staking essentially involves locking up your ETH to support the network’s security by participating in the consensus mechanism. This process is rewarded, with stakers earning a portion of the transaction fees generated by the network. However, traditionally, these staked tokens have remained dormant, unable to contribute further to the DeFi ecosystem.
Restaking: Unlocking the Potential of Staked ETH
Restaking emerges as a game-changer, allowing stakers to leverage their existing ETH holdings in multiple ways:
Increased Staking Rewards: Restaking protocols enable users to restake their ETH (whether directly staked or held as liquid staking tokens — LSTs) and earn additional rewards on top of their base staking returns. This effectively boosts their overall yield potential.
Active Participation in DeFi: While traditionally staked ETH remains inactive, restaking allows it to be transformed into fungible tokens (LSTs). These LSTs unlock the potential for participation in various DeFi applications, such as lending and borrowing platforms. This fosters a more dynamic and interconnected DeFi ecosystem.
Lower Barrier to Entry:
The 32 ETH minimum staking requirement for Ethereum can be a hurdle for smaller investors. Liquid staking protocols address this by allowing users to contribute fractional amounts and still earn staking rewards through LSTs.
Exploring the Different Ways of Restaking
There are two primary approaches to staking:
Native Restaking: This method caters to users running their own Ethereum validator nodes. It involves smart contracts that manage staked assets within the validator node itself, offering additional security benefits.
Liquid Restaking: This approach is more widely accessible. Users stake their ETH with validators who, in turn, provide them with LSTs representing their stake. These LSTs can then be restaked for further rewards.
Liquid Restaking
Taking EigenLayer as an example, we can witness the practical application of liquid restaking. This protocol boasts a total value locked (TVL) exceeding $250 million and acts as a bridge between Ethereum and other blockchain applications. EigenLayer functions through smart contracts that allow anyone who has already staked ETH (directly or through LSTs) to participate in restaking and contribute to the security of various platforms. This fosters a “pooled security” model, leveraging the collective strength of Ethereum’s stakers.
The Power of Collective Security
Traditionally, launching a new protocol involved establishing a separate network of validators. Restaking disrupts this paradigm by allowing these new protocols to “piggyback” on the existing security provided by Ethereum’s massive pool of stakes. This not only enhances security but also streamlines the development process for new blockchain applications.
A Word on Caution: Potential Concerns Regarding Restaking
While restaking offers numerous advantages, it’s crucial to acknowledge the associated risks:
Concentration Risk:
Restaking often involves delegating funds to a limited number of validators, potentially increasing both yield and risk. Excessive leverage within these systems could lead to project instability.
Systemic Risk:
Vitalik Buterin, co-founder of Ethereum, has expressed concerns about restaking protocols potentially exposing the blockchain to significant systemic risks. A large-scale failure within a restaking system could have cascading negative effects.
The Ankr Exploit: The 2022 exploit of Ankr, a restaking protocol built on the BNB network, serves as a cautionary tale. It highlights the importance of robust security measures within restaking protocols.
The Road Ahead: A Balanced Approach to Restaking
Despite the potential risks, restaking has the potential to become a cornerstone of the DeFi ecosystem by attracting more liquidity and users to Ethereum staking. However, careful consideration is needed when developing and deploying restaking services to mitigate potential conflicts and maintain a healthy level of decentralization within the Ethereum ecosystem. By striking a balance between maximizing benefits and minimizing risks, restaking can be a win-win proposition for all stakeholders in the Ethereum network.
