What is restaking?

Staking cryptocurrencies on Proof of Stake (PoS) networks such as Ethereum or Solana has proven to be a highly popular way to generate returns from crypto holdings. However, while rewards are generally stable and reliable, there are a few key disadvantages to staking. The main one is capital inefficiency – while funds are locked in a staking protocol, they are illiquid and cannot be used for any other purposes.

Restaking, a concept pioneered by EigenLayer, offers an opportunity to overcome these limitations by staking ETH already locked on Ethereum into a second protocol, thereby generating a second set of staking rewards and introducing new liquidity for staked cryptocurrencies.

How restaking works

The economic principle behind restaking is comparable to PoS. Apps and services running on restaking networks are called Actively Validated Services (AVS), and they pay transaction fees that generate rewards paid to restakers.

EigenLayer allows developers of infrastructural and support services for Ethereum, such as bridges or oracles, to tap into the shared security of the restaking layer, underpinned by the base layer asset, without building a new consensus from scratch each time.

Such a setup overcomes the challenge of fragmentation, where each protocol operates its own consensus. Over time, as the ecosystem becomes more crowded, smaller protocols struggle to attract a large enough network of validators, creating weaker security. With restaking, consensus is aggregated around the base layer asset, creating shared security that can be leveraged by any developer.

There are several different ways that users can participate in restaking. Native restaking involves first staking crypto such as ETH at the base layer level, then using the same staked ETH to stake on a platform such as EigenLayer. However, barriers to becoming an ETH validator to stake directly are high due to the minimum balance of 32 ETH.

Another option is to restake via a DeFi protocol. Platforms such as EigenLayer allow restaking of certain liquidity provider tokens (LP tokens) or liquid staking derivatives (LSDs) issued by platforms such as Lido Finance. Users stake their ETH with Lido to receive stETH tokens, which can then be used in DeFi protocols or in restaking to generate further returns.

While EigenLayer was the first Ethereum restaking platform, its success has resulted in the emergence of a restaking segment which includes platforms such as Karak and Symbiotic. It’s also now possible to restake coins from several other base layer protocols, including Solana and NEAR.

Liquid restaking

Liquid restaking combines the concept of restaking with that of liquid staking, where protocols such as Lido Finance issue liquid derivatives for staked assets.

Liquid restaking protocols carry out the restaking activities on behalf of users, generating Liquid Restaking Tokens (LRTs) that can be further put to use in DeFi protocols, generating another additional layer of returns.

Examples of liquid restaking protocols include Ether.fi and Puffer.

Benefits of restaking

The most immediate benefit of restaking is the ability to generate additional returns from already-staked cryptocurrencies without unstaking them. In this way, restaking is more capital efficient than straightforward staking since a holder can generate more returns from the same initial stake.

Restaking also allows stakers to help secure more than one blockchain network, and restaking platforms like EigenLayer also allow users to choose the AVS against which they’d like to stake, meaning people can support the projects they like.

Risks of restaking

There are several potential risks to consider when restaking. Firstly, the process can be more complicated to navigate. Restaking involves using multiple protocols and interfaces and is technically quite complex. Many users may be tempted to delegate responsibility to protocols or services that manage the process on the user’s behalf.

However, restaking already comes with an additional requirement of trust, since the user must satisfy themselves that the underlying PoS protocol and the restaking protocol are both secure. Using a liquid restaking protocol introduces a third element, creating another potential point of weakness.

Since restaking is a relatively new concept, there are plenty of new projects emerging, so users should do full due diligence on any restaking platforms or providers before they lock their tokens.

While not necessarily a risk, users should also consider that transaction fees will apply for activities relating to restaking.

Restaking essentials

• Restaking is an innovative concept involving restaking already staked cryptocurrency to create a platform with shared security underpinned by a base layer asset.
• Restaking enables users to generate additional returns over and above staking, increasing capital efficiency of staked funds.
• EigenLayer was the first platform to showcase restaking on Ethereum; however, the concept has now expanded to include other base layers and restaking networks.