The Risks of Restaking
Author: Francesco
Translator: Zombit
“Restaking” seems to be designated as one of the main narratives of 2024. However, although many people talk about how to participate in restaking and its benefits, it is not without drawbacks. This article aims to analyze “restaking” from a higher level, highlighting its risks and clarifying whether it is really worth taking these risks.
Table of Contents
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What is “restaking”?
Why would someone choose to restake?
Is it worth restaking for additional earnings?
Restaking for institutions
How will dynamics change after airdrops?
What can we do to mitigate these risks?
Ethereum’s Proof of Stake (PoS) serves as a decentralized trust mechanism, where participants stake their Ether as a commitment to secure the Ethereum network. “Restaking” refers to staking Ether used to secure Ethereum PoS as a commitment to other network securities.
The representative project for restaking is “EigenLayer,” which is modularizing Ethereum’s decentralized trust to enable other networks to build Active Validation Services (AVS) without needing to bootstrap their own validator sets, effectively reducing the barriers to entry into this market.
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These modules typically rely on active validation services to function, and these services have their own unique decentralized validation methods. These active validation services, or AVS, either sustain themselves with their own tokens or are essentially permissioned systems.
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In simple terms, the reason is based on “economic incentives and earnings.” If the annual return rate for staking Ethereum is around 5%, restaking may provide more attractive additional earnings. However, this also translates into additional risks for stakers.
Apart from the existing risks of staking ETH itself, when users choose to restake their ETH, they essentially delegate power to the EigenLayer contract, and if the AVS they are protecting experiences errors, double-signing, or other issues, their staked ETH may be reduced due to penalties.
Therefore, “restaking” actually adds an additional layer of risk, as restakers may face reduction in both the Ethereum base layer, the restaking layer, or even both.
R(isk)-Staking – What significant risks does restaking add?
ETH (or LST) must be staked, thus lacking liquidity
Smart contract risks of EigenLayer
Specific slashing conditions of the protocol
Liquidity risks
Centralization risks
To quote renowned researcher @ChainLinkGod:
In fact, by restaking, users are utilizing tokens already exposed to the risk of staking and adding additional risks on top of it, ultimately leading to layered risks as shown below:
Furthermore, developing more new primitives on these foundations will add more complexity and additional risks.
In addition to the risks of restakers themselves, the Ethereum developer community has also raised some concerns about restaking, especially in Vitalik’s well-known article “Keeping Ethereum’s Consensus Layer Simple.”
The problem with restaking is that it opens up new risk pathways for the ETH staked by Ethereum to secure the mainnet, diverting a portion of it to protect other chains chosen by restakers. Therefore, if they misbehave under the rules of other protocols (possibly due to vulnerabilities or weak security), their staked ETH will be reduced.
The debate about how developers and EigenLayer coordinate efforts and ensure that Ethereum is not weakened by these technological advancements is very real and important.
It is not an easy task to repurpose Ethereum, the most critical “layer,” to protect the network. Moreover, a key point is the extent to which restakers are allowed to take risk management measures. Restaking projects generally have their own decentralized autonomous organizations (DAOs) responsible for deciding which AVS can be whitelisted.
However, as a restaker, I might prefer to personally review and decide which AVS to include in the whitelist of the restaking service to avoid being slashed by malicious networks and reduce the risk of encountering new attack vectors.
Overall, restaking is a novel and interesting concept worth researching, but the concerns raised by Vitalik and others are equally significant and should not be ignored.
When discussing restaking, we need to keep in mind its impact on Ethereum’s mainnet security model: Restaking undoubtedly adds an additional layer of risk to the core security mechanism of Ethereum.
Ultimately, whether to choose restaking depends entirely on individual decision-making.
Surprisingly, many institutions have expressed interest in restaking Ether and see it as an additional incentive on top of the existing staking rewards. Considering the risks mentioned earlier, it will be interesting to observe which market, retail or institutional, shows more interest in restaking.
While obtaining additional earnings on top of the existing staking rewards is attractive to those already involved, it is not a life-changing return for investors pursuing high-risk, high-reward investments.
However, it does open up new use cases for Ethereum as a financial instrument. An interesting comparison is to liken restaking applications to “corporate bonds.” New networks hope to achieve the same level of security as the underlying network (L1) by issuing bonds through the financial system, just as companies or countries protect their assets.
In the cryptocurrency field, Ethereum is the most widely used and liquid network and possibly the only one capable of supporting such a market, and from the perspective of nation-states in traditional financial economies, it is the safest choice.
However, most of the interest in restaking seems to be driven by the expectations of the EigenLayer airdrop, which could be the largest airdrop in cryptocurrency history.
Actual risk and return analysis may prompt some people to turn to potentially more effective alternatives. I even believe that most of the capital currently deposited in restaking is “employment” capital that may exit after receiving the airdrop.
Separating speculative elements is crucial for accurately assessing the true interest of users in this new infrastructure. Personally, I find the restaking narrative somewhat exaggerated and see obvious risks that need to be carefully evaluated.
Some solutions to mitigate restaking risks include optimizing restaking parameters (total value cap, slashing amount, fee distribution, minimum total value, etc.) and ensuring diversification of funds among various AVS.
The first step restaking protocols can consider is allowing users to choose different risk configurations when participating in restaking. Ideally, each user should be able to evaluate and choose which AVS to restake without delegating this process to a DAO. This requires joint efforts between AVS and EigenLayer to ensure a roadmap is in place to minimize these risks.
Fortunately, the EigenLayer team has been working with the Ethereum Foundation to maintain alignment and ensure that restaking does not pose systemic risks to Ethereum, staked liquidity tokens, or the AVS utilizing them.
