Title: The Hitchhiker’s Guide to Restaking
Source: Binance Research
Author: Shivam Sharma, Binance Research Macro Research Analyst
Table of Contents
Introduction
A Recap of Staking Knowledge
Understanding Restaking
How Does Restaking Work?
What Problem Does Restaking Solve?
Key Projects
EigenLayer
How Does It Work?
The Impact of Trust Aggregation
Timeline
Recharge Limit
Ecosystem Projects
Restaking Aggregation Using AltLayer
Considerations
Technical Risks
Structural Risks
Other Considerations
Outlook and Conclusion
By 2024, the restaking market has gained popularity, quickly transitioning from an emerging narrative to an innovative reality. So far, Ethereum restaking has dominated the narrative, primarily due to EigenLayer, the pioneering sub-chain on Ethereum.
EigenLayer is the most mature project in its restaking roadmap and accounts for the majority of the Total Value Locked (TVL) in the restaking market.
Despite this, other projects are also focusing on developing restaking or restaking-related projects on multiple chains, some of which have already launched and others are about to. These projects include Picasso (Solana restaking) and Babylon (Bitcoin restaking). The integration of Cosmos application chains with EigenLayer is also a hot topic, while AltLayer extends its Restaking as a Service (RaaS) protocol to cover restaking aggregation. Additionally, liquidity staking tokens (LST) had significant development in 2023, and this year saw the emergence of liquidity restaking tokens (LRT).
In this report, we first provide a brief introduction to the basics of restaking, followed by a detailed study of EigenLayer and its ecosystem’s development, restaking on other chains, liquidity restaking protocols, and LRT. Lastly, we offer an outlook on the future of restaking.
At its most basic level, a blockchain can be defined as an immutable transaction ledger that tracks valid transactions in chronological order. To achieve this, a blockchain must perform four key functions:
Consensus: Validators or miners agree on the ordering of transactions, such as Proof of Stake (PoS) or Proof of Work (PoW).
Data availability: Ensuring that transaction data is viewable across the entire network.
Execution: Processing transactions to update the blockchain state.
Settlement: Resolving disputes, validating transaction validity, and ensuring “finality” of transactions.
Consensus is sometimes considered the most fundamental of these functions and crucial for the immutability of the chain. Essentially, in a Proof of Stake (PoS) consensus mechanism, the chain has a set of validators who propose, validate new blocks, and add them to the blockchain. To become a validator, one must stake the native tokens of the chain. In return, validators receive staking rewards in the form of new tokens and fees. However, if validators misbehave or engage in any form of malicious activity, they are likely to be “slashed,” meaning a portion of their staked tokens will be confiscated.
Slashing incentivizes validators to operate the network correctly. Additionally, the more validators join (and therefore the more tokens staked), the more difficult it becomes to attack the network. For example, a typical method of attacking a blockchain network is attempting to gain control of a majority (51%) of the staked tokens in a Proof of Stake system, thus having the power to propose malicious blocks or reorganize blocks. The more tokens staked or the higher the value of staked tokens, the higher the cost and difficulty of such attacks. This is the fundamental reason why staking helps protect blockchain security.
Restaking goes a step further, supporting users to stake their assets multiple times on their original blockchain and other protocols. For example, EigenLayer allows Ethereum stakers to reuse their already staked ETH to secure other applications built on the network. Stakers can choose additional services they want to receive from their currently staked ETH and earn additional rewards from them. In return, they agree to grant EigenLayer additional slashing rights over their staked ETH (in addition to the slashing rights of the underlying Ethereum staking contract).
Essentially, a restaking protocol provides a smart contract that supports the reutilization and restaking of already staked tokens for applications outside the original blockchain, providing security for those applications.
Restaking aims to address the decentralization of blockchain security. Fundamentally, if builders want to create a decentralized network, they need to establish some form of cryptographic economic security. For example, in the Ethereum network, this is achieved through staking ETH tokens. However, if other services want to emulate this, the efficiency can be significantly low. For instance, creating a new Proof of Stake (PoS) network like Ethereum or BNB Chain would require substantial capital costs.
Assuming projects achieve this security function by issuing a token, they must convince ecosystem participants to bear the price risk of staking that new token, as well as the opportunity cost compared to simply staking ETH.
Additionally, generating sufficient security is also time-consuming. And even if generated, its security may not be as strong as Ethereum itself. This often leads to many projects that do not necessarily need to issue their own tokens being forced to do so while struggling to create their own cryptographic economic security. Restaking attempts to aggregate the security of large chains like Ethereum and provide it to other applications, addressing this problem.
EigenLayer is self-proclaimed as the “Ethereum Restaking Aggregation Platform” committed to creating a decentralized trust marketplace. It is the pioneering platform in the restaking field and the largest and most significant project in the space. We can consider EigenLayer as providing “Security-as-a-Service” through Ethereum or Ethereum Security “as-a-Service.”
EigenLayer operates a three-pronged marketplace, including:
1. Restakers: Individuals who secure other applications on the network using liquidity staking tokens (LST). They earn additional rewards but are also subject to additional slashing conditions. Users can also choose to directly stake their ETH into EigenLayer (referred to as native restaking).
2. Node Operators (Validators): Individuals running EigenLayer software. Many restakers may choose to delegate to trusted node operators instead of running their own nodes (similar to how stakers delegate their tokens to trusted validators). Node operators can aggregate delegated staking, spin up Ethereum nodes, and earn fees from Ethereum Proof of Stake (PoS). They can also earn additional rewards from the selected protected protocols through staking. Some portion of the fees is retained, and the rest is passed on to the delegators. If operators misbehave in their participation in EigenLayer modules, their staked tokens (and the tokens they were delegated) will be slashed.
3. Active Verification Services (AVS): Services built on top of EigenLayer that aim to attract restakers to help enhance security. These AVS, sometimes referred to as modules, can be any project like new blockchains, Data Availability (DA) layers, virtual machines, oracle networks, cross-chain bridges, etc.
EigenLayer introduces two novel concepts through this system: (1) aggregating security through restaking and (2) a free-market governance system.
1. Aggregating Security through Restaking: EigenLayer secures new modules by restaking ETH (instead of its own token). This achieves security aggregation.
Specifically, restakers lock their LST or native ETH with validators, who can then decide to protect any chosen module. Validators set their withdrawal credentials to an EigenLayer smart contract, enabling them to be automatically slashed if they misbehave.
In return, these modules pay fees for security and validator services to validators and restakers.
The result is the aggregation of Ethereum’s powerful cryptographic economic security onto other protocols built on it.
2. Free-Market Governance: EigenLayer provides an open market mechanism that allows validators to balance risk and reward and choose which modules to provide security for.
EigenLayer sees this as similar to the services provided by venture capital firms, which support innovation but come with risks (here referring to slashing risks).
This creates an open and competitive market where validators can sell aggregated security, and protocols can purchase security at a certain price. This eliminates the massive capital costs of creating new security models, as protocols can directly purchase them. It also helps create a flywheel effect, where the higher the value of modules protected by EigenLayer, the higher the rewards for ETH restakers. This leads to a higher value of ETH, thereby enhancing Ethereum’s security and creating better security for each EigenLayer module, further incentivizing users to create new modules on it.
Trust aggregation provided by EigenLayer is significant. As new AVS can be protected through larger pools of funds than usual, the Cost of Corruption (CoC) is much higher compared to other cases.
For example, a new Ethereum module no longer needs $1 billion in staking to secure it but can be protected by a larger fund pool. This mechanism essentially increases the CoC from the minimum staking amount to the total staking.
EigenLayer follows a phased approach with three stages. The aim is to ensure a smooth onboarding experience for all different participants expected to be part of the EigenLayer ecosystem.
Stage 1 focused on restakers and was launched in June last year. The idea behind Stage 1 was to familiarize restakers with the restaking process and the EigenLayer modules and interface. Initially, EigenLayer supported three LST tokens in addition to native ETH for restaking. After several months of gradual additions, EigenLayer now supports 12 LST tokens.
Stage 2 focused on node operators, with the testnet launching in November 2023. Since the launch, operators have been able to register on the network and start validating the first AVS, EigenDA. Restakers have also been able to delegate to their chosen operators to begin using shared security. Aggregation developers could integrate EigenDA as a DA layer into their aggregations and experiment with it in the testnet scenario. The mainnet launch for Stage 2 is scheduled for later in the first half of 2024.
Stage 3 will focus on the onboarding of AVS (excluding EigenDA) and the addition of payment and slashing functionalities. Stage 3 is expected to take place in the second half of this year. Once all three stages are completed, the EigenLayer protocol will officially be fully operational.
To ensure a smooth transition to the mainnet, EigenLayer has been using recharge limits to manage the amount of staking on the protocol. At the launch of Stage 1 mainnet, the quantity limits for the three LST tokens were set at 9,600 each, and the quantity limit for native ETH was also set at 9,600. In the past few months, the recharge limits and accepted LST quantities have been gradually increasing.
EigenLayer recently raised the recharge limits and temporarily removed all TVL limits, marking the first time all TVL limits have been removed. The goal is to attract all natural demand for restaking and observe people’s perspectives from an unlimited angle.
