The Rise of Restaking and Its Implications on Ethereum and DeFi

Staking has been a staple of the Ethereum ecosystem before other proof-of-stake protocols, such as Solana, embraced it. By staking, you’re holding and locking your crypto in a particular protocol to support its operations, such as helping to secure the network. In return, you earn rewards. But now, a breakthrough that’s even better than staking is here – restaking. 

This concept is reshaping blockchain utility and laying a new foundation for an improved crypto economy. It is opening up new opportunities to earn in the crypto space by utilizing your capital even more. However, how will this emerging crypto-economic approach fare? How will it impact Ethereum and the broader DeFi? Let’s break it all down in this blog.

Restaking Explained

Restaking is using an already staked token or liquid derivatives on other Blockchain protocols, securing several networks at once. With staking, you only secure a network, and the tokens lie dormant. However, restaking allows you to stake the same tokens on other Blockchain networks simultaneously for additional rewards. It puts your tokens to work, generating extra yields for you while they are being used to secure the new protocols. Think of it as staking your tokens twice and earning double. However, the additional rewards come with added slashing risks.

Slashing occurs when a validator service breaks the rule during consensus. In this case, you and every other restaker lose a percentage of restaked tokens. While reusing your staked tokens, restakers and validator services must accept slashing for added rewards. This ensures that everyone acts appropriately while the protocols are being secured.  

Protocols Powering the Restaking Concept

Restaking is taking DeFi by storm, and holders can’t wait to leverage this rising concept to maximize their yields. Below are some protocols powering the idea within the space.

• EigenLayer

EigenLayer is an Ethereum-based protocol that allows the reuse of staked ETH or liquid staking tokens (LST) to secure several decentralized applications (dApps) or Autonomous Verified Services (AVSs) for extra rewards. Founded by Sreeram Kanna, EigenLayer pioneered the restaking concept. It aims to enhance DeFi infrastructure by unlocking trustless innovations and repurposing Ethereum’s economic security. 

With EigenLayer, users restake their ETH or LST into the protocol, which becomes available to external services to use, like decentralized oracles and Layer2 bridges. If the services fail to honor the consensus agreements, restakers’ deposits are slashed. If everything works out well, restakers earn additional rewards. 

This Ethereum protocol has secured partnerships with Binance, a16z, Renzo, and Espresso to unlock a new layer of decentralization and earning opportunities. EigenLayer once revealed it had more than $6.8 billion TVL and 4.6 million native and LST ETH staked.

• Jito

Jito is a Solana-based restaking protocol that allows the reuse of SOL or its derivatives across multiple networks. The staked assets secure these DeFi networks, and users earn rewards for that. Users who staked SOL or its derivatives receive Vault Receipt Tokens (VRT), which are LSTs that represent their staked assets. These tokens support dApps and will be burned when users want to withdraw their initial assets.

• Babylon

Babylon aims to bring restaking to the Bitcoin network. Remember, Bitcoin is still a proof-of-work network, which makes staking impossible. However, protocols like Babylon are working towards expanding Bitcoin’s utility by using it to secure more AVS. As of this writing, Babylon is under development. 

Other protocols like Renzo and Pendle Finance help to manage and distribute restaking yields to liquidity providers. Renzo acts as a strategy manager for EigenLayer, enabling users to manage their restaking strategies. Pendle, on the other hand, allows users to manage and trade the principal and yield separately.

Benefits of Restaking Cryptocurrencies

As mentioned, staked cryptocurrencies lie dormant. This meant that a significant amount of the coin’s liquidity was still lying on blockchains. Additionally, only large holders could earn staking rewards from blockchains, and validators could only get a small percentage on the main blockchain.

Restaking altered the norm by turning staked coins into liquid staking tokens that can be used in DeFi to generate rewards. The emerging concept also lowers barriers to entry, making staking more accessible with no minimum staking requirements. As a result, smallholders can restake and benefit from the rewards. 

For DeFi protocols, restaking tokens can benefit them by enhancing security and scaling. Protocols can reinforce their security system through a large set of validators, which is more cost-effective than building a security infrastructure from scratch. The network can scale up security during high-demand periods through restaking and scale down when the network returns to normal. 

Potential Risks of Restaking

Restaking improves capital efficiency for users and security for protocols. Like any innovation, there are some downsides to restaking. These includes;

• Slashing: Staking across multiple DeFi protocols increases your exposure to slashing. If one of the AVSs misbehaves, you could lose funds. Therefore, stakers are committed to following the consensus rules to avoid the slash penalty for misbehaving.
• Complexity: Smart contracts using the restaking mechanism still have complex layers that may jeopardize your earning opportunities. 
• Yield risks: Restakers will opt for protocols that offer the highest returns, potentially affecting the Layer1 network. Investors will view restaking as a quick, get-rich financial product.
• Regulations: Given that restaking involves yield, regulators may impose taxes and classify it as a security. This hasn’t happened yet because regulations around restaking haven’t been properly discussed.
• Centralization: Protocols with large staking pools would likely attract more stakers, threatening decentralization.   

Final Say

Restaking, undoubtedly, provides more value for stakers while the DeFi protocol leverages it to boost security and scalability. It’s reshaping the economic layers of DeFi by unlocking capital efficiency and security. Decentralized Finance is on the verge of a revolution, and restaking layers are taking us to the future of a new crypto economy. As more restaking protocols emerge, the space will continue to mature and expand the Layer 1 blockchain’s utilities.