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What Is Ethereum Restaking?

Apr 25,2024

KEY TAKEAWAYS:

— Ethereum restaking is a novel concept that aims to extend the cryptoeconomic security of Ethereum to new protocols while compounding rewards for stakers.

— The process involves using staked Ether or Liquid Staking Tokens to simultaneously stake on another Ethereum protocol, which some commentators warn could ultimately compromise the base network’s resilience.

— EigenLayer, the protocol that introduced restaking, sees it as a way to supercharge innovation in the Ethereum ecosystem by establishing pooled decentralized security.

As the heart of all blockchain networks, the importance of consensus mechanisms can’t be overstated. In the case of the world’s second-largest cryptocurrency, Ethereum, its proof-of-stake consensus model is a crucial part of its security and function. At present, the Ethereum network is shored up by nearly 1 million network validators and over 31 million staked Ether, lending it formidable security.

Of course, creating a network of validators even a fraction of the size of Ethereum’s is a challenging and costly task. This serves as a major roadblock for new and emerging protocols in the ecosystem, stifling what might otherwise be promising innovations.

But what if there was a way to leverage Ethereum’s established security for new projects being built on the network? Could that unlock a whole new level of progress for the ecosystem as a whole?

That’s the thinking behind Ethereum restaking, a concept that wants to share Ethereum’s validator network for the benefit of new protocols, stakers, and the Ethereum community at large.

But just what is ETH restaking? How does it work, and are there any risks when it comes to restaking your ETH? In this article, Ledger Academy will walk you through all of that and more.

Ethereum Staking and Restaking: Explained

To understand restaking, let’s take a step back and look at what staking is and how it works on the Ethereum network.

How Does Ethereum Staking Work?

Ethereum staking is the basis for the network’s proof-of-stake consensus model. One way to look at staking is as a collateral system that helps keep Ethereum secure.

If someone wants to act as an Ethereum validator, they must first put up a stake of (at least) 32 ETH. In return for processing transactions, they receive staking rewards. Conversely, if the validator acts dishonestly or does anything that could harm the network, they may lose their staked ETH via a process called slashing.

What is Ethereum Restaking?

As the name implies, Ethereum restaking is the process of taking ETH that has already been staked on Ethereum and using it to simultaneously secure other decentralized protocols. As with normal staking, restaking earns users staking rewards from the protocol(s) they help to secure.

 

While earning extra rewards is a major incentive for restaking, it isn’t the main reason for the concept. The larger idea behind restaking is so that less developed protocols can take advantage of Ethereum’s robust community of network validators: something that is costly and resource-intensive to do otherwise.

Notably, the restaking mechanism did not come about as the result of an Ethereum Improvement Proposal (EIP) or the Ethereum Roadmap. Rather, it was designed by a third-party protocol, EigenLayer.

EigenLayer: The Origin of ETH Restaking

Founded in 2021, EigenLayer is an Ethereum middleware platform, which simply means that it sits between the Layer 1 network and other applications, allowing them to interact. As of yet, EigenLayer is the only decentralized protocol that offers ETH restaking.

EigenLayer deploys Ethereum smart contracts that allow stakers to restake their ETH on compatible protocols. The platform also acts as a staking marketplace, allowing the three main parties involved—stakers, network validators, and protocols—to find each other.

Since its initial launch in June 2023, EigenLayer has enjoyed massive growth, becoming one of the largest blockchain protocols out there. Over $10 billion worth of ETH has been restaked through EigenLayer, giving it a higher total value locked (TVL) than major DeFi platforms such as Aave, Rocket Pool, and Uniswap.

EigenLayer’s rapid ascent speaks to an obvious demand for restaking and the added rewards that it brings users. But how exactly do users earn these rewards? To understand fully, let’s dive into how Ethereum restaking works

How Does Restaking ETH Work?

Currently, EigenLayer is the only option you have to restake your ETH. So let’s explore how this project approaches the mechanism.

Smart Contracts: EigenPod

Restaking on EigenLayer allows its smart contracts to place additional slashing conditions on your staked ETH. This is how EigenLayer extends Ethereum’s security to the protocols In its ecosystem, which it calls Actively Validated Services (AVSs). If a restaking validator doesn’t perform their duties for their AVS, they are subject to having their ETH stake slashed.

This happens through on-chain slashing contracts and specific smart contracts called EigenPods. You can think of these as an additional account that sits between a restaker’s wallet and their stake. Staking withdrawals and rewards all have to go through the EigenPod before going to a validator’s account, which gives EigenLayer the ability to enact penalties on validators who act poorly.

Native Restaking vs. Liquid Restaking

Native restaking follows a similar process to natively staking ETH, meaning that this option is only available to those willing to run (or already running) an Ethereum validator node. The only difference with native restaking is that an EigenPod becomes the withdrawal address for your stake.

As for liquid restaking, it’s important to first consider how liquid staking works.

Similarly to native staking, liquid staking involves locking tokens up in a smart contract. The key difference, however, is that the liquid staking platform then gives you liquid staking tokens (LSTs) in return. You can then use these LSTs as you would any other token on DeFi applications. Liquid restaking, therefore, is when users deposit LSTs into the EigenLayer contracts.

EigenLayer currently supports staking for 12 LSTs, including popular options like Rocket Pool Ether (rETH), Lido Staked Ether (stETH), and Coinbase Staked Ether (cbETH).

Significantly, some platforms expand liquid restaking utility even further. For example, the protocols Renzo and EtherFi both serve as liquid restaking platforms for EigenLayer. These protocols accept users’ LSTs and give them Liquid Restaking/Receipt Tokens (LRTs) in return.

Several liquid restaking platforms have emerged recently, looking to expand restaking utility even further. Similarly to liquid staking, users restake their LSTs with these platforms and receive Liquid Restaking/Receipt Tokens (LRTs) in return.

Delegation

Once you have successfully staked your ETH or deposited your LSTs, you then have to delegate your stake. The entities that you delegate to – the ones directly helping to run Actively Validated Services on EigenLayer – are called operators.

Similarly to staking ETH, there are two options here. You can either act as an operator and self-delegate, or you can delegate your stake to an existing operator. While simply delegating your stake to an operator is the simplest option, self-delegation gives you more control and responsibility. Importantly, stakers can not dictate to operators what AVS they operate.

What Are the Benefits of Restaking ETH?

More Rewards for ETH Stakers

The clearest benefit of restaking Ether is that it compounds rewards for stakers. While the exact rate of staking rewards fluctuates over time and varies depending on the staking platform, ETH stakers can expect an annual percentage yield of roughly 3%. In other words, you would earn around 3% of the amount you stake over one year.

By restaking, you can supplement your ETH staking rewards with rewards from multiple other protocols. Of course, the rate of rewards will depend on the specific AVS that your staked ETH is going towards.

Lower Costs for Startup Protocols

The other major benefit of ETH restaking is how it lowers costs for new protocols being built on Ethereum. To explain, before the arrival of restaking, new protocols would have to go through the costly process of developing their own validator networks. Thanks to restaking, new protocols can now take advantage of Ethereum’s well-developed validator network. This concept, where decentralized protocols can share validator-powered security, is known as pooled security.

Avoids Layer 2 Restrictions

Due to the high costs associated with launching a new protocol on Ethereum, projects previously went to Layer 2 blockchains as a solution. While these networks can lower costs for new protocols, they also come with some drawbacks.

The design of some Layer 2 chains can lead to certain constraints on protocol architecture such as customization options and the kinds of transactions a protocol can access. Staying and building on Ethereum and using the pooled security that restaking brings means that protocols are freer to build the architecture that best suits their needs, without constraints.

Besides being good for the individual protocols, this is also a major benefit to the Ethereum ecosystem as a whole. The more protocols that can be built on Layer 1, the more innovation can happen without liquidity siphoning off to other chains.

 

What Are the Risks of Restaking?

Increases The Risk of Slashing

As previously mentioned, slashing is a vital component of proof-of-stake systems that helps to keep participants honest. That being said, the nature of slashing means that it can also have negative consequences for people even when they’re not doing any explicit harm to the network.

For example, many ETH stakers do not act as network validators themselves, meaning that they simply delegate their stake to a validator. If their delegated validator behaved poorly, these stakers could still stand to lose their stake to slashing.

Slashing can also be a risk even for validators who are acting honestly. To sum up briefly, because validators can get a slashing penalty if their node goes offline, many validators set up backup rigs. However, if the network detects the same validator keys coming from two different servers, it also punishes this with slashing (to prevent double-spending).

That’s all to say that, no matter how it is done, staking always comes with some level of slashing risk. Therefore by restaking, you are necessarily increasing the risk that you could become subject to slashing.

Effect on ETH Liquidity

Although restaking arguably works to keep more ETH within the ecosystem, you must remember that staked ETH is not available. Not to mention that even when you unstake your restaked ETH, you will likely have to wait longer than you would otherwise to withdraw it.

Centralization Concerns

If more restaking protocols like EigenLayer entice enough people with the promise of higher staking rewards, this could lead to fewer independent stakers, and more people staking via such protocols. This effectively causes staking to become more centralized over time.

Concerns Around LRTs

As previously mentioned, the growth of restaking has brought about a new class of instruments: liquid restaking tokens (LRTs). As these tokens mimic the surge in popularity of LSTs, it’s important to be aware of the risks they carry.

For one thing, there’s the convoluted nature of LRTs. After all, an LRT is a token representing a staked token, which is itself a representation of a staked token. This added complexity raises questions on exactly how LRT providers will distribute losses and gains.

Add onto this the newness of the asset class, and there are likely to be some hiccups as platforms look to hook new users with promises of large yields and unproven tokenomics.

Potential Effect on Ethereum’s Social Consensus

Finally, some believe that using Ethereum’s validator network as the basis of pooled security can have a destabilizing effect on the base network. One such critic is none other than Ethereum co-founder, Vitalik Buterin.

In a May 2023 blog post, Buterin examines the growing trend of protocols leveraging Ethereum’s validator network and argues that certain use cases can introduce high systemic risks to the ecosystem. Specifically, Buterin warns that protocols relying on Ethereum’s social consensus could be a slippery slope.

Ethereum’s social consensus refers to the large global community of Ethereum developers and other users, who are constantly monitoring the network. This social consensus is vital for the health of the network, as the community can always act to secure the network if its cryptoeconomic consensus fails due to a bug or attack.

Buterin’s concern is that the people building protocols could begin to view hard forks as a way of bailing them out if anything goes wrong. Ultimately, he goes on to say that as long as projects only seek to use Ethereum’s validator set, and not its social consensus, they remain low risk. Notably, EigenLayer founder, Sreeram Kannan, agrees with Buterin’s conclusions, reiterating that an Ethereum fork should never be viewed as a potential solution for a protocol’s issues.

How To Restake ETH on EigenLayer

There are two ways to use EigenLayer to restake Ether: native restaking and liquid restaking.

How to initiate Native restaking on EigenLayer

Here’s how you can natively restake ETH on EigenLayer:  

  1. Connect your wallet to the EigenLayer App, ensuring you are connected to the Ethereum mainnet.
  2. Click “Create EigenPod”
  3. If you are successful, you will see the EigenPod address come up on the right of your screen.
  4. Now that you have your Eigen Pod address, you can deposit your 32 ETH stake to the Beacon Chain just as you normally would to stake ETH.
  5. The key step here is that you must set the EigenPod address as the withdrawal credentials for your staking rewards.
  6. Once you deposit your stake, it takes about four hours to finalize. After that, you’re free to choose an operator to delegate your stake to.

How to initiate Liquid restaking on EigenLayer

If you’re looking to get involved in liquid staking you can take the following steps to deposit your LSTs into EigenLayer.

Remember, you can easily exchange ETH for LSTs through Stader Labs or Lido directly from Ledger Live.

  1. Connect your wallet to the EigenLayer app, ensuring you are connected to the Ethereum mainnet.
  2. Select the LST you want to restake from the list.
  3. Enter the amount of LSTs you want to restake and click “Deposit”. If it’s your first time depositing an LST you’ll need to set a token approval in order to restake.
  4. After confirming the token approval, you can confirm the deposit transaction.
  5. If the transaction is successful, you’ll see your deposit in your “Restaked balance” on the app.

The Future of Ethereum Restaking and Pooled Blockchain Security

All in all, Ethereum restaking is a thoroughly exciting proposition that has brought the concept of pooled security to the forefront of blockchain innovation. Not only can it increase the benefits of staking Ethereum, but it also creates exciting opportunities for up-and-coming blockchain protocols.

 

And if you’re ready to jump into the world of Ethereum staking and staking rewards then look no further than Ledger! Staking Ether on Ledger Live couldn’t be easier. When paired with the power of self-custody unlocked by Ledger devices, you’ll have everything to take on the world of Ethereum staking.

So what are you waiting for? Find the Ledger device that’s right for you and start enjoying the freedom of secure self-custody.

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