Original author: Lawrence Lee, Mint Ventures researcher
After securing two rounds of financing, including a $12 million round led by Polychain and financing from Binance Labs, the Solana chain's restaking project Solayer has become one of the few highlights in the DeFi space in the recent market, with its TVL continuously rising, now exceeding Orca, ranking twelfth in TVL on the Solana chain.
Solana project TVL rankings Source: DeFillama
As a crypto-native sub-sector, staking is also the largest crypto sector by TVL. However, the representative tokens such as LDO, EIGEN, ETHFI, etc., have struggled significantly in this cycle. Beyond being situated within the Ethereum network, could there be other reasons?
How competitive are staking and restaking protocols surrounding user staking behavior in the entire staking ecosystem?
What are the differences between Solayer's restaking and Eigenlayer's restaking?
Is Solayer's restaking a good business?
I hope this article can answer the above questions. Let's start with the staking and restaking on the Ethereum network.
The competitive landscape and development pattern of Liquid Staking, Restaking, and Liquid Restaking on the Ethereum network
In this section, we will mainly discuss and analyze the following projects:
The leading liquid staking project Lido on the Ethereum network, the leading restaking project Eigenlayer, and the leading liquid restaking project Etherfi.
The business logic and income composition of Lido
We briefly summarize Lido's business logic as follows:
Due to Ethereum's insistence on decentralization, the PoS mechanism of ETH has softly limited the maximum staking cap of a single node, allowing a single node to deploy a maximum of 32 ETH to achieve higher capital efficiency, while staking requires relatively high hardware, network, and knowledge requirements, making it difficult for ordinary users to participate in ETH staking. Against this backdrop, Lido has popularized the LST concept. Although the liquidity advantage of LST was weakened after the Shapella upgrade opened withdrawals, the advantages of LST in capital efficiency and composability remain solid, forming the basic business logic of LST protocols represented by Lido. Among liquid staking projects, Lido's market share is close to 90%, leading the market.
Liquid staking participants and market share Source: Dune
Lido protocol's revenue mainly comes from two parts: consensus layer income and execution layer income. The so-called consensus layer income refers to the PoS inflation revenue of the Ethereum network, and for the Ethereum network, this expenditure is to maintain network consensus, thus termed consensus layer income, which is relatively fixed (the orange part in the chart below); while execution layer income includes priority fees paid by users and MEV (for an analysis of execution layer income, readers can refer to previous articles by Mint Ventures for more details), this income is not paid by the Ethereum network but is paid (or indirectly paid) by users during transaction execution, and this part varies with the on-chain heat, showing greater volatility.
Lido protocol APR Source: Dune
The business logic and income composition of Eigenlayer
The concept of Restaking was proposed by Eigenlayer last year and has become a rare new narrative in the DeFi field and the entire market over the past year, spawning a series of projects with FDVs exceeding $1 billion at launch (in addition to EIGEN, there are ETHFI, REZ, and PENDLE), as well as many restaking projects that have yet to launch (Babylon, Symbiotic, and the Solayer we will focus on later). The market's enthusiasm is evident (Mint Ventures previously researched Eigenlayer, interested readers can refer to that).
Eigenlayer's Restaking, as defined, refers to users who have already staked ETH, who can restake their already staked ETH in Eigenlayer (thereby obtaining excess income), hence the name 'Re'Staking. Eigenlayer calls the services it provides AVS (Actively Validated Services), which can provide services for various protocols with security requirements, including sidechains, DA layers, virtual machines, oracles, bridges, threshold encryption schemes, trusted execution environments, etc. EigenDA is a typical representative of using Eigenlayer AVS services.
Protocols currently using Eigenlayer AVS Source: Eigenlayer official website
The business logic of Eigenlayer is quite simple; on the supply side, they raise assets from ETH stakers and pay fees; on the demand side, protocols with AVS needs pay for its services, with Eigenlayer acting as a 'protocol security market' to facilitate and earn certain fees.
However, looking across all current restaking projects, the only true income remains the tokens (or points) of the relevant protocols. We still cannot ascertain whether restaking has achieved PMF: from the supply side, everyone enjoys the additional income brought by restaking; but the demand side remains a mystery: are there really protocols that will purchase protocol economic security services? If so, how many?
Kyle Samani, founder of Multicoin, questions the restaking business model Source: X
Looking at the target users Eigenlayer has already issued tokens to: oracles (LINK, PYTH), bridges (AXL, ZRO), DA (TIA, AVAIL), the core use case of their tokens is to maintain protocol security through staked tokens. Choosing to purchase security services from Eigenlayer would significantly undermine the rationale for issuing their tokens. Even Eigenlayer itself, when explaining the EIGEN token, uses very abstract and obscure language to express that 'using EIGEN to maintain protocol security' is the main use case.
The survival path of Liquid restaking (Etherfi)
Eigenlayer supports two ways to participate in restaking: using LST and native restaking. Participating in Eigenlayer Restaking using LST is quite simple; users deposit ETH in the LST protocol to obtain LST, then deposit LST into Eigenlayer. However, the LST pool has a long-term cap, and users who want to participate in restaking during the capped period need to carry out native restaking as follows:
Users first need to complete the entire process of staking on the Ethereum network themselves, including preparing funds, configuring execution layer and consensus layer clients, setting withdrawal credentials, etc.
Users create a contract account named Eigenpod in Eigenlayer.
Users set the withdrawal private key of their Ethereum staking node to the Eigenpod contract account.
It can be seen that Eigenlayer's Restaking is a relatively standard 're-staking'; whether users deposit other LSTs into Eigenlayer or use native restaking, Eigenlayer does not directly 'touch' the ETH staked by users (Eigenlayer also does not issue any LRT). The process of native restaking is a 'complex version' of ETH's native staking, meaning similar funding, hardware, network, and knowledge barriers.
Thus, projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to address this issue. The operational process of Etherfi's eETH is as follows:
Users deposit ETH into Etherfi, and Etherfi issues eETH to users.
Etherfi stakes the received ETH to earn the basic yield of ETH staking;
At the same time, they set the withdrawal private key of the node to the Eigenpod contract account according to Eigenlayer's native restaking process, so that they can obtain Eigenlayer's restaking income (as well as $EIGEN, $ETHFI).
Clearly, the services provided by Etherfi are the optimal solution for users holding ETH who want to earn income: on one hand, eETH is easy to operate and also has liquidity, its experience is basically consistent with Lido's stETH; on the other hand, users who deposit ETH into Etherfi's eETH pool can earn: around 3% basic ETH staking income, possible AVS income from Eigenlayer, token incentives (points) from Eigenlayer, and token incentives (points) from Etherfi.
eETH accounts for 90% of Etherfi's TVL, contributing over $6 billion in peak TVL to Etherfi, as well as a peak FDV of $8 billion, making Etherfi the fourth-largest staking entity in just half a year.
Etherfi TVL distribution Source: Dune
Ranking of staking volume Source: Dune
The long-term business logic of LRT protocols lies in helping users participate in both staking and restaking in a simpler and easier way to obtain higher yields. Since they do not generate any income (except for their own tokens), LRT protocols are more akin to specific income aggregators for ETH. If we analyze carefully, we will find that their business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido were willing to 'mimic' eETH with its stETH, it would be very difficult for Etherfi to match its long-term brand advantage, security endorsement, and liquidity advantage.
Eigenlayer cannot provide liquid staking services. If Eigenlayer were willing to directly absorb users' ETH for staking, it would also greatly undermine Etherfi's value proposition.
From a purely commercial logic perspective, as the leading liquid staking platform, Lido provides users with liquid restaking services to offer a broader range of income sources. Eigenlayer directly attracts user funds to facilitate staking and restaking, which are all completely feasible. So why doesn’t Lido do liquid restaking, and Eigenlayer does not do liquid staking?
The author believes this is determined by the special situation of Ethereum. In May 2023, as Eigenlayer had just completed a new round of $50 million financing, sparking numerous discussions in the market, Vitalik specifically wrote an article (Don't overload Ethereum’s consensus) detailing his views on how Ethereum's consensus should be reused (that is, 'how should we restake').
Regarding Lido, due to its long-term scale accounting for about 30% of Ethereum's staking ratio, voices within the Ethereum Foundation to restrain it have been incessant. Vitalik has also personally written multiple articles discussing the centralization issue of staking, which has led Lido to make 'aligning with Ethereum' a priority in its operations, gradually shutting down all businesses except for Ethereum, including Solana. Its de facto leader, Hasu, confirmed in a publication this May to give up the possibility of participating in the restaking business, limiting Lido's operations to staking, and instead addressing the competition from LRT protocols like Eigenlayer and Etherfi by investing in and supporting the restaking protocol Symbiotic and forming the Lido alliance.
Lido's stance on restaking-related matters Source
On the Eigenlayer side, Ethereum Foundation researchers Justin Drake and Dankrad Feist were hired as consultants for Eigenlayer early on. Dankrad Feist stated that his main purpose for joining was to make 'Eigenlayer align with Ethereum', which may also explain why Eigenlayer's native restaking process is quite contrary to user experience.
In a sense, Etherfi's market space is brought about by the Ethereum Foundation's 'distrust' of Lido and Eigenlayer.
Analysis of the Ethereum staking ecosystem protocols
Combining Lido and Eigenlayer, we can see that currently on PoS chains, surrounding staking activities, excluding related party token incentives, there are a total of three long-term sources of income:
PoS underlying income, the native tokens paid by the PoS network to maintain network consensus. The income rate of this part mainly depends on the chain's inflation plan, for example, Ethereum's inflation plan is linked to the staking ratio; the higher the staking ratio, the slower the inflation rate.
Trading order income refers to the fees that nodes can obtain during the transaction packaging and sorting process, including the priority fees given by users and the MEV income obtained during transaction sorting. The income rate from this part mainly depends on the chain's activity level.
Staking asset rental income refers to leasing the staked assets of users to other protocols in need, thus obtaining fees paid by these protocols. This income depends on how many protocols with AVS needs are willing to pay fees to obtain protocol security.
On the Ethereum network, there are currently three types of protocols surrounding staking activities:
Liquid staking protocols represented by Lido and Rocket Pool. They can only access the aforementioned first and second types of income. Of course, users can take their LST to participate in restaking, but as protocols, they can only share in the aforementioned first and second types.
Restaking protocols represented by Eigenlayer and Symbiotic. These types of protocols can only access the third type of income.
Liquid restaking protocols represented by Etherfi and Puffer. They theoretically can obtain all three types of income mentioned above, but they are more akin to 'aggregating restaking income into LST'.
Currently, ETH PoS underlying income is around 2.8% annualized, gradually decreasing as the staking ratio of ETH increases;
The trading order income has significantly decreased with the launch of EIP-4844, hovering around 0.5% in the last six months.
The base of staking asset rental income is too small to be annualized; it relies more on EIGEN and the token incentives of related LRT protocols to make this part of the incentive significant.
For LST protocols, their revenue base is staking quantity * staking yield. The staking quantity of ETH has approached 30%. Although this figure is still significantly lower than that of other PoS public chains, from the perspective of the Ethereum Foundation's decentralization and economic bandwidth, it does not wish for too much ETH to flow into staking (see Vitalik's recent blog post, where the Ethereum Foundation has discussed whether to set a cap on ETH staking at 25% of the total supply); and the staking yield continues to decline, stabilizing at around 6% since the end of 2022, often reaching around 10% in the short term, now reduced to only 3%, with no reasons for recovery in the foreseeable future.
For the aforementioned protocol tokens, in addition to being constrained by ETH's own downturn:
The market ceiling for LSTs on the Ethereum network has become gradually visible, which may also be the reason for the poor performance of governance tokens for LST protocols like LDO and RPL.
For EIGEN, currently, other PoS chains, including restaking protocols on the BTC chain, are continuously emerging, which has basically limited Eigenlayer's business to the Ethereum ecosystem, further reducing the potential upper limit of its already unclear AVS market scale.
The unexpected emergence of LRT protocols (ETHFI's peak FDV exceeding 8 billion, surpassing LDO and EIGEN's historical peak FDV) further 'diluted' the value of the aforementioned two in the staking ecosystem.
For ETHFI and REZ, in addition to the above factors, the excessively high initial valuations brought about by launching during market booms are more significant factors affecting their token prices.
Solana's staking and restaking
The operational mechanisms of liquid staking protocols on the Solana network, represented by Jito, are fundamentally no different from those on the Ethereum network. However, Solayer's restaking is different from Eigenlayer's restaking. To understand Solayer's restaking, we first need to understand Solana's swQoS mechanism.
The swQoS (stake-weighted Quality of Service) mechanism of the Solana network officially came into effect after a client version upgrade in April this year. The starting point of the swQoS mechanism is for the overall efficiency of the network, as the Solana network experienced prolonged network congestion during the meme craze in March.
In simple terms, after swQoS is enabled, block producers determine the priority of transactions based on the staked amount of stakers. A staker with x% of the entire network's stake can submit up to x% of the transactions (for specifics on the swQoS mechanism and its profound impacts on Solana, readers can refer to Helius's articles). After swQoS was enabled, the transaction success rate of the Solana network rapidly increased.
Success and failure TPS of the Solana network Source: Blockworks
swQoS prioritizes the rights of larger stakers in the network by 'drowning' transactions from small stakers when network resources are limited, thus avoiding malicious attacks on the system. To some extent, the logic of 'the more staking proportion, the more network privileges' aligns with the PoS public chain logic: staking a larger proportion of the native chain token contributes more to the chain's stability and deserves more privileges. Of course, the centralization issues of this mechanism are also very apparent: larger stakers can naturally obtain more priority transaction rights, and priority transaction rights will bring in more stakers, thus reinforcing the advantages of top stakers, further tending towards oligopoly or even monopoly. This seems contrary to the decentralization advocated by blockchain, but this is not the focus of this article; we can clearly see from Solana's consistent development history that Solana adopts a 'performance-first' pragmatic attitude on decentralization issues.
In the context of swQoS, Solayer's target users for restaking are not oracles or bridges, but protocols that require transaction throughput/reliability, typically like DEXs. Therefore, Solayer refers to the AVS services provided by Eigenlayer as exogenous AVS, because these systems that use Eigenlayer's services are typically located outside the Ethereum main chain. In contrast, the services it provides are referred to as endogenous AVS because its service objects are located within the Solana main chain.
The differences between Solayer and Eigenlayer come from
It can be seen that although both are leasing staked assets to other protocols in need for 're-staking', the core services provided by Solayer's endogenous AVS and Eigenlayer's exogenous AVS are different. Solayer's endogenous AVS is essentially a 'transaction throughput leasing platform', whose demand users are platforms (or their users) that require transaction throughput, while Eigenlayer is a 'protocol security leasing platform'. The core support for its endogenous AVS is Solana's swQoS mechanism. As Solayer states in its documentation:
"We did not fundamentally agree with EigenLayer’s technical architecture. So we re-architected, in a sense, restandardized restaking in the Solana ecosystem. Reusing stake as a way of securing network bandwidth for apps. We aim to become the de facto infrastructure for stake-weighted quality of service, and eventually, a core primitive of the Solana blockchain/consensus.
We fundamentally disagree with EigenLayer's technical architecture. Therefore, in a sense, we have restructured restaking within the Solana ecosystem. Reusing stake as a means to protect APP network bandwidth. Our goal is to become the de facto infrastructure for swQoS and ultimately a core primitive of the Solana blockchain/consensus.
Of course, if there are other protocols on the Solana chain that have a demand for staked assets, such as protocol security needs, Solayer can also lease its SOL to these protocols. In fact, by definition, any leasing/reutilization of staked assets can be called restaking, not just limited to security needs. Due to the existence of the swQoS mechanism on the Solana chain, the scope of restaking business on the Solana chain is broader than that on the Ethereum chain, and based on the recent active on-chain activity of Solana, the demand for transaction throughput appears to be more rigid than the demand for security.
Is Solayer's restaking a good business?
The business process for users participating in Solayer restaking is as follows:
Users deposit SOL directly into Solayer, and Solayer issues sSOL to users.
Solayer stakes the received SOL to earn basic staking income.
At the same time, users can delegate sSOL to protocols that require transaction throughput, thereby earning fees paid by those protocols.
Currently, the source of Solayer's AVS
It can be seen that Solayer is not only a restaking platform but also a restaking platform that directly issues LSTs. From a business process perspective, it resembles Lido, which supports native restaking on the Ethereum network.
As mentioned earlier, there are three sources of income surrounding staking activities, and the situation of these three incomes on the Solana network is as follows:
PoS underlying income, Solana pays SOL to maintain network consensus, with an annualized yield of around 6.5%, this income is relatively stable.
Trading order income, the fees that nodes can obtain during the transaction packaging and sorting process, including the priority fee paid by users for expedited transactions, as well as the tips paid by MEV searchers, the total of these two parts is around an annualized 1.5%, but it varies greatly depending on the on-chain activity level.
Staking asset rental income, leasing the staked assets of users to other protocols in need (transaction throughput, protocol security, or others); currently, this part has not yet scaled.
The total returns and MEV income sources of SOL liquid staking (taking JitoSOL as an example)
If we carefully compare the three types of income from Ethereum and Solana, we will find that although SOL's market cap is still only 1/4 of ETH's, the market cap of staked SOL is only about 60% of that of staked ETH, but the staking-related protocols on the Solana chain have a factually larger market and greater potential market than those on the Ethereum chain, because:
1. In terms of PoS underlying income: The network inflation revenue that SOL is willing to pay has been higher than ETH since December 2023, and the gap between the two continues to widen. Whether staking ETH or SOL, this accounts for more than 80% of their yield, which determines the income baseline for all staking-related protocols.
Ethereum and Solana token inflation rewards (i.e., the PoS underlying income of the network) Source: Blockworks
2. In terms of trading order income: Blockworks uses transaction fees and MEV tips to reflect the real economic value (REV) of a chain. This metric can roughly reflect the maximum trading order income that a chain can obtain. We can see that although the REV of both chains fluctuates greatly, Ethereum's REV sharply dropped after the Cancun upgrade, while Solana's REV shows an overall upward trend and has recently successfully surpassed Ethereum.
Solana and Ethereum's REV Source: Blockworks
3. In terms of staking asset rental income, compared to the Ethereum network, which currently only has security income, Solana's swQoS mechanism can bring additional leasing demand for transaction throughput.
4. Additionally, Solana's staking-related protocols can expand their business according to commercial logic; any liquid staking protocol can initiate restaking business, such as Jito; any restaking protocol can also issue LSTs, like Solayer and Fragmetric.
5. More importantly, we currently see no possibility of reversal in the above trend, which means that in the future, the advantages of Solana's staking protocols over Ethereum's staking protocols may continue to expand.
From this perspective, although we still cannot say that Solana's restaking has found PMF, it is clear that Solana's staking and restaking are better businesses than those on Ethereum.
