Author: Dilip Kumar Patairya, CoinTelegraph; Translated by: Deng Tong, Golden Finance

In proof-of-stake (PoS) blockchains such as Ethereum, the security of the network is synchronized with the number of active validators, the percentage of circulating tokens staked, and the distribution of those tokens among active validators. The re-staking mechanism incentivizes these staked tokens (which would otherwise be inactive) to improve the overall functionality of the blockchain.

This article discusses what re-staking is, types of re-staking, how liquidity re-staking works, the collective safety of using staked Ethereum, and concerns about re-staking.

What is re-pledge?

Restaking presents a novel concept in cryptocurrency security, enabling stakeholders to use their Ethereum multiple times in the consensus layer. It allows stakers to increase their rewards while enhancing the security of the staking network by facilitating the deployment of liquid staked tokens across validators of multiple networks.

Staked tokens usually sit idle on the PoS blockchain. Restaking activates staked tokens, providing higher staking rewards to restakers. Whether someone stakes Ethereum directly or uses Liquid Staking Tokens (LST), they can use restaking protocols such as EigenLayer to receive additional rewards for staked tokens.

The number of validators participating in the PoS consensus mechanism on the Ethereum network makes it stand out. However, the staked ETH lies dormant. With the help of the Liquid Staking Protocol, the staked ETH can be converted into fungible tokens, allowing stakers to use it in decentralized finance (DeFi) applications. The mechanism reserves a minimum staking cap of 32 ETH, allowing users with smaller holdings to receive staking rewards.

Re-pledge type

Restaking can be broadly divided into native restaking and liquidity restaking. Native restaking is available to users running Ethereum validator nodes. It functions through a set of smart contracts that oversee the management of assets within the validator node.

Validators can benefit from the cryptoeconomic security provided by the re-staking protocol and can use it to stake their tokens. To participate in the re-staking program, validators need to install and execute additional node software for the re-staking module.

Liquidity re-staking involves users leveraging Liquidity Staking Tokens (LST). During this process, when stakers stake their assets to validators, the validators grant them tokens that are staked on their behalf. Stakers can re-stake LST to earn additional rewards.

How Liquidity Re-Pledge Works

Let’s use the example of EigenLayer to understand how liquidity reinjection works. With over $250M in total value locked (TVL), EigenLayer effectively acts as a bridge between Ethereum and other blockchain applications, providing them with pooled security and markets.

Re-staking through smart contracts

EigenLayer acts as a re-staking infrastructure. Anyone who has staked ETH directly or through a liquid staking solution can participate in EigenLayer's smart contracts. This enables them to re-hold assets and contribute to the security of various platforms, effectively creating a collective security mechanism powered by Ethereum.

The process of re-staking on EigenLayer

This is the process of re-collateralization on EigenLayer.

Step 1: Click "Restake" on the right side of the top menu on the EigenLayer website.

The EigenLayer application will appear in the next tab where the user can complete the relabeling process.

Step 2: Click the “Connect Wallet” button in the top middle. Users can choose between MetaMask, Coinbase Wallet, WalletConnect, and OKX Wallet.

In the top right corner, users can see an icon with three horizontal lines. Through it, users can access the support documents, blog, Discord, and forum sections.

Step 3: In the Liquidity Reinjection section, click on the selected LST.

Let’s say the user selects Rocket Pool Ether. They can make a deposit or unstake on the window that appears. As of the time of writing, deposits are paused.

Using the collective security of staked ETH

Typically, launching a new protocol involves establishing a new network of trust for security purposes, which includes building a network of validators and introducing a native cryptocurrency.

Restaking changes the game by allowing these protocols, or Active Validator Sets (AVS), to leverage the collective security of Ethereum stakers, making development more efficient. These AVS, also known as EigenLayer modules, range from sidechains and bridges to oracle networks, guardian networks, and data availability layers.

In the past, an attacker could have compromised the security of one of these AVSs, causing damage. However, under EigenLayer’s collective security model, any such attempt would require challenging the entire collective stake, which is worth billions of dollars. However, participating in EigenLayer’s smart contracts carries additional risks, including the potential for slashing conditions on users’ staked ETH to increase.

For those who stake Ethereum, this model provides the opportunity to earn higher returns by earning various AVS with re-staked ETH, without having to use other tokens. EigenLayer facilitates this through a market where AVS can attract support from Ethereum validators, who can then choose which modules to support based on the incentives provided.

Concerns about re-staking

A common concern about re-staking is that it repeatedly distributes funds to similar validators, increasing returns and risks. Developers warn that excessive leverage could lead to project instability. They believe that if the blockchain itself embeds more financial risks, it will only destabilize the entire ecosystem. Ethereum co-founder Vitalik Buterin warned that the re-staking protocol could expose the blockchain to significant systemic risks.

The rapid growth of re-staking protocols means that the associated risks are also escalating and require immediate attention. A large number of failures could undermine the security of the underlying blockchain. In 2022, the exploitation of Ankr, a re-staking protocol built on the BNB network, should serve as a preview of possible disasters that could happen to blockchain networks.

However, given the risks that re-staking may pose, it can be deployed in low-risk misconduct scenarios such as double-signing without compromising Ethereum’s decentralized norms.

The emergence of staking as a component of DeFi

As restaking continues to grow, it is likely to become a key DeFi component, attracting more liquidity and user participation in staking Ethereum, whose staking ratio has historically lagged other PoS networks. Through the synergy of LST and re-staking, Ethereum’s staking ecosystem could see significant growth.

The possible risks to Layer 1 blockchains due to re-staking suggest that a cautious approach should be taken to the development and deployment of staking services. Resolving potential conflicts after regaining importance will help prevent negative impacts. Considering both the long-term and short-term impacts of re-staking on the Ethereum ecosystem could result in a win-win situation for every staker.