By Lawrence Lee
After receiving two rounds of financing, including a $12 million round led by Polychain and financing from Binance labs, the restaking project Solayer on the Solana chain has become one of the few bright spots in the DeFi field in the recent market. Its TVL has also continued to rise and has now surpassed Orca, ranking twelfth in TVL on the Solana chain.
Solana project TVL ranking Source: DeFillama
The staking track is a crypto-native sub-track and also the crypto track with the largest TVL. However, its representative tokens such as LDO, EIGEN, and ETHFI have struggled in this cycle. Apart from the Ethereum network on which they are located, are there other reasons?
How competitive are the staking and restaking protocols surrounding user staking behavior in the overall staking ecosystem?
How does Solayer's restaking differ from Eigenlayer's restaking?
Is Solayer's restaking a good business?
This article aims to answer the above questions. We will first discuss the staking and restaking of 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 on the Ethereum network, Lido, the leading restaking project Eigenlayer, and the leading liquid restaking project Etherfi.
The business logic and revenue composition of Lido
The business logic of Lido can be summarized as follows:
Due to Ethereum's insistence on decentralization, the PoS mechanism of ETH softly limits the staking cap of a single node. A single node can only deploy a maximum of 32 ETH to achieve higher capital efficiency, while staking has relatively high hardware, network, and knowledge requirements, making it more challenging for ordinary users to participate in ETH staking. In this context, Lido has greatly promoted the LST concept. Although the liquidity advantage of LST has weakened after the Shapella upgrade opened withdrawals, the advantages of capital efficiency and composability of LST remain solid, forming the basic business logic of LST protocols represented by Lido. In the liquid staking market, Lido's market share is close to 90%, leading the market.
Liquid staking participants and market share Source: Dune
The revenue of the Lido protocol mainly comes from two parts: consensus layer revenue and execution layer revenue. The so-called consensus layer revenue refers to the PoS inflation rewards of the Ethereum network. For the Ethereum network, this expenditure is paid to maintain network consensus and is relatively fixed (orange part in the figure below); while execution layer revenue includes priority fees paid by users and MEV (for analysis of execution layer revenue, readers can refer to previous articles by Mint Ventures), this part of the revenue is not paid by the Ethereum network but is paid (or indirectly paid) by users during transaction execution, and this part varies greatly with the on-chain activity.
Lido protocol APR Source: Dune
The business logic and revenue 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 for more than a year, giving birth to a series of projects with an FDV exceeding $1 billion at launch (besides EIGEN, there are ETHFI, REZ, and PENDLE), as well as many yet-to-launch restaking projects (Babylon, Symbiotic, and the Solayer we will discuss in detail later), indicating the market's enthusiasm (Mint Ventures conducted research on Eigenlayer last year; interested readers can check it out).
Eigenlayer's Restaking, as defined, refers to users who have already staked ETH being able to restake their already staked ETH within Eigenlayer (thus earning additional returns), hence the name 'Re'Staking. Eigenlayer calls the services it provides AVS (Actively Validated Services), which can provide services for various protocols that require security, 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.
Currently, protocols using Eigenlayer AVS Source: Eigenlayer official website
Eigenlayer's business logic is also quite simple; on the supply side, they raise assets from ETH stakers and pay fees; on the demand side, protocols with AVS needs pay to use their services, with Eigenlayer acting as a 'protocol security market' to facilitate this and earn certain fees.
However, reviewing all current restaking projects, the only real revenue remains the tokens (or points) of the associated protocols. We cannot yet determine if restaking has achieved PMF: from the supply side, everyone loves the additional revenue brought by restaking; however, the demand side remains a mystery: will there really be protocols willing to purchase economic security services? If so, how many?
Kyle Samani, founder of Multicoin, questions the restaking business model Source: X
From the perspective of the target users for Eigenlayer's already issued tokens: oracles (LINK, PYTH), bridges (AXL, ZRO), DA (TIA, AVAIL), staking tokens to maintain protocol security is a core use case for their tokens. Choosing to purchase security services from Eigenlayer would greatly undermine the rationale for issuing their tokens. Even Eigenlayer itself, in explaining the EIGEN token, expressed the view in very abstract and obscure language that 'using EIGEN to maintain protocol security' is the primary use case.
The survival path of Liquid restaking (Etherfi)
Eigenlayer supports two methods to participate in restaking: using LST and native restaking. Participating in Eigenlayer Restaking using LST is relatively simple; users deposit ETH into LST protocols to obtain LST, and then deposit LST into Eigenlayer. However, LST pools have long-term caps, and users wishing to participate in restaking during the cap period need to engage in native restaking as follows:
Users first need to complete the entire staking process on the Ethereum network, including fund preparation, client configuration for execution and consensus layers, setting withdrawal credentials, etc.
Users create a contract account named Eigenpod in Eigenlayer.
Users set the withdrawal private key of the 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 engage in native restaking, Eigenlayer does not directly 'touch' the ETH staked by users (Eigenlayer does not issue any LRT). The process of native restaking is a 'complex version' of ETH's native staking, indicating similar funding, hardware, network, and knowledge thresholds.
Thus, projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to solve this problem. The operation 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 basic ETH staking rewards.
At the same time, they follow Eigenlayer's native restaking process, setting the withdrawal private key of the node to the Eigenpod contract account to earn Eigenlayer's restaking rewards (as well as $EIGEN and $ETHFI).
Clearly, the services provided by Etherfi are the optimal solution for users holding ETH who want to earn returns: on one hand, the eETH operation is simple, also provides liquidity, and has an experience almost identical to Lido's stETH; on the other hand, users depositing ETH into Etherfi's eETH pool can earn: around 3% basic ETH staking rewards, potential AVS rewards from Eigenlayer, token incentives (points) from Eigenlayer, and token incentives (points) from Etherfi.
eETH accounted for 90% of Etherfi's TVL, contributing over $6 billion in TVL at its peak, and a maximum FDV of $8 billion, making Etherfi the fourth-largest staking entity within just six months.
Etherfi TVL distribution Source: Dune
Staking volume ranking Source: Dune
The long-term business logic of LRT protocols is to help users participate in both staking and restaking in a simpler and easier manner, thereby obtaining higher returns. Since they do not generate any returns (besides their own tokens), the overall business logic of LRT protocols is more similar to a specific yield aggregator for ETH. If we analyze it closely, we will find that its business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido were willing to 'emulate' its stETH as eETH, Etherfi would struggle to match its long-term brand advantages, security endorsements, and liquidity advantages.
Eigenlayer cannot provide liquid staking services. If Eigenlayer were willing to directly accept users' ETH for staking, it would significantly undermine Etherfi's value proposition.
From a purely business logic perspective, as the leading liquid staking provider, Lido providing liquid restaking services offers users broader revenue sources, while Eigenlayer directly absorbs user funds to facilitate staking & restaking, both are completely feasible. So why doesn’t Lido do liquid restaking, and why doesn’t Eigenlayer do liquid staking?
The author believes that this is determined by the special circumstances of Ethereum. In May 2023, shortly after Eigenlayer completed a new round of $50 million in funding, generating many discussions in the market, Vitalik specifically wrote an article (Don't overload Ethereum’s consensus) detailing how he believes Ethereum's consensus should be reused (i.e., '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 have continually constrained it. Vitalik has also personally written several times to discuss the centralization issue of staking, which has forced Lido to make 'aligning with Ethereum' a business priority, gradually shutting down operations on other chains besides Ethereum, including Solana. Its de facto leader Hasu confirmed in a May article the possibility of abandoning its own restaking business, limiting Lido's operations to staking and instead investing in and supporting the restaking protocol Symbiotic, as well as forming the Lido Alliance to respond to competition from LRT protocols like Eigenlayer and Etherfi for its market share.
Reaffirm that stETH should stay an LST, not become an LRT.
Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.
Lido's stance on restaking-related matters Source
In terms of Eigenlayer, Ethereum Foundation researchers Justin Drake and Dankrad Feist were hired as consultants early on, and Dankrad Feist stated that his main purpose for joining was to align 'eigenlayer with Ethereum,' which may also be the reason 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' towards Lido and Eigenlayer.
Analysis of Ethereum's staking ecosystem protocols
Combining Lido and Eigenlayer, we can see that there are three long-term revenue sources surrounding staking behavior on the current PoS chains, excluding token incentives from related parties:
PoS underlying revenue: The native token rewards paid by the PoS network to maintain network consensus. The yield from this part mainly depends on the chain's inflation plan. For example, Ethereum's inflation plan is tied to the staking ratio; the higher the staking ratio, the slower the inflation rate.
Transaction ordering revenue: The fees that nodes can obtain during the transaction packaging process, including the priority fees paid by users and the MEV earnings obtained during transaction packaging. This part's yield mainly depends on the activity level of the chain.
Staking asset leasing revenue: Lending the user's staked assets to other protocols that have needs, thus earning fees paid by these protocols. This part of the revenue depends on how many protocols with AVS needs are willing to pay fees to obtain protocol security.
Currently, there are three types of protocols surrounding staking behavior on the Ethereum network:
Liquid staking protocols represented by Lido and Rocket Pool. They can only obtain the first two types of revenue mentioned above. Of course, users can take their LST to participate in restaking, but as protocols, they can only take a cut from the aforementioned first two.
Restaking protocols represented by Eigenlayer and Symbiotic. This type of protocol can only obtain the third type of revenue mentioned above.
Liquid restaking protocols represented by Etherfi and Puffer. Theoretically, they can obtain all three types of revenues mentioned above, but they are more like 'aggregated LSTs of restaking revenue.'
Currently, the ETH PoS underlying revenue is about 2.8% annually, which gradually decreases as the staking ratio of ETH increases.
Transaction ordering revenue has significantly decreased with the launch of EIP-4844, recently hovering around 0.5%.
The revenue base from staking asset leasing is still small and cannot be annualized; it relies more on the token incentives from EIGEN and associated LRT protocols to become substantial.
For LST protocols, their revenue base is the staking amount * staking yield. The staking amount of ETH has approached 30%. Although this value is still significantly lower than other PoS public chains, the Ethereum Foundation does not wish for too much ETH to flow into staking from the perspective of decentralization and economic bandwidth (see Vitalik's recent blog post, where the Ethereum Foundation discussed whether to set a cap on ETH staking at 25% of the total supply); the staking yield has been continuously declining, from stabilizing at around 6% at the end of 2022 to often achieving around 10% short-term APR, down to only 3% now, with no reason for recovery in the foreseeable future.
For the aforementioned protocol tokens, besides being constrained by the slump of ETH itself:
The market ceiling for LSTs on the Ethereum network has gradually become visible, which might also explain the poor price performance of governance tokens for LST protocols like LDO and RPL.
For EIGEN, other PoS chains, including the BTC chain's restaking protocols, are continuously emerging, basically limiting Eigenlayer's business within the Ethereum ecosystem, further reducing the potential upper limit of its AVS market, which is already quite unclear.
The emergence of the LRT protocol, which was not anticipated (the FDV of ETHFI at its peak exceeded $8 billion, surpassing the historical highest FDV of LDO and EIGEN), further 'diluted' the value of the above two in the staking ecosystem.
For ETHFI and REZ, apart from the aforementioned factors, the excessively high initial valuations brought about by the market boom period are more significant factors affecting their token prices.
Staking and restaking on Solana
The operational mechanism of liquid staking protocols on the Solana network, represented by Jito, is fundamentally no different from that of the Ethereum network. However, Solayer's restaking differs 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 swQoS mechanism is designed 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 the swQoS is enabled, block producers determine the priority of transactions based on the amount staked by stakers. A staker holding x% of the entire network's stake can submit up to x% of the transactions (for details on the swQoS mechanism and its profound impact on Solana, readers can refer to Helius's article). After swQoS was enabled, the transaction success rate of the Solana network rapidly increased.
Sources of successful and failed TPS on the Solana network: Blockworks
swQoS prioritizes the rights of larger stakers by 'overwhelming' transactions from smaller stakers, thus avoiding malicious attacks on the system when network resources are limited. To some extent, 'the more staked, the more network privileges' aligns with the logic of PoS public chains: the more native tokens staked, the more contribution to the stability of the chain and the native tokens, thus deserving more privileges. Of course, the centralization issue of this mechanism is also very apparent: larger stakers can rightfully gain more priority in transactions, leading to more stakers, thereby reinforcing the advantages of top stakers and further leaning towards oligopoly or even monopoly. This seems to contradict the decentralization advocated by blockchain; however, this is not the focus of this article. From Solana's consistent development trajectory, we can clearly see Solana's pragmatic attitude of 'performance first' on issues of decentralization.
Under the backdrop of swQoS, the target users for Solayer's restaking are not oracles or bridges, but protocols that require transaction throughput/reliability, typically DEXs. Therefore, Solayer refers to the AVS services provided by Eigenlayer as exogenous AVS (Exogenous AVS), because these systems usually reside outside the Ethereum main chain. Its own services are termed endogenous AVS (Endogenous AVS), as their service targets are located within the Solana main chain.
The differences between Solayer and Eigenlayer
It can be seen that although both involve leasing staked assets to other protocols with demand for restaking, Solayer's endogenous AVS and Eigenlayer's exogenous AVS provide different core services. Solayer's endogenous AVS is essentially a 'transaction throughput leasing platform,' with its demand users being platforms (or their users) that require transaction throughput, whereas Eigenlayer is a 'protocol security leasing platform.' The core support for its endogenous AVS is Solana's swQoS mechanism. As Solayer stated 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 reconstructed restaking in the Solana ecosystem. We aim to reuse stake as a way of securing network bandwidth for applications. Our goal is to become the de facto infrastructure for stake-weighted quality of service and ultimately a core primitive of the Solana blockchain/consensus.
Of course, if there are other protocols on the Solana chain that have demands for staked assets, such as protocol security needs, Solayer can also lend its SOL to these protocols. In fact, by definition, any lending/reuse of staked assets can be referred to as restaking, without being limited to just security needs. Due to the existence of Solana's swQoS mechanism, the scope of restaking business on the Solana chain is broader than that on the Ethereum chain, and from Solana's recent active on-chain activity, the demand for transaction throughput appears to be more rigid than that 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, which issues sSOL to users.
Solayer stakes the received SOL to earn basic staking rewards.
At the same time, users can delegate sSOL to protocols that require transaction throughput, thus earning fees paid by these protocols.
Currently, the sources of AVS for Solayer
It can be seen that Solayer is not just a restaking platform; it is also a restaking platform that directly issues LSTs, resembling Lido, which supports native restaking on the Ethereum network.
As mentioned earlier, there are three revenue sources surrounding staking behavior, and the situation of these three revenues on the Solana network is as follows:
PoS underlying revenue: SOL paid by Solana to maintain network consensus. This part of the annualized yield is around 6.5%, and this revenue is relatively stable.
Transaction ordering revenue: The fees that nodes can obtain during the transaction packaging process, including priority fees paid by users to expedite transactions, and tips paid by MEV searchers. Together, these two parts amount to an annualized yield of around 1.5%, but this varies significantly, depending on the activity level on-chain.
Staking asset leasing revenue: Lending users' staked assets to other protocols with demands (transaction throughput, protocol security, or others). Currently, this part is not yet significant.
Total revenue of SOL liquid staking (using JitoSOL as an example) and MEV revenue sources
If we closely compare the three revenues mentioned above between Ethereum and Solana, we will find that although SOL's market value is still only 1/4 of ETH's, and the market value of staked SOL is only about 60% of that of staked ETH, the staking-related protocols on the Solana chain have, in fact, a larger market and greater potential market than those on the Ethereum chain because:
1. In terms of PoS underlying revenue: the network inflation rewards that SOL is willing to pay have already surpassed ETH since December 2023, and the gap between the two is continuing to widen. Whether it is ETH or SOL staking, this accounts for over 80% of their yield, determining the income baseline for all staking-related protocols.
The token inflation rewards for Ethereum and Solana (i.e., the underlying PoS revenue of the network) sources: Blockworks
2. In terms of transaction ordering revenue: Blockworks uses transaction fees and MEV tips to reflect the real economic value (REV) of a chain. This metric approximates the maximum transaction ordering revenue that a chain can achieve. We can see that, although the REV fluctuations of both chains are significant, Ethereum's REV sharply declined after the Cancun upgrade, while Solana's REV has shown an overall upward trend and recently successfully surpassed Ethereum.
Sources of REV for Solana and Ethereum: Blockworks
In terms of staking asset leasing revenue, compared to the Ethereum network where currently only security revenue exists, Solana's swQoS mechanism can bring additional leasing demand for transaction throughput.
Moreover, Solana's staking-related protocols can expand their business according to their business logic; any liquid staking protocol can engage in restaking, such as Jito; any restaking protocol can also issue LSTs, such as Solayer and Fragmetric.
More importantly, we currently see no possibility of reversing the above trends. This means that the advantages of Solana's staking protocols relative to Ethereum's staking protocols may continue to expand.
From this perspective, even though 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.
