When people first get into cryptocurrencies, they usually buy Bitcoin or Ethereum (the largest cryptocurrencies with market caps of $1.4 trillion and $247 billion, respectively) to get some exposure. However, when they delve deeper into the cryptocurrency ecosystem and are exposed to DeFi, they quickly realize that there are many other ways to earn yields besides holding crypto assets, which are the lifeblood of the crypto economy.
Those early participants stand to reap substantial returns and drive the spread of cross-chain liquidity, arguably the spice of cryptocurrency.
While current yield-earning options are already extremely diverse, there are increasingly more creative new ways for users and investors to earn additional returns.
1. Current Staking Options
To stake native ETH and earn yield, one must hold 32 ETH and run their own node. At current prices, this requires the holder to have $112,000, so the cost is relatively high. In addition, more accessible yield options have emerged early on, allowing anyone to stake any amount of ETH in the following ways:
1) Centralized trading platforms (such as BN, Coinbase)
2) Staking pools (such as Staked.us, Figment); or
3) Liquidity staking protocols (such as Lido, Rocketpool, Frax)
With CEX, you can stake your ETH directly to BN or Coinbase, and they will get rewards from it. This makes staking very easy for beginners to start earning income, but user assets are exposed to centralization and exchange platform risks - if the exchange platform goes down, then your ETH will also go down. If they choose to withhold assets, ordinary people can't do anything.
With a staking pool, you stake your ETH to a node operator who handles the technical backend and receives fees in return. While still largely centralized, it does offer better security.
Using the Liquid Staking protocol, ETH can be staked into the Lido or Rocketpool smart contracts. They then aggregate ETH and launch validators, earning yields from them and passing them on to users at a small fee. Unlike the previous options, when ETH is deposited into their contracts, users receive a Liquid Staking Token (LST) in return. This token represents a claim to their ETH and its staking yield.
This liquid pledge token can then be used for other DeFi activities, such as using it as collateral to borrow in protocols such as Aave. This enables users to improve their capital efficiency and earn yield and returns from a variety of sources. Liquidity staking is a key innovation that has become a core building block (or "primitive") of DeFi, currently accounting for 30% of Eth staking, making it the most popular form of staking, surpassing Eth staked on centralized trading platforms Coinbase and BN.
In the years since the advent of LST, it has naturally evolved to more complex ways of earning yield and leveraging the concept of staking. This is where the concept of Restaking comes in.
2、Restaking & OwnLayer
Restaking allows users to re-stake their staked ETH or LST into new pools that provide additional yields. These pools protect other protocols, projects, and networks (such as rollups, data availability layers, and oracles) and are provided with additional yields by them. This is an evolution of current staking.
By re-staking, ETH holders can now earn more by supporting countless emerging projects, products, and protocols. The current core project of Restaking is EigenLayer, an infrastructure protocol that drives this novel innovation and allows ETH's proof-of-stake network to be flexibly used by other projects and protocols that want to launch quickly and securely.
EigenLayer helps solve this problem by taking a lot of the value that secures the Ethereum network and applying some of that value to these new networks, but for a fee (in the form of additional revenue paid by the new protocol).
What does the ETH security number look like? Conceptually, staking takes some of the security of the underlying ETH and applies it to another protocol, helping it bootstrap and "inherit" the security of Ethereum - a $427 billion network with 930,000 validators worldwide, 25% of which are staked - an incredibly decentralized and economically secure system. According to Nuzzi's February 2024 paper, a Waters & Andrade attack on Ethereum would cost billions of dollars and be relatively insurmountable, making it "secure."
There are four key players in the re-staking ecosystem:
1) Restaking Stakers/Users - Those who wish to stake their ETH or LST to earn additional yield.
2) Flow
Liquidity Restaking Providers - User interfaces that abstract away the complexity of managing nodes and choosing between different protocols for security. Users deposit ETH into them and let liquidity restaking providers manage who and what to allocate.
3) Operators - validators who ensure the security of tasks on the new protocol.
4) Active Validation Services - Protocols secured by re-staking.
In the years since the advent of LST, it has naturally evolved to more complex ways of earning yield and leveraging the concept of staking. This is where the concept of Restaking comes in.
2、Restaking & OwnLayer
Restaking allows users to re-stake their staked ETH or LST into new pools that provide additional yields. These pools protect other protocols, projects, and networks (such as rollups, data availability layers, and oracles) and are provided with additional yields by them. This is an evolution of current staking.
By re-staking, ETH holders can now earn more by supporting countless emerging projects, products, and protocols. The current core project of Restaking is EigenLayer, an infrastructure protocol that drives this novel innovation and allows ETH's proof-of-stake network to be flexibly used by other projects and protocols that want to launch quickly and securely.
EigenLayer helps solve this problem by taking a lot of the value that secures the Ethereum network and applying some of that value to these new networks, but for a fee (in the form of additional revenue paid by the new protocol).
What does the ETH security number look like? Conceptually, staking takes some of the security of the underlying ETH and applies it to another protocol, helping it bootstrap and "inherit" the security of Ethereum - a $427 billion network with 930,000 validators worldwide, 25% of which are staked - an incredibly decentralized and economically secure system. According to Nuzzi's February 2024 paper, a Waters & Andrade attack on Ethereum would cost billions of dollars and be relatively insurmountable, making it "secure."
There are four key players in the re-staking ecosystem:
1) Restaking Stakers/Users - Those who wish to stake their ETH or LST to earn additional yield.
2) Flow
Liquidity Restaking Providers - User interfaces that abstract away the complexity of managing nodes and choosing between different protocols for security. Users deposit ETH into them and let liquidity restaking providers manage who and what to allocate.
3) Operators - validators who ensure the security of tasks on the new protocol.
4) Active Validation Services - Protocols secured by re-staking.
The whole process is as follows:
3. Current Restaking Ecosystem
EigenLayer is relatively new, so where are we currently in terms of the Restaking setup?
Active Validation Service (AVS): AVS is any system that wants to use re-staked ETH to launch its network. It can be a rolling upgrade, data availability layer, oracle, co-processor, or even a simple encrypted memory pool. Relying on Restaking ETH for network verification and security can avoid them having to issue their own tokens to accomplish this task.
Currently, there are about 10 AVSs scheduled to launch in the coming months before becoming permissionless. These AVSs are distributed in rolling upgrade infrastructure (AltLayer, Lagrange), serializers (Espresso), other chains (Ethos, Near for Cosmos), L2/Rollup aggregators (Omni, Hyperlane), and other areas (Silence for privacy, Aethos for compliance). The full list can be found here.
Operators: Operators provide security for AVS (a unit of work that AVS needs to complete, which may include verifying transactions and completing blocks, providing data availability guarantees, guaranteeing coprocessor outputs, or verifying rolling upgrade status, etc.) on EigenLayer by staking their ETH. They register with EigenLayer, enabling ETH holders to delegate their staked assets, and then choose to provide a range of services to AVS to enhance the overall security and functionality of their network. The most active operators are Figment, P2P, Chorus One, and Kiln.
Liquidity Restaking Providers: Cryptocurrency wouldn’t be unique without another innovation to unlock liquidity — the introduction of “Liquid Restaking Tokens” or LRTs. These tokens are an improvement on Liquid Staking Tokens (LSTs). Just like users stake ETH into LST protocols like Lido and use the derivatives they earn (stETH) to participate in more DeFi activities, LRT users can now stake their ETH or LST into a Liquid Restaking protocol and use the derivative tokens they earn to participate in more DeFi activities.
4. Why is the emergence of Restaking groundbreaking and what are the main concerns?
1) Main positive factors:
Inheriting the security of Ethereum
It will take years to reach critical mass for Ethereum. To put it simply in numbers, the estimated cost of a 34% attack on the Ethereum network in early 2024 (when the price of Ethereum was around $2,300) was approximately $34.39 billion, and the attacker would need until June 14, 2024 to successfully gain the control they need over the network. Inheriting this decentralization and thorough security at even a fraction of the cost and effort is an obvious choice. This makes Ethereum the foundational asset for programmable trust.
Leveraging existing infrastructure will drive innovation
A significant concern and cost of any middleware or infrastructure solution is ensuring a decentralized validator set. This is undoubtedly a significant undertaking. With EigenLayer, these issues can be abstracted away, allowing the focus to be on building the best technology.
LRTs significantly facilitate retail adoption - LRTs provide seamless integration between re-staking and DeFi, allowing users to deposit Ether or LSTs without having to worry about which operators it makes sense to partner with and which AVSs it makes sense to support. This is evidenced by their success in attracting billions in total value locked (TVL).
2) Notes:
Huge Leverage Effect or “Restaking”
Operators/re-stakers will stake on multiple AVS without any mechanism to stop them from doing so. In fact, it is in their financial interest to do so. We must understand the ripple effects this could cause. In short, if they are penalized somewhere, then ether will be lost and security will be reduced elsewhere, which could have a ripple effect and potentially cause problems. One solution here is to attribute security, but this means that every dollar that is staked only secures one AVS, which brings better security but lower returns.
Risks of using native ETH vs. re-staking with LRT - If you re-stake LST with LRT (now there are more options) and then stake it with AVS, you will have 3 layers of smart contract risk for each AVS you restake with it. Finally, EigenLayer itself is also only staked with
Smart contract system on Ethereum.
Another recent development is the collaboration between LRT providers and AVS to guarantee a specific level of security. For example, EtherFi pledged $500 million in Ethereum security to Lagrange and Aethos each, and $600 million to Omni Network. As competition in this space intensifies, expect more such deals to emerge, but it is important to understand that absolute digital security is more difficult to guarantee because TVL is entirely dependent on the USD price of Ethereum, and users have no lock-up period and can unstake at any time, which makes absolute numbers even more unreliable.
Here we would like to mention a (definitely not comprehensive) list of some innovations and missing pieces that we think will be very interesting when EigenLayer hits mainnet and becomes permissionless.
In Restaking, we are excited about innovation and some of the unfinished business... Restaking is in its infancy and there are several untapped aspects that will help realize its full potential by simplifying it for various stakeholders and reducing user and liquidity friction.
3) Key innovations:
A、MEV
In addition to inheriting Ethereum’s trust in decentralized security and economic security, you also inherit Ethereum’s inclusive trust, which means that these operators (validators) are the validators (aka proposers) of Ethereum, and there are a lot of possibilities for innovation here (and some necessary risk control).
B. Decentralized AI
Although decentralized AI is still in the building stages, the potential opportunities that can be enabled by using EigenLayer are fascinating. This is not surprising, as the founders of Eigenlayer have a strong background in AI research. Recently, Ritual announced a partnership with EigenLayer, which will provide Ritual's AI operations with a higher degree of decentralization and security than it could have achieved if it had launched its own network. But what else can be achieved with AI and EigenLayer?
C. Zero-knowledge proof verification
Ethereum is a very good general purpose virtual machine. You can build a zero-knowledge validator on top of it, but each operation has a cost, or you could potentially spam the system. The cost of each zero-knowledge proof depends on SNARKs which are usually cheaper than STARKs, and Mina's IPA commitment scheme.
D. Optimize the payment between AVS and operators
As AVS become more permissionless and numerous, it will be critical to understand how much they are paying operators to ensure the security of their networks. Are they paying too little, too much, or just right? This requires serious risk and security modeling, understanding the cost of corrupting the protocol, the amount an attacker could potentially profit, and ensuring the former is always higher than the latter. Hydrogen Labs is trying to solve this problem by building an economically secure oracle that brings the required data on-chain and dynamically adjusts the fees paid to operators to ensure they are within a safe range.
E. Easy integration between operators and AVS
Node operators want to quickly integrate with the best AVS to ensure the most optimized returns. However, each AVS will have a different CLI to manage and a different integration path. What if there was a single interface that allowed easy integration between operators and AVS? Although it is still early days, the team at Nethermind is working hard to make this happen and we clearly see this will further create a frictionless experience.
F、EigenCerts
Although still in development and tied to the attributed security model described above, EigenCerts was built for AVS and allows signatures to be aggregated and published to mainnet, detailing that every dollar re-staked on AVS is attributed to a single operator.
5 Conclusion
EigenLayer brings a transformative future to Web3, providing a scalable, secure foundation for Ethereum innovation and beyond. While there are some risks, the high returns make it more tempting to take such risks, but we hope that the key stakeholders here take risk management seriously and take proactive approaches to mitigate these concerns.