Original author: Lawrence Lee
Reprinted: Daisy, Mars Finance
After successfully obtaining two rounds of financing, including $12 million led by Polychain and financing from Binance Labs, the restaking project Solayer on the Solana chain has become one of the few highlights in the DeFi field recently, with its TVL continuously rising and currently exceeding Orca, ranking twelfth in TVL on the Solana chain.
Solana Project TVL Rankings Source: DeFillama
The staking track, as a crypto-native segment, is also the largest crypto track in terms of TVL. However, its representative tokens like LDO, EIGEN, ETHFI have struggled significantly in this cycle. Aside from being on the Ethereum network, is there another reason?
How competitive are the staking and restaking protocols surrounding user staking behavior in the entire staking ecosystem?
How do Solayer's restaking and Eigenlayer's restaking differ?
Is Solayer's restaking a good business?
This article aims to 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 primarily 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.
Lido's business logic and income composition
For Lido's business logic, we summarize it as follows:
Due to Ethereum's insistence on decentralization, the PoS mechanism has softly limited the staking cap of a single node, allowing only the deployment of a maximum of 32 ETH for higher capital efficiency, while staking has relatively high hardware, network, and knowledge requirements, making it difficult for ordinary users to participate in ETH staking. In this context, Lido has promoted the concept of LST. Although the liquidity advantage of LST has been 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. In the liquid staking projects, Lido's market share is close to 90%, leading the market.
Liquid staking participants and market share Source: Dune
Lido's revenue mainly comes from two parts: consensus layer income and execution layer income. The so-called consensus layer income refers to the PoS issuance rewards of the Ethereum network. For the Ethereum network, this expenditure is to pay for maintaining network consensus, hence it is called consensus layer income, which is relatively fixed (the orange part in the chart below); while execution layer income includes user-paid priority fees and MEV (for more analysis on execution layer income, readers can refer to previous Mint Ventures articles), this part of income is not paid by the Ethereum network but is paid (or indirectly paid) by users during transaction execution. This part varies with on-chain activity and is subject to significant fluctuations.
Lido Protocol APR Source: Dune
Eigenlayer's business logic and income composition
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, giving rise to a series of projects that launched with an FDV exceeding 1 billion USD (besides EIGEN, there are ETHFI, REZ, and PENDLE), as well as many yet-to-launch restaking projects (Babylon, Symbiotic, and Solayer, which we will focus on in the following text), reflecting the market's heat (Mint Ventures previously conducted research on Eigenlayer, interested readers can check it out).
Restaking of Eigenlayer, as defined, refers to users who have already staked ETH and can re-stake their previously staked ETH in Eigenlayer (thereby obtaining additional returns), hence the name 'Re'Staking. Eigenlayer names its offered services 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 that uses Eigenlayer AVS services.
Protocols currently 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' that facilitates the match and earns a certain fee.
However, looking at all current restaking projects, the only real income remains the tokens (or points) of related protocols; we cannot yet determine whether restaking has achieved PMF: from the supply side, everyone likes the additional income brought by restaking; but the demand side remains a mystery: will any protocols really purchase protocol economic security services? If so, how many?
Kyle Samani, founder of Multicoin, questions the restaking business model Source: X
From the target users of Eigenlayer who have already issued tokens: oracles (LINK, PYTH), bridges (AXL, ZRO), DA (TIA, AVAIL), staking tokens to maintain protocol security is a core use case of their tokens, choosing to purchase security services from Eigenlayer would greatly undermine the rationality of issuing their tokens. Even Eigenlayer itself, when explaining the EIGEN token, expressed in very abstract and obscure terms 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 relatively simple; users deposit ETH in the LST protocol to obtain LST and then deposit LST into Eigenlayer. However, LST pools have long-term caps, and users who wish to participate in restaking during capped periods need to conduct native restaking as follows:
Users first need to complete the entire staking process on the Ethereum network by themselves, including fund preparation, execution layer and consensus layer client configuration, and setting withdrawal credentials.
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 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 also does not issue any LRT). The native restaking process is a 'complex version' of ETH's native staking, meaning similar capital, hardware, network, and knowledge thresholds.
Thus, projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to address this issue, and the operating 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 ETH staking rewards;
At the same time, they set the withdrawal private key of the node according to Eigenlayer's native restaking process to the Eigenpod contract account to obtain Eigenlayer's restaking rewards (and $EIGEN, $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 and also has liquidity, providing an experience similar to Lido's stETH; on the other hand, by depositing ETH into Etherfi's eETH pool, users can earn: around 3% basic ETH staking returns, possible AVS returns from Eigenlayer, token incentives (points) from Eigenlayer, and token incentives (points) from Etherfi.
eETH occupies 90% of Etherfi's TVL, contributing over 6 billion USD of TVL at its peak, and a maximum FDV of 8 billion USD, making Etherfi the fourth-largest staking entity within just six months.
Etherfi TVL Distribution Source: Dune
Staking Volume Rankings Source: Dune
The long-term business logic of the LRT protocol is to help users participate in both staking and restaking more simply and easily, thereby obtaining higher returns. Since it does not inherently generate any revenue (aside from its own tokens), the overall business logic of the LRT protocol is more similar to a specific yield aggregator for ETH. If we analyze closely, we will find that its business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido is willing to emulate eETH with its stETH, Etherfi will find it hard to match its long-standing brand advantage, security backing, and liquidity advantage.
Eigenlayer cannot provide liquid staking services. If Eigenlayer is willing to directly absorb users' ETH for staking, it will also significantly undermine Etherfi's value proposition.
From a purely commercial logic perspective, Lido, as a leader in liquid staking, provides users with liquid restaking services to offer a broader range of income sources, while Eigenlayer directly absorbs user funds for easier staking & restaking, both of which 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 situation of Ethereum. In May 2023, when 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) to detail his views on how Ethereum's consensus should be reused (i.e., 'how should we restake').
In the case of Lido, due to its long-term market share of around 30% of Ethereum staking, there are constant internal voices within the Ethereum Foundation restraining it. Vitalik has also repeatedly written about the issue of staking centralization, which has forced Lido to align its business with Ethereum, progressively shutting down businesses on all other chains aside from Ethereum, including Solana. The de facto leader Hasu confirmed in May this year 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 establishing the Lido Alliance to respond to the competition from LRT protocols like Eigenlayer and Etherfi for 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 Eigenlayer, researcher Justin Drake and Dankrad Feist from the Ethereum Foundation were hired as consultants early on. Dankrad Feist stated that his main purpose for joining was to make 'eigenlayer align with Ethereum,' which may also be why Eigenlayer's native restaking process significantly contradicts user experience.
In a sense, Etherfi's market space is derived from the 'distrust' of the Ethereum Foundation towards Lido and Eigenlayer.
Analysis of Ethereum staking ecosystem protocols
By combining Lido and Eigenlayer, we can see that currently on PoS chains, excluding the token incentives from related parties, there are three long-term sources of income surrounding staking behavior:
PoS underlying income, the native tokens paid by PoS networks to maintain network consensus. The yield of this part mainly depends on the chain's inflation plan, such as Ethereum's inflation plan being tied to the staking ratio; the higher the staking ratio, the slower the inflation rate.
Transaction sorting income, the fees that nodes can obtain during the transaction packaging and sorting process, including user-provided priority fees, as well as MEV income obtained during transaction packaging and sorting. The yield of this part mainly depends on the chain's activity level.
Rental income from staked assets, lending the assets staked by users to other protocols with demand to obtain the 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 behavior:
Liquid staking protocols represented by Lido and Rocket Pool. They can only obtain the first two types of returns mentioned above. Of course, users can hold their LSTs to participate in Restaking, but as protocols, they can only take a cut from the aforementioned 1 and 2.
Restaking protocols represented by Eigenlayer and Symbiotic. These protocols can only obtain the third type of return mentioned above.
Liquid restaking protocols represented by Etherfi and Puffer. They can theoretically obtain all three types of returns mentioned above, but they are more like 'aggregators of restaking returns for LST.'
Currently, the ETH PoS underlying income is around 2.8% annualized, gradually decreasing as the ETH staking ratio increases;
Transaction sorting income has significantly decreased with the launch of EIP-4844, recently around 0.5%.
The base yield from renting out staked assets is still small and cannot be annualized, relying more on EIGEN and the token incentives of related LRT protocols to make this part of the incentive substantial.
For LST protocols, their revenue base is staking volume * staking yield. The staking volume of ETH is already close to 30%. Although this figure is still significantly lower than that of other PoS public chains, from the perspective of the Ethereum Foundation regarding decentralization and economic bandwidth, they do not wish too much ETH to flow into staking (refer to Vitalik's recent blog post, where the Ethereum Foundation previously discussed whether to set the ETH staking cap at 25% of the total); while the staking yield has been continuously declining, stabilizing at 6% since the end of 2022, often achieving around 10% short-term APR, and now reduced to only 3%, with no reason for recovery in the foreseeable future.
For the above-mentioned protocol tokens, in addition to being subject to the decline of ETH itself:
The market ceiling for LST in the Ethereum network has gradually become visible, which may also explain the poor price 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 constantly emerging, limiting Eigenlayer's business essentially to the Ethereum ecosystem and further reducing the potential upper limit of its already ambiguous AVS market.
The unexpected emergence of the LRT protocol (with ETHFI peak FDV exceeding 8 billion, surpassing the historical highs of LDO and EIGEN) further 'diluted' the value of the above two in the staking ecosystem;
For ETHFI and REZ, aside from the factors mentioned above, the excessively high initial valuations brought by launching during the market frenzy period are more important factors affecting their token prices.
Staking and restaking of Solana
The operational mechanism of Solana's liquid staking protocols 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 began to take effect after a client version upgrade in April this year. The starting point of the swQoS mechanism is to enhance overall network efficiency, as the Solana network experienced prolonged network congestion during the meme frenzy in March.
In simple terms, after enabling swQoS, block producers determine the priority of transactions based on the staker's staking amount. Stakers holding x% of the entire network's stake ratio can submit up to x% of transactions (for a detailed mechanism of swQoS and its profound impact on Solana, readers can refer to Helius's article). After enabling swQoS, the transaction success rate of the Solana network has rapidly increased.
Success and failure TPS of Solana network Source: Blockworks
swQoS prioritizes the rights of larger stakers by 'submerging' the transactions of smaller stakers in the network when resources are limited, thus avoiding malicious transaction attacks on the system. To some extent, the logic of 'the more you stake, the more you enjoy network privileges' is consistent with the logic of PoS public chains: staking a larger proportion of the chain's native tokens contributes more to the stability of the chain and the native tokens, so enjoying more privileges is reasonable. Of course, this mechanism's centralization issue is also very evident: larger stakers can naturally obtain more priority transaction rights, and priority transaction rights will bring more stakers, thereby reinforcing the advantages of leading stakers and further leaning 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 also clearly see Solana's pragmatic attitude of 'performance first' regarding decentralization issues in its consistent development history.
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 DEX. Hence, Solayer refers to the AVS services provided by Eigenlayer as exogenous AVS, since these systems serviced by Eigenlayer are usually located outside the Ethereum main chain. In contrast, the services they provide themselves are referred to as endogenous AVS, as their service targets are located within the Solana main chain.
Differences between Solayer and Eigenlayer Source
It can be seen that although both involve renting staked assets to other protocols with demand to achieve 're'staking, Solayer's endogenous AVS and Eigenlayer's exogenous AVS provide different core services. Solayer's endogenous AVS is essentially a 'transaction throughput leasing platform,' aimed at platforms (or their users) that need transaction throughput, while Eigenlayer is a 'protocol security leasing platform.' The core support of 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 in the Solana ecosystem. Reusing stake as a means to secure network bandwidth for apps. 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 demands for staked assets, such as protocol security needs, Solayer can also lend its SOL to these protocols. In fact, by definition, any leasing/reutilization of staked assets can be referred to as restaking and does not need to be limited to security needs. Due to the existence of the Solana chain's swQoS mechanism, the scope for restaking business on the Solana chain is broader than that on the Ethereum chain, and from the recent enthusiasm for on-chain activity on Solana, the demand for transaction throughput appears to be more rigid than 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 rewards.
At the same time, users can delegate sSOL to protocols that require transaction throughput, thus earning the fees paid by these protocols.
Current sources 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 previously mentioned, there are three sources of income related to staking behavior; the situation of these three types of income on the Solana network is as follows:
PoS underlying income, SOL paid by Solana to maintain network consensus, has an annualized return of about 6.5%, and this income is relatively stable.
Transaction sorting income, the fees that nodes can obtain during the transaction packaging and sorting process, including priority fees given by users to expedite transactions, as well as tips paid by MEV searchers, the two parts combined yield about 1.5% annualized, but it varies greatly depending on on-chain activity.
Rental income from staked assets, lending the assets staked by users to other protocols with demand (transaction throughput, protocol security, or others) is currently not yet substantial.
Total returns and MEV returns of SOL liquid staking (taking JitoSOL as an example) Source
If we carefully compare the three types of returns on Ethereum and Solana, we find that although the market value of SOL is still only 1/4 of ETH, the market value of staked SOL is only about 60% of the market value of staked ETH, but Solana's staking-related protocols have a significantly larger market and greater potential market than those on the Ethereum chain, because:
1. In terms of PoS underlying income: the network issuance rewards SOL is willing to pay have already started exceeding ETH since December 2023, and the gap between the two continues to widen. Whether for ETH or SOL staking, this constitutes over 80% of their yield, determining the income baseline for all staking-related protocols.
Ethereum and Solana token issuance rewards (i.e., the PoS underlying revenue of the network) Source: Blockworks
2. In terms of transaction sorting income: Blockworks uses transaction fees and MEV tips to reflect the real economic value (REV) of a chain. This indicator can roughly reflect the maximum transaction sorting income a chain can obtain. We can see that although the REV of both chains fluctuates greatly, Ethereum's REV sharply declined after the Cancun upgrade, while Solana's REV has generally shown an upward trend and recently successfully surpassed Ethereum.
REV of Solana and Ethereum Source: Blockworks
In terms of rental income from staked assets, compared to the Ethereum network, which currently only has security income, Solana's swQoS mechanism can bring additional leasing demand for transaction throughput.
Furthermore, Solana's staking-related protocols can expand their business according to commercial logic. Any liquid staking protocol can engage in restaking, such as Jito; any restaking protocol can issue LSTs, such as Solayer and Fragmetric.
More importantly, we currently see no possibility of reversal in the above trends, meaning that the advantages of Solana's staking protocols compared to 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.
