Original author: Lawrence Lee, Mint Ventures researcher
After securing two rounds of financing, including a $12 million investment led by Polychain and a financing from Binance Labs, the restaking project Solayer on the Solana chain has become one of the few highlights in the DeFi sector in the recent market, with its TVL continuously rising, currently surpassing Orca and ranking twelfth in TVL on the Solana chain.
Solana project TVL ranking Source: DeFillama
The staking track, as a crypto-native segmented track, is also the largest crypto track in terms of TVL. However, its representative tokens LDO, EIGEN, ETHFI, etc., have struggled significantly during this cycle. Aside from their position in the Ethereum network, could there be other reasons?
How competitive are the staking and restaking protocols surrounding user staking behavior in the entire staking ecosystem?
What is the difference between Solayer's restaking and Eigenlayer's restaking?
Is Solayer's restaking a good business?
I hope this article can answer the above questions. We will first discuss 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 Lido, leading restaking project Eigenlayer, and leading liquid restaking project Etherfi on the Ethereum network.
Lido's business logic and income composition
We summarize Lido's business logic as follows:
Due to Ethereum's insistence on decentralization, the PoS mechanism softly limits the staking cap of a single node, with a single node only able to deploy a maximum of 32 ETH to achieve higher capital efficiency. Meanwhile, staking requires relatively high hardware, network, and knowledge requirements, making the barrier for ordinary users to participate in ETH staking quite high. In this context, Lido has promoted the LST concept. 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 market, Lido's market share is close to 90%, leading the market.
Liquid staking participants and market share Source: Dune
The income of the Lido protocol mainly comes from two parts: consensus layer income and execution layer income. The so-called consensus layer income refers to the PoS issuance income of the Ethereum network, which is paid to maintain network consensus, hence referred to as consensus layer income, this part is relatively fixed (the orange part in the figure 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), this part of income is not paid by the Ethereum network, but rather paid (or indirectly paid) by users during the transaction execution process, this part varies significantly with on-chain activity.
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 sector and the entire market over the past year, giving birth to a series of projects with FDVs exceeding $1 billion at launch (besides EIGEN, there are ETHFI, REZ, and PENDLE), as well as many restaking projects yet to launch (Babylon, Symbiotic, and the Solayer we will discuss in detail later). The market heat 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, being able to restake their staked ETH on Eigenlayer (thus obtaining additional income), hence the name 'Re'Staking. Eigenlayer calls its offered services AVS (Actively Validated Services), which can provide services for various protocols requiring security, including sidechains, DA layers, virtual machines, oracles, bridges, threshold encryption schemes, trusted execution environments, etc. EigenDA is a typical representative using Eigenlayer's 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. Eigenlayer acts as a 'protocol security market' to facilitate and earn some fees.
However, surveying all current restaking projects, the only real income remains the tokens (or points) of related protocols. We cannot yet confirm that restaking has achieved PMF: from the supply side, everyone likes the additional income that restaking offers; but the demand side remains a mystery: do protocols really purchase protocol economic security services? If so, how much?
Questions raised by Multicoin founder Kyle Samani on the restaking business model Source: X
Looking at the target users already issued by Eigenlayer: oracles (LINK, PYTH), bridges (AXL, ZRO), DA (TIA, AVAIL), maintaining protocol security through staking tokens is the 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, when explaining the EIGEN token, uses very abstract and obscure language to express the view 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. Using LST to participate in Eigenlayer Restaking is relatively simple. After users deposit ETH in the LST protocol to obtain LST, they can deposit the LST into Eigenlayer. However, LST pools have long-term limits, and users wanting to participate in restaking during the limit period need to follow the process for native restaking:
Users first need to complete the entire staking process on the Ethereum network themselves, including preparing funds, configuring execution layer and consensus layer clients, 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 relatively standard 're'staking process. Whether users deposit other LST 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 process of native restaking is the 'complex version' of ETH's native staking, implying similar thresholds in terms of funds, hardware, network, and knowledge.
Thus projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to address this issue. The operation process of Etherfi’s eETH is as follows:
Users deposit ETH into Etherfi, and Etherfi issues eETH to users.
Etherfi stakes the ETH it receives, which allows it to gain the basic yield from ETH staking;
At the same time, they set the withdrawal private key of the nodes to the Eigenpod contract account according to Eigenlayer's native restaking process, thus obtaining 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, the eETH operation is simple and provides liquidity, essentially matching the experience of Lido's stETH; on the other hand, users depositing ETH into Etherfi's eETH pool can earn: approximately 3% basic ETH staking yield, potential AVS yield from Eigenlayer, token incentives (points) from Eigenlayer, and token incentives (points) from Etherfi.
eETH accounts for 90% of Etherfi's TVL, contributing more than $6 billion in peak TVL and a maximum FDV of $8 billion, making Etherfi the fourth largest staking entity in just six months.
Etherfi TVL distribution Source: Dune
Staking volume ranking Source: Dune
The long-term business logic of the LRT protocol lies in helping users participate in both staking and restaking in a simpler and easier way, thereby obtaining higher returns. Since it does not generate any revenues itself (apart from its own token), the overall business logic of the LRT protocol is more akin to a specific revenue aggregator for ETH. If we analyze carefully, we will find that its business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido were willing to 'imitate' eETH with its stETH, it would be challenging 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 user ETH for staking, it would also 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 a broader range of revenue sources, while Eigenlayer directly absorbing user funds for staking & restaking are both completely feasible. So why doesn't Lido do liquid restaking, and why doesn't Eigenlayer do liquid staking?
The author believes this is determined by Ethereum's unique circumstances. In May 2023, when Eigenlayer had just completed a new round of $50 million financing, and amidst much discussion 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 (i.e., 'how should we restake').
In the case of Lido, due to its long-standing scale of about 30% of the Ethereum staking ratio, voices within the Ethereum Foundation have been continuously urging limitations on it. Vitalik has also personally written multiple times discussing the issue of staking centralization, which has forced Lido to prioritize 'alignment with Ethereum' as its business focus, gradually shutting down its operations on all other chains besides Ethereum, including Solana. The de facto leader Hasu confirmed in a post this May the possibility of abandoning his own restaking business, limiting Lido's operations to staking, while investing and supporting the restaking protocol Symbiotic and establishing the Lido Alliance to respond to the competition for market share from LRT protocols like Eigenlayer and Etherfi.
Lido's stance on restaking-related matters
On the Eigenlayer side, Ethereum Foundation researchers Justin Drake and Dankrad Feist were hired early on as advisors for Eigenlayer. Dankrad Feist stated that the main purpose of his joining was to ensure 'Eigenlayer aligns with Ethereum', which may also be the reason why Eigenlayer's native restaking process significantly contradicts user experience.
In a sense, Etherfi's market space is driven by the 'distrust' of the Ethereum Foundation towards Lido and Eigenlayer.
Analysis of Ethereum staking ecosystem protocols
Combining Lido and Eigenlayer, we can see that on the current PoS chains, surrounding staking behavior, excluding associated token incentives, there are three long-term sources of revenue:
PoS underlying earnings refer to the native tokens paid by PoS networks to maintain network consensus. The yield from 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.
Transaction sorting revenue comes from the fees that nodes can earn during the transaction packaging and sorting process, including priority fees paid by users and MEV income earned during the transaction packaging and sorting process. The yield from this part mainly depends on the activity level of the chain.
Leasing revenue from staked assets involves leasing users' staked assets to other protocols with demand, thus earning the 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.
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 gain the aforementioned first and second types of revenue. Of course, users can take their LST to participate in Restaking, but as a protocol, the only cut they can take is the aforementioned first and second.
Restaking protocols represented by Eigenlayer and Symbiotic. These protocols can only obtain the aforementioned third type of revenue.
Liquid restaking protocols represented by Etherfi and Puffer. They can theoretically obtain all three types of revenue mentioned above, but they are more like 'aggregated LST that includes restaking income'.
Currently, the underlying PoS earnings from ETH are about 2.8% annually, gradually decreasing as the staking ratio of ETH increases;
Transaction sorting revenue has significantly decreased with the launch of EIP-4844, recently averaging around 0.5%.
The revenue base from leasing staked assets is relatively small and cannot yet be annualized, relying more on EIGEN and tokens from associated LRT protocols to make this part of the incentive substantial.
For LST protocols, their income base is the amount staked * staking yield. The amount of ETH staked has approached 30%. Although this value is still significantly lower than that of other PoS public chains, from the perspective of the Ethereum Foundation, which aims for decentralization and economic bandwidth, it does not wish too much ETH to flow into staking (refer to Vitalik's recent blog post, where the Ethereum Foundation discussed whether to set the staking cap at 25% of the total supply); while the staking yield has been continuously declining, stabilizing at 6% since the end of 2022, often achieving around 10% short-term APR, it has now dropped to only 3%, and there is no reason to expect a rebound in the foreseeable future.
For the aforementioned protocol tokens, in addition to being constrained by the overall downturn of ETH itself:
The market ceiling for LST on the Ethereum network has gradually become visible, which may also be the reason for the poor performance of the governance tokens LDO and RPL for LST protocols;
For EIGEN, currently, other PoS chains, including restaking protocols on the BTC chain, are continuously emerging, which has basically confined Eigenlayer's business to the Ethereum ecosystem, further reducing the potential upper limit of its AVS market, which is already unclear.
The emergence of the LRT protocol, which was not initially anticipated (ETHFI's peak FDV exceeded $8 billion, surpassing that of LDO and EIGEN), further 'diluted' the value of the aforementioned two in the staking ecosystem.
For ETHFI and REZ, besides the aforementioned factors, the excessively high initial valuations brought by launching during market booms are also more significant factors affecting their token prices.
Solana's staking and restaking
The operating 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 need to first 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 to enhance 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 amount staked by stakers. A staker with x% of the total stake in the network can submit up to x% of the transactions (for specifics on the swQoS mechanism and its profound impact on Solana, readers can refer to Helius's article). After the activation of swQoS, the transaction success rate on the Solana network rapidly increased.
Successful and failed TPS of the Solana network Source: Blockworks
swQoS ensures the rights of larger stakers in the network through the 'drowning' of small amount stakers' transactions, thereby avoiding malicious transaction attacks on the system when network resources are limited. To some extent, the logic 'the more you stake, the more privileges you enjoy in the network' aligns with the logic of PoS public chains: staking a larger proportion of the chain's native tokens contributes more to the chain's stability and the chain's native token, thus enjoying more privileges is only natural. Of course, the centralization issue of this mechanism is also very evident: larger stakers can naturally gain more priority in transactions, which leads to more stakers, thereby reinforcing the advantages of leading stakers, further leaning towards oligopoly or even monopoly. This seems to contradict 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 pragmatic attitude of 'performance first' regarding decentralization issues.
In the context of swQoS, the target users of Solayer's restaking are not oracles or bridges, but protocols that require transaction throughput/reliability, such as DEX. Therefore, Solayer refers to the AVS services provided by Eigenlayer as exogenous AVS because these systems that utilize Eigenlayer's services typically reside outside the Ethereum main chain. The services it provides are referred to as endogenous AVS because its service targets are located within the Solana main chain.
The difference between Solayer and Eigenlayer
It can be seen that although both lease staked assets to other protocols with demand for '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', targeting platforms (or their users) that require transaction throughput, while Eigenlayer is a 'protocol security leasing platform'. The core support of its endogenous AVS is the swQoS mechanism of Solana. 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. Thus, in a sense, we have restructured restaking within the Solana ecosystem. Reusing stake as a method to protect APP network bandwidth. Our goal is to become the de facto infrastructure for swQoS and eventually a core primitive of the Solana blockchain/consensus.
Of course, if there are other protocols on the Solana chain with demands for staked assets, such as protocol security needs, Solayer can also lease its SOL to these protocols. In fact, from a definitional standpoint, any leasing/reutilization of staked assets can be called restaking, not limited to just security needs. Due to the existence of the swQoS mechanism in the Solana chain, the scope of restaking business on the Solana chain is broader than that on the Ethereum chain, and from the recent active on-chain activity of Solana, the demand for transaction throughput is more rigid than the demand for security.
Is Solayer's restaking a good business?
The user participation process for Solayer's restaking is as follows:
Users deposit SOL directly into Solayer, and Solayer issues sSOL to users.
Solayer stakes the SOL it receives, allowing it to earn basic staking income.
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 is evident that Solayer is not just a restaking platform; it is also a platform that directly issues LSTs, resembling Lido on the Ethereum network that supports native restaking.
As mentioned earlier, there are three sources of revenue surrounding staking behavior. The situation of these three revenues on the Solana network is as follows:
PoS underlying revenue: the SOL paid by Solana to maintain network consensus, with an annualized yield of about 6.5%, this revenue is relatively stable.
Transaction sorting revenue: the fees that nodes can earn during the transaction packaging and sorting process, including priority fees paid by users for expedited transactions and tips paid by MEV searchers, totaling approximately an annualized 1.5%, but this varies significantly depending on on-chain activity.
Leasing revenue from staked assets involves leasing users' staked assets to other protocols with demand (transaction throughput, protocol security, or others). This part has not yet scaled.
The total revenue and MEV revenue sources of SOL liquid staking (taking JitoSOL as an example)
If we carefully compare the three types of revenues from Ethereum and Solana mentioned above, we will find that although SOL's market value is still only 1/4 of ETH's, 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 the staking-related protocols on the Ethereum chain because:
1. In terms of PoS underlying revenue: the network issuance revenue that SOL is willing to pay has begun to exceed 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 underlying PoS earnings of the network) Source: Blockworks
2. In terms of transaction sorting revenue: Blockworks uses transaction fees and MEV tips to reflect a chain's real economic value (REV, Real Economic Value). This indicator can approximately reflect the maximum value that a chain can obtain from transaction sorting revenue. We can see that although the REV fluctuations of both chains are large, Ethereum's REV sharply declined after the Cancun upgrade, while Solana's REV overall shows an upward trend and recently surpassed Ethereum.
Solana and Ethereum's REV Source: Blockworks
3. In terms of leasing revenue from staked assets, compared to the Ethereum network, which currently only has security income, Solana's swQoS mechanism can generate additional leasing demand for transaction throughput.
4. Moreover, Solana's staking-related protocols can expand their business according to business logic; any liquid staking protocol can engage in restaking business, like we see with Jito; any restaking protocol can also issue LST, like Solayer and Fragmetric.
5. More importantly, we currently see no possibility of reversal in the above trends, meaning that the advantages of Solana staking protocols relative to Ethereum staking protocols may continue to expand.
From this perspective, although we cannot yet say that Solana's restaking has found PMF, it is clear that Solana's staking and restaking are better businesses than those on Ethereum.
