Apr 4, 2024 | Updated Apr 4, 2024
The process involves using staked Ether or Liquid Staking Tokens to simultaneously stake on another Ethereum protocol, which some commentators warn could ultimately compromise the base networks resilience.
EigenLayer, the protocol that introduced restaking, sees it as a way to supercharge innovation in the Ethereum ecosystem by establishing pooled decentralized security.
As the heart of all blockchain networks, the importance of consensus mechanisms cant be overstated. In the case of the worlds second-largest cryptocurrency, Ethereum, its proof-of-stake consensus model is a crucial part of its security and function. At present, the Ethereum network is shored up by nearly 1 million network validators and over 31 million staked Ether, lending it formidable security.
Of course, creating a network of validators even a fraction of the size of Ethereums is a challenging and costly task. This serves as a major roadblock for new and emerging protocols in the ecosystem, stifling what might otherwise be promising innovations.
But what if there was a way to leverage Ethereums established security for new projects being built on the network? Could that unlock a whole new level of progress for the ecosystem as a whole?
Thats the thinking behind Ethereum restaking, a concept that wants to share Ethereums validator network for the benefit of new protocols, stakers, and the Ethereum community at large.
But just what is ETH restaking? How does it work, and are there any risks when it comes to restaking your ETH? In this article, Ledger Academy will walk you through all of that and more.
To understand restaking, lets take a step back and look at what staking is and how it works on the Ethereum network.
Ethereum staking is the basis for the networks proof-of-stake consensus model. One way to look at staking is as a collateral system that helps keep Ethereum secure.
If someone wants to act as an Ethereum validator, they must first put up a stake of (at least) 32 ETH. In return for processing transactions, they receive staking rewards. Conversely, if the validator acts dishonestly or does anything that could harm the network, they may lose their staked ETH via a process called slashing.
As the name implies, Ethereum restaking is the process of taking ETH that has already been staked on Ethereum and using it to simultaneously secure other decentralized protocols. As with normal staking, restaking earns users staking rewards from the protocol(s) they help to secure.
While earning extra rewards is a major incentive for restaking, it isnt the main reason for the concept. The larger idea behind restaking is so that less developed protocols can take advantage of Ethereums robust community of network validators: something that is costly and resource-intensive to do otherwise.
Notably, the restaking mechanism did not come about as the result of an Ethereum Improvement Proposal (EIP) or the Ethereum Roadmap. Rather, it was designed by a third-party protocol, EigenLayer.
Founded in 2021, EigenLayer is an Ethereum middleware platform, which simply means that it sits between the Layer 1 network and other applications, allowing them to interact. As of yet, EigenLayer is the only decentralized protocol that offers ETH restaking.
EigenLayer deploys Ethereum smart contracts that allow stakers to restake their ETH on compatible protocols. The platform also acts as a staking marketplace, allowing the three main parties involvedstakers, network validators, and protocolsto find each other.
Since its initial launch in June 2023, EigenLayer has enjoyed massive growth, becoming one of the largest blockchain protocols out there. Over $10 billion worth of ETH has been restaked through EigenLayer, giving it a higher total value locked (TVL) than major DeFi platforms such as Aave, Rocket Pool, and Uniswap.
EigenLayers rapid ascent speaks to an obvious demand for restaking and the added rewards that it brings users. But how exactly do users earn these rewards? To understand fully, lets dive into how Ethereum restaking works
Currently, EigenLayer is the only option you have to restake your ETH. So lets explore how this project approaches the mechanism.
Restaking on EigenLayer allows its smart contracts to place additional slashing conditions on your staked ETH. This is how EigenLayer extends Ethereums security to the protocols In its ecosystem, which it calls Actively Validated Services (AVSs). If a restaking validator doesnt perform their duties for their AVS, they are subject to having their ETH stake slashed.
This happens through on-chain slashing contracts and specific smart contracts called EigenPods. You can think of these as an additional account that sits between a restakers wallet and their stake. Staking withdrawals and rewards all have to go through the EigenPod before going to a validators account, which gives EigenLayer the ability to enact penalties on validators who act poorly.
Native restaking follows a similar process to natively staking ETH, meaning that this option is only available to those willing to run (or already running) an Ethereum validator node. The only difference with native restaking is that an EigenPod becomes the withdrawal address for your stake.
As for liquid restaking, its important to first consider how liquid staking works.
Similarly to native staking, liquid staking involves locking tokens up in a smart contract. The key difference, however, is that the liquid staking platform then gives you liquid staking tokens (LSTs) in return. You can then use these LSTs as you would any other token on DeFi applications. Liquid restaking, therefore, is when users deposit LSTs into the EigenLayer contracts.
EigenLayer currently supports staking for 12 LSTs, including popular options like Rocket Pool Ether (rETH), Lido Staked Ether (stETH), and Coinbase Staked Ether (cbETH).
Significantly, some platforms expand liquid restaking utility even further. For example, the protocols Renzo and EtherFi both serve as liquid restaking platforms for EigenLayer. These protocols accept users LSTs and give them Liquid Restaking/Receipt Tokens (LRTs) in return.
Several liquid restaking platforms have emerged recently, looking to expand restaking utility even further. Similarly to liquid staking, users restake their LSTs with these platforms and receive Liquid Restaking/Receipt Tokens (LRTs) in return.
Once you have successfully staked your ETH or deposited your LSTs, you then have to delegate your stake. The entities that you delegate to the ones directly helping to run Actively Validated Services on EigenLayer are called operators.
Similarly to staking ETH, there are two options here. You can either act as an operator and self-delegate, or you can delegate your stake to an existing operator. While simply delegating your stake to an operator is the simplest option, self-delegation gives you more control and responsibility. Importantly, stakers can not dictate to operators what AVS they operate.
The clearest benefit of restaking Ether is that it compounds rewards for stakers. While the exact rate of staking rewards fluctuates over time and varies depending on the staking platform, ETH stakers can expect an annual percentage yield of roughly 3%. In other words, you would earn around 3% of the amount you stake over one year.
By restaking, you can supplement your ETH staking rewards with rewards from multiple other protocols. Of course, the rate of rewards will depend on the specific AVS that your staked ETH is going towards.
The other major benefit of ETH restaking is how it lowers costs for new protocols being built on Ethereum. To explain, before the arrival of restaking, new protocols would have to go through the costly process of developing their own validator networks. Thanks to restaking, new protocols can now take advantage of Ethereums well-developed validator network. This concept, where decentralized protocols can share validator-powered security, is known as pooled security.
Due to the high costs associated with launching a new protocol on Ethereum, projects previously went to Layer 2 blockchains as a solution. While these networks can lower costs for new protocols, they also come with some drawbacks.
The design of some Layer 2 chains can lead to certain constraints on protocol architecture such as customization options and the kinds of transactions a protocol can access. Staying and building on Ethereum and using the pooled security that restaking brings means that protocols are freer to build the architecture that best suits their needs, without constraints.
Besides being good for the individual protocols, this is also a major benefit to the Ethereum ecosystem as a whole. The more protocols that can be built on Layer 1, the more innovation can happen without liquidity siphoning off to other chains.
As previously mentioned, slashing is a vital component of proof-of-stake systems that helps to keep participants honest. That being said, the nature of slashing means that it can also have negative consequences for people even when theyre not doing any explicit harm to the network.
For example, many ETH stakers do not act as network validators themselves, meaning that they simply delegate their stake to a validator. If their delegated validator behaved poorly, these stakers could still stand to lose their stake to slashing.
Slashing can also be a risk even for validators who are acting honestly. To sum up briefly, because validators can get a slashing penalty if their node goes offline, many validators set up backup rigs. However, if the network detects the same validator keys coming from two different servers, it also punishes this with slashing (to prevent double-spending).
Thats all to say that, no matter how it is done, staking always comes with some level of slashing risk. Therefore by restaking, you are necessarily increasing the risk that you could become subject to slashing.
Although restaking arguably works to keep more ETH within the ecosystem, you must remember that staked ETH is not available. Not to mention that even when you unstake your restaked ETH, you will likely have to wait longer than you would otherwise to withdraw it.
If more restaking protocols like EigenLayer entice enough people with the promise of higher staking rewards, this could lead to fewer independent stakers, and more people staking via such protocols. This effectively causes staking to become more centralized over time.
As previously mentioned, the growth of restaking has brought about a new class of instruments: liquid restaking tokens (LRTs). As these tokens mimic the surge in popularity of LSTs, its important to be aware of the risks they carry.
For one thing, theres the convoluted nature of LRTs. After all, an LRT is a token representing a staked token, which is itself a representation of a staked token. This added complexity raises questions on exactly how LRT providers will distribute losses and gains.
Add onto this the newness of the asset class, and there are likely to be some hiccups as platforms look to hook new users with promises of large yields and unproven tokenomics.
Finally, some believe that using Ethereums validator network as the basis of pooled security can have a destabilizing effect on the base network. One such critic is none other than Ethereum co-founder, Vitalik Buterin.
In a May 2023 blog post, Buterin examines the growing trend of protocols leveraging Ethereums validator network and argues that certain use cases can introduce high systemic risks to the ecosystem. Specifically, Buterin warns that protocols relying on Ethereums social consensus could be a slippery slope.
Ethereums social consensus refers to the large global community of Ethereum developers and other users, who are constantly monitoring the network. This social consensus is vital for the health of the network, as the community can always act to secure the network if its cryptoeconomic consensus fails due to a bug or attack.
Buterins concern is that the people building protocols could begin to view hard forks as a way of bailing them out if anything goes wrong. Ultimately, he goes on to say that as long as projects only seek to use Ethereums validator set, and not its social consensus, they remain low risk. Notably, EigenLayer founder, Sreeram Kannan, agrees with Buterins conclusions, reiterating that an Ethereum fork should never be viewed as a potential solution for a protocols issues.
There are two ways to use EigenLayer to restake Ether: native restaking and liquid restaking.
Heres how you can natively restake ETH on EigenLayer:
If youre looking to get involved in liquid staking you can take the following steps to deposit your LSTs into EigenLayer.
Remember, you can easily exchange ETH for LSTs through Stader Labs or Lido directly from Ledger Live.
All in all, Ethereum restaking is a thoroughly exciting proposition that has brought the concept of pooled security to the forefront of blockchain innovation. Not only can it increase the benefits of staking Ethereum, but it also creates exciting opportunities for up-and-coming blockchain protocols.
And if youre ready to jump into the world of Ethereum staking and staking rewards then look no further than Ledger! Staking Ether on Ledger Live couldnt be easier. When paired with the power of self-custody unlocked by Ledger devices, youll have everything to take on the world of Ethereum staking.
So what are you waiting for? Find the Ledger device thats right for you and start enjoying the freedom of secure self-custody.
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What Is Ethereum Restaking? - Ledger