KEYTAKEAWAYS
- Restaking boosts capital efficiency by enabling the same staked assets to secure multiple networks while earning additional rewards.
- It provides scalable security solutions for new protocols, offering a cost-effective way to strengthen network protection.
- Higher rewards come with risks, including slashing, market volatility, and potential governance conflicts in Layer 1 ecosystems.
CONTENT
Restaking enhances capital efficiency by allowing users to stake the same token across multiple protocols. It boosts rewards but increases risks, requiring careful management for long-term sustainability.
WHAT IS RESTAKING?
Restaking is an emerging mechanism focused on improving capital efficiency, allowing users to stake the same token on both the main blockchain and other protocols, thereby securing multiple networks simultaneously. In return, users can earn additional staking rewards but must also take on higher slashing risks.
- Restaking enables users to stake the same asset across both the main blockchain and other protocols, maximizing resource utilization.
- While the risk increases, restakers are rewarded with higher returns for assuming additional responsibilities.
This concept was pioneered by EigenLayer as a decentralized staking resource management method. The system heavily utilizes Liquid Restaking Tokens (LRTs), a liquid form of restaked tokens that allow stakers to extract more value while maintaining flexibility. By doing so, they can provide security to other networks and restaking protocols, strengthening the overall blockchain ecosystem.
Currently, many projects are actively exploring how to efficiently leverage restaking resources or become a part of the restaking ecosystem to maximize the value of staked assets.
📌Restaking & Blockchain Security
Blockchain security primarily relies on two consensus mechanisms:
✅ Proof-of-Work (PoW): Ensures network security through computational power, as seen in Bitcoin.
✅ Proof-of-Stake (PoS): Relies on staked assets to maintain network security, as seen in Ethereum 2.0.
In PoS networks, stakers lock their assets in validator nodes to help secure the network. The security of the network depends on the number of active validators, the percentage of total circulating tokens that are staked, and the distribution of these tokens among validators.
However, these staked tokens are typically idle, limiting their usability. This has led to the emergence of restaking protocols, which allow these otherwise inactive assets to be used for securing additional protocols. One of the most notable examples is EigenLayer, which enables projects to leverage Ethereum’s security infrastructure without needing to establish their own validator set.
📌 Understanding Restaking
The concept of restaking refers to re-staking already staked assets in additional protocols, thereby increasing their utility. This approach benefits both token holders, who receive additional rewards, and participating protocols, which gain enhanced security.
➤ For example, in Ethereum:
Ethereum is considered one of the most secure PoS networks due to its high validator participation and decentralized staking model. However, in traditional staking models, staked ETH remains locked, leading to the rise of liquid staking derivatives (LSDs) such as stETH, rETH, and others. These allow stakers to use their tokens in DeFi while still earning staking rewards.
Restaking takes this one step further, allowing these staked ETH to be reallocated to other protocols for additional rewards. In EigenLayer, other protocols can rent Ethereum’s staking security, while stakers can earn multiple layers of rewards.
>>> More to read: What Is Crypto Staking?: Overview
HOW RESTAKING WORKS
Restaking allows users to stake the same token on both the main blockchain and other protocols, securing multiple networks simultaneously while earning additional staking rewards. There are currently two primary types of restaking:
1. Native Restaking on EigenLayer
This type of restaking is only available to users running Ethereum validator nodes. Native restaking operates through a set of smart contracts that manage staked assets while providing additional cryptoeconomic security.
✅ Validators who wish to participate in restaking must download and run additional node software required for the restaking module.
✅ Once set up, validators must agree to EigenLayer’s restaking terms, which include additional slashing conditions that could result in more severe penalties for misconduct.
✅ By engaging in native restaking, validators earn additional rewards from EigenLayer and other protocols while still receiving their standard Ethereum staking rewards.
2. Liquid Restaking
Liquid restaking utilizes Liquid Staking Tokens (LSTs), allowing users to restake their assets without locking them in a single protocol.
✅ Stakers delegate their assets to validators and receive corresponding LSTs (e.g., stETH, rETH), which represent their staked positions.
✅ These LSTs can then be further staked in restaking protocols to generate additional rewards.
✅ As of now, EigenLayer has paused new liquid restaking deposits, but this model is expected to play a key role in future restaking innovations.
>>> More to read: What is Proof of Staked Authority(PoSA)?
RESTAKING BENEFITS & POTENTIAL RISKS
📌 Benefits of Restaking
Restaking transforms staked assets into “flexible assets” that can be leased by multiple protocols based on demand, enhancing capital efficiency and network security. The key advantages include:
(1) Increased Rewards for Stakers
At the time of writing, Ethereum’s native staking offers an approximate 3.6% yield, while Liquid Staking Tokens (LSTs) provide returns ranging from 3.08% to 4.06%. By participating in a restaking protocol, users can earn additional rewards by securing multiple networks, depending on their restaking strategy.
(2) Bootstrapping Security for New Protocols and Networks
Emerging Actively Validated Services (AVSs)—such as data availability layers and Layer 2 networks—often struggle to establish sufficient security in their early stages. Restaking allows these protocols to tap into a larger validator set, enhancing their security without having to build a dedicated validator network from scratch. This approach provides a cost-effective way for new networks to achieve a high level of security.
(3) Scalable and On-Demand Security
With restaking services, protocols can dynamically scale their security based on network demand. When additional security is needed, protocols can contract with validators in the restaking network to temporarily increase security. Similarly, security can be reduced when demand decreases. This flexible model enables protocols to optimize security expenditures without excessive infrastructure costs.
📌 Potential Risks of Restaking
While restaking improves capital efficiency and security provisioning, it also introduces several risks for Layer 1 networks (e.g., Ethereum), restaking protocols, and stakers themselves. The primary risks include:
(1) Slashing Risks
Restaking agreements impose additional slashing conditions in exchange for higher rewards. Depending on the protocol’s slashing rules, validators may suffer significant asset losses if they violate security requirements.
- Penalties for downtime or failing to validate transactions properly.
- Malicious behavior, such as double signing, which results in slashing.
- Breach of restaking contract terms, leading to higher-than-usual slashing penalties.
Since restaking involves multiple protocols, a slashing event in one protocol could cascade into others, amplifying the overall risk exposure for validators and stakers.
(2) Yield and Leverage Risks
Restaking is designed to enable protocols to borrow Ethereum’s security, but restakers are incentivized by the yield mechanisms of the protocols they participate in. This creates several financial risks:
- Uncertain Incentives: Rewards depend on the protocols’ incentives, which may fluctuate over time, making yield unpredictable.
- Stakers Chasing High-Yield Protocols: Restakers may prioritize protocols offering the highest returns, potentially neglecting the long-term sustainability of these platforms.
- Market Leverage Concerns: If investors treat restaking as a high-yield and easily leveraged financial product, it could lead to excessive leverage, increasing market volatility and destabilizing Layer 1 networks.
(3) Impact on Layer 1 Blockchain (Ethereum)
Ethereum co-founder Vitalik Buterin has highlighted a critical risk associated with restaking—protocols relying on Ethereum’s social consensus to recover from catastrophic failures.
- If a restaking protocol suffers a major loss event (e.g., a mass validator slashing scenario), it may attempt to appeal to Ethereum’s community to fork or reorganize the chain to restore lost funds.
- This could create conflicts within the Ethereum ecosystem, as some participants may advocate for intervention while others argue that Ethereum should not bail out external protocols.
🔎 Conclusion
Restaking introduces a revolutionary model for enhancing staking rewards, improving security for new protocols, and offering scalable security solutions. However, slashing risks, leverage concerns, and the impact on Ethereum’s governance must be carefully considered.
As EigenLayer and other restaking protocols continue to evolve, we can expect more risk management mechanisms to emerge. These advancements will be crucial in balancing higher rewards with decentralized security, ensuring that restaking becomes a sustainable and long-term solution within the blockchain ecosystem.
>>> More to read: How to Get Crypto Passive Income Easily?
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