Restaking platform development

In April 2023, Ethereum developers activated the Shapella update, which included several changes to the consensus and execution levels. One of the most significant changes was the ability to withdraw ETH from the Beacon Chain deposit contract.The hard fork sparked a surge of interest in cryptocurrency staking. Over a period of three months, the volume of assets locked in the validation mechanism increased by 130%, surpassing 26 million ETH. The influx of liquidity is largely attributed to the fact that validators now have the ability to unlock their assets. In the eyes of potential investors, the finalization of the Proof-of-Stake (PoS) mechanism has transformed staking into a comprehensible and relatively low-risk model for passive earnings. Some experts even believe that the network’s proposed yield will become the main driver of Ethereum’s ecosystem development in the near future.

The Shapella hard fork has also created the necessary conditions for the emergence of new directions and the implementation of projects that were previously impossible due to existing network limitations. And one of these directions is restaking.

The concept of restaking shares many similarities with merged mining. The latter refers to the process of simultaneously mining two or more cryptocurrencies without reducing the overall mining performance. Essentially, the model allows the same proof of work to serve as a security guarantee for multiple networks that have compatible consensus algorithms based on Proof-of-Work (PoW). When applied to PoS blockchains, the concept involves redeploying capital that is already staked for similar purposes.

In Ethereum, restaking aims to address the challenges faced by products classified as Actively Validated Services (AVS). These services process data obtained from outside the main network and thus need to independently create security mechanisms for their systems. Examples of such projects include cross-chain bridges, oracles, and sidechains.

The implementation approach for this model can vary, but in general, derivative tokens are issued within the restaking framework and then locked in specific smart contracts. Holders of the underlying assets may be subject to additional slashing conditions according to the rules of the target AVS. In other words, the user stakes a cryptocurrency that is already in staking, generating additional income.

The value of this model extends beyond profitability. Restaking enhances capital efficiency by allowing validators to scale their presence in the ecosystem through offering additional services to participants. In turn, AVS (Actively Validated Services) gain a secure and efficient tool for creating a verification mechanism. For example, restaking can have a significant impact on liquid staking protocols, enabling them to increase their decentralization.

This new crypto-economic security primitive has the potential to firmly establish itself in the industry. However, the viability of restaking on the Ethereum network is yet to be proven. And the pioneer in this segment is the EigenLayer project.

EigenLayer

EigenLayer allows ETH stakers to participate in the verification of software modules based on Ethereum and receive additional rewards. To do this, they must connect to specific smart contracts and agree to additional slashing conditions.

At the time of writing, there are two types of restaking available in the protocol:

• Native restaking allows validators to “re-stake” cryptocurrency by providing account details to withdraw staked ETH to the EigenLayer smart contract address.
• Liquid restaking enables the re-locking of liquid staking tokens (LST) like stETH from Lido and rETH from Rocket Pool.

According to the technical documentation, there is also the potential for modifications that involve locking LP tokens representing a share in a pool containing ETH or LST.

In April 2023, developers launched the project on the Goerli test network, and in mid-June, they deployed the smart contracts on the Ethereum mainnet.

A full-scale protocol launch is expected in the future. Afterward, validators will be able to choose projects whose security they want to support based on their risk readiness, while their resources will be pooled together.

For their activity, stakers receive special points called restaking points. These points are awarded based on the volume of cryptocurrency deposited into the protocol over a specific period of time. In the future, modules will be able to take these points into account when selecting a validator.

The EigenLayer team intends to open registration for “operators,” who are network participants that will interact with AVS on behalf of ETH holders who have delegated assets to them. According to the developers, these mechanisms combined will ensure the necessary level of decentralization in the system.

A Potential Trendsetter

EigenLayer has been actively discussed since the development was announced. The protocol launch on Goerli confirmed that the new concept still interests users. From April to June 2023, the project interacted with over 200,000 unique addresses. After the protocol launch on the main network, the team limited the maximum possible volume of LST to 9,600 ETH, explaining the decision as a measure to safeguard the project. Once this mark was reached, the ability to create new EigenPods, smart contracts necessary for native restaking, was also disabled.

In mid-July 2023, the developers raised the limit to 32,000 ETH. Then, literally the next day, it was increased to 45,000 ETH. EigenLayer explained that this step was taken due to “incredibly high demand” from ecosystem participants. The expanded pool was filled within a few minutes, with interest in the project coming from major players as well. For example, according to Arkham Intelligence, market maker Wintermute deposited 750 stETH into the protocol. However, the majority of deposits still do not exceed 1 ETH.

According to an EigenLayer representative, the team plans to increase the limit on the maximum token volume for restaking in the future. However, he noted that there are currently no “exact data [on this matter].” The project is targeting a market whose value is estimated to be nearly $50 billion at the time of preparing this material. Several products oriented towards utilizing the protocol are already known, some of which are internal developments. Among the recent ones is EigenDA. EigenLayer claims that this solution has the potential to reduce transaction costs in Ethereum-based L2 networks by 80%.

By democratizing the validator system-building process, EigenLayer has a chance to set a new trend and address a relevant issue for many AVS. If the project succeeds in the market, a new segment of products offering similar services may also emerge. For example, Polygon 2.0’s roadmap already includes a similar mechanism, albeit with a slightly different implementation. More protocols working in this direction will enter the market. The main question is how committed the new participants of the ecosystem will be to the core security principles of the Ethereum network.

Despite all the advantages of restaking, the model has several drawbacks that can pose systemic risks to the underlying network. As EigenLayer is a pioneer in this segment, we will examine the key ones using it as an example. In May 2023, Ethereum founder Vitalik Buterin stated that projects expanding validator capabilities pose a potential threat to the blockchain’s “social consensus.” He distinguishes between economic and social consensus. The former entails decision-making solely based on the amount of cryptocurrency staked. The latter relies on events occurring outside the blockchain. According to Buterin, some projects, including those focused on restaking, can become influential enough to exert pressure on the community to make decisions favoring specific groups. This would undermine Ethereum’s status as a neutral network.

As for EigenLayer, according to the project’s founder, the team is also developing specific mechanisms for internal protection. Among the potential measures to mitigate risks, he mentioned vetoing slashing and preventing excessive financialization of the protocol. Slashing is often considered a weak point of the restaking concept. In particular, EigenLayer has complete control over this mechanism, which means that “honest” validators can be unjustly penalized due to vulnerabilities in its smart contracts or connected services.The open-market model employed by the protocol can also play a mischievous role. Potentially, in the competition for AVS validators, the conditions for slashing may be softened, making it practically impossible to identify dishonest network participants.

In the future, the proliferation of protocols like EigenLayer will change the economic balance of Ethereum and simplify the process of infrastructure building, which will ultimately have a positive impact on ecosystem development. However, it is important to remember the drawbacks of the mechanism, especially in terms of its influence on the consensus mechanism. Development teams need to proceed methodically and conservatively, paying special attention to proactive management of systemic risks.At the same time, restaking is actively discussed within the community, and the discussion is conducted in a constructive manner. This is a positive signal because by the time the concept is widely implemented, developers may address existing issues and mitigate intra-network risks, as was the case with the aforementioned MEV. The technology addresses problems that are relevant to many services and enables validators to more effectively manage capital. Therefore, one can expect the standard cycle of development in the cryptocurrency industry segment: early experiments, concept validation, emergence of imitators, excitement, and, finally, an influx of investments.