Why build your own security apparatus when you can rent?
That’s the premise behind “restaking,” a new concept taking hold in the crypto landscape – where the ether (ETH) tokens that are deposited or “staked” on Ethereum, the world’s second-largest blockchain – as a guarantee of security – can get reused and repurposed for smaller networks and applications.
The goal is to make it easier for blockchain developers to set up new projects without having to shoulder the high costs of rallying their own groups of operators or “validators” – and staked tokens – to assure that the new systems are secure.
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For Ethereum stakers – those investors and users who deposit ETH tokens into the blockchain’s security mechanism to help guarantee the transactions – the ability to restake tokens to other projects outside of Ethereum could offer an additional source of income. Some 23.4 million ETH (worth $43 billion) have been staked on Ethereum, and there about 730,000 validators, according to the blockchain tracker beaconcha.in.
EigenLayer, founded in 2021 by the University of Washington’s Sreeram Kannan, is frequently credited as a pioneer of restaking. The protocol deployed its “Stage 1” launch on the main Ethereum network in June, after a two-month testing phase. A month prior, lead developer EigenLabs raised $50 million in a Series A fundraising, following an earlier $14.5 million seed round.
The EigenLayer protocol makes “it easier for anybody to be able to spin up and build their projects, where historically it was extremely difficult to bootstrap your own trust network,” said Brianna Montgomery, head of strategy at the company.
One risk is that restakers could be subject to “slashing” – penalties assessed against staked deposits – and the dynamic could eventually lead to conflicts of interest that might split the consensus on Ethereum. None other than Ethereum co-founder Vitalik Buterin, in a May 2023 blog post, flagged the potential for “high systemic risks to the ecosystem.”
Despite the natural urge to extend the blockchain’s core with more functionality, “we should instead preserve the chain’s minimalism, support uses of restaking that do not look like slippery slopes to extending the role of Ethereum consensus,” according to Buterin.
How does restaking work?
Through EigenLayer’s restaking techniques, the pooled security of ETH stakers extends Ethereum’s decentralized trust to other systems, according to the protocol’s documents. In the Stage 1 launch, EigenLayer supports liquid staking of Lido stETH, Rocket Pool ETH (rETH) and Coinbase Wrapped Staked ETH (cbETH).
According to a whitepaper, “Stakers opt in by granting the EigenLayer smart contracts the ability to impose additional slashing conditions on their staked ETH, allowing an extension of cryptoeconomic security.”
The process is akin to the practice of “merged mining” on the Bitcoin blockchain, where hashpower – or computational power – is reapplied to another blockchain to provide security; Syscoin is one such project.
Bart Stephens, managing partner of lead investor Blockchain Capital, wrote in a blog post in March that “the types of cryptoeconomic protocols that are suitable to be built on EigenLayer are extremely broad and span everything from middleware to brand new blockchains.” Blockchain Capital was the lead investor in EigenLayer’s recent fundraising round.
Protocols made possible through restaking include “things like hyperscale data availability layers, off-chain ZKP verification protocols, protocols augmenting Ethereum’s censorship resistance, novel oracle mechanisms, cross-chain bridges/messaging protocols, decentralized sequencing protocols, as well as completely novel protocols we cannot even begin to imagine,” according to Stephens.
According to a June 5 Medium post on the topic by Ben Wee, EigenLayer “creates a marketplace for staking, where protocols can buy pooled security from validators, and validators can sell pooled security to protocols.”
EigenLabs developed its own protocol for “data availability” – a cost-saving measure that allows layer 2 networks and so-called “light clients” to confirm that transaction data is valid without having to actually download all data.
It’s called EigenDA, and according to Wee, “buyers of data availability on Ethereum (such as rollups) can purchase DA bandwidth at low fees.”
EigenLayer has announced plans to provider data availability services for layer 2 scaling solutions, Celo and Mantle, in addition to teaming up with other entities in the crypto ecosystem like Espresso Systems and Nethermind.
EigenLayer TVL
In a sign of demand for the protocol, the project has repeatedly raised its staking capacity, and the caps keep getting hit right away.
EigenLayer saw its total value locked – the value of tokens deposited on the protocol – quadruple to about $90 million in about two days after it announced on July 12 an increase in its restaking capacity for liquid staking tokens to 45,000, according to the tracking website DeFiLlama.
Within the first day, its limit for stETH and rETH – Lido and RocketPool’s liquid staking tokens – was reached, with cbETH, Coinbase’s staked ETH, hitting its capacity the next day, highlighting the enthusiasm of crypto users toward EigenLayer.
Last week, EigenLabs announced that the caps would be raised again on Aug. 22 – with additional deposits of the liquid staking tokens remaining open until any one of them hits 100,000 tokens restaked.
New applications leveraging the pooled security from staked ether through EigenLayer “impose additional slashing conditions on validators’ staked ETH, and in return, validators earn extra revenue for providing security and validation services,” said Nansen senior research analysts Osgur Murphy O Kane and Jake Kennis in a research report.
That’s what was apparently at the core of the essay that Buterin wrote in May pleading for Ethereum’s consensus or security mechanism to not be overloaded – specifically mentioning restaking and EigenLayer.
He said dual-use validator staked ETH is “fundamentally fine,” but the attempt to recruit “Ethereum social consensus for your application’s own purposes is not.”
Kannan, the EigenLayer founder, posted in response on X (formerly Twitter) on May 21 that he would “welcome this excellent analysis” and that the risk assessment “is consistent with what we have been advocating.”
After the Buterin salvo, “the conversation” about EigenLayer and restaking “became more thoughtful, with an emphasis on managing risk and aligning with the long-term interests of Ethereum,” Steven Quinn, head of research for the staking infrastructure firm P2P, told CoinDesk.