A Comprehensive Look at Restaking

November 03, 2023
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A closer look at restaking

As the crypto-economy moves towards innovative measures to harness value from established blockchain utility, restaking emerges as the frontrunner. The concept allows Ethereum PoS stakers to capitalize on their staking ventures beyond what is possible at the consensus level. In fact, it also amplifies the reward generation capabilities of the more novel liquid staking created to make staking on Ethereum more attractive.

TL;DR:

  • Restaking allows Ethereum stakers to earn additional rewards by securing a variety of blockchain applications through the EigenLayer protocol;
  • EigenLayer enhances the security of AVSs by leveraging Ethereum's security, creating a marketplace for validators to choose AVSs based on incentives;
  • Validators receive rewards for delegating their stakes to secure AVSs, with penalties in place for malicious behavior to maintain network integrity;
  • Challenges with EigenLayer include the risk of loss from slashing, lengthy unbonding periods, and illiquidity of restaked assets;
  • InceptionLRT improves upon EigenLayer by offering liquid restaking tokens (LRTs) for liquidity and reward maximization, with added slashing insurance for node operators.

Restaking – An EigenLayer-Based Creation

The restaking arc begins with the EigenLayer protocol, which acts as an add-on to the Ethereum PoS process, letting the network’s validators secure more than just the blockchain. The avant-garde protocol attracts applications called AVSs (Actively Validated Services) that commonly utilize standalone consensus implementations to validate protocol-level transactions. Nevertheless, they still rely on Ethereum to save their data on its immutable data storage layer. EigenLayer’s ingenuity lies in shifting the derivation of application security entirely from individual consensus setups to Ethereum’s enormous security resources.

Restaking can occur in varying ways, with the two most popular ones being native restaking and LST restaking. The former allows restaking by letting Ethereum validators switch their withdrawal credentials to EigenLayer contracts, which activates their nodes on the protocol. With the latter method, holders of stETH, rETH, and cbETH LSTs can deposit their tokens on EigenLayer and delegate them to EigenLayer validators. Other methods also exist – delegating ETH LPs (liquidity pool tokens) and LST LPs by depositing them on the platform.

What Restaking Does

Through restaking, the ETH staked at the Ethereum consensus layer, and even the DeFi layer, is now amortized to secure newly deployed AVS protocols that include the likes of layer-2 blockchains, oracles, data availability layers, virtual machines, and several other dApps. With that, EigenLayer bridges the gaps in security between Ethereum and these applications.

Since AVSs traditionally rely on their own transaction validating mechanisms, a fracture exists in the levels of security witnessed between them and the Ethereum blockchain. EigenLayer transfers Ethereum’s validation power to AVSs, bringing in high-level security that the applications can use to operate more securely than they would by bootstrapping their own security implementations. EigenLayer thus does away with the vulnerabilities existing with newly erected consensus mechanisms. Moreover, it drastically reduces the costs associated with setting them up by leveraging the already existing Ethereum validator base.

Benefitting Ethereum’s Staking Community

Restaking’s benefits extend to Ethereum’s staking community through the reward generation capabilities available for those restaking their assets on EigenLayer. To that point, ETH validators and LST and LP delegators get incentivized to extend their security capabilities to the protocols. Furthermore, Ethereum validators can delegate their entire ETH stakes to EigenLayer operators. That way, they can continue validating transactions on Ethereum, leaving AVS validation to EigenLayer operators while receiving a portion of the validation rewards generated through restaking.

The incentivization measures extend to other forms of stakers beyond those validating transactions. Users can stake their ETH and ETH-based derivatives like LSTs, LPs (liquidity pool tokens), and LST LPs to validators on EigenLayer to receive a portion of their rewards. Furthermore, Ethereum validators can delegate their entire ETH stakes to EigenLayer operators. That way, they can continue validating transactions on Ethereum, leaving AVS validation to EigenLayer operators while receiving a portion of the AVS validation rewards.

The highly appealing incentivization prospects provided by EigenLayer create an open marketplace where Ethereum nodes can choose AVSs to secure based on their reward offerings and the risks associated with validating them. Hence, EigenLayer pushes Ethereum’s proven decentralization to the freshly implemented AVS networks.

EigenLayer also addresses the possibilities of Ethereum validators going rogue and attacking AVSs for their self-serving financial benefit. The protocol allows AVSs to implement slashing mechanisms that penalize validators by deducting up to 50% of their staked assets – a large amount that nullifies the value they can gain from taking over AVSs. Validator stakes will also be penalized if they withdraw their staked ETH from the Ethereum base layer unwarranted.

The Inefficiencies of EigenLayer Restaking

While slashing enforces crypto-economic security, it is one of the biggest risks associated with EigenLayer. Stakers can lose large sums due to contract bugs and unethical behavior by AVSs. EigenLayer also harbors other inefficiencies, like the seven-day unbonding period associated with withdrawing restaked assets from the platform. The unbonding term exists on top of Ethereum’s unbonding period, making unstaking assets a hassle. The absence of the issuance of liquid receipt tokens for restaked value further amplifies the illiquidity of EigenLayer.

InceptionLRT Takes-Off Where EigenLayer Halts

EigenLayer advances the staking ecosystem in the right direction despite its inefficiencies. Restaking will witness increased adoption in the coming times, considering the entry of applications building on top of the primitive concept. InceptionLRT is one such dApp developing the restaking utility by addressing the inefficiencies that EigenLayer leaves unaddressed.

Users holding LSTs like stETH, rETH, and cbETH, the biggest LSTs by market share, can utilize InceptionLRT to restake their value. The primary benefit InceptionLRT offers over restaking capabilities are its LRTs (liquid restaking tokens), which enable users to maintain liquid positions while restaking. They breed DeFi composability as users can restake their assets and earn rewards from DeFi protocols deployed on Ethereum and its layer-2s. The LRT pushes staking reward generation to the maximum by innovating in the restaking sector.

Also, InceptionLRT works with vetted node operators known to exhibit good behavior. In case of inevitable slashings, the protocol safeguards whitelisted operators with its slashing insurance, keeping the validation process going and preventing the slashing of AVS rewards accumulated for delegators.

InceptionLRT makes the restaking ecosystem as safe and rewarding as can be.

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