Restaking provides decentralized finance users with a way to improve capital efficiency by “staking” the same token to secure both the underlying blockchain and protocols building atop of the network. It allows additional protocols to benefit from the same security mechanism, while users can earn greater rewards, though they also take on additional risks.
The concept of restaking was invented by EigenLayer on Ethereum and relies on “liquid restaking tokens”, which are issued as a receipt to those who stake cryptocurrencies such as ETH, BTC, and SOL. These LRTs, as they’re known, allow users to retain their staked liquidity, so they can provide security to further networks and protocols and strengthen the broader blockchain ecosystem.
With the emergence of restaking, dozens of projects are exploring ways in which they can leverage the security provided by restaked assets, through mechanisms such as Actively Validated Services and Bitcoin Validated Services.
Restaking Explained
Restaking builds on staking, where crypto users can lock their tokens in validator nodes to help secure the underlying blockchain network. For instance, the security of Ethereum depends on the number of active validators, plus the percentage of tokens in circulation that are staked, and how they are distributed across the validator set.
Traditionally, staked tokens have always been considered “idle”, and once locked up could no longer be traded or used in DeFi protocols. To free up these locked tokens, the DeFi industry birthed the idea of LRTs, which can still be traded or allocated to other protocols – for instance, some LRTs can be used as collateral for decentralized loans.
Restaking provides more options, allowing staked ETH, BTC, or SOL to be reallocated and staked a second time to secure other protocols. It means more projects benefit from the security provided by the original staked collateral, and investors benefit from earning additional rewards. With EigenLayer, for instance, decentralized applications are effectively allowed to rent the staking security of Ethereum.
Ethereum Restaking
Most restaking today occurs on the Ethereum blockchain, which first pioneered the concept and has spawned the most extensive and sophisticated ecosystem around the idea. EigenLayer boasts the most total value locked, at over $5.2 billion.
Uniquely, Ethereum allows users to engage in two kinds of restaking. Native restaking is the first method and involves running an Ethereum validators node and restaking staked ETH on Ethereum’s Beacon Chain to EigenLayer. More common is LRT restaking, where holders of LRTs such as stETH deposit those assets with validators on EigenLayer.
On Ethereum, restaked assets are allocated to Actively Validated Services, which are the dApps and other protocols, such as network bridges, that want to share the benefits of Ethereum’s staked security. The restaking process is quite simple, and you can check out this guide for restaking assets on Eigenlayer.
Besides restaking with EigenLayer, Ethereum restakers have additional options with protocols such as Ether.Fi and Puffer Finance, which are focused exclusively on native restaking, and Renzo Protocol and Kelp, which support both native and LRT restaking, accepting tokens such as stETH, ETHx, and wBETH, among many others.
Restaking On Other Networks
While Ethereum accounts for the vast majority of restaked capital, few people realize that it’s also possible to restake Bitcoin and other assets, thanks to protocols such as SatLayer.
Although Bitcoin is not a proof-of-stake chain, it’s possible to stake BTC anyway through Babylon Chain, Lorenzo Protocol and others, where the staked assets are instead used to secure third-party PoS blockchains.
SatLayer builds on this idea, allowing users to restake the LRTs they get from Babylon and Lorenzo Protocol to secure its “Bitcoin Validated Services”, which are much like the Actively Validated Services found on Ethereum, enabling dApps to tap into the security foundation of the Bitcoin blockchain. The process is pretty simple, with SatLayer offering a straightforward, ten-step guide for BTC holders to get started.
SatLayer has proven popular, amassing more than $266 million in total value locked, because it dramatically increases the utility of Bitcoin, which was once almost completely useless for DeFi users. Not only can BTC holders stake, but now they can restake those assets in order to maximize the security they provide and the rewards they earn.
It’s also possible to restake on the Solana blockchain via protocols such as Solayer.
Why is Restaking Important?
For investors, the biggest advantage of restaking is that it re-energizes once-idle assets sitting in smart contracts, allowing them to be reinvested. It’s a way of enhancing capital efficiency for users to earn additional rewards in return for boosting the security of the blockchain ecosystem.
By restaking assets, investors can effectively double the amount of rewards they would earn from regular staking. For instance, native staking on Ethereum provides an average yield of 3.6%, while restaking can generate anything from 3.08% to 4.06%. Staking Bitcoin on Babylon currently earns a 2.3% APR as well as additional Babylon points, while restaking through SatLayer means users can earn additional rewards.
Restaking is extremely beneficial for the wider blockchain ecosystem. Protocols such as data availability layers, Layer-2 networks, and network bridges have often struggled to establish security because they’re unable to attract enough staked capital by themselves. After all, who wants to be the first to stake on an unsecured network? Restaking provides a way around this “cold start” problem. Instead of growing their network of validators, these protocols can create an Actively Validated Service or Bitcoin Validated Service and tap into the security foundation of Ethereum or Bitcoin.
Are There Any Risks?
Yes! It’s important to understand there are downsides to restaking. After all, there’s no such thing as a free lunch.
The risks are similar to those of traditional staking. When users stake or restake their assets, they’re subject to the blockchain or protocol’s “slashing rules”. Should the validator they entrust with their capital break any of these rules, their funds could be “slashed”, or taken away from them to be redistributed by the protocol or burned.
Each AVS or BVS has its own slashing rules, but they generally cover things like penalties for downtime or not validating transactions properly, breaches of the restaking contract terms, and malicious activities such as double-signing or front-running transactions.
The risks have become more complex with the growth of the restaking ecosystem, and some experts warn that a slashing event on one protocol could potentially create a cascading effect, causing slashing events on multiple others.
More Rewards, More Security
It’s easy to see why restaking has exploded into life over the last couple of years. Restaked capital brings major benefits to both investors (through enhanced rewards) and new protocols (scalable security). That said, users need to be aware of the slashing risks associated with restaking, and the fluctuating rewards.
Nonetheless, it’s clear that restaking is captivating the DeFi community, and as protocols like EigenLayer and SatLayer evolve, we’re hopeful that the rewards on offer will become more enticing, and that superior risk management mechanisms might emerge. Such developments are necessary to boost the restaking ecosystem and ensure it provides sustainable security and rewards over the long term.
