The Race of Restaking is in Full Swing, a New Engine for a Bull Market is Right in Front of Us

[TL；DR]:

As a leading restaking protocol in the Ethereum ecosystem, EigenLayer enhances the security of the Ethereum network and provides more reward opportunities for stakers by allowing users to stake LST on other side chains, oracle machines, middleware, etc.

The Restaking sector has multiple favorable macro environments, including new hype, multi-layer nesting to improve capital efficiency, and upgrading and halving of Cancun. This track has quickly gained popularity and shows no signs of cooling down.

Restaking has released the liquidity of ETH and improved capital efficiency for investors, but nesting development also comes with fines, concentration, contracts, and multi-level risks, and participation needs to be done within one’s capacity.

Introduction

Technology and product innovation have always been the driving force behind the development of the crypto industry. Recently, with the approaching upgrade of Ethereum Cancun, especially with the rise and growth of EigenLayer, the total locked-in value (TVL) of multiple restaking projects has significantly increased, and the liquidity restaking (LRT) track has begun to receive widespread attention.

This article will explore the potential and impact of EigenLayer and its related restaking projects from multiple dimensions, as well as their impact on the Ethereum ecosystem, to reveal the value of each project.

EigenLayer Stirs Up a New Trend in Restaking

Restaking was first proposed by @sreeramkannan, which refers to allowing ETH that has already been staked on Ethereum to be re-staked on other consensus protocols, in order to achieve secure sharing of assets.

In fact, this secure sharing model is not unique to EigenLayer. Blockchains such as Polkadot, Cosmos, and Avalanche also adopt similar secure sharing mechanisms.

As a leader in restaking protocols in the Ethereum ecosystem, EigenLayer has further promoted the application of this concept and become a leading project in this field. This protocol allows users to restake ETH, lsdETH (liquidity staked ETH), and LP Token on other side chains, oracle machines, middleware, etc., to receive verification rewards. This core innovation not only increases the security of the Ethereum network but also provides more reward opportunities for stakers, achieving a win-win situation.

Source: @DWFVentures

According to the de_script_ion in the white paper, the core of the EigenLayer implementation mechanism lies in two pillars: pooled security and open market governance.

The working principle of the pooling security mechanism is that Ethereum validators can bind their beacon chain withdrawal vouchers with EigenLayer smart contracts and build new modules based on EigenLayer. These modules impose additional reduction conditions on the ETH staked by the validators who join them. As a reward, validators can not only receive rewards from staked vouchers but also earn additional income from projects using Active Verification Services (AVS).

The free market governance mechanism is a major feature of EigenLayer, which constructs an open market environment that allows validators to freely choose whether to join or exit each module based on EigenLayer. This market mechanism ensures that validators have sufficient incentives when allocating their pooled security, while considering potential additional risk reduction, validators will assist in determining which modules are worth allocating more pooled security.

In terms of punishment mechanisms, Eigenlayer has also taken strict measures. Through executing smart contracts, malicious attackers will face a penalty of up to 50% of their staked ETH, significantly increasing the cost of malicious attacks. This measure ensures the security and stability of the EigenLayer ecosystem.

In summary, the core value of EigenLayer lies in renting the security layer of ETH to multiple Dapp/Blockchains to collect security taxes, solving the problem of the original crypto economy security of blockchain being difficult to transmit and expand to other protocols in the ecosystem.

According to Dune’s data statistics, as of the writing date, EigenLayer has staked over 110000 ETH addresses for LST, with a quantity exceeding 2.87 million, equivalent to a value of over $9.7B.

Source: Dune

The Hot LEGO Revenue Background of Restaking

The reason why the Restaking track has become an important focus of the new narrative in this bull market is mainly because it cleverly inherits the “nesting” strategy of the Ethereum community, which uses LEGO to stack BUFFs to increase profits in the same way as the DeFi Summer in the previous bull market.

From a principle perspective, the process of ETH passing through LST and LRT is as follows:

Firstly, invest ETH into LSD protocols (such as Lido) as collateral to obtain lsdETH (such as stETH). During this process, you can enjoy the PoS inflation interest of ETH, and if the LSD protocol does not issue coins, you may also receive airdrop rewards.

Subsequently, the user re-staked the LST in exchange for a new re-staking voucher, proving that the LST has been re-staked, but only ETH remains as the original underlying asset.

In short, staking ETH to obtain LST, and staking LST again to obtain LRT, this repeated staking process is called Restaking.

In fact, users holding LST/LRT can engage in more financial operations, such as re-staking, lending, leveraged derivatives, etc., increasing the opportunity to use liquidity to earn profits with each staking.

Source: Messari

Combined with the mechanism of Eigenlayer and other interest-earning protocols such as Pendle and Frax Finance, liquidity has been accelerated and a new round of token arbitrage has been launched, equivalent to an enhanced version of DeFi Summer.

As a result, under the multiple stimuli of hype, multi-layer nesting to improve capital efficiency, and the upgrading and halving of Cancun in the new track, the track quickly gained popularity and has shown no signs of cooling down so far.

The Restaking Ecosystem is Becoming Increasingly Perfect, and a Positive Spiral Has Formed

The development of the restaking market is far from stopping at EigenLayer. Multiple chain and derivative projects, as well as various infrastructure, have sprung up like mushrooms after rain. These projects have shown remarkable potential under the restaking framework, greatly enriching the ecosystem of this sector.

From the perspective of various project types, this section not only includes LSD Restaking, Liquid LSD Restaking, Native Restaking, Liquid Native Restaking, etc. Pendle, Swell, Ether. fi, Eigenpie, Renzo, Puffer Finance, and other projects are particularly eye-catching, each with unique re-staking mechanisms and return prospects, attracting a large number of participants and investments, and expanding EigenLayer’s TVL.

From the perspective of multi chain applications, the development of the stacking/restaking ecosystem outside of Ethereum is equally impressive, such as the Bitcoin staking protocol Babylon, Solana ecosystem Picasso, Near ecosystem LiNear, and Octopus Network, all of which have experienced similar narrative hype.

Source: Babylonchain

From the perspective of restaking’s infrastructure, such as lending platforms Ion Protocol, Astrid, Rollup, AltLayer, L2 public chains Supermeta, Tenet, etc., which are specifically used for restaking, greatly reduce the user threshold for restaking and further elevate the ceiling of the ecosystem.

Of course, it cannot be ignored that the nesting style positive spiral is often accompanied by various risks, such as fine risk, concentration risk, contract risk, and multi-level risk superposition, all of which are worth considering by participants.

Currently, the positive impact of this new track is clearly more accepted by the market. Eigenlayer has successfully unleashed the nesting potential of Ethereum and, driven by the trend of modularity, has transformed Ethereum’s security consensus into a modular layer. This innovation enables Ethereum to expand to other heterogeneous chains, compensating for its lack of data availability (DA) capabilities.

In summary, in the context of the continuous emergence of emerging chains, the restaking project represented by Eigenlayer has injected new vitality into the old public chain of Ethereum and promoted a new round of innovation and prosperity in various products of each chain.