*Forward the Original Title： 三角债 or 温和通胀：Restaking 再质押的另类视角

Ethereum has been a hotbed of innovation, or at least it used to be. Celestia introduced the concept of the DA layer, while EigenLayer fueled the frenzy around the restaking track. Technological innovation drove growth, providing some justification for the eventual decline in coin prices. Even Uniswap managed to boost coin prices by reviving the age-old topic of fee switches.

However, growth driven by technology inevitably has its limits. It’s like trying to eat two extra bowls of rice in a fit of anger; you can’t punch through the earth. The long-term ceiling of technology is the “cycle,” such as the well-known Kondratiev cycle, which lasts roughly 50-60 years. If ChatGPT can’t open the door to the fourth industrial revolution, then we’ll have to greet the fourth world war with sticks and stones.

A thousand years is too long; seize the day.

But long-term cycles are too slow, and there are shorter ones, such as Bitcoin halving, occurring every four years like clockwork. Similarly, tokens restaked on Ethereum, I predict, will also follow the price cycles I’ve summarized: concept emergence -> user attraction -> airdrop begins -> price rise -> short-term peak -> price drop -> positive news -> another surge -> return to normalcy, with occasional fluctuations as the market shifts focus to the next hot topic.

Seizing the day is still too long; understanding the concept of restaking in 5 minutes is enough.

1. Restaking is a typical debt-driven economy, facing value appreciation from the start. Only by meeting the requirements of LSD and ETH double staking rewards can one retain their earnings, leading to a more “impulsive” pursuit of high returns, resulting in higher risks than LSD.
2. What is sold in restaking is the security of Ethereum. Previously, L2 Rollups could only be priced based on Ethereum’s block space, reflected in DA and Gas Fees. Restaking standardizes the security of Ethereum and “monetizes” it, providing Ethereum-level security with a more affordable method.

First, let’s explain the second point. Only by understanding what product restaking produces can one understand the rationality of the pricing mechanism and the magical way to borrow real ETH from your hands.

Security involution, capital spillover

The product of restaking is not complicated. It’s essentially leveraging the security of the Ethereum mainnet, whether it’s ETH staking or LSD assets. They are all part of the Ethereum staking system. Previously, they could only contribute to the Ethereum mainnet indirectly benefiting various L2 or applications on Ethereum. Restaking is essentially separating this security and supplying it to dApps or Rollups in need, eliminating intermediaries and price differences.

The deduction logic of restaking

First, please do not doubt the PoS (Proof of Staking) mechanism. On one hand, ETH has chosen the PoS mechanism, and the subsequent restaking is also based on the principle that staking represents security extension. PoW and PoS are at least in a standoff for now. BTC monopolizes 50% of the market share, and the remaining public chains basically default to PoS. The rationality of PoS is recognized by all public chains except BTC, which is the premise for all our discussions. Let’s say it together: PoS is secure, and the more ETH staked, the safer it is!

At this point, the only risk of holding ETH is the decline in value based on USD-margined pricing. If viewed in terms of ETH pricing, Ethereum will gradually become more valuable. (Excluding risks such as theft or slashing)

Secondly, to maintain the security and smooth operation of the Ethereum network, it is necessary to lock some ETH into the staking system. This is a necessary protocol for network security, which everyone understands. However, it is not reasonable to take ETH from individuals for no reason, so they need to be given staking rewards, or interest.

The Ethereum Foundation has summarized four modes of staking participation:

• Solo home staking: Requires individuals to own 32 ETH, purchase hardware, set up nodes, and connect to the Ethereum network themselves. This is the most decentralized staking behaviour, but the downside is that it requires some money. Currently, the cost is over $100,000.
• Staking as a service: If you have 32 ETH but don’t want or don’t have the money to buy hardware, you can entrust your ETH to staking nodes, but you can still retain a certain degree of control. The downside is that you still need to pay for it yourself, costing around $100,000.
• Pooled staking, known as the familiar LSD mode such as Lido, where you stake ETH while receiving stETH tokens anchored 1:1 to ETH. You can still exchange it back to ETH, share staking rewards, and use stETH to participate in DeFi for earnings, and there is no limit on the amount of staking. It is suitable for retail investors, but the downside is that stETH still faces the risk of anchor detachment, potentially losing the principal ETH, and participating in DeFi can lead to more severe losses.
• CEX: Depositing coins for interest is the simplest method, with risks borne by oneself.

In this process, the Lido and CEX modes dominate the market. Lido alone holds about 30% of the market share, and exchanges such as Binance and Coinbase are also among the top. It can be said that Ethereum staking and liquidity staking (LSD) are essentially synonymous, and even CEX can be seen as a higher permission LSD mode.

But whether it’s staking or liquidity staking, they are functionally consistent, which is to provide security for the Ethereum network by staking ETH. The difference is that liquidity staking provides additional liquidity incentives for staking.

Restaking improves the original function of staking, which can be understood as “part-time”. With the restaking system, the Ethereum staking network can now individually meet the security needs of dApps, while still providing security for the Ethereum mainnet, and claim staking rewards, LSD rewards, and restaking rewards. (Depending on the collateral)

This change in security purposes is not difficult to understand. In real life, the security guard theoretically maintains the security of the community, but occasionally stopping a delivery guy is also reasonable. If the delivery is placed in the security booth, it’s essentially entering the community. The same logic applies to Rollups using EigenDA, which saves money. If placed in a parcel locker, it’s equivalent to Celestia serving as a DA service, which would be cheaper.

If you insist on having the delivery or parcel delivered to your doorstep, you need to pay extra or use high-end delivery services like JD or SF Express, which essentially equates to using Ethereum as a DA layer, the safest and most expensive option. For details on how to build DA with restaking services, refer to my previous article: The Rise of DA Narratives, Ethereum Rollups Exit.

Functional description of re-staking

Before the emergence of re-staking, taking DA as an example, one would either use the expensive but secure Ethereum mainnet, or the cheap but unorthodox services such as Celestia. Now using re-staking, one can enjoy the security of Ethereum while reducing costs. At the same time, the existing multi-staking income and the circulation function of LRT re-staking tokens are not restricted.

DA is just an example. EigenLayer is essentially a bunch of smart contracts, not a public chain or L2. Using the services provided by EigenLayer is equivalent to using Ethereum itself. It is a bit difficult to understand from the software level. Switching to PoW is easier to understand.

Take Dogecoin as an example. Although it’s a PoW token, there hasn’t been a dedicated Dogecoin mining machine for a long time. Instead, it’s sold bundled with LTC mining machines. This is called merged mining, where buying an LTC mining machine also gives you additional Dogecoin mining functionality. Taking it a step further, when Solana’s token Saga was selling for $1000, there were few takers. But after the associated BONK token surged in popularity, people were eager to buy Saga even at $10,000. This is also a form of “merged mining,” where mining Saga earns you Bonk tokens.

To sum it up, theoretically, Ethereum’s security can still be utilized by Rollups without using re-staking. However, direct interaction with the mainnet would be more expensive and time-consuming due to Ethereum’s well-known scalability issues. Re-staking essentially visualizes security by the quantity of staked tokens:

• The composition of re-staking tokens is ETH or LSD. Any dApp using re-staking tokens to build its staking node network is equivalent to the security of Ethereum;
• The greater the number of re-staking tokens, the higher the security of its active verification service AVS (Actively Validated Services). This is consistent with the principle that the greater the number of ETH staked, the safer Ethereum is;
• The re-staking service can still issue its tokens as a certificate for participating in the re-staking service. This function is similar to stETH. The inconsistencies will be mentioned below.

Finally, EigenLayer’s re-staking has reached its limit in terms of providing security. Other solutions are based on this, or they support more public chains, or make some solution modifications in terms of security, such as Puffer can share the dual benefits of LSD and LRT at the same time, or ether.fi can change itself from an LSD service to a re-staking service.

But our journey is not over yet. EigenLayer TVL has exceeded US$10 billion, Lido TVL has exceeded US$30 billion, and the staked amount of ETH is around 30 million, worth US$100 billion. If we believe that the value of derivatives should exceed spot, then there is still room for the value of the two to increase several times or dozens of times, but the value of items such as the US dollar, gold or crude oil is recognized by all mankind. The capital overflow process of Ethereum will take a long time, which is also an important reason why LSDs are not very successful, or there is a ceiling for re-staking, and the value needs time to be poured out.

Triangular debt or moderate inflation

Re-staking not only expands the boundaries in function but also has a stronger profit-seeking nature in the economic mechanism. This is not a derogatory meaning, but an objective description of its operation process, starting from ETH, to staking/LSD, and then to re-staking, the three parties are interconnected and indispensable, among which ETH provides security and income guarantee, staking/LSD provides liquidity certificates, and then restaking provides quantifiable security, which ultimately comes down to ETH itself.

It should be noted here that the security and income of ETH are built into LSD and re-staking. Even if LSD tokens are considered to be placed in the re-staking system, they can be decoupled into LSD and eventually returned to ETH itself.

However, this gives rise to a problem. On one hand, restaking involves two layers of staking systems, each requiring more returns to cover costs. Consider a scenario where the staking yield for ETH is 4%. Restaking promises returns higher than 4% to attract staking of LSD tokens. As a result, the restaking yield for ETH will significantly exceed the mainnet staking yield. If it’s lower or close to the mainnet staking yield, then ETH won’t be attracted to the restaking system.

From this, we can draw the following conclusion: staking itself is a form of inflationary system, which can be broadly categorized into three scenarios for discussion:

1. Staking on the mainnet provides the most secure staking yield, as every ETH holder contributes to profits. This is akin to the minting tax on USD. Holding USD or ETH inevitably faces slow erosion of purchasing power due to inflation.
2. Liquidity staking, such as those offered by Lido, issues “corporate bonds” with a 4% yield. stETH serves as a bond certificate, with Lido needing to offer returns higher than 4% to maintain equilibrium. For every stETH minted, Lido incurs a liability of 1.04 ETH.
3. If stETH is restaked, the restaking network purchases these corporate bonds at a price higher than 1.04 ETH. The restaking network receives reserves and can continue issuing its own “currency,” such as various LRT tokens. This process is akin to currency creation, with restaking based on credit to generate tokens. This differs from LSDs creating credit based on ETH (retail investors’ actual assets). In simpler terms, restaking assumes the role of a bank.

To illustrate with a real-life example, let’s consider the infamous “triangle debt.” In the late 1990s, industrial enterprises, particularly state-owned heavy industries in Northeast China, fell into a vicious cycle:

• Large industrial enterprises couldn’t sell their goods, resulting in financial losses and the inability to pay smaller enterprises’ debts.
• Small enterprises’ payments were held up by large enterprises, leading to severe funding shortages for expansion and causing a debt crisis.
• Both large and small enterprises borrowed from banks. Small enterprises, mostly private, struggled to obtain loans, while large enterprises, even after obtaining loans, couldn’t sell their goods, exacerbating the backlog.
• The rise in bad debts at banks made it harder for both large and small enterprises to obtain loans, leading to an economic slowdown and impacting social order with unemployment issues.

At first glance, the problem lies in the bad debt rate at banks, as their risk control models were practically non-existent, turning lending to large enterprises into a political task that failed to guide economic production. However, on a deeper level, it was a production problem. Large and small enterprises couldn’t directly respond to market signals for production and were completely decoupled from production and consumption, operating on inertia. Large enterprises didn’t want to improve product quality, and small enterprises didn’t explore civil markets.

From their perspective, large enterprises could easily obtain loans, eliminating the need to organize production based on the market. Eventually, the government would arrange for banks to lend to large enterprises, ensuring eventual receipt of payments.

In reality, although the “triangle debt” issue was “resolved” by transferring debt burdens, it was essentially turning a blind eye to past mistakes. Only after escaping the crisis did large and small enterprises begin to produce based on market signals, but it was too late. The ultimate winners were the Yangtze River Delta and the Pearl River Delta.

Similarly, ETH represents large enterprises, LSDs represent small enterprises, and restaking represents banks. In this logic, it’s not a simple case of ETH leverage expanding. Instead, it’s a cycle of ETH, credit certificates, token creation, and feeding back to ETH, where the entire flow process’s yield must exceed the ETH staking yield. Otherwise, it’s debt surpassing economic growth, where economic growth can’t even cover debt interest payments, let alone eliminate debt. Currently, the United States, Japan, and Europe are racing down this path, with the United States in the best position because everyone bears the cost of inflation for the USD; if you hold USDT, you bear it too.

Debt-based economies are indeed unsustainable. However, this approach has its rationale. ETH is based on staking, which is the biggest political correctness. Criticism can only target the insufficient stake amount, lack of decentralization, or security issues of restaking services, but cannot negate PoS itself.

Triangular debt and restaking analogy

As a production enterprise, ETH ensures the baseline of staking returns. Whether it’s LSD or re-staking, the returns must be higher than or close to this baseline. LSD transfers credit certificates to re-staking, which needs to enhance its reserve fund to participate in activities with higher returns. Transitioning from ETH to re-staking, the market’s re-staking ETH certificates are already higher than 104% of ETH. As long as users don’t redeem, the market’s wealth is invisibly amplified, bringing stronger re-staking purchasing power and debt repayment capability.

However, risks also come hand in hand. Re-staking is based on a credit-based “currency” system, requiring the maintenance of one’s credit to prevent user runs. Luna-UST serves as a cautionary tale, depending on the return commitment of the re-staking system. In fact, EigenLayer’s available staking assets include various types such as ETH, LSD, LP assets, and others, mainly due to the high level of risk involved.

The risk with LSD lies in the exchange rate between stETH and ETH. In theory, as long as the reserve is sufficient or there is a white knight to rescue, converting back to ETH in times of crisis is feasible. However, the re-staking system not only needs to ensure a high return rate but also meet redemption demands. Thus, while only absorbing strongly correlated ETH assets might be safe, it cannot guarantee returns. If alternative assets are absorbed excessively, their debt repayment ability will be questioned.

Currently, EigenLayer’s Total Value Locked (TVL) is lower than Lido’s for the same reason. Excessive stacking creates uncontrollable crises. Consider a theoretical scenario: Lido only needs to revert to ETH to stabilize, while EigenLayer needs to revert to stETH, then back to ETH via stETH. If it involves other tokens, the rollback-exchange process becomes even more complex. (In reality, such a complex mechanism may not be necessary.)

Similar to triangular debt, the operation of the re-staking system is based on the return commitment of the re-staking network, but its core lies in the strength of ETH. Excluding uncontrollable factors like contract security crises, as long as ETH remains strong and the TVL of the EVM ecosystem increases, staking and re-staking networks based on ETH can continue to print money limitlessly. With a spot value of 100 billion in Ethereum staking, even a tenfold increase is just a trillion-dollar scale.

As long as ETH is adopted by more individuals and institutions, the re-staking system will be an efficient and moderate form of inflation. We will experience a warm period of prosperity together, where all ETH-related assets will rise in price, until the collapse.

Conclusion

The product of re-staking is the monetization of Ethereum security, and its economic model represents moderate inflation. This leverage is a slow upward trend, rather than the violent and drastic leverage of contracts multiplied by 125 times. The price increase of ETH-related assets is not heavily influenced by tokens like LDO from Lido or EigenLayer’s native tokens because Ethereum’s core consists solely of ETH. There is absolutely no room for a second mainnet-related asset, which is the bottom line for the Ethereum network under the PoS mechanism. This is also the fundamental reason why Vitalik strongly criticizes Celestia. All profits belong to ETH.

Compared to Bitcoin, Ethereum needs to create income sources for ETH itself, whereas BTC is its own income source. This is a completely different situation. As for the staking and re-staking of other networks, they must first answer the necessity of their own attachment to the public chain; otherwise, it’s just a round of fast-running gambling games.

Disclaimer：

1. This article is reprinted from [Zuoye Waibo Mountain]. Forward the Original Title‘三角债 or 温和通胀：Restaking 再质押的另类视角’.All copyrights belong to the original author [Master Zuo]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.