Original title: "An Early Look at Ethereum's Restaking Landscape"

Author: TY, Etherscan Blog

Compiled by: Elvin, ChainCatcher

In the past two months, the total value locked (TVL) on EigenLayer has increased from $1 billion on December 23 to $9.5 billion, and the TVL of Liquidity Recollateralized Tokens (LRT) has increased from $152 million at the beginning of the year to $9.5 billion as of December 23. With more than $4 billion on February 24, re-hypothecation has shown significant growth momentum.

The community is particularly hot, and it is expected that airdrops may occur by accumulating EigenLayer points, and using the same ETH to obtain additional re-staking rewards.

In this article, we will review Ethereum staking and compare it to restaking. We'll look at the cases and explain some of the advantages and concerns associated with remortgaging for those looking to get a piece of the pie.

Proof of Stake (PoS) Ethereum and Security

Ethereum has undergone a merger, transforming its security model into a PoS consensus mechanism. To ensure the security of Ethereum under PoS, anyone can participate as a validator by depositing 32 ETH into the Beacon Chain, granting them the right to prove new blocks and occasionally propose new blocks. Validators are rewarded for honest work, but dishonest work may result in some or all of the staked ETH being slashed.

As of this writing, over 25% of the ETH supply (31,061,263 ETH out of 120,142,088.89 ETH) is staked. The total market value of ETH is US$400 billion, while the total value of pledged ETH is US$100 billion. This means that executing a 51% attack on Ethereum (where an attacker would control the majority of validators) would require the deployment of over $100 billion in capital (assuming that current network validators are honest) to successfully influence Ethereum in their favor .

Additionally, validator churn limits prevent new validators from entering the network at the same time. At the current limit of 15 per cycle, an attack could take more than 6 months to execute. In addition, the current supply of ETH on the exchange is 13,735,858.547 ETH (about 11.43%), which is less than half of the total amount of ETH pledged, making it increasingly difficult to purchase enough ETH to attack the network.

Source: cryptoquant.com

The Liquid Stake protocol allows more users to delegate ETH to node operators instead of running validator clients themselves, allowing more users to participate in PoS. In return, users receive liquid staking tokens (LST) that they can freely use in DeFi activities, unlike native staking where ETH must be locked on Beacon Chain. LST represents a commitment to exchange it back for delegated ETH and earned rewards.

The new ETH staking is mainly aimed at the liquidity staking protocol and has even sparked discussions about changing the staking issuance.

Remortgage and its cases

To put things into perspective, it took Ethereum more than three years to build its cryptoeconomic security, with over 25% of ETH staked. Staked ETH is currently worth over $100 billion, exceeding the combined market cap of the next major networks like BSC ($62 billion) and Solana ($59 billion) (both figures at the time of writing).

Source: https://beaconscan.com/stat/voted

New protocols seeking to build strong cryptoeconomic security will need to invest more time and resources to achieve similar feats. They must find new capital that has not yet secured existing blockchain protocols. This will also further dilute capital among various blockchain protocols and lead to security fragmentation.

The concept of restaking introduced by EigenLayer involves ETH validators/stakeholders choosing to secure additional protocols (or active verification services) with their staked ETH. This approach allows developers to launch new protocols faster by leveraging Ethereum’s security.

Since launching its first phase on the Ethereum mainnet on June 23, EigenLayer has accumulated more than $9.5 billion in total value locked (TVL), making it the second-largest protocol by TVL on Ethereum. Its Liquidity Re-staking Token (LRT) counterpart, similar to LST-staking ETH, currently has a TVL of over $4 billion.

Source: https://defillama.com/chain/Ethereum

According to EigenLayer's website, there are currently 13 AVS projects built in its ecosystem, utilizing re-pledged ETH to enhance the security of the project. The first AVS EigenDA (developed by EigenLabs) is being tested on the testnet and will be launched on the mainnet in the first half of 2024.

For a market overview of re-staking in February 2024, please read the blog here.

What are the advantages and concerns of remortgaging?

Because the active verification service is still undergoing rigorous testing and has not yet launched on mainnet, the full range of benefits and concerns are yet to be seen.

Nonetheless, here are the preliminary benefits and concerns of remortgaging gathered from the community:

Advantage

1. Sharing security

Protocols built on EigenLayer can benefit from pooled security without the additional startup costs of assembling a validator base, especially in PoS networks.

Sreeram Kannan, founder of EigenLayer, said sharing security has been massively strengthened. If $1 billion of equity is recollateralized and shared across all protocols, the cost of attacking any one of them is $1 billion.

This begs the question, if EigenLayer is a permissionless protocol that anyone can build on top of, will pooling security incentivize people to take more security risks funded by others?

Upcoming changes to the shared security model may introduce vested security, allowing AVS to purchase claims against a certain amount of pooled (rehypothecated) capital. If there is a problem with AVS, claims can be reassigned to the AVS user, making them complete. This is similar to insurance.

2. Capital efficiency

Re-staking ETH will enjoy more rewards for validating AVS than Ethereum alone.

Worry

1. Centralization risk

In addition to the normal ETH staking yield, validators utilizing AVS will be able to offer higher APY to their delegators. Validators need to understand the risks of acquiring additional AVS rather than blindly exploiting each AVS to obtain the promised returns.

Re-stakeholders may naturally be inclined to delegate their ETH to validators to maintain higher yields by minimizing the risk of slashing. This may develop into a feedback loop, with those validators that can provide sustainably higher returns attracting more capital in the long run, further consolidating their position, potentially creating a monopoly and risking centralization.

2. Decentralized Ethereum consensus

Like other blockchain communities, Ethereum’s social consensus is fragile. If social consensus is exploited mercilessly, it is likely to cause community divisions and chain rupture.

Re-staking should keep Ethereum minimalist and avoid introducing unnecessary “scope” that distracts from the role of Ethereum consensus. If recollateralized AVS becomes too large to fail, it could trigger a social consensus fork.

in conclusion

Re-staking quickly became a hot topic within the community, providing additional incentives for accumulating EigenLayer points and potential airdrop opportunities. This is also a promising technology that could allow Ethereum to secure more useful protocols.

The team behind EigenLayer is also in no rush to move forward with the process, as they consider multiple perspectives from the community and core developers, gradually making informed updates to the protocol.