Author: Snow Translator: Paine

Key Points of the Report

Restaking is a mechanism that improves yield by releasing Liquidity and increasing leverage, mainly based on the security framework of Ethereum. Although it can provide additional income for stakers and improve capital utilization efficiency, it also brings a series of risks, including slashing, Liquidity, centralization, contract, and Smart Contract risks. EigenLayer is a pioneer in this field, but with the entry of more competitors such as Symbiotic, Karak Network, Babylon, BounceBit, and Solayer, the market funds are being diversified and may face more challenges in the future. Users need to carefully consider the risks and benefits of participating in the restaking protocol and configure corresponding contract monitoring to ensure asset security.

Background

stake与Liquiditystake

Stake in ETH 2.0 refers to users locking their ETH in the ETH 2.0 network to support the operation and security of the network. In ETH 2.0, this stake mechanism is part of the Proof of Stake (PoS) Consensus Algorithm, replacing the previous Proof of Work (PoW) mechanism. Stakeholders stake ETH to become validators, participating in the creation and confirmation of blocks, and in return, they can receive stake rewards.

The birth of Liquid Staking Derivatives (LSD) aims to solve the Liquidity problem in traditional stake. It allows users to obtain LiquidityToken representing their stake share while staking Tokens (such as Lido's stETH or Rocket Pool's rETH). These LiquidityTokens can be traded, borrowed, or used for other financial activities on other platforms, allowing users to participate in staking rewards while maintaining fund flexibility.

Trust Network Breakdown

The BTC network has introduced the concept of Decentralization since its inception, designed to be a peer-to-peer Digital Money system based on UTXO and script language. However, its ability to build various applications on the network is limited. Later, Ethereum allowed developers to build permissionless Decentralization applications (DApps) on its consensus layer through the highly Programmable Virtual Machine (EVM) and the concept of modular blockchain, providing trust and security for all DApps built on it. However, many protocols or middleware have not fully utilized Ethereum's trust network.

For example, Rollup enhances Ethereum's performance by separating transaction execution from the EVM and returning only when Settlement occurs. However, these transactions are not deployed and verified on the EVM, so they cannot fully rely on Ethereum's trust network. In addition to Rollup, other systems based on new Consensus protocol, such as Sidechain, data availability layer, new Virtual Machine, Oracle Machine, and cross-chain bridges, also face similar challenges and need to establish their own trust layer to ensure security and prevent malicious behavior, namely Active Verification Service (AVS).

Liquidity割裂

As the largest Proof of Stake (PoS) blockchain, ETHereum relies on stake to ensure its security, such as cross-chain bridges, Oracle Machine, data availability layers, and Zero-Knowledge Proof. Therefore, whenever a new project goes online, users must lock in a certain amount of capital, leading to different projects competing for a limited pool of funds. As the stake yield offered by different projects continues to rise, the risks borne by the projects themselves also increase correspondingly, forming a vicious circle. On the other hand, users can only stake limited funds in limited projects to obtain limited returns, resulting in relatively low capital utilization. With the increasing number of public chains, applications, and various projects, Liquidity is becoming more fragmented.

Market demand for stake services

With the approval of BTC Spot ETF and the successful upgrade of the Ethereum network, Ethereum is rejuvenated with new vitality. As of July 15th, 2024, over $111 billion worth of Ether (ETH) has been staked, accounting for 28% of the total supply. The amount of staked ETH is referred to as the 'security budget' of the Ethereum network, as these assets are subject to network penalties in the event of a Double Spend Attack or other protocol violations. Users who stake ETH contribute to the security of the Ethereum network and are rewarded through protocol issuance, priority tips, and MEV. Users can easily stake ETH through the liquid staking pool without sacrificing asset liquidity, leading to an increasing demand for staking.

In this context, there is a market demand for shared security, requiring a platform that can use the assets staked by users to secure multiple projects. This is the background in which Restaking emerges.

What is stake again

The modular expansion of the blockchain has led to the birth of many new protocols and support for middleware. However, each network needs to establish its own security mechanism, usually using a variant of the Proof of Stake (PoS) Consensus, but this approach can result in each security pool becoming an isolated entity.

Staking is the process of using the economic and computing resources of one blockchain to protect multiple blockchains. In a PoS blockchain, staking allows the stake weight and validators set of one chain to be used on any number of other on-chain. That is, using the liquidity staked on the ETH network to stake tokens for validators on other blockchains, to obtain more earnings, and to enhance the security and Decentralization features of the new network. As a result, a more unified and efficient security system is formed, which can be shared by multiple blockchain ecosystems. This concept extends the existing economic trust of the ETH network to protect other distributed systems, such as Oracle Machine, bridges, or sidechains.

The concept of stake has been around in the industry for many years. The Polkadot ecosystem attempted this concept in 2020. In May 2023, Cosmos launched a replicated security stake model, and in the same month, Ethereum introduced a similar model through EigenLayer. The main value of the replicated security stake protocol is the stake funds locked in Ethereum, making Ethereum the PoS blockchain with the highest economic security.

One important difference between the stake mechanism and Liquiditystake is that although both mechanisms can help ETH staked on the Ethereum network to earn more profits, the stake mechanism fully inherits the trust consensus of the stake mechanism and extends it, allowing validators to make trustworthy commitments for more applications, infrastructure, or distributed networks, thereby improving the overall economic security of the Ethereum ecosystem.

How does stake work in re-staking?

The core of staking again is to use LiquiditystakeToken assets to stake validators in other blockchains, to obtain more rewards while establishing a shared security pool to improve the security and decentralization of new networks. Specifically, LiquiditystakeToken (LST) represents a tokenized form of stake ETH and accumulated rewards, while Liquidity restakeToken (LRT) represents a tokenized form of restake ETH and accumulated rewards. Staking is built on the security framework of the ETH network and aims to optimize the utilization efficiency of funds in the cryptocurrency ecosystem. Stakers can not only support the security of one network, but also provide verification services for multiple networks to obtain additional rewards.

The main issue faced by staking is still Liquidity. Similar to PoS staking, assets staked in re-staking are locked in the Node, resulting in limited Liquidity. To solve this problem, Liquid Restaked Token (LRT) is introduced. LRT is a synthetic Token for re-staking ETH or other LST issuance, used by multiple Active Verification Services (AVS) to ensure the security of applications and networks, and distribute various types of additional rewards. It allows staked assets to provide secure support across multiple services, while bringing additional rewards and returns to stakers. Therefore, although there are some detailed risks in the re-staking process, it brings important Liquidity and returns to stakers and Decentralized Finance.

Track Analysis

Competitive Case

EigenLayer

EigenLayer is a leader in the stake field and currently has no significant direct competitors. As an innovative concept, there are relatively few direct competitors in the market. However, EigenLayer may face the following potential competition and challenges:

Other LSD protocols may develop their own stake function, such as Lido Finance and Rocket Pool.

Other data availability and governance service protocol may develop their own LSD features, such as The Graph and Aragon.

Other Layer 2 or Cross-Chain Interaction protocols may develop their own secure and trust networks, such as Polygon and Cosmos.

Since EigenLayer primarily uses LSD as collateral, LSDFi projects in the market may also compete for LSD market share.

Karak Network

The operation of Karak Network is similar to the EigenLayer protocol, but its AVS service is called Distributed Security Service (DSS) and has launched its own Layer 2 network, K2. Unlike EigenLayer, Karak aims to support the re-staking of any asset. Currently, the platform supports re-staking of assets such as ETH, various LST and LRT assets, as well as Stable Coins like USDT, USDC, DAI, and USDe. In addition, Karak has been deployed on ETH, Arbitrum, BSC, Blast, and Mantle, and users can choose to re-stake based on their asset distribution.

Babylon

Babylon is a stake protocol based on BTC, which introduces the stake function for BTC, enabling BTC holders to stake their assets to other protocols or services in need of security and trust without trust, and to obtain PoS stake income and governance rights. Babylon covers two aspects: first, BTC holders can stake BTC to provide security and credibility for other protocols, and profit from it; second, new protocols in the PoS chain or BTC ecosystem can use BTC stakers as validating Nodes to enhance security and efficiency.

Solayer

Solayer is a stake protocol in the Solana ecosystem, supporting SOL holders to stake their assets into secure and trusted protocols or DApp services within the Solana ecosystem to earn more PoS stake rewards. Solayer has completed its builder round financing, with investors including Solana Labs co-founder Anatoly Yakovenko, Solend founder Rooter, Tensor co-founder Richard Wu, Polygon co-founder Sandeep Nailwal, and others. Solayer supports users to deposit native SOL, mSOL, JitoSOL, and other assets. As of July 15, 2024, the Total Value Locked (TVL) on the Solayer platform exceeds 100,000,000 USD, with SOL accounting for about 60%.

Picasso

Picasso is a general on-chain blockchain built on the Cosmos SDK for collateral. It connects to the underlying chain through the IBC protocol, processes detailed information about the deposited assets, and then allocates funds to AVS. Picasso's collateral solution is similar to EigenLayer, which allows subsets in the network to join to protect AVS weight. This architecture has been replicated on multiple underlying on-chain and unified on Picasso. The node operators of Picasso are selected by the governance mechanism. Currently, the collateral layer of Picasso only accepts assets deposited from Solana through SOL LST and native SOL as collateral. The roadmap of Picasso plans to launch AVS on Solana and then expand to the Cosmos chain and other assets. Currently, collateral products supported on Picasso include SOL, JitoSOL, mSOL, bSOL, and other LST assets.

Universal Restake Protocol

Universal Staking is a system that allows for the centralized restaking of multiple on-chain native assets. This method is agnostic to specific assets and underlying chains, allowing for the aggregation of many staked assets across multiple chains. Universal Staking relies on an additional layer between the economic security source chain and AVS or a series of contracts that span multiple blockchains.

Overview

The stake field is currently developing rapidly. Although EigenLayer is a pioneer in this field, more and more competitors and innovators are joining in, continuously expanding the application scenarios and technological boundaries of stake. Stake not only brings new revenue models but also promotes the security and Liquidity of the blockchain ecosystem.

Market Size

According to data from Decentralized FinanceLlama, as of July 21, 2024, the Total Value Locked in the global ETH Liquiditystake market is $47.599 billion. Lido is the largest participant with a lock-up value share of 72.31%. Lido provides a Liquiditystake solution that allows users to stake ETH on the ETH 2.0 network and receive equivalent stETH Tokens, which can be used or staked again in the Decentralized Finance market. Major protocols for re-staking include EigenLayer and Tenet, among others.

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As of June 25, 2024, the total locked value of assets in the global stake market reached $20.14 billion. Currently, most stake protocols are deployed on the ETH blockchain, with a total locked value of ETH and derivative assets reaching $19.4 billion. In addition, through Solana on-chain stake protocols such as Picasso and Solayer, assets worth $58.5 million are staked. Through Pell Network and Karak, assets worth $223.3 million BTC are staked on various on-chain platforms including Bitlayer, Merlin, and BSC.

The chart below shows the Total Value Locked of the leading staking solutions (EigenLayer, Karak, Symbiotic, Solayer, Picasso, and Pell Network) calculated based on the locked total value. Overall, the total value of staked assets exceeds $20,000,000,000. The majority of the assets come from staking ETH and ETH LST, with the top three categories of staked assets centered around ETH according to TVL calculation.

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Core Competencies

Asset Scale

The asset size is the total stake amount in the stake platform. A high-quality stake platform should have a large scale of assets to demonstrate its stability and credibility. For example, EigenLayer currently stakes 5,842,593 Ethereum, with a total TVL exceeding 18 billion US dollars, making it the largest protocol in the stake field.

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Yield

• The stake project should provide higher yields than a single stake to attract users. To achieve this, it is necessary to optimize the stake strategy, allocate income and rewards reasonably, and utilize the compound interest effect to improve users' capital efficiency and return on investment. For example, Eigenlayer proposed a re-stake solution, where Liquidity Token can earn profits not only from staking ETH, but also from other cross-chain bridges, Oracle Machine, LP stake, etc.
• stake Ethereum earnings. Such as stETH obtained through Liquiditystakeprotocol like Lido;
• Token rewards for collaboration project node construction and verification;
• Liquidity TOKEN stake Decentralized Finance LP rewards.

Liquidity

In the stake project, it is necessary to solve the Liquidity problem of stake assets, so that users can easily join or exit the stake, or transfer assets to other protocols or platforms. Therefore, LiquiditystakeToken, Liquidity Mining, and lending market services need to be provided to enhance user Liquidity and flexibility.

Security

Protecting user asset security is the primary goal of the stake project. In the stake project, it is necessary to ensure that user assets are not compromised due to Smart Contract vulnerabilities, improper behavior of validators, or Hacker attacks. Therefore, high-level security measures and Risk Management mechanisms are essential, such as Multi-signature, firewall, insurance, and slashing mechanisms. For example, EigenLayer becomes a validating Node through stakeETH assets related to Ethereum, borrowing the security of the Mainnet through the slashing mechanism.

Ecosystem

To stake projects need to build a strong ecosystem, support a variety of PoS networks and validation services for protocols, thereby enhancing network security and the degree of decentralization, and providing users with more choices and opportunities. To achieve this goal, it is necessary to cooperate and integrate with other blockchain platforms, decentralized finance applications, and Layer 2 protocols.

What risks does re-staking bring?

slashing risk

In the Ethereum stake mechanism, as well as in the stake protocol, there is a 50% slashing risk. This means that users' funds may face the risk of slashing, although this risk will be dispersed to multiple Nodes.

Liquidity Risk

Many stake protocols will lock a large amount of Liquidity in stake Token (LST). If most LST is locked in the stake pool, it may exacerbate the Fluctuation of LST relative to ETH price. This situation increases users' risk exposure as the security of AVS is directly related to the Liquidity of LST. When a certain type of LST is overly concentrated in AVS, Liquidity risk will further increase.

Centralized Risk

Centralization risks may lead to DAO Hacker attacks. For example, if one-third of the ETH is centralized in a single AVS, exceeding the traditional Byzantine fault tolerance security threshold, this portion of ETH may be slashed for not submitting fraud proof, rather than due to technical issues such as double signing. Centralization risks mean an increase in system coupling, increasing the overall vulnerability of the system.

Contract Risks

Participating in stake again requires interaction with the contract of the project party, so users need to bear the risk of contract attack. The project funds are ultimately stored in contracts of protocols such as EigenLayer. If the contract is attacked, users' funds will also be lost.

LST Risk

There is a possibility of LST Token being unanchored, which may result in value deviation due to LST contract upgrade or attack.

Exit Risk

Currently, except for EigenLayer, most mainstream stake protocols in the market do not support withdrawals. If the project party fails to implement the corresponding withdrawal logic through contract upgrades, users will not be able to withdraw assets and can only exit liquidity through the Secondary Market.

How to reduce these risks?

Stake again is a new concept, and it has not been tested for a corresponding time either at the Contract Layer or the protocol layer. In addition to the risks outlined above, there may be other unknown risks, and how to drop the risks is particularly important.

Capital Allocation

For users who use large amounts of funds to participate in stake, directly participating in EigenLayer's Native ETH stake is an ideal choice. This is because in the Native ETH stake, the ETH assets deposited by the user are not stored in the EigenLayer contract, but in the Beacon chain contract. Even in the worst case of a contract attack, the attacker cannot immediately obtain the user's assets.

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(Currently there are 3340 million ETH stake on the Beacon Chain (including ETH in the queue for entry/exit).)

For users who want to participate with large amounts of funds but are unwilling to wait for a long redemption time, they can choose relatively stable stETH as the participating asset and directly invest in EigenLayer.

For users who want to earn additional income, they can invest a portion of their funds in projects built on EigenLayer, such as Puffer, KelpDAO, Eigenpie, and Renzo, according to their own risk tolerance. However, it should be noted that these projects have not yet implemented corresponding withdrawal logic. Participants need to consider exit risks and follow the relevant LRT's Liquidity in the Secondary Market during the investment process.

Monitoring Configuration

The mentioned projects all have the ability to upgrade and pause contracts, and the project's multi-signature Wallet can execute high-risk operations. For advanced users, it is recommended to configure a corresponding contract monitoring system to monitor the upgrade of related contracts and the execution of sensitive operations by the project party.

Optimize Parameters

Optimize the parameters of re-staking (TVL upper limit, reduction amount, fee allocation, minimum TVL, etc.) and ensure the diversification of funds between AVS. Re-stake protocol allows users to choose different risk levels when depositing and staking. Ideally, each user should be able to evaluate and choose which AVS to re-stake without delegating this process to DAO.

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Challenges Ahead

From the perspective of AppChain, stake applications represented by EigenLayer can meet the needs of reducing Node deployment costs for small and medium-sized AppChains. However, these AppChains cannot fully meet their security requirements, and the sustainability of their needs is relatively weak.

From a competitive perspective, although the stake track has a huge amount of capital, as more and more stake applications are launched, the market funds will be dispersed. If the profits of stake applications such as EigenLayer decline, for example, during a bear market when the demand for application chains sharply decreases, will it cause a bank run effect on the funds?

From the perspective of partners, EigenLayer initially developed 14 AVS partners. Although early AVS may be attracted by potential benefits, the security risks of the re-stake mechanism may affect the willingness of subsequent AVS operators to join.

From the perspective of users, it is possible that users may not be able to obtain substantial Staking returns in the short term. The uncertainty of Staking yield may have a negative impact on the rise in the number of future users.