What Is Restaking? What Is Liquid Restaking? What Is EigenLayer?

In less than a year, Ethereum “restaking” juggernaut EigenLayer has gobbled up more than $16 billion in ether (ETH) deposits – digital assets that will theoretically be used to help secure upstart cryptocurrency protocols.

Restaking – the idea of using a blockchain to secure other apps – has quickly become the crypto industry’s biggest new investment trend. New restaking startups seem to arrive every week, and entire cottage industries, “actively validated services” and “liquid restaking” platforms, have seized on the hype with their own takes on the tech.

While some laud restaking as a promising investment opportunity and a major leap for crypto security, others see it as a much riskier gambit – a rehypothecation scheme that promises too-good-to-be-true rewards premised on flimsy fundamentals.

Staking and Proof-of-Stake

Restaking is the latest answer to the security question at the heart of everything in crypto: how to use economic games to protect decentralized computing systems

At the heart of all blockchains is the idea of “decentralization” – where a broadly distributed network of operators, rather than one single party, takes transactions from users, writes them to the chain’s digital ledger, and ensures all other operators are reporting data honestly.

In contrast to proof-of-work blockchains like Bitcoin, where “miners” expend compute power to keep a chain secure, proof-of-stake blockchains like Ethereum and Solana are run by “validators” who “stake” currency to help run the network.

Read more: Crypto Staking 101: What Is Staking?

Validators earn interest as a reward for their work. The bigger their stake, the more they’ll earn in rewards. The stake also acts like collateral; if a validator tries to lie to the blockchain or is misconfigured, a portion of the stake gets revoked by the network.

The exact mechanics behind staking can vary from chain to chain, but the important takeaway when it comes to staking is this: The cost of attacking (read: draining money from) a proof-of-stake system is roughly the amount of money that has been staked in its defense. That’s why Ethereum, in particular, is considered so safe: there’s over $100 billion worth of ETH staked with it.

Restaking

Restaking promises to apply this economic game to pretty much anything, leveraging the big staking numbers on incumbent protocols to help secure upstart blockchain apps. As an investment opportunity, it’s pitched as a way to juice a bit of extra interest out of conventional staking.

EigenLayer, Ethereum’s restaking leader, lets users take ETH they’ve staked with Ethereum and then restake it with so-called “Actively Validated Services,” or AVSs. Today, that’s mostly just blockchain protocols that provide support for Ethereum scaling solutions.

Proponents of the tech argue that restaking helps to improve the security of smaller blockchain apps since they might struggle to prop up their own proof-of-stake security systems, given that doing so requires substantial capital and an active community.

In an interview with CoinDesk last month, EigenLayer founder Sreeram Kannan explained how this works by using the example of 100 blockchain protocols that are each secured by $1 billion worth of stake: Imagine that “instead of each of the protocols having $1 billion separately staked, there was $100 billion commonly staked across 100 protocols,” said Kannan. “To attack any one protocol, now you need $100 billion rather than needing $1 billion.”

The specifics might look different on other blockchains, but the gist is the same. On Solana, for instance, users will be able to restake SOL they’ve staked on that network to earn extra interest and to help secure other apps.

Liquid Restaking

Restaking via a platform like EigenLayer typically means depositing one’s ETH (or select ETH derivatives) into the protocol, spinning up an operator, and then selecting which AVSs to secure in exchange for interest.

A simpler way to stake is via liquid restaking services like Puffer, Ether.Fi and Renzo. These are middlemen that take assets from users, deposit them into EigenLayer and equivalent platforms, and offer receipts, called “liquid restaking tokens” (LRTs), that accrue interest and can be traded in decentralized finance to earn even larger yields.

The liquid restaking platforms do all of the heavy lifting of setting up operator software and selecting which AVSs to work with. The LRTs let users easily enter and exit restaking positions, and they offer users the ability to increase their leverage by re-investing into decentralized finance protocols.

The services mirror platforms like Lido, the liquid staking behemoth on Ethereum that stakes assets on behalf of investors and offers a derivative liquid staking token, “Lido staked ETH” (stETH), that tracks the price of ETH. StETH is hugely popular in decentralized finance, and upstart liquid restaking platforms are hoping to replicate Lido’s success with their convenience-oriented LRTs.

Considering Risk

While investors, developers, and venture firms have embraced restaking, some fret that the trend is crypto’s latest ticking time bomb, a rehypothecation of trust that will inevitably collapse.

They point to the specter of contagion risk – the idea that if an operator is slashed by an AVS, the impact could ripple across the entire staking ecosystem, depleting the value of the entire restaking pool, and cutting down on the security of every other AVS as a result. (EigenLayer is adding an insurance program called “attributable security” to address this concern, but the details haven’t been finalized.)

With the rise of LRTs comes an even larger fear of a mass catastrophe. If protocols start leveraging people’s trust by allowing them to stake tokens, liquid staking tokens, and also liquid restaking tokens, then the surface area for a rehypothecation crisis grows. One slashing event or depegged asset could topple many.

Although versions of pooled security have existed for a while – most notably in the Cosmos blockchain ecosystem – the modern formulation of “restaking” remains more theory than reality. EigenLayer was technically the first restaking protocol to launch on Ethereum’s mainnet, but it remains in limited beta. EigenLayer accepts deposits, but most of its key features – including slashing – had yet to exist at press time, and AVSs are only allowed to register with the program but can’t yet deploy.

Read more: EigenLayer, Crypto’s Biggest Project Launch This Year, Is Still Missing Crucial Functionality

The only incentive for restaking and liquid restaking thus far has been “points,” which are score counts tracked by EigenLayer and liquid restaking protocols that depositors hope will be tied to future airdrops of digital assets.

Points aren’t designed to have any value, but users have begun buying and selling them outright – igniting a speculative frenzy around restaking that some fear isn’t grounded in economic reality, and could lead to disappointment and big sell-offs down the line. EigenLayer and liquid restaking protocol Renzo have already shown how the point systems can set unrealistic expectations: Both projects sparked fury last month when they revealed token airdrop plans that featured smaller allotments for point-earners than some depositors had anticipated.

One prolific angel investor of Solana projects told CoinDesk he “had not (yet)” invested in any restaking teams for that ecosystem. When asked why, he responded cheekily: “Just debating when restaking blows up crypto.”

Danny Nelson contributed reporting

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