The Risks of Restaking
Author: Francesco
Translation: Zombit
“Restaking” seems to be shaping up as one of the main narratives for 2024. However, while many discuss the participation in restaking and its benefits, it is not without its drawbacks. This article aims to analyze “restaking” from a higher level, highlighting its risks and clarifying whether it is truly worth taking these risks.
Table of Contents
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What is “restaking”?
Why would someone choose to restake?
Is it worth restaking for additional returns?
Restaking for institutions
How will dynamics change after airdrops?
What can we do to mitigate these risks?
Proof of Stake (PoS) in Ethereum serves as a decentralized trust mechanism, with participants staking their Ether as a commitment to ensure the security of the Ethereum network. “Restaking” refers to the restaking of “staked Ether” used to secure Ethereum PoS as a commitment to securing other networks as well.
The representative project for restaking is “EigenLayer,” which is modularizing Ethereum’s decentralized trust to allow other networks to leverage it in building Active Validation Services (AVS) without having to bootstrap their own validator sets, effectively lowering the barrier to entry into this market.
(These modules typically rely on active validation services to function, and these services have their own unique decentralized validation methods. These active validation services, or AVS, either sustain themselves with their own tokens or are inherently permissioned systems.)
Simply put, it is based on the reasons of “economic incentives and returns.” If the annual staking yield for Ethereum is around 5%, restaking may offer more enticing additional returns. However, this also translates into additional risks for the restakers.
Apart from the existing risks of staking ETH itself, when users choose to restake their ETH, they are essentially entrusting power to the EigenLayer contract, and if the AVS they are protecting experiences errors, double-signing, and other issues, their staked ETH will be slashed as a penalty.
Therefore, “restaking” actually adds an additional layer of risk, as restakers may face slashing in both the Ethereum base layer, the restaking layer, or even both.
R(isk)-Staking – What significant risks does restaking add?
ETH (or LST) must be staked and therefore lacks liquidity.
Smart contract risks of EigenLayer.
Specific slashing conditions of the protocol.
Liquidity risk.
Centralization risk.
To quote renowned researcher @ChainLinkGod:
In fact, by restaking, users are leveraging tokens that are already exposed to the risk of staking and adding additional risks on top, ultimately leading to layered risks as shown below:
Furthermore, developing more new primitives on top of these would add more complexity and additional risks.
Apart from the risks of restakers themselves, the Ethereum developer community has also raised some concerns about restaking, especially in the famous article “Keeping Ethereum’s Consensus Layer Simple” written by Vitalik.
The problem with restaking is that it opens up new avenues of risk for the ETH staked to secure the Ethereum mainnet to be used to protect other chains (chosen by the restakers). Hence, if they misbehave under the rules of other protocols (possibly due to vulnerabilities or weak security), their staked ETH will be slashed.
The debate about how developers and EigenLayer coordinate efforts and ensure that Ethereum is not weakened by these technological advancements is very real and important.
It is not an easy task to reuse Ethereum’s key “layer” to secure the network. Additionally, a crucial point is the degree to which restakers can take risk management measures. Restaking projects generally allow their own decentralized autonomous organizations (DAOs) to decide which AVS can be whitelisted.
However, as a restaker, I may prefer to personally review and decide which AVS to whitelist for restaking services, to avoid being slashed by malicious networks and to reduce the risk of encountering new attack vectors.
Overall, restaking is a novel and interesting concept worth exploring, but the concerns raised by Vitalik and others are equally significant and cannot be ignored.
When discussing restaking, we need to keep in mind how it affects the security model of the Ethereum mainnet: Restaking undoubtedly adds an additional layer of risk on top of Ethereum’s core security mechanism.
Ultimately, the decision to restake entirely depends on individual choices.
Surprisingly, many institutions have expressed interest in restaking Ether and see it as an additional reward on top of existing staking returns. Considering the risks mentioned earlier, it will be interesting to observe the level of interest in restaking from both the retail and institutional markets.
Obtaining additional returns on top of existing staking returns is attractive for those already involved, but considering the risks, it is not a “life-changing” return for investors seeking high-risk, high-reward opportunities.
However, it does open up new use cases for Ethereum as a financial instrument. An interesting comparison is to liken restaking applications to “corporate bonds.” New networks seek similar security as the underlying network (L1) just like companies or countries issuing bonds through the financial system to protect their assets.
In the cryptocurrency space, Ethereum is the most widely used and liquid network and likely the only network capable of supporting such a market — and from the perspective of a nation in a similar financial economy, it is the safest choice.
However, most of the interest in restaking currently seems to be driven by the anticipation of the EigenLayer airdrop, which could be the largest airdrop in the history of cryptocurrencies.
An actual risk and return analysis might prompt some to turn to other potentially more fruitful options. I even believe that most of the capital currently locked in restaking is “hired” capital and may exit after receiving the airdrop.
Separating speculative elements is crucial for accurately assessing the true interest of users in this new infrastructure. Personally, I find the restaking narrative somewhat overhyped, with obvious risks that need careful evaluation.
Some solutions to mitigate restaking risks include optimizing restaking parameters (total value cap, slashing amount, fee allocation, minimum total value, etc.) and ensuring diversification of funds across different AVS.
The first step that restaking protocols can consider is allowing users to choose different risk allocations when participating in restaking. Ideally, each user should be able to assess and choose which AVS to restake with, without having to delegate this process to a DAO. This requires joint efforts between AVS and EigenLayer to ensure that a roadmap aimed at minimizing these risks is in progress.
Fortunately, the EigenLayer team has been working with the Ethereum Foundation to ensure alignment and that restaking does not introduce systemic risks to Ethereum, staked liquidity tokens, or the AVS utilizing them.
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