Binance Research Report: Exploring the Realm of Restaking

Binance Research Report: Exploring the Realm of Restaking

Binance Research Report: Exploring the Realm of Restaking

“The Hitchhiker’s Guide to Restaking”

Source: Binance Research
Author: Shivam Sharma, Binance Research Macro Researcher

Table of Contents
Introduction
Review of Staking Knowledge
Before delving into restaking, let’s review what staking is
How does restaking work?
What problem does restaking aim to solve?
Key Projects
EigenLayer
How does it work?
Impact of Trust Aggregation
Timeline
Recharge Limit
Ecosystem Projects
Restaking Aggregation using AltLayer
Considerations
Technical Risks
Structural Risks
Other Considerations
Outlook
Restaking on Other Chains
Bitcoin Restaking: Babylon
Solana Restaking: Picasso
Liquidity Restaking
What is liquidity restaking?
Different Approaches to Restaking
Liquidity Restaking Protocols
Ether.fi
Puffer Finance
Kelp DAO
Renzo
Others
Outlook and Conclusion
By 2024, restaking market has gained popularity, rapidly transitioning from an emerging narrative to an innovative reality. So far, Ethereum restaking has dominated this narrative, primarily due to EigenLayer, the pioneering sub-sector built on Ethereum.

EigenLayer is the most mature project in its restaking roadmap, accounting for a major portion of the total value locked (TVL) in the restaking market.

However, other projects are also focused on developing restaking or restaking-related projects on multiple chains, some of which are already live or soon to be launched. These projects include Picasso (Solana restaking) and Babylon (Bitcoin restaking). The integration of Cosmos application chains with EigenLayer is also a hot topic, while AltLayer extends its Restaking as a Service (RaaS) protocol to cover restaking aggregation. Additionally, liquidity staking tokens (LST) saw significant development in 2023, and this year witnessed the emergence of liquidity restaking tokens (LRT).

In this report, we first provide a brief introduction to the basics of restaking, followed by a detailed study of EigenLayer and its ecosystem development, restaking on other chains, liquidity restaking protocols, and LRT. In the end, we provide an outlook on the future of restaking.

At its most fundamental level, blockchain can be defined as an immutable transaction ledger that requires tracking valid transactions in chronological order. To achieve this, blockchains must perform four key functions:

Consensus: Validators or miners agree on the order of transactions, such as Proof of Stake (PoS), Proof of Work (PoW), etc.
Data Availability: Ensuring transaction data is visible to the entire network
Execution: Processing transactions to update the blockchain state
Finality: Resolving disputes, validating transaction validity, and ensuring “final confirmation” of transactions
Consensus is often considered the most fundamental of these functions and crucial for the immutability of the blockchain. Essentially, in a Proof of Stake (PoS) consensus mechanism, the chain has a set of validators who propose, validate new blocks, and add them to the blockchain. To become a validator, one must stake the native tokens of the chain. In return, validators earn staking rewards in the form of new tokens and fees. However, if validators misbehave or engage in any form of malicious activity, they are likely to be “slashed,” meaning a portion of their staked tokens will be confiscated.

Slashing mechanism incentivizes validators to operate the network correctly. Additionally, the more validators join (and hence, the more tokens staked), the more difficult it becomes to attack the network. For example, a typical method of attacking a blockchain network is to attempt to gain control of a majority (51%) of the staked tokens in the proof-of-stake system, thereby having the power to propose malicious blocks or reorganize blocks. The more tokens staked or the higher the value of staked tokens, the higher the cost and difficulty of such attacks. This is the fundamental reason why staking helps protect blockchain security.

Restaking goes a step further, allowing users to stake their assets multiple times on their native blockchain and other protocols. For example, EigenLayer supports Ethereum stakers to reuse their already staked ETH to secure other applications built on the network. Stakers can choose the additional services they want to benefit from their currently staked ETH and earn additional rewards from it. In return, they agree to grant EigenLayer additional slashing rights on their staked ETH (in addition to the slashing rights of the underlying Ethereum staking contract).

Essentially, restaking protocols provide smart contracts that support the reuse of already staked tokens and restake them (i.e., restake). This provides security for applications beyond their native blockchain.

Restaking aims to address the decentralization of blockchain security. Fundamentally, if builders want to create a decentralized network, they need to establish some form of cryptographic economic security. For example, in the Ethereum network, this is achieved through staking ETH tokens. However, if other services were to mimic this, the efficiency could be significantly lower. For instance, creating a new proof-of-stake network like Ethereum or BNB Chain requires significant capital costs.

Assuming a project achieves this security feature by issuing a token, they must convince ecosystem participants to bear the price risk of staking this new token, as well as the opportunity cost compared to just staking ETH.

Moreover, generating sufficiently secure processes is also time-consuming. And even when generated, their security may not match that of Ethereum itself. This often leads to many projects that may not necessarily need to issue their own tokens being forced to do so, while struggling and slowly trying to create their own cryptographic economic security. Restaking attempts to aggregate the security of large chains like Ethereum and provide it to other applications, addressing this problem.

EigenLayer is self-proclaimed as an “Ethereum Restaking Aggregator” and is dedicated to creating a decentralized trust market. It is the pioneering platform in the restaking sector and the largest and most significant project in the space. EigenLayer can be seen as providing “Security as a Service” or “Ethereum Security as a Service” through Ethereum.

EigenLayer operates a three-pronged market, including:
1. Restakers: Individuals who use liquidity staking tokens (LST) to secure other applications on the network. They earn additional rewards but are also subjected to additional slashing conditions. Users can also choose to directly stake their ETH with EigenLayer (referred to as native restaking).
2. Node Operators (Validators): Individuals running EigenLayer software. Many restakers may choose to delegate to trusted node operators instead of running their own nodes (similar to how stakers delegate their tokens to trusted validators). Node operators can aggregate delegated stakes, start Ethereum nodes, and earn fees from Ethereum Proof of Stake (PoS). They can also earn additional rewards from chosen protected protocols through staking. After retaining a portion of the fees, they distribute the remaining fees to the delegators. If the operator misbehaves in their participation in EigenLayer modules, their stake (and the delegated stake) will be slashed.
3. Active Validation Services (AVS): Services built on EigenLayer that aim to attract restakers and help enhance security. These AVS, also referred to as modules, can be any project, such as new blockchains, data availability (DA) layers, virtual machines, oracle networks, cross-chain bridges, etc.

EigenLayer introduces two new concepts through this system: (1) aggregating security through restaking and (2) free-market governance.

1. Aggregating Security through Restaking: EigenLayer secures new modules by restaking ETH (rather than its own tokens). Specifically, restakers lock their LST or native ETH with validators who can then decide to secure any chosen module. Validators set their withdrawal credentials to the EigenLayer smart contract, enabling automatic slashing in case of their misbehavior. In return, these modules pay fees for security and validator services to validators and restakers.

The result is the aggregation of Ethereum’s powerful cryptographic economic security onto other protocols built on it.

2. Free-Market Governance: EigenLayer provides an open-market mechanism that allows validators to weigh risks and rewards and choose which modules to secure. EigenLayer considers this similar to the services provided by venture capital firms, which support innovation but come with risks (in this case, slashing risks). This creates an open and competitive market where validators can sell aggregated security, and protocols can purchase security at a certain price. This eliminates the significant capital costs of creating new security models since protocols can buy it directly. It also helps create a flywheel effect, where the higher the value of modules protected by EigenLayer, the higher the rewards for ETH restakers. This leads to higher ETH value, thus increasing Ethereum’s security and creating better security for each EigenLayer module, further incentivizing users to create new modules on it.

Trust aggregation provided by EigenLayer is crucial. As new AVS can be protected through larger capital pools than usual, the cost of corruption (CoC) is much higher than in other cases.

For example, a new Ethereum module no longer needs a stake of $1 billion to secure it but can be protected by a larger capital pool. This mechanism essentially increases the CoC from the minimum staking amount to the total staked amount.

EigenLayer takes a phased approach, divided into three stages. The aim is to ensure all different participants expected to be part of the EigenLayer ecosystem have a smooth onboarding experience.

Stage 1 focused on restakers and was launched as early as June last year. The idea behind Stage 1 was to familiarize restakers with the restaking process and get them acquainted with EigenLayer modules and interfaces. Initially, EigenLayer supported three types of LST for restaking, and over the course of several months, the number of supported LST has increased to 12.

Stage 2 focused on node operators, with the testnet launched in November 2023. Since its launch, node operators have been able to register on the network and start validating the first AVS (EigenDA). Restakers, on the other hand, can also delegate their stakes to their chosen node operators to start benefiting from shared security. Aggregation developers can integrate EigenDA as the DA layer into the aggregation and experiment with it in a testnet scenario. The mainnet for Stage 2 is expected to go live later in the first half of 2024.

Stage 3 will focus on the onboarding of AVS (other than EigenDA) and the addition of payment and slashing functionalities. Stage 3 is expected to take place in the second half of this year. After all three stages are completed, the EigenLayer protocol will be fully and officially live.

To ensure a smooth transition to the mainnet, EigenLayer has been using recharge limits to manage the amount of stake on the protocol. When Stage 1 mainnet went live, the quantity limit for the three types of LST tokens was set at 9,600, and the quantity limit for native ETH was also set at 9,600. Over the past few months, both the recharge limit and the accepted quantity of LST have been gradually increasing.

EigenLayer recently increased the recharge limit and temporarily removed all TVL limits, marking the first time TVL limits have been completely removed. The goal is to attract all natural demand for restaking and observe people’s behavior from an unlimited perspective.