Ethereum restaking \u2014 proposed by middleware protocol EigenLayer \u2014 is a controversial innovation over the past year that has some of the brightest minds worried about the potential ramifications.<\/p>\n
Restaking involves reusing staked or locked-up Ether tokens to earn fees and rewards. The restaked tokens can then help secure and validate other protocols.\u00a0<\/p>\n
Proponents believe restaking can squeeze additional security and rewards from already staked ETH and grow the crypto ecosystem in a healthier way based on Ethereum\u2019s existing trust mechanisms. Restaking could serve as a security primitive for exporting Ethereum\u2019s trust generated by its validators to other projects.<\/p>\n
Yet Ethereum co-founder Vitalik Buterin and a number of key devs worry<\/a> that restaking is a house of cards that will inevitably tumble. Some of those Ethereum devs have even proposed a fork to head off restaking platform EigenLayer.\u00a0<\/p>\n Why the project\u2019s founders promote \u201ctrust as a service\u201d from Ethereum without the Ethereum founder and others\u2019 willingness to participate is still to play out. Will the whole concept result in an Ethereum fork to protect the network from catastrophic failure?\u00a0<\/p>\n The way eth Community turned on EigenLayer should be studied, it\u2019s not for building, just side @BanklessHQ<\/a> deals with canto n other grifters, we gonna keep forking yall ideas tho on other non zuzalu shit https:\/\/t.co\/7Erh6qKVSE<\/a><\/p>\n \u2014 \u27e0yumatrades.eth\u27e0 \u2013 #6585 (😈,😇) (@yumatrades) May 22, 2023<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n Staking is a crypto-native concept. On Ethereum, it means putting up a security bond in ETH so that the validator (validators of new transactions who maintain the security of the blockchain) will behave honestly in verifying transactions rather than lose their staked tokens. Stakers are then paid rewards for locking up this ETH.\u00a0<\/p>\n In essence, stakers lock up their tokens to commit to producing Ethereum blocks \u2014\u00a0an on-chain way of supporting development, regardless of fluctuations in highly volatile token prices.\u00a0<\/p>\n So what is restaking?<\/p>\n In short, restaking works in that already staked Ethereum tokens can be rehypothecated (when a lender re-uses collateral posted from one loan to take out a new loan) to secure a wider variety of applications and accrue additional rewards.<\/p>\n But restakers also get penalized or slashed for non-performance of their staking tasks. (More on that below).<\/p>\n So restaking is a crypto primitive for generating economic security from Ethereum\u2019s nine years of concerted developer activity and project track record.\u00a0<\/p>\n \u201cIt\u2019s an extension protocol to extend what Ethereum can do, scaling out Ethereum stakers beyond Ethereum to other bridges and oracles that need to be secured,\u201d EigenLayer founder Sreeram Kannan tells Magazine.<\/p>\n He says EigenLayer is commoditizing ETH staking to make it more general purpose, as, in crypto parlance, \u201cstaking is the root of trust.\u201d\u00a0<\/p>\n Kannan is an academic on leave from the University of Washington, and EigenLayer began as academic research into \u201cexported trust\u201d as a consensus protocol. Basically, he sought to piggyback the trust generated by Ethereum to other ecosystems.\u00a0<\/p>\n Kannan essentially seeks to export the \u201ctrust\u201d generated by Ethereum for other projects across the ecosystem and other chains. \u201cIn crypto, mechanisms for trust mean that investors need skin in the game. The pseudonymous world needs carrots and sticks whereby validators are distributed.\u201d He calls it \u201cpermissionless innovation.\u201d\u00a0<\/p>\n The big idea for EigenLayer is to bridge blockchains and create super applications, taking the best each chain has to offer. Kannan says \u201cevery ecosystem is better in some dimension, but not all dimensions,\u201d and EigenLayer enhancing decentralized tech stacks will actually benefit the industry.\u00a0<\/p>\n Kannan said that what can be built with EigenLayer fits roughly into two categories.<\/p>\n Firstly, EigenLayer allows for the construction of bridges from chain to chain, say Ethereum to Avalanche. EigenLayer acts as a marketplace for \u201cdecentralized trust,\u201d connecting stakers seeking yields, projects built on EigenLayer offering risk-reward structures for yields, and operators acting as bridges between stakers and projects.<\/p>\n Secondly, a set of smart contracts on Ethereum\u2019s chain lets ETH stakers opt to run other software. EigenLayer could, for example, improve Ethereum transaction finality speeds. ETH stakers can now take the layer-1 blockchain Fantom chain (for better transaction finality times) and fork it on EigenLayer, thereby running a layer as a super fast finalization layer with an EigenLayer trust layer.<\/p>\n But it\u2019s all still theoretical.\u00a0\u00a0<\/p>\n The idea of restaking makes sense theoretically, helping projects build off Ethereum\u2019s security layer \u2014 but the problems worry many.\u00a0<\/p>\n In theory, \u201cit\u2019s like the NATO security alliance; each country is still a sovereign country, but their mutual defense pact is secured by the sum of their military power,\u201d Sunny Aggarwal, co-founder of Osmosis Labs and creator of a similar restaking system \u2014 Mesh, on Cosmos\u2019 chain \u2014 told Magazine.\u00a0<\/p>\n In practice, EigenLayer provides two ways to restake: whitelisted liquid staking derivatives can be restaked with EigenLayer or an EigenPod (a smart contract can be created to run a validator while restaking). But most restakers won\u2019t run their own validator, so new networks can build projects without their own communities of validators.\u00a0<\/p>\n EigenLayer isn\u2019t live yet, and it\u2019s impact is still highly speculative, according to Anthony \u201c0xSassal\u201d Sassano, a full-time Ethereuem educator, founder of YouTube channel The Daily Gwei<\/em> and an early investor in EigenLayer.<\/p>\n To date, there\u2019s only a smart contract for staked ETH to bootstrap the EigenLayer network, and perhaps given EigenLayer\u2019s hype, people are depositing their ETH into that network, expecting to farm an unconfirmed airdrop of native EigenLayer tokens.\u00a0<\/p>\n To be successful, new consensus protocols need a balanced alignment of incentives. Trust is like a scale weighing competing interests. And trying to export Ethereum security layers to different blockchain ecosystems worries some. Many are still trying to understand if it\u2019s a force for good or evil \u2014 or both.<\/p>\n \u201cThere are two camps: those excited by broadening the use case of ETH staking, and then there are those that worry about potential attack vectors on Ethereum and potential negative consequences for Ethereum if something goes wrong with EigenLayer. My view is in the middle; I understand the concerns and the excitement.\u201d Sassano says.<\/p>\n \u201cInherently, all of this is complex; it depends which rabbit hole you want to go down. The simple answer is that Ethereum, as a network, currently has over 25 million ETH at stake \u2014 that\u2019s tens of billions of dollars. So restaking is asking, what if we could harness that economic security for other purposes than just securing the Ethereum chain?\u201d<\/strong><\/p>\n<\/blockquote>\n Sassano continues: \u201cThat\u2019s exactly what EigenLayer is trying to do, to generalize the security that Ethereum has with its stakers and expand that to other things like an oracle network or a data availability network. It\u2019s inherently more technical and complex than that, but that\u2019s the gist of it.\u201d\u00a0<\/p>\n There are two types of danger that restaking could pose: first for \u201crestakers\u201d and then for Ethereum itself.\u00a0<\/p>\n Restaking is controversial as it is akin to leveraged investing through borrowing. Some argue that the danger here is that the hunger for \u201creal yields<\/a>\u201d or actual revenue that emerged in crypto in 2022 leads to unsavory developments, like restaking.\u00a0<\/p>\n Jae Sik Choi, portfolio manager at Greythorn Asset Management, told Magazine that securing networks through restaking could work, but restaking is akin to leverage:<\/p>\n \u201cJust like how Terra\u2019s over-leveraged \u2018safe\u2019 collateralization of Luna was, there would always be a risk of participants over-leveraging into this new concept, and such a risk won\u2019t be quantifiable until we see more data sets throughout the emergence of this new restaking narrative.\u201d<\/strong><\/p>\n<\/blockquote>\n Dan Bar, chief investment officer at Bitfwd Capital \u2014 a boutique crypto assets hedge fund \u2014 agreed that restaking amounts to leverage, telling Magazine: \u201cWhile moderate schemes of restaking could be beneficial for capital efficiency purposes, any crypto assets manager and finance professional worth their salt knows too well how easily and quickly leverage can turn into a slew of synthetic toxic financial instruments that bring disasters into even the most healthy of ecosystems.\u201d<\/p>\n And maybe that\u2019s the first major problem. Investors will only see restaking as quick, easily leveraged financial products. EigenLayer building an open-source, decentralized network security may fail to convince doubters.<\/p>\n One fear is that slashing on EigenLayer will affect Ethereum itself.<\/p>\n Ethereum\u2019s proof-of-stake trust system keeps everyone in check with slashing conditions \u2014 essentially non-performance penalties. Programmable slashing means restakers have additional computational responsibilities and face consequences for non-execution.<\/p>\n Ethereum co-founder Vitalik Buterin fears an overload of the chain\u2019s consensus, basically, computational overloads, if the blockchain\u2019s computational power is suddenly redirected elsewhere.\u00a0<\/p>\n Read also<\/p>\n Australia\u2019s world-leading crypto laws are at the crossroads: The inside story<\/p>\n <\/a>\n <\/div>\n Why are crypto fans obsessed with micronations and seasteading?<\/p>\n <\/a>\n <\/div>\n<\/div>\n<\/div>\n Kannan admits that Vitalik\u2019s concerns are valid. \u201cWe don\u2019t want to shard Ethereum\u2019s trust layer, and we don\u2019t want contagion of nefarious actors leveraging Ethereum\u2019s trust system.\u201d<\/p>\n Sassano also notes that the functionality of Ethereum proof-of-stake was designed to make sure that there won\u2019t be a sudden influx or outflux of validators, which would affect the core properties of Ethereum\u2019s consensus mechanism.\u00a0<\/p>\n The issue is that EigenLayer will decide where to take ETH from, but they can\u2019t slash a validator on Ethereum.<\/p>\n \u201cIn Ethereum, there\u2019s also a queue for validators to enter or exit each day. So let\u2019s say, in an extreme example, 30% of all staked ETH begins staking with EigenLayer and say that all 30% gets \u2018slashed\u2019 by EigenLayer. While it depends on what the slashing condition was, let\u2019s say all this ETH was lost because they tried to do something really bad. Even if all 30% had to be exited, there\u2019s a limit on how much can exit per day. It would take literally years to exit 30% of ETH stake. So I understand people\u2019s concerns, but at the same time, other things built on top cannot dictate what happens on Ethereum.\u201d<\/strong><\/p>\n<\/blockquote>\n So, restakers should have to play by Ethereum\u2019s rules.\u00a0<\/p>\n Yet Sassano\u2019s biggest concern is around the calculus of ETH staking, which may one day become a question of whether stakers get more from staking on EigenLayer than Ethereum itself. This could erode the Ethereum staking model in time.<\/p>\n He is confident, though, that Ethereum\u2019s tech offsets those systemic risks: \u201cIt\u2019s not a critical risk to Ethereum if you are slashed on EigenLayer. You are not slashed on Ethereum. EigenLayer cannot cause you to be slashed on Ethereum because Ethereum has its own slashing conditions built into the protocol. And EigenLayer has its own separate slashing conditions built into its protocol as well.\u201d<\/p>\n Anything built on top of Ethereum introduces additional complexity and risk. Juan David Mendieta Villegas, co-founder and chairman at crypto market maker Keyrock, tells Magazine:<\/p>\n \u201cEigenLayer is an interesting development but creates additional attack vectors without providing explicit benefits to the Ethereum ecosystem itself. If we take a step back, it\u2019s important to note that ETH staking has introduced a base benchmark yield for the industry, and that is a good development. You can almost think of it as a \u2018risk-free\u2019 rate. Any additional layers, such as liquid staking derivatives and re-staking mechanisms, of course, can carry more concerns such as concentration risk, security and smart contract.\u201d<\/strong><\/p>\n<\/blockquote>\n But Villegas wishes EigenLayer well. \u201cOverall, we\u2019re advocates of the innovations that are happening around staking and want to see multiple protocols win as this will assist in the decentralization and democratization of the network.\u201d<\/p>\n In other words, he wishes for competitors to EigenLayer to create similar products.\u00a0<\/p>\n Great conversation. The TLDR is that basically Justin, Vitalik, and Dankrad all agree that restaking is a giant existential threat to Ethereum if it gets big (if it even works at all). These guys are all way too nice, but this was a brutal takedown of Eigenlayer. The takeaway\u2026 https:\/\/t.co\/kY8gKmzxrF<\/a><\/p>\n\n
Staking and restaking<\/strong><\/h2>\n
The best each chain has to offer<\/strong><\/h2>\n
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A force for good or evil?<\/strong><\/h2>\n
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Restaking creates too much leverage<\/strong><\/h2>\n
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Risks to Ethereum itself<\/strong><\/h2>\n
\n Features<\/span><\/p>\n
\n Features<\/span><\/p>\n\n
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