The Risks of Restaking
Author: francesco
Translation: Zombit
“Restaking” seems to be set as one of the main narratives for 2024. However, while many people talk about how to participate in restaking and its benefits, it is not without drawbacks. This article aims to analyze “restaking” from a higher level, highlighting its risks and clarifying whether it is really 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 the dynamics change after the airdrop?
What can we do to mitigate these risks?
Ethereum’s Proof of Stake (PoS) as a decentralized trust mechanism, participants stake their Ether as a commitment to ensure the security of the Ethereum network. “Restaking” refers to staking the “staked Ether” used to secure Ethereum PoS as a commitment to other network security as well.
Restaking’s flagship project is “EigenLayer,” which is modularizing Ethereum’s decentralized trust to allow other networks to utilize it for building Active Validation Services (AVS) without having to bootstrap their own validator set, effectively lowering the barriers to entry into this market.
(These modules typically rely on active validation services to function, and these services have their unique decentralized validation methods. These active validation services (AVS) either sustain operation with their own tokens or are essentially permissioned systems.)
Simply put, it is based on “economic incentives and returns.” If the annual return rate of staking Ethereum is around 5%, restaking might offer more attractive additional returns. However, this also translates into additional risks for the stakers.
Apart from the existing risks of staking ETH itself, when users choose to restake their ETH, they are essentially delegating power to the EigenLayer contract, and when the AVS they protect experiences errors, double signatures, etc., 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 simultaneously.
R(isk)-Staking – What significant risks does restaking add
ETH (or LST) must be staked, hence lacks liquidity
Smart contract risk of EigenLayer
Specific slashing conditions of the protocol
Liquidity risk
Centralization risk
To quote the renowned researcher @ChainLinkGod:
In fact, through restaking, users are leveraging tokens already exposed to risk (staking risk) and adding additional risk on top, ultimately leading to layered risks as shown below:
Furthermore, developing more new primitives on top of these will add more complexity and additional risks.
In addition to the risks of restakers themselves, the Ethereum developer community has raised some doubts about restaking, especially in Vitalik’s famous article “Keep it Minimal, Avoid Ethereum Consensus Overload,” where he raises these issues.
The problem with restaking is that it opens up new risk pathways for the ETH staked by Ethereum to secure the mainnet to be used to protect other chains (chosen by the stakers). Therefore, if they behave improperly under the rules of other protocols (possibly due to vulnerabilities or weaknesses in security), their staked ETH will be slashed.
The debate on how developers and EigenLayer coordinate efforts and ensure that Ethereum is not weakened by these technological advancements is very real and important.
Reusing Ethereum’s critical “layer” to protect the network is not an easy task. Furthermore, a key point is the extent to which restakers are allowed to take risk management measures. Restaking projects generally let their own decentralized autonomous organization (DAO) decide which AVS can be whitelisted.
However, as a restaker, I might prefer to personally review and decide which AVS to whitelist for restaking services to avoid being slashed by malicious networks and reduce the risk of encountering new attack vectors.
Overall, restaking is a novel and interesting concept worth researching, but the concerns raised by Vitalik and others are equally significant.
When discussing restaking, we need to bear in mind how it affects the security model of the Ethereum mainnet: Fairly speaking, restaking undoubtedly adds an additional layer of risk to the core security mechanism of Ethereum.
Ultimately, the choice to restake entirely depends on individual decisions.
Perhaps more surprisingly, many institutions have expressed interest in restaking Ether and see it as an additional reward on top of the existing staking returns. Considering the risks mentioned earlier, which market, retail or institutional, has a greater interest in restaking will be an interesting observation.
For those already involved, the prospect of additional returns on top of existing staking returns is appealing, but considering the risks, it is not a return that can “change lives” for investors seeking high risk-high return investments.
However, it does open up new use cases for Ethereum as a financial instrument. An interesting analogy is to compare restaking applications to “corporate bonds.” New networks seek similar security to base layer networks (L1), just as companies or countries issue bonds through the financial system to protect their assets.
In the cryptocurrency field, Ethereum is the most widely used and liquid network and may be the only network that can support this market — and from the perspective of countries in traditional financial economies, it is the safest choice.
However, most of the interest in restaking seems to be primarily driven by the expectations of EigenLayer’s airdrop, which could be the largest airdrop in the history of cryptocurrency.
Actual risk and return analysis may prompt some to turn to potentially more effective alternatives. I even believe that most of the capital currently held in restaking is “employed” capital that might exit after receiving the airdrop.
Separating out the speculative elements is crucial for accurately assessing the real interest of users in this new infrastructure. Personally, I find the restaking narrative somewhat overhyped, with clear risks that must be carefully evaluated.
Some solutions to mitigate restaking risks include optimizing restaking parameters (total value cap, slashing amount, fee distribution, minimum total value, etc.), and ensuring diversification of funds among various AVS.
The first step restaking protocols can consider is allowing users to choose different risk configurations when participating in restaking. Ideally, each user should be able to evaluate and choose which AVS to restake to without having to delegate this process to the DAO. This requires joint efforts between AVS and EigenLayer to ensure there is a roadmap in place aimed at minimizing these risks.
Fortunately, the EigenLayer team has been working with the Ethereum Foundation to further align and ensure that restaking does not pose systemic risks to Ethereum, liquid staking tokens, or the AVS using them.