Crypto restaking has emerged as a novel method for yield generation and looks set to gain momentum and value in 2024 – so what is it and how do you get started?
While standard crypto staking does offer some attractive interest rates, what if you could do even more with your Ethereum? For example, use it to secure other networks and protocols, and earn additional rewards on top of your staking rewards? This is where restaking comes in.
What is Crypto Restaking?
Restaking is a new concept in the world of cryptocurrency security that enables you to use your Ethereum (ETH) more than once at the consensus layer. For instance, if you’re staking your Ethereum directly or using a liquid staking token (LST), you can opt to use a service like EigenLayer to earn additional rewards on your stake.
EigenLayer is a restaking marketplace that allows you to deposit your LSTs into different pools that support various applications and services on the Ethereum ecosystem. By doing so, you are not only earning staking rewards from your LSTs, but also restaking rewards from the pools you join.
The idea behind restaking is to leverage the security and trust of Ethereum’s validators and staked tokens to benefit smaller and newer networks that need more protection from attacks or failures. By restaking your ETH or LSTs, you are effectively lending your stake to these networks and protocols, and helping them achieve higher security and decentralization.
How Does Restaking Work?
To understand how restaking works, let’s take a look at an example using EigenLayer. EigenLayer is a protocol that enables restaking on Ethereum by creating an EigenLayer app that runs on top of the Ethereum virtual machine (EVM). The app acts as a bridge between Ethereum stakers and other networks or protocols that need more security.
To use EigenLayer, you need to have some LSTs, such as stETH or rETH, which you can obtain by staking your ETH on Lido or Rocket Pool respectively. You can then deposit your LSTs into one of the EigenLayer pools that support different applications or services, such as layer-2 solutions, DeFi protocols, oracles, etc.
By depositing your LSTs into an EigenLayer pool, you are essentially locking them up for a period of time, during which you will receive restaking rewards in the form of EL tokens. EL tokens are the native token of EigenLayer, and they represent your share of the pool’s rewards and governance rights.
The restaking rewards are generated by the applications or services that use the EigenLayer app for security. These applications or services pay fees to the EigenLayer app in exchange for using its stake as collateral. The fees are then distributed to the EigenLayer pools according to their stake contribution and risk profile.
The risk profile of each pool depends on the slashing conditions of the application or service it supports. Slashing is a mechanism that penalizes validators or stakers for misbehaving or failing to perform their duties. If an application or service slashes its validators or stakers, it will also slash the EigenLayer pool that supports it, resulting in a loss of LSTs for the pool members.
Therefore, restaking involves a trade-off between higher rewards and higher risks. You can choose to join pools that offer higher rewards but also higher slashing risks, or pools that offer lower rewards but also lower slashing risks. You can also diversify your LSTs across different pools to balance your risk-reward ratio.
What are the Benefits of Restaking?
Restaking offers several benefits for Ethereum stakers and network participants. Some of these benefits are:
– Higher yield: By restaking your ETH or LSTs, you can earn additional rewards on top of your staking rewards, increasing your overall yield and capital efficiency.
– More opportunities: By restaking your ETH or LSTs, you can access more opportunities to participate in various blockchain events and activities, such as governance voting, liquidity provision, lending, borrowing, etc.
– More security: By restaking your ETH or LSTs, you can help secure other networks and protocols that need more protection from attacks or failures, improving the overall security and resilience of the Ethereum ecosystem.
– More innovation: By restaking your ETH or LSTs, you can support the development and adoption of new and innovative services and applications that are built on top of Ethereum, fostering more innovation and growth in the blockchain space.
What are the Risks of Restaking?
Restaking also comes with some risks and challenges that need to be considered and addressed. Some of these risks are:
– Higher slashing: By restaking your ETH or LSTs, you expose yourself to higher slashing risks, as you are subject to the slashing conditions of both Ethereum and the applications or services you support. If any of them slashes its validators or stakers, you will lose a portion of your stake.
– Higher complexity: By restaking your ETH or LSTs, you introduce more complexity and uncertainty to the Ethereum consensus layer, as you are relying on multiple layers of smart contracts and code to secure your stake. If any of them has a bug or vulnerability, you could lose your stake or rewards.
– Higher centralization: By restaking your ETH or LSTs, you could create a tendency for stake centralization, as validators or stakers who use restaking services can offer higher rewards to their delegators, attracting more stake to them. This could result in fewer validators or stakers controlling more stake, reducing the decentralization and neutrality of the system.
How to Get Started with Restaking?
If you are interested in restaking your ETH or LSTs, you can get started by following these steps:
– Step 1: Stake your ETH on a liquid staking protocol, such as Lido or Rocket Pool, and receive LSTs in return.
– Step 2: Choose a restaking service, such as EigenLayer, and connect your cryptocurrency wallet to it.
– Step 3: Select an EigenLayer pool that supports an application or service that you want to secure and earn rewards from.
– Step 4: Deposit your LSTs into the pool and start earning restaking rewards in EL tokens.
– Step 5: Monitor your rewards and risks, and withdraw your LSTs and EL tokens when you want to exit the pool.
Conclusion
Restaking is a new concept in the world of cryptocurrency security that allows you to use your Ethereum (ETH) more than once at the consensus layer. By restaking your ETH or LSTs, you can earn additional rewards, access more opportunities, help secure other networks and protocols, and support more innovation on the Ethereum ecosystem. However, restaking also involves higher risks, complexity, and centralization that need to be carefully weighed and managed. If you are interested in restaking your ETH or LSTs, you can try out EigenLayer as one of the leading restaking services on Ethereum.
Learn More: Crypto Staking Or Lending – What’s The Difference And Why Does It Matter?
