Restaking Ecosystem: Transforming Yield Generation with EigenLayer

As individuals start venturing into cryptocurrencies, they often begin by purchasing Bitcoin or ETH (the largest cryptocurrencies by market cap at $1.4 trillion and $270 billion, respectively) to gain some exposure. As they delve deeper into the cryptocurrency ecosystem and encounter DeFi, they quickly realize that beyond just holding crypto assets, there are many other activities that can be profitable—these are the lifelines of the crypto economy.

Early adopters are poised to achieve substantial gains and promote the spread of cross-chain liquidity, which could be described as the spice of cryptocurrency.

Despite the already diverse options available for earning yields, more creative methods continue to emerge, offering users and investors additional opportunities for profit. This article first breaks down the current ways Ethereum holders can earn yields (skip this section if you are not a beginner), and then deeply explores the next evolution of crypto earnings and security—Restaking. Specifically, we will cover what it is, the risks we should be aware of, the current ecosystem participants, and finally, what we hope to see next in the Restaking ecosystem to fully unleash its potential.

1. Current Staking Options

To stake native ETH and earn returns, one must possess 32 ETH and run their own node. With the current pricing, this requires holders to have $112,000, making it a relatively high-cost endeavor. However, earlier alternatives emerged that provided easier access to returns, allowing anyone to stake ETH in any amount through the following means:

1. Centralized exchange platforms (e.g., Binance, Coinbase)
2. Staking pools (e.g., Staked.us, Figment); or
3. Liquid staking protocols (e.g., Lido, Rocketpool, Frax)

Through centralized exchanges (CEX), you can directly stake ETH with Binance or Coinbase, which then earn rewards. This makes staking very accessible for beginners to start earning returns, but it poses risks of centralization and exchange platform hazards—if the platform goes down, so does your ETH. If they choose to withhold assets, there is little the average person can do.

Using staking pools, you can stake ETH with node operators who handle the technical backend and take a fee in return. This option is aimed at institutional clients and, although largely still centralized, it does offer better security.

With liquid staking protocols, you can stake ETH into smart contracts with Lido or Rocketpool. They aggregate ETH, initiate validators to earn rewards, and pass these on to users minus a small fee. Unlike previous options, when you deposit ETH into their contracts, you receive a Liquidity Staking Token (LST) in return. This token represents a claim on your ETH and its staking yield.

Current staking options for cryptoassets like ETH

Then, this liquidity staking token can be used for other DeFi activities, such as using it as collateral to borrow in protocols like Aave. This allows users to enhance their capital efficiency and gain returns from various sources. When first introduced, liquidity staking was a key innovation and has since become a cornerstone of DeFi (or “primitive”). As of today, it accounts for 30% of staked ETH, making it the most popular form of staking, surpassing the staked ETH on centralized platforms like Coinbase and Binance.

Source: https://dune.com/hildobby/eth2-staking

In the years following the emergence of LSTs, naturally, more complex methods of earning and leveraging staking concepts have developed. This is where the concept of Restaking comes into play.

2、Restaking & EigenLayer

Restaking enables users to re-stake their already staked ETH or LST into new pools that offer additional yields. These pools safeguard other protocols, projects, and networks (like aggregators, data availability layers, and oracles), and in return, they provide extra rewards. This represents an evolution from traditional staking practices.

With restaking, ETH holders now have the opportunity to earn more by supporting a plethora of new projects, products, and protocols. The linchpin of the restaking movement currently is EigenLayer—a foundational infrastructure protocol that drives this innovative concept, allowing the Proof of Stake (PoS) network of ETH to be flexibly utilized by other projects and protocols that desire to launch securely and swiftly.

Traditionally, whenever new protocols launch, they must establish their own network for validation, often securing it with their own tokens which have not had the time to accumulate significant value and might be susceptible to 51% attacks. Due to their smaller resources and communities, these newer protocols face challenges in achieving security and decentralization.

EigenLayer helps address this issue by leveraging the substantial value securing the Ethereum network and applying some of this value to these new networks, albeit with a fee (in the form of extra returns paid by the new protocols).

What does ETH security mean in this context? Conceptually, staking harnesses a portion of the underlying ETH’s security and applies it to another protocol, thereby assisting it in bootstrapping and “inheriting” Ethereum’s security—a network valued at $427 billion globally, with 930,000 validators, of which 25% is staked—an incredibly decentralized and economically secure system. According to a paper published by Nuzzi in February 2024, an attack on Ethereum would cost billions of dollars and is relatively insurmountable, making it “secure.”

There are four key participants in the restaking ecosystem:

1. Restaking Stakers/Users - Those who wish to stake their Ethereum or LST for additional returns.
2. Liquidity Restaking Providers - User interfaces that abstract the complexities of managing nodes and choosing different protocols to secure. Users deposit ETH into these, allowing the liquidity restaking providers to manage who and what gets allocated.
3. Operators - Validators who ensure task security on new protocols.
4. Active Validation Services - Protocols that are secured through restaking.

The entire process typically unfolds as follows:

3. Current Restaking Ecosystem

EigenLayer, being relatively new, where do we currently stand with Restaking setups?

Active Validation Services (AVS): AVS are systems that intend to bootstrap their networks using restaked ETH, which could be a rolling upgrade, a data availability layer, oracles, co-processors, or even a simple cryptographic memory pool. They rely on restaked ETH for network validation and security, avoiding the need to issue their own tokens for this purpose. As of now, in EigenLayer’s Holesky testnet, unpermissioned AVS have not yet been launched. Currently, as the second quarter of 2024 approaches for the mainnet phase 2, only the internal and first AVS - EigenDA (a data availability layer) is operational on the testnet. Phase 3 will introduce AVS beyond the scope of EigenDA, entering the testnet and mainnet in the latter half of 2024.

Approximately 10 AVS are planned to be launched in the next few months before becoming unpermissioned. These AVS span various domains including rolling upgrade infrastructure (AltLayer, Lagrange), serializers (Espresso), other chains (Ethos for Cosmos, Near), L2/Rollup aggregators (Omni, Hyperlane), and sectors like privacy (Silence) and compliance (Aethos). A complete list can be found here.

Operators: Operators provide security by restaking their ETH on EigenLayer for AVS (a unit of work needed by an AVS, which may include validating transactions and completing blocks, providing data availability guarantees, ensuring co-processor outputs, or validating rolling upgrades). They register on EigenLayer, allowing ETH holders to delegate their staked assets, and then choose to offer a range of services to AVS to enhance the overall security and functionality of their networks. The most active operators include Figment, P2P, Chorus One, and Kiln.

Liquidity Restaking Providers: Without another innovation to unleash liquidity, cryptocurrencies would lose their distinctiveness—hence the introduction of “Liquid Restaking Tokens” or LRTs. These tokens are an advancement over Liquidity Staking Tokens (LSTs). Just as users stake ETH into an LST protocol like Lido and use the derivative (stETH) to engage in more DeFi activities, LRT users can now stake their ETH or LST into a Liquid Restaking protocol and use the derivative tokens they receive to participate in more DeFi activities. LRT abstracts all complexities from the end-user and acts as the interface layer between the user and EigenLayer operators. Their sole goal is to maximize returns for the user while minimizing exposure to risks.

The full ecosystem is mapped out at the following link:https://www.eigenlayer.xyz/ecosystem?category=AVS%2CRollup%2COperator

4. Why the Emergence of Restaking is Pioneering and Main Concerns

1) Major Positive Factors:

Inheriting Ethereum’s Security: Achieving the critical mass that Ethereum has reached took years. By early 2024, the estimated cost to launch a 34% attack on the Ethereum network was around $34.39 billion, showing the immense difficulty and expense involved. The option to inherit such decentralized and thorough security at a fraction of the cost and effort is an obvious choice, making ETH a foundational asset for programmable trust.

Leveraging Existing Infrastructure to Drive Innovation: A significant concern and cost for any middleware or infrastructure solution is securing a decentralized set of validators, undoubtedly a massive undertaking. EigenLayer abstracts these issues, allowing the focus to shift to building top-tier technology.

LRTs Significantly Facilitating Retail Adoption: LRTs provide seamless integration between restaking and DeFi, allowing users to deposit ETH or LSTs without worrying about which operators to work with or which AVSs make sense to support. This is proven by their success in attracting billions in total value locked (TVL).

2) Points of Concern:

Massive Leverage or “Restaking”: Operators/restakers can stake across multiple AVS without any mechanism preventing them from doing so. This aligns with their financial interests. We must understand the potential domino effects this could cause. In brief, if they are penalized somewhere, the ETH could be lost, reducing security elsewhere, potentially leading to systemic issues. One solution here is attributing security, but this means that every dollar staked only protects one AVS, offering better security but lower returns.

Assumption of Honesty and Security: While Ethereum as a whole is decentralized and secure, can we guarantee the same characteristics for the very small subset of validators protecting your AVS? This is hard to ensure and ultimately depends on the AVS to secure. Although EigenLayer stresses the importance of decentralization within each AVS, any project leveraging a small number of validators for security could face issues.

Risk of Using Native ETH vs. LRT for Restaking: If you use LRT to restake LST (now with more choices) and then stake it with an AVS, you are facing triple layers of smart contract risk. Ultimately, EigenLayer itself is just another smart contract system on Ethereum.

LRT as “Risk Managers”: LRTs decide which AVS to protect with their ETH, but do they possess the necessary skills to manage risks? While LRT abstracts all details from retail users and allows them access to restaking, they not only need to trust the LRT smart contract but also trust that it will collaborate with the right operators, select the best AVS, and manage risks accordingly. Currently, there is hardly any evidence of any LRT’s risk management capabilities, hoping that no single LRT chases the highest returns without considering the risks.

Collaborations between LRT Providers and AVS for Security Guarantees: Recently, there have been developments where LRT providers guarantee specific levels of security to certain AVS, such as EtherFi committing $500 million in Ethereum security to both Lagrange and Aethos, and $600 million to Omni Network. As competition in this field intensifies, more such deals are expected, but it’s important to understand that absolute numeric security is harder to guarantee because TVL entirely depends on the dollar price of Ethereum, and with no lock-up periods, users can unstake at any time, making absolute numbers even less reliable.

Despite technically being in the “testnet” phase, the EigenLayer and Restaking ecosystem is growing rapidly. We anticipate many missing pieces and simplified products to be added, along with more innovations that can be unleashed through EigenLayer.

In Restaking, we are excited about innovations and some yet-to-be-completed parts. Restaking is in its infancy, and several undeveloped aspects will help realize its full potential by simplifying stakeholders and reducing user and liquidity friction.

3) Key innovations:

A. MEV (Maximal Extractable Value) Management

In addition to inheriting Ethereum’s trust in decentralized security and economic security, you also inherit its inclusion trust. This means that the operators (validators) on EigenLayer are also validators (proposers) on Ethereum, opening up many possibilities for innovation (and some necessary risk controls).

This allows for alterations in the inclusion, ordering, and structure of blocks, thereby fully securing MEV management through EigenLayer. An example could be a proposer adding new transactions to a block (enhanced by EIP-1559) which might increase censorship resistance, or a block proposer committing to return arbitrage or liquidation profits to, say, a Uniswap pool. Additionally, managing MEV for rolling upgrades could involve having decentralized serializers or even threshold cryptography, all possible as AVS!

It’s crucial to note that some risks do emerge here, especially with the evolution of EigenLayer, such as EigenLayer operators potentially having exclusive order flows or extracting more cross-domain MEV, as these operators are also builders and validators. A pertinent example is if an EigenLayer node responsible for updating oracles is also the current Ethereum proposer, they could locally construct blocks and capture MEV related to oracle updates.

B. Decentralized AI

Though decentralized AI is still in its developmental stages, the potential opportunities with using EigenLayer are intriguing. This isn’t surprising, given EigenLayer’s founders have a strong background in AI research. Recently, Ritual announced a collaboration with EigenLayer, where EigenLayer will provide a higher degree of decentralization and security than Ritual could achieve starting its own network. But what else could AI and EigenLayer accomplish?

Starting from an example given by an EigenLayer founder on the Unchained podcast, consider that Web3 wallets are in dire need of upgrades. Now imagine running an AI model that can execute trades or bridge assets for you based on natural language commands. It’s akin to calling your broker to buy stocks of a company, and he tells you it’s done. The end user doesn’t need to worry about which trading platform was used or where the custody took place. All of this is safeguarded by the operators who sign the intentions and the transactions. Think of it as a trade driven by natural language processing, protected by Ethereum.

Another example could be leveraging this security to guarantee AI inference responses using co-processors. The inference protocol runs off-chain, then the answers return, but how can you trust it? One method is using ZKML, which is a great but still evolving approach. A simpler method might just be a security pool that supports this answer. This cryptographic economic security adds trust to the AI inference protocol, with a pool of capital that can be allocated appropriately if a claim is incorrect.

C. Zero-Knowledge Proof Verification

Ethereum is an excellent general-purpose virtual machine. You can build zero-knowledge verifiers on it, but each operation has a cost, otherwise you might potentially spam the system. The cost of each zero-knowledge proof depends on whether it uses SNARKs (generally cheaper) or STARKs, like Mina’s IPA commitment scheme.

Given these costs can be quite high, involving EigenLayer operators in off-chain zero-knowledge proof verification and proving the correctness of these proofs on-chain might be more efficient, and this is emphasized in the EigenLayer whitepaper.

The team at Aligned Layer (set to become an AVS) is addressing this challenge by building a layer for verification and aggregation above EigenLayer, compatible with any proof system. In fact, this could work very well with optimistic proofs, actively exploring fraud proofs to reduce proof time windows for better finality.

D. Optimized Payments Between AVS and Operators

As AVS become more unpermissioned and numerous, understanding how much they pay operators to secure their networks is critical. Are they paying too little, too much, or just right? This necessitates serious risk and security modeling, understanding the cost needed to corrupt protocols, potential profits for attackers, and ensuring the former always exceeds the latter. Hydrogen Labs’ Anzen is tackling this issue by building economically secure oracles that bring the needed data on-chain and adjust payments to operators dynamically to ensure they stay within secure parameters.

E. Ease of Integration Between Operators and AVS

Node operators want to integrate quickly with the best AVS for optimized returns. However, integrating each AVS could have different CLIs to manage and different integration paths. What if there could be a single interface that allows easy integration between operators and AVS? Although still in its early stages, the team at Nethermind is working to achieve this, clearly moving towards creating a frictionless experience.

F. EigenCerts

Although still under development and associated with the aforementioned security model, EigenCerts are designed for AVS, allowing for the aggregation of signatures and publication to the mainnet, detailing every dollar restaked on AVS attributed to an operator. Once this feature is enabled, restakers will want to see this certificate to ensure their stakes aren’t allocated to too many AVS, even if that might lower returns. Here we can see some early stages of the code.

5. Conclusion

EigenLayer brings a transformative future to Web3, providing a scalable and secure foundation for Ethereum innovation and beyond. While there are some risks, the high potential rewards make these risks more enticing, but it is crucial for key stakeholders here to take risk management seriously and adopt proactive measures to mitigate these concerns. EigenLayer has the potential to disrupt the Web3 ecosystem and propel innovation at an unprecedented rate. We look forward to seeing how it develops in the future.

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