Why Has "Re-Staking" Dominated Social Media?

EigenLayer’s proposed re-staking protocol has increasingly come under the spotlight for providing innovative solutions to several challenges. It also plays a crucial role in the narrative of the liquidity staking derivatives track. This article will briefly discuss “re-staking,” including some of its underlying implementations and security risks.

OwnLayer Protocol

Staking and Liquidity Staking on Ethereum

Ethereum staking refers to the process where users lock their ETH in the Ethereum network to support its operation and security. In Ethereum 2.0, this staking mechanism is part of the Proof of Stake (PoS) consensus algorithm, which replaces the former Proof of Work (PoW) mechanism. By staking ETH, users become validators, participating in the creation and confirmation of blocks. In return, they receive staking rewards.

Trends in Ethereum Staking and Validators

This native method of staking presents several issues, such as the significant amount of capital required (32 ETH or its multiples), the need for some hardware to serve as a validation node while ensuring its availability, and the inflexibility due to the staked ETH being locked.

Consequently, Liquid Staking Derivatives (LSD) emerged to address the liquidity issues inherent in traditional staking. They allow users to earn a liquidity token representing their staked share (such as Lido’s stETH or Rocket Pool’s rETH) while staking their tokens. These liquidity tokens can be traded, loaned, or used for other financial activities on different platforms. Thus, users can participate in staking to earn rewards while maintaining the flexibility of their funds.

Liquidity staking tokens are generally issued by the project and maintain a fixed exchange ratio with the original staked asset, for example, Lido’s stETH has a 1:1 exchange relationship with ETH.

Popular Liquidity Staking Projects

Is liquidity the only issue with staking?

Clearly not. Nowadays, an increasing number of middleware, DA, cross-chain bridges, and oracle projects are adopting a node + staking operation model. They decentralize consensus by offering airdrops and higher staking rewards, enticing users to leave larger consensus groups for their smaller communities.

Additionally, for most new projects, creating a PoS consensus network is challenging. Persuading users to forgo other earnings and liquidity to participate is not easy.

Problems solved by EigenLayer

EigenLayer addresses the issue of enhancing consensus security and diversification of Ethereum’s security mechanism through an innovative protocol that introduces a Restaking mechanism. This allows for the reuse of Ethereum and Liquid Staking Tokens (LST) at the consensus layer. As of February 2024, the total value locked (TVL) in the EigenLayer protocol has reached $4.5 billion, with LST making up about 40% of this value. Additionally, prominent investment firm a16z has recently announced a $100 million investment in the protocol. Its ecosystem projects like Renzo and Puffer have also secured investments from major exchanges like Binance and OKX, indicating significant progress in enhancing Ethereum’s scalability infrastructure and the security of the crypto economy.

Restaking is not simply about reinvesting returns; it’s a fundamentally different concept. In the Ethereum consensus protocol, the key constraint for validating nodes is the slashing mechanism. EigenLayer’s restaking protocol essentially expands on this slashing logic, enabling various Actively Validated Services (AVS) to implement logic for penalizing malicious actors, thus constraining behavior and achieving consensus.

Locked price exceeds $4.5 billion

EigenLayer aims to diversify Ethereum’s security, as demonstrated in an example from its whitepaper. Through the restaking protocol, three AVS can more easily attain consensus security with larger amounts of funds without weakening ETH Layer 1’s integrity.

EigenLayer makes consensus more centralized

EigenLayer consists of three core components, corresponding to the three user types of the restaking protocol:

• TokenManager: Manages stakers’ deposits and withdrawals.
• DelegationManager: Registers operators and tracks and manages their shares.
• SlasherManager: Manages slashing logic, providing an interface for AVS developers to implement penalties.

EigenLayer simplified architecture diagram

This architecture simplifies the interaction among different roles:

1. Stakers deposit their LST via the TokenManager to earn additional returns, trusting the operators in a manner similar to staking on platforms like Lido and Binance.
2. Operators, after registering through the DelegationManager, receive LST assets to provide node services for projects requiring AVS, earning rewards and fees from these projects.
3. AVS developers create general or specific Slashers running on nodes for use by projects (such as cross-chain bridges, decentralized autonomous organizations, and oracles), which buy these services through EigenLayer for direct consensus security.

Overall, EigenLayer creates a “triple-win, zero-loss” situation, benefiting all participants within its protocol and marking a significant step forward in Ethereum’s security and scalability efforts.Overall, EigenLayer creates a “triple-win, zero-loss” situation, benefiting all participants within its protocol and marking a significant step forward in Ethereum’s security and scalability efforts.

How to Implement Re-Staking

To simplify the explanation of the implementation logic, this section omits the Operator and DelegationManager, which slightly differs from the architecture diagram mentioned earlier. Firstly, taking the re-staking of liquidity staking tokens as an example, the simplest TokenPool implementation only needs to fulfill three functions: staking, withdrawal, and slashing, which can be implemented in Solidity as follows:

contract TokenPool {

// Staking balance

mapping(address => uint256) public balance;

function stake(uint256 amount) public; // Staking

function withdraw() public; // Withdrawal

// Execute slashing logic

function slash(address staker, ??? proof) public;

}

To horizontally expand the slash logic and provide a unified interface for AVS developers, the following modifications can be made, registering multiple slashers that will execute in sequence according to demand and pass on, appropriately reducing the staked funds in case of malicious actions (similar to native staking):

contract Slasher {

mapping(address => bool) public isSlashed;

// Implement slashing logic

function slash(address staker, ??? proof) public;

}

contract TokenPool {

mapping(address => uint256) public balance;

// Manage registered slashers

mapping(address => address[]) public slashers;

function stake(uint256 amount) public;

function withdraw() public;

// Register slasher

function enroll(address slasher) onlyOwner;

}

Registering a slasher is a relatively strict process, and only the slash logic that has been reviewed can be accepted by EigenLayer and users. How to allocate the staking tokens is another core issue.

Currently, EigenLayer supports 9 different types of liquidity staking tokens (LSTs), which is implemented by encapsulating a higher-level TokenManager on top of TokenPool:

contract TokenManager {

mapping(address => address) tokenPoolRegistry;

mapping(address => mapping(address => uint256)) stakerPoolShares;

// Stake stETH to stETHTokenPool

function stakeToPool(address pool, uint256 amount);

// Withdraw stETH from stETHTokenPool

function withdrawFromPool(address pool);

// …

}

With this, we can implement a simple LSD re-staking contract. Here’s a question to ponder 🤔: Where does the slashed LST (e.g., 1 stETH) go? Is it destroyed, added to EigenLayer’s treasury, or used for other purposes?

Understanding the principle of native re-staking is easier, but the implementation is more complex because the staked ETH is on the Beacon Chain. The EigenLayer protocol, running as a smart contract on Ethereum’s execution layer, leverages oracles to obtain data from the consensus layer (such as node validator balances), which can be referenced in the contract implementation: https://github.com/Layr-Labs/eigenlayer-contracts/blob/master/src/contracts/pods/EigenPod.sol

The Exploding Re-Staking Ecosystem

Since 2023, the narrative around re-staking has become increasingly profound. Many project teams have built on the EigenLayer protocol to create sophisticated upper-layer wrappers, and many projects hope to gain more consensus and security through the EigenLayer protocol. Below are several popular projects:

Puffer Finance (pufETH) is a liquidity re-staking protocol based on EigenLayer, aiming to lower the entry threshold for individual stakers. It focuses on the “native staking” domain within EigenLayer, such as reducing the minimum requirement for node operators from 32 ETH to 2 ETH.

Technically, Puffer emphasizes a remote signing tool called Secure-Signer. The remote signer is a module in the validator, allowing key management and signing logic to be moved outside of the consensus client. Secure-Signer runs on TEE device Intel SGX, offering validators enhanced key security and slashing protection guarantees.

As the only project currently invested in by both Binance and EigenLayer, Puffer is also popular among ordinary investors. We can participate in Puffer staking to earn pufETH and certain points.

The Flywheel Between Stakers and NoOps

Renzo Protocol is a higher-level wrapper for the StrategyManager in the EigenLayer protocol, aimed at protecting AVS and offering higher staking returns. Through the principle of EigenLayer, we know the slashing logic is provided by AVS developers, and the combined strategies among these AVS become more complex as their number increases. Renzo provides protection for node operators and AVS developers through a layer of encapsulation.

Renzo has also received investments from OKX Ventures and Binance Labs this year. It is believed to become an important contender in the re-staking race soon.

Renzo Protocol Architecture

EigenPie is a re-staking protocol launched by MagPie and EigenLayer collaboration. Its name might be mistakenly thought of as an official project, but it’s not strictly accurate. Earlier this year, EigenPie initiated its first round of staking points activity, where participants could benefit thrice: EigenLayer points, EigenPie points, and IDO shares.

KelpDAO (rsETH) is a triple-reward re-staking protocol based on EigenLayer, focusing on the collaborative relationship between node operators and AVS like other ecosystem projects, providing high-level packaging to protect the interests and collaborative relationships of both parties.

KelpDAO is a significant leading unissued project in the re-staking race, with the wool-gathering army actively participating.

New Security Risks

Re-staking, while offering additional returns, also introduces greater risk exposures.

The first is the contract security risk of the re-staking protocol itself. Projects built on the EigenLayer protocol generally have their funds residing in its contracts. If the EigenLayer contract is attacked, both project and user funds could be compromised.

Secondly, re-staking protocols have issued more LSTs, such as Puffer’s pufETH and KelpDAO’s rsETH, among others. Compared to traditional LSDs (e.g., stETH), these are more complex in contract logic and are more likely to suffer asset loss due to LST depegging or project rug pulls.

Besides the EigenLayer protocol itself, most other Restaking protocols have not yet implemented withdrawal logic. Early participants can only obtain some liquidity through the secondary market, so they may also suffer losses due to insufficient liquidity.

Furthermore, EigenLayer is still in its early stages (Stage 2), meaning some contract functions (such as StrategyManager) are not fully perfected. Early participants need to be aware of these risks.

Summary

Since 2023, the re-staking track has been very popular, with many independent investors and investment institutions in the blockchain circle participating. Technically, the re-staking protocol proposed by EigenLayer has brought new ideas to liquidity staking and solved more problems.

On the other hand, the concept of re-staking is still relatively new, including the EigenLayer protocol and many other re-staking projects are still in the early testnet phase, presenting both opportunities and challenges.

Currently, EigenLayer dominates the re-staking track, and it is expected that more projects will join in the future, exploring new models of liquidity staking and providing new consensus security solutions for project operators.

With the gradual rise of re-staking protocols, ZAN provides professional node services and audit services for early re-staking projects, helping them to grow steadily in this promising field.

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2. Disclaimer: The views and opinions expressed in this article are those of the author alone and do not constitute any investment advice.

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