What is Restaking?

Restaking is a way of earning rewards for staking the same tokens on the main blockchain and other protocols, securing multiple networks at once. Restaking offers users additional rewards for securing additional protocols, in exchange for undertaking increased slashing risks.

Restaking is a resource management approach to decentralized staking pioneered by EigenLayer. Protocols in this sector use Liquid Restaking Tokens (LRT), a flexible version of staked tokens to extract more value from staked tokens in a way that is beneficial for stakers, other networks, and the restaking protocol itself.

For example, if you have stETH, which is an LST that represents your staked ETH on Ethereum 2.0, you can restake it on a protocol like EigenLayer, which is an LSTFI protocol that allows you to earn more yield from your stETH.

How Does Restaking Work?

Restaking works by creating a derivative token that represents your restaked LST. For example, if you restake your stETH on EigenLayer, you will receive eLST, which is a derivative token that represents your stETH plus the rewards and fees from EigenLayer. You can then use your eLST to access other DeFi protocols, such as lending, borrowing, swapping, etc.

Source: Mirror.xyz

To restake your tokens, you will need to use a restaking protocol, such as EigenLayer, Lido, StakeWise, or Rocket Pool. Each protocol has its own features and benefits, so you should do your research and compare them before choosing one. In this article, we will use EigenLayer as an example, but the steps are similar for other protocols.

Step 1: Stake your tokens on the main blockchain

Source: Figment website

The first step is to stake your tokens on the main blockchain, such as Ethereum 2.0, Cardano, Polkadot, or Tezos. To do this, you will need to send your tokens to a smart contract or a wallet address that is linked to the blockchain. This will lock up your tokens for a certain period of time, which varies depending on the blockchain. For example, on Ethereum 2.0, you need to stake at least 32 ETH for at least 18 months, while on Cardano, you can stake any amount of ADA for any duration. Once you stake your tokens, you will start receiving rewards periodically, usually every epoch or every day. For this tutorial we are staking testnet ETH (Georli) on Figment.

Step 2: Deposit your staked tokens to the restaking protocol

Source: Figment website

The second step is to deposit your staked tokens to the restaking protocol, such as EigenLayer. To do this, you will need to send your staked tokens to another smart contract or wallet address that is linked to the restaking protocol. This will exchange your staked tokens for liquid staking tokens (LST), which are derivatives of your staked tokens that can be used in DeFi or restaked on other protocols. For example, on EigenLayer, you will receive eETH for your staked ETH, eADA for your staked ADA, eDOT for your staked DOT, or eXTZ for your staked XTZ. The amount of LST you receive will depend on the exchange rate, which is determined by the supply and demand of the market.

Step 3: Restake your LST on another protocol

Source: EigenLayer website

The third step is to restake your LST on another protocol, such as Lido, StakeWise, or Rocket Pool. To do this, you will need to send your LST to another smart contract or wallet address that is linked to the additional protocol. This will lock up your LST for another period of time, which may also vary depending on the protocol. For example, on Lido, you can restake your LST for any duration, while on StakeWise, you need to restake your LST for at least 6 months. Once you restake your LST on another protocol, you will start receiving rewards from both the main blockchain and the additional protocol, usually in different tokens. For example, on Lido, you will receive stETH for your eETH, stADA for your eADA, stDOT for your eDOT, or stXTZ for your eXTZ.

Different Restaking Methods and Models

There are different methods and models of restaking, depending on how the derivative token is created and managed. In general, there are three main types of restaking: native restaking, LST restaking, and LSD restaking.

Source: EigenLayer whitepaper

Native Restaking

This is the simplest and most direct method of restaking, where the LSTFI protocol itself issues the derivative token and manages the staking and reward distribution. For example, EigenLayer is a native restaking protocol that issues eLST for stETH holders and handles the staking and reward distribution of both ETH 2.0 and EigenLayer. The advantage of native restaking is that it is easy to use and has low risk since the LSTFI protocol is fully responsible for the security and performance of the restaking. The disadvantage is that it has low flexibility and complexity since the LSTFI protocol only supports one type of LST and one type of reward.

In Native restaking, the LSTFI protocol acts as a proxy validator for the underlying PoS blockchain and also as a reward aggregator for the restaked LST. The LSTFI protocol maintains a one-to-one mapping between the LST and the derivative token and ensures that the derivative token inherits the same properties and functionalities as the LST. The LSTFI protocol also collects the network fees and inflation rewards from the underlying PoS blockchain and distributes them proportionally to the derivative token holders.

Additionally, the LSTFI protocol generates its own rewards and fees from its own network operations and distributes them to the derivative token holders as well. The LSTFI protocol uses smart contracts to automate and secure the restaking process and also provides governance mechanisms for the derivative token holders to participate in the network decisions.

LST Restaking

This is a more advanced and indirect method of restaking, where the LSTFI protocol uses another LST as the derivative token and leverages the existing staking and reward distribution of the underlying LST.

The advantage of LST restaking is that it has high flexibility and complexity since the LSTFI protocol can support multiple types of LSTs and multiple types of rewards. The disadvantage is that it has high risk and cost since the LSTFI protocol depends on the security and performance of the underlying LST and may incur additional fees and slippage.

In LST restaking, the LSTFI protocol acts as a liquidity provider and a yield optimizer for the underlying LST. The LSTFI protocol pools the LSTs from the users and supplies them to other DeFi protocols that offer attractive returns, such as lending, borrowing, swapping, etc. The LSTFI protocol then receives the LSTs plus the returns from the DeFi protocols and distributes them to the users proportionally.

The LSTFI protocol also collects its own rewards and fees from its own network operations and distributes them to the users as well. The LSTFI protocol uses smart contracts to automate and secure the restaking process and also provides governance mechanisms for users to participate in network decisions.

LSD Restaking

This is a hybrid and innovative method of restaking, where the LSTFI protocol splits the LST into two components: a liquid staking derivative (LSD) and a future yield token (FYT). The LSD represents the principal of the staked asset, while the FYT represents the future rewards of the staked asset. For example, Origin Ether is an LSD restaking protocol that splits stETH into oETH and fyETH.

The advantage of LSD restaking is that it has high capital efficiency and liquidity since the LSTFI protocol allows users to trade, hedge, and arbitrage their LSD and FYT separately. The disadvantage is that it has high complexity and volatility since the LSTFI protocol introduces new dynamics and risks to the restaking process.

In LSD restaking, the LSTFI protocol acts as a market maker and a price oracle for the LSD and the FYT. The LSTFI protocol creates a synthetic market for the LSD and the FYT, where users can buy and sell them at a fair price that reflects the present and future value of the staked asset. The LSTFI protocol also provides a price oracle that feeds the real-time price of the LSD and the FYT to other DeFi protocols, enabling them to integrate and interact with the LSD and the FYT. The LSTFI protocol uses smart contracts to automate and secure the restaking process and also provides governance mechanisms for the LSD and FYT holders to participate in the network decisions.

The ultimate restaking method chosen by users will be dependent on the level of risk they are willing to take on and the kinds of positions they already hold.

How to Choose the Best Restaking Method for You

There is no definitive answer to how to choose the best restaking method for your portfolio, as different methods and models of restaking may entail different levels and types of risks and rewards. However, some general factors that may help you decide are:

• Your risk tolerance and return expectations: Depending on your risk appetite and investment goals, you may prefer a restaking method that offers higher or lower returns, as well as higher or lower risks. For example, if you are a conservative investor who values security and stability, you may opt for native restaking, which has low risk and low complexity but also low flexibility and low reward. On the other hand, if you are an aggressive investor who seeks growth and innovation, you may opt for LSD restaking, which has high capital efficiency and liquidity but also high complexity and volatility.
• Your portfolio composition and diversification: Depending on your portfolio size and allocation, you may prefer a restaking method that complements or balances your existing investments, as well as diversifies your exposure, and reduces your correlation. For example, if you have a large and concentrated portfolio of ETH, you may prefer LST restaking, which allows you to access and explore various LSTs and LSTFI protocols and gain exposure to different tokens and rewards. On the other hand, if you have a small and diversified portfolio of LSTs, you may prefer native restaking, which simplifies and streamlines your restaking process and avoids additional fees and slippage.
• Your liquidity needs and preferences: Depending on your liquidity needs and preferences, you may prefer a restaking method that offers more or less liquidity, as well as more or less capital efficiency. For example, if you have high liquidity needs and preferences, such as frequent trading or withdrawals, you may opt for LSD restaking, which allows you to trade, hedge, and arbitrage your LSD and FYT separately and optimize your capital utilization. On the other hand, if you have low liquidity needs and preferences, such as long-term holding or accumulation, you may opt for native restaking, which locks up your LSTs and derivative tokens and maximizes your compound interest.

Benefits of Restaking

Restaking has many benefits for investors, such as:

Capital efficiency

Restaking allows users to utilize their staked tokens in multiple ways, without sacrificing their original stake or rewards. Users can use their LRT in DeFi applications, such as lending, borrowing, swapping, or farming, or restake them on other protocols, such as Lido, StakeWise, or Rocket Pool, to earn additional rewards. This way, users can maximize their returns and optimize their capital allocation.

Higher rewards

Restaking enables users to earn higher rewards for securing multiple networks at once. Users can receive rewards from the main blockchain, such as Ethereum 2.0, as well as from the restaking protocol and the additional protocol. The rewards are usually paid in different tokens, which diversifies the user’s portfolio and exposes them to different market opportunities.

Network security

Restaking contributes to the security and stability of the networks that users stake on. By restaking their tokens, users are increasing the number of tokens that are locked and committed to the network, which makes the network more resilient against attacks and forks. Restaking also reduces the risk of centralization, as users can choose from different validators and protocols to delegate their stake.

Restaking is supported by many cryptocurrencies that use proof-of-stake or its variants, such as Ethereum 2.0, Cardano, Polkadot, and Tezos with each network having its own rules and requirements for staking, such as the minimum amount of tokens, the lock-up period, the reward rate, and the risk of slashing.

Risks of Restaking

Restaking, while offering attractive opportunities for yield enhancement and asset management, also entails various risks that need to be considered and mitigated. Some of the main risks of restaking are:

Slashing risk

This is the risk of losing a portion of your staked assets due to network violations or misbehavior by the validators. Slashing can occur on both the underlying PoS blockchain and the LSTFI protocol, depending on their respective slashing rules and conditions. For example, if you restake your stETH on EigenLayer, you may face slashing risk from both Ethereum 2.0 and EigenLayer, if either of them detects any fault or attack by the validators. Slashing risk can be reduced by choosing reputable and reliable validators, diversifying your staking portfolio, and monitoring network performance and security.

Liquidity risk

This is the risk of not being able to access or trade your staked assets or derivative tokens at a fair price or promptly. Liquidity risk can arise from various factors, such as low market demand, high transaction fees, network congestion, protocol failure, or regulatory intervention. For example, if you restake your stETH on Pendle, you may face liquidity risk from both stETH and Pendle if either of them suffers from the low trading volume, high slippage, or technical issues. Liquidity risk can be reduced by choosing liquid and stable LSTs and LSTFI protocols, hedging your positions, and using liquidity aggregators and bridges.

Complexity risk

This is the risk of not fully understanding or anticipating the implications and outcomes of your restaking decisions and actions. Complexity risk can stem from various sources, such as lack of information, education, or transparency, as well as human error, bias, or manipulation. For example, if you restake your stETH on Origin Ether, you may face complexity risk from both stETH and Origin Ether if you don’t understand their documentation, governance, or tokenomics. Complexity risk can be reduced by doing your own research, due diligence, and verification, as well as seeking expert advice and feedback.

How to Mitigate Restaking Risk

There is no definitive answer to how to mitigate the risks of restaking, as different methods and models of restaking may entail different levels and types of risks. However, some general tips and best practices that may help you reduce and manage the risks of restaking are:

• Do your own research and due diligence: Before you decide to restake your LSTs on any LSTFI protocol, make sure you understand the features, functions, and terms of the protocol, as well as the underlying LST and the derivative token. Read the documentation, whitepaper, audit reports, and user reviews of the protocol, and verify the source code, smart contracts, and governance mechanisms. Also, check the market data, price history, and liquidity of the LST and the derivative token, and compare them with other similar options.
• Choose reputable and reliable validators and operators: When you restake your LSTs, you are entrusting your assets to the validators and operators who secure and run the network. Therefore, it is important to choose validators and operators who have a good reputation, track record, and performance in the industry.
• Diversify your staking portfolio and strategy: One of the main advantages of restaking is that it allows you to access and explore various LSTs and LSTFI protocols and gain exposure to different tokens and rewards. However, this also means that you are exposed to different risks and uncertainties. Therefore, it is wise to diversify your staking portfolio and strategy and not put all your eggs in one basket. You can diversify your portfolio by allocating your assets to different LSTs and LSTFI protocols, and you can diversify your strategy by using different methods and models of restaking, such as native, LST, or LSD restaking.
• Monitor the network performance and security: Restaking involves interacting with multiple networks and protocols, each with its own dynamics and conditions. Therefore, it is crucial to monitor the network performance and security of the LSTs and LSTFI protocols that you are using and be aware of any changes, updates, or incidents that may affect your restaking process.
• Hedge your positions and use liquidity aggregators and bridges: Restaking can expose you to various market risks, such as price volatility, liquidity risk, or slippage. Therefore, it is advisable to hedge your positions and use liquidity aggregators and bridges to protect and optimize your restaking process. You can hedge your positions by using various DeFi protocols, such as options, futures, or swaps, to reduce your exposure to price movements or lock in your profits. You can also use liquidity aggregators and bridges, such as 1inch, Uniswap, or EigenBridge, to find the best prices and routes for your LSTs and derivative tokens and to move them across different networks and protocols.

Conclusion

Restaking is a way to earn more rewards by staking your tokens on multiple networks. It has benefits like capital efficiency, network security, and governance. But it also has risks like slashing, liquidity, regulation, and security. You should research and compare the networks and protocols before restaking your tokens.