How Restaking & Oracles Could Transform DeFi? Part 1

What is Restaking?

When you need additional protection for your house, do you build a private security company, or hire one?

Unless your wealth comes from the security business, probably the latter. A similar logic revolves around restaking, the concept that took by the storm the Ethereum and crypto space. How does it work? In simple terms, Ether (ETH) is staked on the Ethereum blockchain to increase the economic security of the network. It turns out that you can reuse and repurpose that locked economic security for smaller networks and applications. May it be a rollup, bridge, appchain, or another system. In this article, we will dive deeper into the use of restaking for boosting Oracle networks.

Restaking, introduced by EigenLayer, allows modules to use ETH for security rather than their native tokens. Validators opt in by assigning their credentials to EigenLayer smart contracts and running additional node software. In return, validators earn extra revenue for securing chosen modules. This approach broadens the range of blockchain applications that can benefit from pooled security. Stakers can validate various modules, including consensus protocols, data availability layers, virtual machines, keeper networks, oracle networks, and bridges. Restaking streamlines the process of bootstrapping security for new applications, making it more cost-effective, efficient, and scalable.

EigenLayer offers various methods for yield stacking, allowing stakers to earn additional rewards from securing new actively validated services (AVSs). Restaking options include native restaking, where validators restake ETH, liquid staking token restaking, and LP tokens restaking, whether ETH or LST pairs. Each pathway carries different risks, and module developers determine which tokens to accept as a stake for their AVS.

The Restaking Fundamentals: Operators, AVSes, Consumer Systems

Essentially, restaking is based on a set of smart contracts on Ethereum. Their integration allows the validating of additional modules such as protocols, bridges, oracles, etc. Restaking requires a unique architecture to provide pooled security and remaining benefits. The system encompasses several entities to operate, including restakers, operators, actively validated services, and consumers. Restakers are users who delegate their ETH or LSTs to the protocol. They can be node operators or participate as delegators only. Restakers have two options: solo staking or delegated staking. The former refers to native restaking and binding withdrawal credentials to smart contracts. The latter facilitates participation by allocating stake to an operator.

Meanwhile, an operator is a user responsible for assisting in software operations. They register within EigenLayer, facilitating stakers to delegate to them. Subsequently, they provide diverse services and execute validation tasks essential for the functioning of AVSs. Operators may or may not be Stakers, with the two roles not being mutually exclusive. Actively validated services encompass systems necessitating their own distributed validation mechanisms for verification purposes. These include different services such as sidechains, data availability layers, decentralized sequencers, novel virtual machines, keeper networks, oracle networks, bridges, threshold cryptography schemes, and trusted execution environments. Lastly, consumers are end-users who utilize the entire model and benefit from AVS’s capabilities. They could be dapps and rollups.

A diagram of how restaking works

Data Availability: The First Restaking Implementation

Data availability in blockchain and cryptocurrency refers to the accessibility of transaction data to all participants in the network, usually nodes. It ensures that the data associated with transactions, smart contracts, and other blockchain activities is reliably stored and accessible to anyone who needs it. This availability is crucial for maintaining transparency, enabling decentralized verification, and ensuring the integrity of the blockchain. In essence, data availability ensures that all participants have access to the necessary information to validate transactions and participate in the network’s consensus process.

In monolithic blockchains, users typically download all the data to ensure its availability. However, as block sizes increase, it becomes challenging for regular users to download and verify the entire chain, leading to potential issues with chain validation. Modular blockchains address this challenge by implementing a technology called data availability sampling. This enables users to verify large blocks efficiently without downloading all the data, thereby ensuring that the blockchain remains accessible and verifiable even as it scales in size.

EigenDA is a decentralized data availability service built on Ethereum utilizing the EigenLayer restaking mechanism. As the first actively validated service (AVS) on EigenLayer, EigenDA allows users to delegate stake to node operators who perform validation tasks. In return, these operators receive service payments. Rollups, such as zero-knowledge and optimistic rollups, can utilize EigenDA by posting data to it, thereby accessing benefits like lower transaction costs, higher transaction throughput, and secure composability across the EigenLayer ecosystem. The security and throughput of EigenDA are designed to scale horizontally with the amount of stake delegated and the number of operators involved in servicing the protocol. In the context of rollups, EigenDA ensures that transaction data is readily available for reconstructing rollup states and creating fraud proofs. The process involves the sequencer creating blocks with transactions, which are then dispersed to EigenDA nodes. These nodes verify the data, persist it, and return a signature to the disperser for aggregation.

Celestia is a modular data availability network designed to scale securely alongside user growth, simplifying the process of launching individual blockchains. Rollups and Layer 2 solutions utilize Celestia as a platform for publishing transaction data, ensuring accessibility for all users to download. With Celestia, high-throughput data availability is achieved, ensuring easy verification even for light nodes. Furthermore, by adopting a modular approach to the blockchain stack, Celestia enables anyone to launch their own blockchain without the necessity of a predefined validator set.

Data availability services like EigenDA and Celestia solve problems associated with data accessibility. They provide transaction information for zero-knowledge and optimistic rollups. Rollup participants will find it impossible to reconstruct the rollup state to bridge their assets out, and data unavailability could lead to fraud proofs. In addition, DA services have mechanisms to verify and access relevant data without downloading all the block data. They reduce costs for networks and protocols, delegating data storage and availability operations to the DA layer. This solution is vital for modular blockchains dividing systems across multiple layers.

Other AVS Implementations

EigenLayer created the ecosystem for actively validated services, and it already consists of tens of operators and dozens of AVSs and rollups. This section introduces selected AVSs that leverage restaking technology, integrating and developing groundbreaking products and services, and tackling everlasting issues such as decentralization, scalability, and security.

Espresso develops decentralized sequencing technology, helping rollups scale and enhance interoperability. It utilizes restaking by engaging Ethereum validators to run the Espresso Sequencer protocol, which modularly enhances the rollup ecosystem without altering the security model. This strategy helps avoid centralization risks by sharing the value generated by rollups with Layer 1 nodes. Already staked ETH can be restaked for additional participation in the Espresso Sequencer, subjecting it to additional slashing conditions. Espresso is an actively validated service on EigenLayer, utilizing pooled security in its system components.

Espresso provides a data availability layer as well, introducing Tiramisu, a highly efficient data availability solution comprising three tiers. It offers web2-level efficiency in optimistic scenarios and robust Ethereum-level guarantees during pessimistic conditions, such as network outages or attacks. Tiramisu prioritizes not only fallback data availability but also efficient data access, even under malicious behavior. Rollups utilizing the Espresso Sequencer can opt for alternative DA systems to balance different tradeoffs.

AltLayer is an open and decentralized protocol designed for rollups. It introduces the concept of restaked rollups, which enhances the security, decentralization, interoperability, and crypto-economic finality of existing rollups derived from various rollup stacks like OP Stack, Arbitrum Orbit, ZKStack, and Polygon CDK. Restaked rollups leverage EigenLayer’s restaking mechanism to bootstrap network security and establish a decentralized network. They consist of three vertically integrated actively validated services tailored to each rollup, providing services such as state correctness verification, accelerated finality, and decentralized sequencing.

AltLayer provides three modular components representing these services, including VITAL, MACH, and SQUAD. VITAL serves as a dedicated verification layer for rollups, comprising a network of AVS-registered operators responsible for validating new rollup states. MACH is a rapid finality layer for Ethereum rollups, prioritizing swift transaction confirmations, robust crypto-economic security against network threats, compatibility with zero-knowledge and optimistic rollups, and flexibility to accommodate various proof systems and runtimes, ensuring finality. SQUAD is a decentralized sequencing mechanism within AltLayer that automates finding and bootstrapping sequencers for rollups by allowing EigenLayer AVS operators to register as sequencers, providing security through collateral restaking and slashing for misbehavior.

Omni Network is a blockchain designed to address the challenge of fragmented rollups within the Ethereum ecosystem by offering restaking secured cross-rollup compatibility. It aggregates users, liquidity, and activity from various rollups, allowing developers to create applications accessible across all rollups without adding complexity to development. Utilizing Ethereum’s validator set for security and leveraging modular architecture, Omni Network enables seamless application development across different rollups while abstracting away cross-domain complexities, ensuring a smooth user experience. Omni Network is an actively validated service, growing the EigenLayer and restaking the ecosystem.

Omni Network operates through validators who restake ETH to monitor rollup states, assuring validity. Omni’s modular approach uses an EVM-compatible execution layer. This mechanism ensures the security and integrity of data transitions across rollups, enabling developers to build applications with ease.

Restaking For Increasing Security Of Rollups

The innovation of restaking and AVSs enables new capabilities and system designs for rollups. They gain advantages from the introduction of novel modular services. Restaking presents a significant opportunity within rollups, particularly in establishing decentralized sequencers and managing Maximal Extractable Value (MEV). These sequencers could be created on smart contract platforms like EigenLayer. ETH stakers could organize decentralized councils and service numerous rollups, providing an optimized sequencing mechanism. This approach allows for lightweight or horizontally scalable designs, mitigating state growth concerns. Espresso is a proponent and an example of a protocol focused on decentralizing sequencers. It achieves scalability to tens of thousands of nodes while upholding robust performance, facilitating the involvement of Ethereum’s complete validator set, and its sequencer can be shared across multiple rollups.

Restaking can enhance both zero-knowledge and optimistic rollups. A group of operators with restaked ETH can verify ZK proofs off-chain, ensuring their correctness on Ethereum. This reduces delays and enhances composability. Similarly, in optimistic rollups, restaking allows for a larger collateral pool to certify state roots, reducing the risk of slashing and improving security.

Integration of restaking technology does not end there. Blockchain development and deployment heads towards the facility, ensuring security in the process. Rollup deployment platforms become more popular. They enable the launch of bespoke, high-performance rollups tailored to specific applications. These platforms, like Caldera, utilize existing rollup stacks and development kits and combine them with remaining essential parts including data availability layers, settlement layers, decentralized sequencer sets, and interoperability bridges. Restaking can play a crucial role in guaranteeing Ethereum-level security, leading to restaked rollups, introduced by AltLayer. Apart from security inherited from Ethereum validators through restaking, emerging networks can leverage this technology in combination with data availability services such as EigenDA to scale horizontally and maintain significantly lower transaction fees, and much higher throughput. Projects like Layer N use these solutions to store data, provide cost-efficient development, and improve network performance.

Future Prospects and Challenges

EigenLayer is the leading and currently only restaking protocol on Ethereum. An entirely new DeFi branch emerged with liquid restaking protocols and networks offering native ETH yield. EigenLayer’s astonishing growth and technology make it difficult to dethrone. It is a clear example of a first-mover advantage project. Historically, they cope pretty well, presenting the likes of Lido for liquid staking, Aave for lending, or Uniswap for DEXes. The further development path for restaking involves integration with other blockchains. The closest chain to incorporate restaking is Cosmos. Although projects working on it do not develop EigenLayer alternatives, we cannot rule out such a solution in the future. Currently, projects like Polymer Labs combine Cosmos SDK with EigenDA for data availability and Ethereum for settlement, and protocols like Ethos bring Ethereum restaking to Cosmos, increasing economic security utilizing Ethereum and its largest node operators network.

Restaking and AVSs could create new token business models offering various fee structures and operational frameworks. These models could utilize restaked ETH and AVS’s native token. Protocol users could pay fees in either token. Additionally, the portion of fees generated by AVSs could go to ETH restakers or AVS token holders. Lastly, the innovative architecture allows for a dual staking utility model involving two quorums, one comprising ETH restakers and the other AVS native stakers, prioritizing safety, allowing participants to enhance security, and mitigating risks.

Restaking implementation, while offering significant benefits, carries inherent risks for the parent network (Ethereum, Cosmos) and stakers. These risks include the potential for slashing, where validators may incur losses for breaching restaking terms. Penalties could affect ETH restakers who delegate assets to operators. Additionally, there is concern that relying on Ethereum’s social consensus for resolving issues could lead to conflicts over the principal version of the Layer 1 blockchain, highlighting the need for careful consideration and risk management in implementing restaking protocols.

Restaking via smart contract platforms such as EigenLayer distinguishes two delegation types. Solo stakers, operators, restake ETH natively and unlock additional revenue streams by validating other modules like data availability layers, sequencers, oracles networks, etc. The second option is associated with a delegation from users who want to participate in restaking but are not interested in becoming an operator. Delegators can provide ETH, but it is not exclusive. EigenLayer enables users to restake liquid staking tokens. This involves extra risk regarding LST issuers. It introduces protocol risks, additional leverage, and de-pegging risks. The entire situation with liquid staking and restaking seems like cranking up the engine and increasing the boost. Ethereum might face maxing out and incredibly high loads with the upcoming new user wave.

Conclusion

In conclusion, Part 1 of our exploration into restaking has provided a comprehensive overview of the fundamental concepts and practical applications of restaking within the blockchain ecosystem. We have explained how restaking functions, its significance in enhancing network security, and its role in enabling cross-rollup compatibility through examples such as EigenLayer’s innovative restaking mechanism. Additionally, we have examined the importance of data availability and its implementation in blockchain technology, showcasing projects like EigenDA and Celestia as solutions to ensure transparent and decentralized data accessibility. This article has explored various implementations of actively validated services (AVSs). Restaking not only enhances the security and efficiency of blockchain networks but also introduces new possibilities for decentralized application development. By enabling validators to restake ETH and validate additional modules, the restaking mechanism facilitates the seamless operation of various services, including data availability layers, decentralized sequencers, and oracle networks.

Dive deep into Liquid Restaking in the LRT Report

Looking ahead, stay tuned for Part 2 of our series will delve deeper into the integration of restaking with oracles, exploring how these combined technologies can further enhance blockchain functionality and security. However, it is important to recognize the risks associated with restaking, including the potential for slashing and conflicts within the Layer 1 blockchain’s social consensus. Overall, restaking and oracles represent a significant advancement in blockchain technology, paving the way for a more secure, efficient, and interconnected decentralized ecosystem.

Resources

1. https://docs.eigenlayer.xyz/assets/files/EigenLayer_WhitePaper-88c47923ca0319870c611decd6e562ad.pdf
2. https://docs.eigenlayer.xyz/
3. https://www.eigenlayer.xyz/ecosystem
4. https://docs.celestia.org/
5. https://docs.espressosys.com/
6. https://docs.altlayer.io/

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