Inside the Restaking Ecosystem: Restaking Protocols

This post is the second in a series (read the first post if you missed it) that offers a comprehensive look at the restaking ecosystem — its players, projects and protocols — and the various risk-related considerations to be aware of as the space continues to evolve. 

Introduction to Restaking Protocols

Innovations like restaking have emerged as pivotal mechanisms reshaping how digital assets and networks are utilized and secured.

Restaking revolves around the strategic reuse of staked capital to secure not just the underlying blockchain, but also various blockchain infrastructure projects built atop it that require their own network of nodes to handle whatever consensus operations are necessary.

This approach leverages the inherent security and consensus-building capabilities of proof-of-stake (PoS) networks to secure a broader range of projects, while allowing stakers and node operators to increase the rewards they earn from their staked capital (though not without accepting additional risk).

In this post, we delve into the concept of restaking, chart the restaking ecosystem’s development from the inception of EigenLayer to where it is today, and examine the risks stakeholders should consider as this space continues to evolve at a rapid pace.

What is Restaking?

Restaking is all about using staked capital to secure more than a single PoS network — some refer to this as “shared” or “modular” security, others as “modular consensus.”

A PoS network like Ethereum gains security, resiliency, and trustless consensus from node operators, called validators, that stake capital to participate in the network. Validators are incentivized to be reliable and act honestly because they have a financial stake in the network. If an Ethereum validator acts dishonestly or makes significant mistakes, a portion of their staked tokens can be taken away (i.e., slashed).

Currently, ~32.9 million ETH (worth roughly $114 billion at today’s price) is staked to secure the Ethereum network. Before EigenLayer, that massive pool of ETH was essentially locked up and unavailable to be restaked elsewhere. This means new blockchain infrastructure projects must bootstrap their own PoS networks, which requires them to compete with Ethereum and other networks for a finite amount of capital in the ecosystem available to be staked.

Restaking, as introduced by EigenLayer to the Ethereum community, rests on the premise that the ~32.9 million ETH staked to secure Ethereum should be available to be restaked to secure new and emerging PoS networks. Not doing so, goes the argument, risks fragmenting Ethereum’s security as more networks compete for stake, siphoning value away from Ethereum’s economic security and ultimately leading to thinner security for all networks in the ecosystem.

A Marketplace for Decentralized Trust

Rather than needing to spin up their own PoS networks, restaking creates a pool of shared security that blockchain infrastructure projects can use by enticing validators within the EigenLayer ecosystem to secure their networks.

In other words, EigenLayer has created a marketplace for decentralized trust, with the blockchain infrastructure projects, called Actively Validated Services (AVSs) (while restaking terminology is still evolving, we're defaulting for now to using EigenLayer's terms as they're the most established), on one side and validators, called Operators, on the other. AVSs are looking for Operators to run nodes on their network, offering rewards as incentives, while Operators are looking for AVSs offering rewards to maximize the yield on their restaked ETH.

Operators can pick and choose which AVS to support with their restaked capital, and technically can choose to allocate to as many AVSs as they wish. On paper, it may look attractive to back as many AVS as possible to maximize rewards, but which AVS to back comes with important considerations that are still evolving (read our research on optimizing AVS allocations here). Like validators on Ethereum, unreliable or malicious Operators risk getting their restaked assets slashed per the individual contracts they enter into with each AVS. Operator profitability is also driven by the operational costs required to run nodes for a particular AVS, as the computational complexity of tasks can differ based on each AVS’ needs.

At least, that’s how it’ll work in theory. While EigenLayer is live with Operators supporting more than a dozen AVSs, rewards and slashing have yet to be enabled on the platform. 

Evolution of Restaking Protocols

EigenLayer is not the first project to introduce the idea of shared or pooled security within the context of a blockchain network. Though different in design and implementation, both Polkadot and Cosmos have shared-security models in which their respective networks of interconnected but sovereign blockchains — called “interchains” in the Cosmos ecosystem and “parachains” in Polkadot — share the underlying security of the network. 

But it wasn’t until EigenLayer introduced restaking within the Ethereum ecosystem that the concept really took off. In the past year, stakers on Ethereum have restaked $19.2 billion worth of ETH and various liquid staking tokens (LSTs), according to DeFiLlama, drawn by the opportunity to earn restaking rewards on top of their original staking rewards. EigenLayer accounts for the vast majority of this total, with ~$17.6 billion in total value locked (TVL), reflecting its nearly year-long head start since it began accepting deposits in June 2023.

The restaking landscape is rapidly evolving, however. Competitors have emerged, including Karak Network, which explains restaking in terms of “modular security” and has almost $1 billion in TVL, according to DeFiLlama.

Symbiotic is the most recent market entrant, emerging from stealth mode in early June 2024 with the ability to accept deposits. Users deposited more than $200 million worth of tokens in a matter of days. Its current TVL is ~$315 million, according to DeFiLlama. Symbiotic proposes to enable any ERC-20 token to be restaked (via the minting of “collateral tokens” that are then deposited into vaults). This differentiates it from EigenLayer, which enables the restaking of native ETH and a curated list of LSTs.

Symbiotic’s approach of enabling users to mint tokens to represent the positions they wish to restake is reminiscent of liquid staking, which makes sense given Symbiotic is backed by the founders of Lido Finance, which dominates the liquid staking space with its LST, stETH, representing more than 70% of the TVL of all LSTs. The majority of Symbiotic’s current TVL is wstETH, the wrapped version of Lido’s stETH. 

Restaking’s popularity has expanded beyond Ethereum, with teams building projects to implement restaking on Solana, Bitcoin, NEAR, and Filecoin.

Risk Considerations in Restaking Protocols

There are still many unknowns regarding the implementation of the existing restaking protocols. As mentioned, EigenLayer is still preparing to ship the ability for AVS to reward Operators or for those Operators to be slashed.

But as protocols like EigenLayer, Karak and Symbiotic continue to evolve, and new restaking protocols emerge on Ethereum and in other ecosystems, there are some things to keep in mind in terms of risk. 

There are the usual risks when interacting with blockchain applications and staking via a third-party (i.e., smart-contract risk, slashing risk, etc.). There are restaking-specific risks, such as Operator collusion, which EigenLayer covers in its whitepaper. There are DeFi-related risks that come into play; for example, if too much of an LST’s supply is locked in restaking protocols, a lack of liquidity could create price volatility that would have an adverse impact on AVS security (Gauntlet CEO Tarun Chitra discusses liquidity risk in his talk from last year’s Restaking Summit).   

We won’t cover those risks in further detail here. But we will explore concentration risk a bit further, particularly because EigenLayer has taken a unique approach to addressing it, before diving into a topic we expect will be a major risk-related narrative around restaking going forward — the mutability of a protocol’s parameters.

How EigenLayer Manages Concentration Risk with EIGEN

One major concern that’s been raised is the risk to the security of the underlying Ethereum network when a restaking protocol like EigenLayer, which has more than $17 billion in already-staked ETH locked up, were to suffer a breach, mass slashing event, or experience another black swan event. This is referred to as concentration risk.

Besides finding ways to disincentivize Operators from concentrating too much restaked ETH in any one AVS, EigenLayer also recently introduced a novel method for addressing concentration risk — a new token, EIGEN, with a unique architecture.

In a PoS network, the rules governing the decision to slash a validator for being dishonest or unreliable should be objective (i.e., everyone knows the rules going in, and those rules are applied programmatically in a universal way that can’t be disputed). EigenLayer calls these “objective faults.”

But within EigenLayer, where AVSs are often dealing with off-chain inputs (hence the need for their own decentralized networks to trustlessly validate those inputs before they reach Ethereum’s base settlement layer), the decision of whether to slash an Operator can quickly venture into subjective territory. EigenLayer calls these “intersubjective faults.”

This is where EIGEN comes in. EigenLayer has dubbed it a Universal Intersubjective Work Token (read the whitepaper). Within the EigenLayer ecosystem, EIGEN will be used to manage “intersubjective faults” or other issues that require broad stakeholder agreement. In cases where human consensus has agreed that an intersubjective fault has occurred, the community is able to fork the EIGEN token, creating a new version that all honest actors will continue using and which excludes the original dishonest actors.

This effectively frees restaked ETH from being put at risk of slashing for reasons that can’t be objectively judged as worthy of slashing.

Mutability Considerations

A risk narrative we anticipate will become increasingly important is the mutability of each protocol’s parameters. This refers to the ability of the protocol to adjust its settings and rules over time. We’re not advocating for mutability over immutability, only pointing out that there are risks and benefits to consider no matter which direction the protocol teams take as they continue to build. 

Mutable Parameters

Protocols with mutable parameters can adapt to changing conditions and emerging threats. This flexibility allows for timely updates to address vulnerabilities, optimize performance, and respond to evolving market dynamics.

However, the ability to change parameters also introduces a layer of uncertainty. Stakeholders must trust that those controlling the protocol will make changes that enhance security and functionality without undermining the system's integrity.

If a protocol’s parameters are mutable, efforts should be made to strike a balance between flexibility and the need for stability and security. Strategies to help achieve this balance could include transparent governance mechanisms, robust security safeguards to protect against unauthorized changes, and a gradual approach to implementing parameter updates.

Immutable Parameters

On the other hand, protocols with immutable parameters offer stability and predictability. Once set, the rules cannot be altered, which can instill confidence in the system's reliability and consistency.

However, immutability can be a double-edged sword. If unforeseen issues or vulnerabilities arise, the protocol may be unable to adapt quickly, potentially exposing it to prolonged periods of risk.

If a protocol’s parameters are immutable, it's important the team conducts thorough initial economic design and security audits, including via third parties, to ensure security from the start. If it’s not possible to tweak parameters, there would need to be much more thought put into the protocol’s design in terms of stakeholder dynamics. In other words, applying game theory to ensure there are robust incentive structures and strict penalties for misbehavior. And there should be a plan in place in the event of worst-case scenarios.

The Balancing Act

Whether a protocol's parameters are mutable or immutable, risks will inevitably emerge. The key to effective risk management lies in a protocol’s ability to monitor its environment continuously and implement robust mechanisms to handle potential threats. Stakeholders should assess how a protocol’s design choices align with their own risk tolerance and long-term goals.

With multiple restaking protocols deploying, we expect mutability to become a common comparison tool.

Conclusion

Restaking has enormous potential to revolutionize the blockchain ecosystem, lowering barriers for teams building the innovative blockchain infrastructure that will push the industry forward.

But there are still plenty of potential risks to consider. As these platforms evolve, stakeholders must adopt robust risk management strategies to harness its benefits while mitigating potential pitfalls.

In the next post, we’ll dive into one important group of stakeholders — the AVSs building on EigenLayer, and their equivalents on other platforms.

Gauntlet Team