The Restaking Narrative in Blockchain

You've likely heard numerous narratives about how restaking is gonna change blockchain security and its growing prominence. Eigenlayer is leading this charge, with many projects attracting venture capital funding to catch the wave before it subsides.

Etherfi, KelpDAO, and RenzoProtocol are just a few examples.

Etherfi managed to lock around 1 billion in mere months, and the rest of the restaking narrative has caught a similar wind

So, what exactly are we dealing with here? What is restaking? Is it staking on top of staking, and if that's the case, why not create re-re-staking?

Understanding Staking

Jokes aside, let's first delve into the staking part. Staking is a process where you lock your assets on the Ethereum network to earn potential yields, which are around 4% at the moment. By staking, you help secure the network. But how? To explain this, let's understand a few terminologies first. In the Ethereum ecosystem, we have what we call Validators and Stakers. Validators are the nodes (or participants) that validate the authenticity of transactions on the blockchain. They assist in creating new blocks by bundling verified transactions together. To become a validator, one must put up some collateral, which is around 32 ETH, and this comes with a caveat. If we act maliciously, that is, if we validate a transaction incorrectly, we are at risk of losing our collateral, a term often referred to as slashing.

But isn't having 32 ETH too much of a requirement? How is this decentralized? It seems only the whales can afford such an amount. However, this is where stakers come into the picture. Many stakers can unite and contribute, say, 1 ETH or 2 ETH, and collectively have 32 ETH to become a validator. When validators propose a new block, they earn rewards, which are then distributed among all the stakers.

In short, Validators are a subset of stakers who have staked the required minimum of 32 ETH and are actively involved in the consensus process. They have specific responsibilities, such as proposing and voting on new blocks. So, while all validators are stakers, not all stakers are validators. Some stakers may choose to delegate their stake to a validator rather than running a validator node themselves.

Now that we know a little about staking, let's try to understand how restaking differs from staking.

Restaking and staking are both methods of participating in blockchain networks, but they serve different purposes and operate under different principles. In a traditional staking model, our assets are locked up and cannot be used for other purposes. However, restaking introduces a concept that allows these staked assets to be utilized further.

Liquid Staking

When we stake our assets, some platforms issue us liquid staking tokens in return for the native token. For example, in the case of Etherfi, they'll issue 1 eETH token for every 1 ETH you stake. Now you have the option to trade this eETH and swap it for regular ETH on any decentralized exchange where there is liquidity for it. You will have to incur a small slippage, but you can get your original ETH back much faster than with native staking, which usually takes months to unstake.

These issued tokens are sort of an IOU from the platform, and they accrue in value over time.

So, say the native yield you get for staking is 4%; these liquid staking platforms provide you with 3.5% because you have the flexibility to end the position whenever you like. After 1 month of holding this token, you can swap it for ETH for more than what you got because the value of these tokens itself increases at a 3.5% rate. That's the beauty of it.

Restaking

Now for the interesting part: you can either hold the liquid-staked token indefinitely or - you guessed it - restake it. This means that while your original assets are still locked on the platform, the liquid tokens they generate can be used again for additional staking opportunities.

This process increases the capital efficiency of your staked assets. Instead of being dormant, they are actively participating in securing multiple networks, which can potentially lead to higher rewards.

How does Eigenlayer fit into this?

Think of EigenLayer as a service that helps secure different blockchain projects without them having to do all the hard work of setting up their own security from scratch. It's like hiring a top-notch security team for your building instead of training and managing one yourself.

Here's what EigenLayer does in simpler terms:

• Shared Security: It lets smaller blockchain projects use Ethereum's strong security. This is like a small store getting the same level of security as a big bank.
• Marketplace for Security: EigenLayer creates a place where people who want to provide security (validators) and those who need it (protocols) can come together and make deals.
• More Rewards: If you're someone who has Ethereum and you want to help secure the network, EigenLayer can help you earn more rewards for doing so.
• Cost Savings: It helps new blockchain projects save money on security costs, which they can use to make their projects better.
• Supporting Growth: By saving costs on security, blockchain projects can use their funds for innovation and growth.

In short, EigenLayer is like a middleman that connects Ethereum's security with other blockchain projects, making it easier and more profitable for everyone involved. It's a win-win for the security providers and the projects that need security.

I hope this brief article gave you a better understanding of what restaking is and how it benefits the whole blockchain ecosystem.