From Staking to Restaking: the 3 Technological Steps

November 29, 2023

From staking to restaking, the DeFi journey has evolved in the last few years. Users and investors now have more chances to expand their investment yield. From the more simplistic staking to the more complex restaking strategy, users and investors can expand their exposure to the network, although, they simultaneously increase their investment risk.

TL;DR:

Staking is a cryptoeconomic primitive that enables users to provide network security by locking their funds with validator pools.
While the previous use case locks users' liquidity, the liquid staking strategy enables users to provide the same network security while remaining liquid to undergo different DeFi strategies.
Furthermore, with the new restaking primitive created by EigenLayer, users can further increase their network exposure and be rewarded so.
While users can boost their yield through asset restaking, they also expose themselves to two layers of risk simultaneously.

Why web3 users opt for staking

Staking is a critical mechanism introduced as part of the Proof of Stake (PoS) consensus algorithm. Just like heavy computer power was used to validate transactions in the Proof of Work (PoW) consensus, staking is used to do so in the PoS ones. To become a member of a network’s validating ecosystem, holders need to stake, or lock, their coins for a period of time, and receive in return network rewards.

The reason why staking is one of the go-to solutions for investors is due to its ability to generate a passive yield from investors' holdings. It became particularly attractive as a DeFi strategy for its user-friendliness since it doesn’t require regular users to have any particular expertise. This is not to say that users shouldn't conduct their own research on the coin and validators' KPIs; nevertheless, compared to other DeFi strategies like yield farming or liquidity mining, staking is relatively easier to understand.

However, just like any other financial venture, it doesn’t come without its limitations. From a more technical point of view, users do need to choose the right validator so they don’t incur the risk of getting “slashed” - a portion of the staked coins can be lost as a penalty if the validator node fails to comply with network rules.

Furthermore, from a financial point of view, by staking their coins, users are in fact locking them for a period of time, which becomes a huge capital inefficiency, and disables them from reacting to market movements.

From Staking to Restaking_1 Why stake your Ethereum? Source: Ethereum

From staking to liquid staking

Addressing the locked liquidity limitation from traditional staking, the liquid staking sector has been on a surge. This happens because it allows users to stake their coins and in return mint an equivalent liquid token that not only encompasses the underlying asset, but the staking rewards equivalent to it.

This token is named liquid staked token (LST) and can be freely traded and used in several other DeFi applications, all while the original asset is earning rewards. According to Defillama, the largest three protocols on this market are Lido (with stETH), Rocket Pool (with rETH), and Binance (with WBETH), each offering unique features and supported assets but united by the core principle of enabling staking without sacrificing liquidity.

From Staking to Restaking_2 Liquid Staking TVL structure. Source: DefiLlama

The main advantages of liquid staking are evident in its rapidly growing popularity. Users leverage it to explore various DeFi strategies, all while earning rewards for their stake. This dual-benefit mechanism increases capital efficiency significantly, increasing the yield users can generate from the same asset.

From a blockchain perspective, LSTs also offer substantial benefits, by incentivizing a larger user base to pledge their coins, since it doesn’t limit them. This larger pledge of coins bolsters the overall network security and robustness.

From liquid staking to restaking

However, the blockchain's permissionless nature allows developers to keep on extending utilities and solutions to different blockchain limitations. Leveraging this, EigenLayer proposed the creation of a new cryptoeconomic primitive named restaking.

Traditional Ethereum validators stake ETH to make capital-based commitments to the Ethereum protocol, but EigenLayer found a way to broaden these commitments by allowing stakers to opt into actively participating and responding to tasks for new use cases and distributed systems, termed as "Actively Validated Services" (AVSs).

Doing so, EigenLayer enabled protocols to leverage Ethereum’s trust network and expand it to off-chain interactions, overcoming one of the main development limitations, which was the bootstrap of trust networks that could validate off-chain interactions (whether it’s a bridge, oracles, or AI systems).

For the end user, this brought another earning possibility. By staking their ETH or LST with EigenLayer, users are extending Ethereum’s trust network, and at the same time, earning rewards from the AVSs fees, thus increasing their yield.

Despite the innovative approach, it once again brought back the locking limitation loop. By restaking on EigenLayer smart contracts, users end up with their tokens locked once again.

That’s where InceptionLRT appears with a liquid restaking solution. Similar to liquid staking tokens, this solution enables users to maintain liquidity while participating in the EigenLayer protocol, unlocking Layer 2 rewards while preserving the liquidity of the capital.

This allows users to amplify rewards on restaked tokens by selecting optimal EigenLayer's node operators, thus providing a solution that blends the benefits of additional yield generation with the flexibility of liquid assets.

From Staking to Restaking_3 Comparison table between staking and restaking.

It all comes down to your risk/reward appetite

As we conclude our exploration of the journey “from staking to restaking” it’s important to note that despite sounding quite lucrative, each DeFi strategy encompasses its own set of risks.

As usual, aggressive strategies offer higher potential yield, however, more often than not, they also come with increased exposure to risk. At the end of the day, it’s crucial that users understand what they are doing and the possible outcomes of it.

Make sure that whatever strategy you opt for, fits within your risk-reward appetite, and that you’re comfortable with your investment decisions.