What is Restaking? EigenLayer has created a new trend

One of these emerging strategies in the DeFi world is Restaking, a technique that allows users to reuse their staked assets to secure multiple protocols, thus multiplying their rewards and contributing to the security and efficiency of the DeFi ecosystem.

Restaking has gained significant traction thanks to EigenLayer, the first protocol to introduce this revolutionary concept into the blockchain space. Currently, the total TVL within the Restaking sector is close to $15 billionof which about $12 billion is deposited in EigenLayer. Not only did it pioneer this idea, but it has also set a framework that other platforms are beginning to follow. This strategy allows investors to earn additional returns while strengthening interoperability and security between different blockchain protocols.

In this article, we will explore in depth what restaking is, how it works, its advantages and challenges, and the main platforms that are driving this revolutionary trend in the DeFi space.

TVL Sector Restaking(Defillama)

Ethereum Staking (Proof of Stake)

To understand the concept of restaking, it is essential to first understand what staking is. staking. In the realm of decentralized finance (DeFi) and Proof of Stake (PoS) based blockchains, staking is the process by which users lock their cryptocurrencies into a network to help validate transactions and secure the blockchain. In exchange for their participation and contribution to the security of the network, users receive rewards in the form of additional tokens. Staking has gained popularity as a way to generate passive income, as users can earn returns without having to sell their assets. However, once assets are staked, they are usually locked, meaning that they cannot be used for other purposes until they are released.

What is Restaking?

Restaking is a mechanism by which users can reuse assets that have already been staked on a main blockchain (such as Ethereum) to secure and participate in multiple additional protocols. This means that, instead of keeping their assets locked and earning rewards from a single protocol, users can "reuse" those same assets to generate additional revenue in other decentralized services or applications.

This concept extends the utility of staked assets, enabling greater capital efficiency and contributing to the security and decentralization of multiple protocols simultaneously. Restaking resembles the concept of shared security, where a pool of resources is used to secure multiple systems, improving cohesion and interoperability within the blockchain ecosystem.

How Restaking Works

Restaking works by implementing additional layers or protocols that allow users to commit their staked assets as collateral for multiple services. The most prominent example is EigenLayer, which introduced the concept of a "decentralized security marketplace," where validators and delegators can reuse their Ethereum staked to secure other protocols and applications.

Practical Example:

Suppose a user stakes 100 ETH in a protocol with an annual rate of return (APY) of 10%. In a traditional staking scenario, at the end of the first year, the user would have 110 ETH (initial 100 ETH + 10 ETH in rewards). However, with restaking, those 10 ETH in rewards would be automatically reinvested in other protocols. This allows the user to generate additional rewards in different applications, increasing the total return on their investment without the need to contribute more capital. Furthermore, by reinvesting these rewards, returns are maximized through compound interest, where the profits generated also begin to generate their own rewards.

Restaking system schematic

Benefits of Restaking

1. Maximizing Returns: By reinvesting staking rewards across multiple protocols, users can significantly increase their returns over time, especially in protocols with compound interest rates.
2. Capital Optimization: restaking allows each fraction of the rewards to work to generate more income, thus optimizing the efficiency of the invested capital.
3. Strengthening Ecosystem Security: By sharing the security provided by the staked assets, multiple protocols can benefit from a stronger security foundation, increasing the resiliency and reliability of the DeFi ecosystem as a whole.
4. Fostering Innovation and Interoperability: restaking facilitates the creation and growth of new protocols and services by providing them with access to security and shared resources, driving innovation and interoperability between different blockchain solutions.
5. Flexibility and Customization: Users can choose which additional protocols they wish to participate in, allowing for customization of their investment and risk management strategies according to their preferences and financial objectives.

Restaking Challenges and Considerations

1. Amplified Slashing Risk: By resampling assets in multiple protocols, users are exposed to an increased risk of slashing if any of the protocols fail or if the user does not fulfill the assigned obligations, which may result in the loss of part of the staked assets.
2. Technical Complexity: The management and monitoring of staked assets across multiple protocols can be complex, especially for less experienced users, requiring a thorough understanding of the mechanisms and risks involved.
3. Reliance on Smart Contracts: Restaking relies on smart contracts that may be subject to vulnerabilities and exploits. The security of the system is highly dependent on the quality and auditability of the underlying code.
4. Governance and Coordination Issues: Participation in multiple protocols may involve different governance models and rules, which can complicate coordination and decision making for users and validators.
5. Impact on Decentralization: If not properly managed, restaking could lead to a concentration of power and resources in the hands of large validators, negatively affecting the decentralization and diversity of the ecosystem.

Liquid Restaking: An Evolution of Restaking

Liquid Restaking is an evolution of the restaking concept that combines the benefits of liquid staking and liquid staking and restaking. Instead of locking assets in a single protocol, liquid restaking allows staked assets to remain liquid and can be used simultaneously in multiple protocols without compromising liquidity. This is achieved by issuing representative tokens, similar to staking derivatives in traditional liquid staking.

Benefits of Liquid Restaking

1. Maximizing Liquidity and Yields: Users can continue to use their assets in different DeFi applications while continuing to receive staking rewards, thus multiplying their income.
2. Greater Flexibility: Liquid restaking allows users to switch between different protocols quickly and efficiently, without having to wait for long unlocking times.
3. Shared and Efficient Security: Similar to traditional restaking, liquid restaking strengthens the security of multiple protocols through the use of shared assets.
4. Improved Interoperability: Liquid restaking facilitates integration between different protocols and blockchains, improving the interoperability and efficiency of the ecosystem.

Comparison between Traditional Staking, Liquid Staking, Restaking and Liquid restaking

Main Restaking Platforms and Protocols

1. EigenLayer

EigenLayer is the pioneering platform in the restaking space, and was the first to introduce this revolutionary concept to the Ethereum network. This platform creates a "decentralized security marketplace" that allows validators and delegators to reuse their Ethereum staked to secure and validate a variety of additional services and protocols. This not only maximizes capital efficiency, but also strengthens collective security and fosters innovation within the blockchain ecosystem.

Key Features:

• Reusable Security: Allows assets staked in Ethereum to be used to secure multiple protocols, optimizing capital utilization and strengthening collective security.
• Participation Flexibility: Users can select which services they wish to participate in, allowing customized management of their restaking strategies and risk exposure.
• Protection Mechanisms: Implements slashing systems and other control mechanisms to ensure compliance and integrity of participants, protecting the protocols and users involved.

2. Ether.fi

Ether.fi is a liquid restaking protocol that allows users to stake ETH while maintaining the liquidity of their assets. By staking ETH, users receive liquid tokens that can be used in other DeFi applications, enabling restaking and maximizing returns.

Key Features:

• Liquid Staking and Restaking: Combines the advantages of liquid staking with restaking, allowing users to obtain rewards in multiple protocols without sacrificing liquidity.
• Security and Decentralization: Ether.fi uses a robust security model that secures staked assets while encouraging decentralized staking.

3. Puffer Finance

Puffer Finance is a liquid restaking protocol that focuses on maximizing capital efficiency and returns for users. It offers a platform where users can stake assets and receive liquid tokens that can be used in other DeFi protocols. Puffer Finance has received investment from Binance Labs, which provides significant financial backing for its development and expansion.

Key Features:

• Capital Efficiency: Puffer Finance allows users to maximize their returns by using their staked assets in multiple protocols, without losing liquidity.
• Binance Labs investment: Binance Labs' support gives Puffer Finance a competitive advantage in terms of development, security and growth in the DeFi space.

4. Renzo Protocol

Renzo Protocol is a liquid restaking protocol designed to improve staking efficiency and increase yields. Users can stake assets and receive liquid tokens, which can be reused in multiple DeFi protocols. Renzo Protocol distinguishes itself by facilitating liquid restaking on other blockchains that have lower fees than Ethereum, making restaking accessible to a wider range of users and enabling capital optimization in a lower cost environment.

Key Features:

• Rewards Multiplication: Allows users to obtain staking rewards in multiple protocols at the same time, maximizing the use of their assets.
• Ease on Low Commission Blockchains: Renzo Protocol specializes in offering liquid restaking on blockchains with lower commissions, such as Polygon or Binance Smart Chain, facilitating participation and capital optimization on more accessible networks.

Conclusion

Restaking emerges as a revolutionary strategy that redefines the way investors and participants in the blockchain ecosystem manage and optimize their assets. By enabling the efficient reuse of staked assets to secure and participate in multiple protocols, restaking maximizes returns, enhances shared security, and fosters innovation and sustained growth of the DeFi ecosystem.

Platforms such as EigenLayer, Ether.fi, Puffer Finance, and Renzo Protocol are at the forefront of this transformation, offering infrastructures and solutions that facilitate and enhance restaking, opening new opportunities and horizons for investors, developers and users in general.

As this trend continues to gain momentum, it is essential that participants understand both the benefits and associated challenges, carefully managing the risks and seizing the opportunities to contribute to and benefit from the dynamic and evolving future of decentralized finance.