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Restaking Reaches $12B as Rising Ethereum Sector Flourishes

Move over staking: the hottest sector in Ethereum is now restaking. The sprawling blockchain ecosystem that’s coalesced around Ethereum, incorporating layer2 (L2) networks such as Optimism and the Coinbase-created Base, draws its security from that of the mainchain. The rise of restaking is now bringing Ethereum’s security model to other EVM chains – and unlocking new financial opportunities along the way.

Ethereum’s High Stakes Game

In 2022, Ethereum shifted from the energy intensive Proof of Stake consensus, as pioneered by Bitcoin, to the leaner Proof of Stake. With Proof of Stake (PoS) blockchains, validators are chosen to create new blocks and validate transactions based on the number of native tokens they hold – e.g. ETH – and are willing to stake as collateral. 

Ethereum’s transition to a staking security model in 2022 quickly spawned a thriving industry for liquid staking: the process by which depositors who lock their ETH up to participate in network consensus receive a corresponding derivative token on a 1:1 basis with their staked ETH. This liquid staking derivative (LSD), also known as a Liquid Staking Token (LST), can be used in DeFi protocols to generate additional yield to that being earned on the staked ETH.

From Staking to Restaking 

Liquid staking protocols such as Lido, one of the first to launch on Ethereum following its transition to PoS, bypass the 32 ETH minimum required to run an Ethereum validator. This allows more people to participate in Ethereum staking and earn ETH rewards, but the same technology also provides liquidity to Ethereum. That’s because the LSDs issued to ETH stakers can be utilized in other protocols and networks in a variety of increasingly creative ways.

This capability has given birth to restaking, as championed by EigenLayer. Its protocol supports the creation of liquid restaking tokens (LRTs) that can be used to secure other EVM networks and used as collateral in DeFi protocols. Third party protocols such as Etherfi and Puffer, built atop EigenLayer, support the restaking industry, which is now worth $12B based on total ETH deposits.

With all the similar-sounding acronyms and interchanging references to staking and restaking, this multibillion dollar industry isn’t for the tech-averse. Those who don’t dabble in the Ethereum ecosystem on a daily basis have little reason to acquaint themselves with the finer points of EVM restaking. But for those on the inside, which includes an army of developers, project teams, third-party builders, VCs, node operators, and retail users, restaking is 2024’s fastest growing and most innovative sector – as evidenced by a16z investing $100M in EigenLayer.

Restaking, Rewards, and Risk

With restaking, Ethereum users can essentially have their stake and eat it. They can lock their assets into a mainchain staking contract while simultaneously enjoying the liquidity from being able to lock the corresponding LRTs into other protocols and earn additional yield. It’s all very meta.

The complexity associated with restaking, as derivatives of ETH are utilized in multiple blockchain layers, doesn’t just add complexity: it potentially adds risk. So why do Ethereum stakers take on this risk, given that a major restaking hack could deprive them of their LRTs, rendering them unable to withdraw their staked ETH?

As Tristan Dickinson explains, “The allure of re-staking particularly with the promise of high yields, undeniably draws interest from users seeking to maximize their returns.” The Head of Marketing and Communications at dYdX Foundation adds: “The risks such as slashing penalties for Validators and potential security vulnerabilities pose significant concerns and make it challenging to understand if the risk is worth the reward.”

So far, the restaking industry has escaped the sort of major hacks and exploits that have taken their toll on DeFi in the past. Staking protocols such as Lido, EigenLayer, and Etherfi, are famed for commissioning multiple independent audits and running extensive testnets before debuting new code in a live environment. When there are billions of dollars at stake, it’s better to move slowly and break nothing.

The risks of restaking have yet to manifest, and there are many in the industry who believe that the sector’s obsession with security has mitigated the likelihood of systemic failure. For teams launching their own layer2 EVM network, or building a protocol on an L2 chain, there’s a lot to love about restaking, particularly in its ability to provide liquidity, the lifeblood of every DeFi project.

According to Validation Cloud CTO Andrew McFarlane, “A major friction in launching web3 protocols is the cost and coordination of bootstrapping crypto-economic security. Restaking will lead to a wave of innovation as developers can go-to-market faster, with stronger ecosystems. While restaking adds additional risks, participants need to actively opt in to participate. Similar to traditional markets, those that opt in to higher risks unlock the opportunity to generate enhanced yield.”

Defining Sustainable Yield

In the early days of DeFi, which sprang to life in 2020, the APRs offered by yield farming – the act of staking liquidity provider (LP) tokens into protocols in order to earn a reward – often ran into triple digit percentage points. This level of yield ultimately proved unsustainable, resulting in plummeting native token prices as users rushed to sell the “free” tokens they had farmed.

Restaking, in comparison, offers much lower APRs of perhaps 30% – though this is still multiples higher than the 3.5% to be earned from staking Ethereum. So long as stakers can multiply their return, they’ll be incentivized to participate in restaking, generating derivatives of their derivatives in the process. It remains to be seen if current restaking yields can be maintained. But while crypto remains in a bull market, restaking is seen as a comparatively low risk means of amplifying yield. This much is clear: the future of Ethereum is now inescapably bound with the future of restaking.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Nikolai Kuznetsov

Nikolai Kuznetsov is a financial analyst and professional trader. Based in Israel, he has been trading in multiple markets and educating traders as a teacher and mentor. Nikolai has extensive experience in stock market analysis, investment research and in various assets such as cryptocurrencies, FX, commodities, equities and bonds. In the last decade, Nikolai has devoted his energy and skillset to the crypto market, contributing analysis pieces, trade commentaries and op-eds to publications such as Cointelegraph, Forbes, TheNextWeb, and Investing.com, among others. He also holds a black belt in Brazilian Jiu-Jitsu.

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