Do you know that the Ethereum network has nearly 1 million network validators and over 31 million staked Ether? But this number is likely to increase because of the strong rise of Ethereum restaking. Restaking revolutionizes the staking landscape by allowing assets to be staked multiple times across various platforms and earning additional rewards. This article will provide a comprehensive guide on increasing Ethereum rewards through restaking.
What is Ethereum Restaking?
Ethereum restaking is the process of using assets that have been staked in the proof-of-stake Ethereum blockchains to be staked once again on different platforms or programs for additional rewards. This also enhances the utility and liquidity of the staked assets, as they can be used in various DeFi protocols or other staking mechanisms, thereby maximizing their potential returns and contributing to the overall efficiency of the Ethereum ecosystem.
Restaking is also helpful in enhancing the security of the Ethereum network. By adding slashing conditions on the restaked ETH, the security of the blockchain can be extended to other networks. This allows for emerging blockchains to leverage the established security of Ethereum instead of developing their own security measures independently.
In the restaking landscape, projects like EigenLayer play a major role. They act as middlemen connecting users staked ETH with diverse opportunities across multiple platforms or protocols.
How Restaking Works?
Let’s use EigenLayer, one of the best protocols for restaking ETH, as an example to explain how restaking works.
Smart Contracts
Restaking using the EigenLayer protocol involves implementing additional slashing conditions on the staked ETH in the form of smart contracts. This extends Ethereum’s security to the protocols within the EigenLayer ecosystem, known as Actively Validated Services (AVSs). If the validator fails to fulfill their duties to their AVS, their ETH stake will likely be slashed. This helps maintain accountability and reliability within the ecosystem. Furthermore, it occurs through on-chain slashing contracts and specialized smart contracts known as EigenPods.
EigenPods act as intermediary accounts positioned between a restaker’s wallet and their stake. All staking withdrawals and rewards must pass through the intermediary before reaching the validator’s account. This allows the smart contract to impose penalties on validators who exhibit poor behavior, thereby enforcing the integrity of the network. EigenLayers offers two ways of restaking: native restaking and liquid restaking.
Native Restaking And Liquid Restaking
Native restaking is similar to the native staking process, which allows only those willing to run or already running on the Ethereum validator node. The difference is that the validator’s withdrawal address of native restaking becomes an EigenPod smart contract.
Liquid staking is the process of locking up tokens in a smart contract in exchange for liquid staking tokens (LSTs) from liquid staking platforms like Lido and Rocket Pool. These LSTs represent staked assets and can be traded or utilized within the ecosystem while keeping the original tokens locked. Liquid restaking is when users deposit the LSTs into the Eigenlayer contracts, enabling them to participate in restaking activities. The smart contract allows the staking of Rocket Pool ETH (rETH), Coinbase Staked Ether (cbETH), and other liquid assets.
Entrustment
Once you have staked your ETH or deposited LSTs, the next crucial step is to delegate your stake. The person you delegate to will be directly responsible for AVS on the EigenLayer and is called the operator. They play a major role in the functionality and security of the EigenLayer network.
There are two options for delegating stakes on the smart contract. You can act as an operator and delegate the stake yourself or delegate your stake to an existing operator. Although delegating your stake is easy, you can’t have any control over it. On the other hand, by delegating yourself, you can have control over the stake.
How to Restake Ethereum?
1. Establish a Web3 Wallet: Acquire a Web3 wallet to enable interaction with DeFi protocols and dApps. If you have already staked ETH on liquid staking platforms, you can directly deposit it into the Web3 wallet.
2. Connect EigenLayer With Your Wallet: Go to the website app.eigenlayer.xyz to connect the wallet with the protocol. You will see a list of assets supported on EigenLayer and the TVL of each wallet locked in the smart contracts.
3. Choose Restaking Option: To become a validator and run your own node, native restaking is the way to go. On the other hand, if you don’t want to take responsibility, then choose your preferred liquid staking token and input the amount.
4. Verify Your Transactions: Ensure your transaction is deposited on EigenLayer and in-wallet.
What Are The Benefits of Restaking?
- Flexibility: Restaking offers traders greater flexibility. It enables the utilization of staked assets in various financial activities without requiring the unstaking of the staked ETH. This allows for greater liquidity while retaining the potential for rewards. Furthermore, the enhanced flexibility optimizes the efficiency of capital allocation and the utility of staked assets.
- Extended Security: Restaking allows protocols to adjust security levels according to network needs. By utilizing restaking, protocols can increase security by engaging validators within the restaking protocol when necessary and scaling it down once demands return to normal. This cost-effective approach facilitates efficient network security scaling. Moreover, restaking provides early access to a wide array of validators for new protocols seeking to establish robust security, significantly enhancing their security during initial development stages.
- Rewards: Restaking Ethereum offers validators the advantage of compounding staking rewards through participation in multiple protocols. This allows stakers to enhance their ETH staking rewards with additional rewards from various protocols, potentially increasing their overall yield. While the exact reward rates fluctuate and vary among different protocols, stakers can typically expect an annual percentage yield of around 3% on their staked ETH. Ultimately, the rate of rewards from restaking depends on the specific AVS associated with the staked ETH.
What Are the Risks Associated With Restaking?
- Slashing: When staking ETH, the user faces the risk of slashing, a consequence of malicious behavior. Moreover, this risk is increased when restaking, as additional slash conditions are included in exchange for the potential higher rewards. Slashing is a disciplinary measure in proof-of-stake blockchains, penalizing dishonest validators by reducing their staked assets and temporarily excluding them from the network. Each protocol has its own slashing terms, and depending on these terms, validators could potentially lose a significant portion of their staked assets.
- Centralization: A significant concern surrounding restaking is the potential for centralization. Validators leveraging restaking services often offer higher annual percentage yields (APY), potentially attracting more delegation to select validators, leading to few validators controlling the majority of the stake. This concentration of stake may compromise network neutrality.
Conclusion
Ethereum restaking offers an opportunity to maximize rewards and flexibility in the blockchain ecosystem. By leveraging restaking protocols like EigenLayer, users can compound staking rewards, enhance liquidity, and contribute to the network’s resilience and development. However, it’s also crucial to be mindful of the various risks of restaking.
