Restaking in cryptocurrency refers to staking tokens already used as collateral in one protocol to earn additional rewards in another. This allows users to maximize their yield by utilizing the same assets across multiple platforms simultaneously.
The process typically begins with staking tokens in an initial protocol, receiving a liquid staking token (LST) in return, and then using that token as collateral in another protocol. This enables users to continue earning rewards from the original blockchain while also accessing potential yield from DeFi applications. Notable platforms like EigenLayer and SSV offer restaking.
Restaking is typically discussed in the context of ETH staking, although any liquid staking token can be restaked. For the sake of simplicity, we will discuss restaking in Ethereum.
The mechanics of restaking in the context of ETH staking allow users to earn additional rewards by leveraging already staked assets to secure multiple protocols. Initially, users stake ETH either directly or through LSTs like Hord’s hETH. Instead of simply earning rewards from Ethereum's consensus layer, they can restake their ETH or LSTs as collateral in another protocol. Restaking helps to increase yield and enhance security via services, such as EigenLayer.
EigenLayer enables restaking through two methods: native and LST restaking. In native restaking, users create an EigenPod smart contract and set their validator's withdrawal credentials to this pod, allowing them to earn both Beacon Chain rewards and additional restaking rewards. In LST restaking, users deposit their LSTs (like hETH) into EigenLayer's smart contract, which they can then delegate to an operator or use to run a validator for Actively Validated Services (AVSs).
Similarly, the SSV Network introduces distributed native restaking by combining restaking with Distributed Validator Technology (DVT). Validators on ssv.network are distributed among multiple non-trusting nodes for improved fault tolerance and uptime. Users can create an EigenPod and set their validator’s withdrawal credentials to the pod. This allows them to earn both Beacon Chain rewards and additional restaking rewards from SSV.
Restaking offers the potential to stack rewards across multiple layers, such as Ethereum consensus rewards, SSV tokens, and future EigenLayer rewards. These rewards make it an attractive option for maximizing returns while enhancing the security of multiple networks.
Restaking in the context of ETH staking presents both significant opportunities and challenges. On the opportunity side, restaking enhances capital efficiency by allowing stakers to earn an additional yield on assets that are already staked, maximizing the potential returns on their holdings. It also increases liquidity in the broader ecosystem by enabling staked assets to be reused in other protocols, providing more flexibility for users and improving market dynamics. Additionally, restaking strengthens security by letting smaller or newer protocols tap into the security of larger networks like Ethereum, bolstering their resilience. Restaking also paves the way for innovation in DeFi, creating new financial instruments and use cases built around staked assets.
However, restaking is not without its challenges. One major concern is centralization risk, as larger stakers may dominate the space by offering more attractive yields, leading to an unequal distribution of power and resources. Another challenge is the potential for compounded slashing, where a validator’s misbehavior in one protocol could lead to cascading losses across multiple platforms. The interconnected nature of restaking also raises the risk of systemic failures if one part of the system collapses. Additionally, the complexity of restaking introduces higher barriers for average users, who may struggle to fully understand and manage the associated risks. Regulatory uncertainty around restaking may add further complications, particularly concerning the classification of these activities as securities. Finally, there are concerns about how restaking might impact the security incentives of Ethereum’s base layer and introduce operational challenges for validators juggling multiple protocols.
A Simplified Opportunities vs Challenges
Restaking is an innovative way to enhance the profitability of staking ETH, making it even more appealing in today’s difficult market conditions. By allowing users to earn additional rewards on their already staked ETH through other protocols, restaking maximizes the potential yield from a single asset. This dual-reward system can be particularly attractive to investors looking for higher returns during uncertain market periods.
While restaking introduces additional risks compared to solo staking—such as potential compounded slashing across multiple protocols—it has so far proven relatively safe. There have been no major hacks related to restaking, which suggests that the infrastructure is stable for now. However, as with any new technology, it’s important to monitor developments and stay aware of potential risks.
For those comfortable with slightly higher risk, combining restaking with DeFi protocols could provide a significant upside. This strategy allows players in the ETH space to benefit from both staking rewards and decentralized finance opportunities, positioning restaking as a promising tool for increasing profitability in the Ethereum ecosystem.
