Ethereum restaking, as proposed by the Ethereum-based middleware protocol EigenLayer, involves reusing staked ETH tokens to secure other protocols. Proponents of restaking believe it can be used to amplify trust across networks, while detractors are worried about its possible ramifications.
Read on to learn what Ethereum restaking is, how it works, and the pros and cons of restaking ETH tokens.
What Is Ethereum Restaking?
Before we can delve into restaking, we need to understand staking digital assets in PoS networks.
Staking refers to network participants locking up a certain amount of cryptocurrency on-chain to secure the network in exchange for staking rewards.
On Ethereum, it means locking up 32 ETH into a validator, which acts as an economic incentive for validators to act honestly when verifying transactions. In this process, a validator commits to producing Ethereum blocks and maintains the integrity of the Ethereum network. The economic incentive for validators is earning ETH rewards.
However, if they attempt to manipulate the network or act dishonestly, they are penalized and stand to lose their staked ETH in an act called slashing.
Ethereum restaking refers to simultaneously using your staked ETH to secure other protocols and earn rewards. In other words, you are depositing your already staked ether tokens in another protocol to extend the same trust generated by Ethereum’s validators to the new protocol.
During this process, your ETH will remain staked on Ethereum, and validators will continue confirming transactions, but your staking power will now expand to other protocols. Restakers will earn additional rewards for their ETH stake but will be penalized or “slashed” for failing to perform their staking duties.
How Does Ethereum Restaking Work?EigenLayer deploys smart contracts on Ethereum so ETH stakers can restake their assets on external protocols. EigenLayer acts as the conduit through which you can restake your staked ETH tokens, as well as a decentralized trust marketplace for stakers looking to compound their yields.
EigenLayer provides two ways to restake: native restaking or LSD restaking.
Native restaking allows you to restake your ETH stake directly to EigenLayer by assigning your validator’s withdrawal credentials to EigenLayer’s smart contracts (EigenPod).
LSD restaking is you restaking your liquid-staked tokens. You can stake ETH on liquid-staking platforms such as Lido and Rocket Pool. Liquid staking is less complicated and has a lower barrier of entry than running your Ethereum validator. You can then restake your liquid-staked tokens.EigenLayer allows you to stake Lido ETH (stETH), Rocket Pool ETH (rETH), Coinbase Staked Ether (cbETH), and more liquid staked assets.
How to Restake Ethereum
Now, let’s take a look at how you can restake your ETH.
- Set up a Web3 wallet: Get a Web3 wallet to allow you to interact with DeFi protocols and dApps. If you have already staked ETH on liquid staking platforms, you can deposit it directly into the wallet.
- Connect your wallet to the EigenLayer App: Navigate to app.eigenlayer.xyz and connect your wallet to the protocol. The page will display the assets supported on EigenLayer and the TVL of each locked in the smart contracts.
- Select a restaking option: Choose the method of restaking that works for you. If you are a validator running your node, then native restaking is optimum. Alternatively, you can select your preferred liquid staking token and input the desired amount.
- Confirm your transaction: Confirm your deposit on EigenLayer and in-wallet to ensure the transaction is complete.
Benefits and Drawbacks of Restaking Ethereum
Here, we explore several benefits and drawbacks of restaking Ethereum for validators, protocols, and developers.
- Additional rewards: The most obvious advantage of Ethereum restaking for a validator is the ability to compound staking rewards by staking ETH on other protocols.
- Reducing the start-up cost of new protocols: By restaking Ethereum’s pool of assets, new protocols can benefit economically from Ethereum’s security offerings without starting their validation services.
- Protocols can retain sovereignty: By building on EigenLayer, protocols will have the flexibility to customize their architecture without adhering to the rigid rules imposed on Ethereum Layer 2 chains.
- Slashing: When you stake ETH, you are exposed to slashing as an economic consequence of bad behavior. Staking amplifies the risk, and you could lose staked ETH if you engage in malicious activity on a secondary protocol.
- Risk to Ethereum performance: Restaking opponents fear that with Ethereum’s computational power being redirected to secondary networks, there could be a computational overload on Ethereum’s consensus.
- Centralization risks: Restaking protocols like EigenLayer may attract ETH stakers with the promise of high yields, resulting in the rise of centralized networks and a decline in individual ETH stakers.
While still in its early stages, Ethereum restaking is an interesting approach to network security and validation and how users can actively contribute to both.
Ethereum restaking may set the precedent on how blockchain protocols incorporate the power of collective participation and pooled economic incentives to shape the future of decentralized finance.