Exploring the Complexities of Restaking: Risks and Rewards

The
world
of
blockchain
technology
continues
to
evolve,
with
restaking
emerging
as
a
pivotal
concept
for
enhancing
security
across
multiple
networks.
According
to

Galaxy.com,
restaking
leverages
one
blockchain’s
economic
and
computational
resources
to
secure
multiple
blockchains,
aiming
to
create
a
more
unified
and
efficient
security
system.

This
in-depth
report
is
part
two
of
a
three-part
series
exploring
the
dynamics
of
staking,
restaking,
and
liquid
restaking.
The
focus
here
is
on
restaking,
its
mechanics
on
Ethereum
and
Cosmos,
and
the
associated
risks.

Overview
of
Restaking

Restaking,
though
not
a
new
concept,
has
gained
significant
traction
with
implementations
in
ecosystems
like
Polkadot,
Cosmos,
and
Ethereum.
The
idea
is
to
use
the
stake
weight
and
validator
set
of
one
blockchain
to
secure
multiple
blockchains,
thereby
creating
a
shared
security
model.
This
approach
aims
to
optimize
resource
use
and
enhance
overall
network
security.

For
instance,
Ethereum,
the
most
economically
secure
proof-of-stake
(PoS)
blockchain,
supports
restaking
through
EigenLayer.
As
of
June
2024,
Ethereum
has
over
$100
billion
in
staked
ETH
across
more
than
a
million
validators.
Restaking
protocols
have
amassed
around
$20.14
billion
in
assets,
with
Ethereum
capturing
the
lion’s
share
at
$19.4
billion.

Restaking
on
Ethereum

EigenLayer,
a
set
of
smart
contracts
on
Ethereum,
enables
restaking
by
allowing
Beacon
Chain
validators
to
secure
external
services
called
Actively
Validated
Services
(AVS).
Validators
can
opt
into
EigenLayer,
subjecting
their
staked
ETH
to
additional
slashing
conditions
while
earning
extra
rewards.

EigenLayer’s
approach
is
market-driven,
allowing
AVS
to
purchase
economic
security
from
a
subset
of
Ethereum
validators.
This
flexibility
contrasts
with
Cosmos’
more
rigid
replicated
security
model.

Restaking
on
Cosmos

Cosmos
implements
restaking
through
its
Cross-Chain
Validation
(CCV)
module,
enabling
replicated
security.
This
model
mandates
that
a
significant
portion
of
Cosmos
Hub
validators
secure
consumer
chains,
effectively
copying
the
validator
set
across
all
consumer
chains.

While
this
approach
ensures
robust
security,
it
also
introduces
risks
related
to
slashing
and
stake
centralization.
Validators
must
secure
consumer
chains
approved
through
governance,
adding
layers
of
complexity
and
potential
centralization
pressures.

Generalized
Restaking
Protocols

Generalized
restaking,
or
universal
restaking,
pools
assets
from
multiple
chains
to
secure
AVS.
Platforms
like
Picasso
and
Karak
exemplify
this
approach.
Picasso,
built
using
the
Cosmos
SDK,
connects
base
chains
via
IBC,
while
Karak
operates
through
smart
contracts
across
various
chains,
including
Ethereum
Layer
2s.

These
platforms
aim
to
create
a
flexible,
asset-agnostic
restaking
system,
though
they
face
challenges
related
to
operational
complexity
and
scalability.

Risks
and
Considerations

Restaking
introduces
several
risks
across
different
stakeholder
groups:

• 
  Base
  Networks:
  Slashing
  events
  and
  centralization
  of
  stake
  distribution
  can
  undermine
  base
  chain
  security.
• 
  Node
  Operators:
  Operational
  challenges
  and
  the
  need
  for
  streamlined
  processes
  for
  adding/removing
  AVS
  can
  impact
  performance
  and
  profitability.
• 
  Actively
  Validated
  Services:
  Economic
  security
  volatility
  and
  the
  need
  to
  incentivize
  node
  operators
  adequately
  are
  significant
  concerns.

Additionally,
the
influence
of
airdrop
farming
and
liquidity
dynamics
pose
further
challenges.
Airdrop
farming
can
inflate
restaked
asset
supply,
while
restaking
may
attract
liquidity
back
to
Ethereum
Layer
1,
countering
the
rollup-centric
roadmap.

Conclusion

Restaking
represents
a
crucial
development
in
blockchain
security,
offering
potential
benefits
in
efficiency
and
unified
security.
However,
the
concept
is
still
in
its
early
stages,
with
many
details
and
implications
yet
to
be
fully
understood.
Future
research
and
experimentation
will
be
essential
in
refining
restaking
protocols
and
addressing
the
associated
risks.

Image
source:
Shutterstock