What is Restaking?

What is Restaking

After the Ethereum blockchain transitioned to Proof of Stake (PoS) infrastructure, users had the opportunity to contribute to the security of the network and earn passive income by staking ETH. Various solutions have since been developed to make the staking process more effective and simple. In this article, you can find answers to questions such as what the concepts of restaking and Liquid Staking Tokens, abbreviated as LST, mean and how they work.

Liquid Staking Tokens – LST

Anyone can stake ETH on the Ethereum blockchain. However, the staking process can be difficult for users who do not have sufficient technical knowledge, and since a minimum of 32 ETH can be staked, it is not suitable for every budget.

To overcome this problem, the staking process has been simplified by establishing intermediary platforms. An attempt is made to overcome the 32 ETH dam by creating a pool. Users stake smaller amounts of ETH, and when their staked ETH balance reaches 32 ETH, the intermediary platform enters it into the system as if a single user is staking. Thus, the amount of ETH that can be staked per person has decreased slightly, making it accessible to more users.

ETH tokens staked on the Ethereum network are no longer in circulation as they remain locked in the network. For this reason, there is a decrease in the depth of liquidity in the market. Intermediary platforms that facilitate the staking process give a new token to everyone who stakes through their platform to avoid liquidity problems.

For example, Lido, one of the most popular brokerage platforms, gives a token called stETH to staking users. This token, distributed to users according to the equation 1 ETH = 1 stETH, represents both the staked ETH amount and the passive income to be earned over time. If they wish, users can get back their staked ETH tokens by returning their stETH tokens.

There are many platforms that mediate the staking process, such as Lido. With the same logic, each platform distributes its own token to its users in exchange for staking. In this way, it is tried to prevent a liquidity problem in the market due to ETH staking. All stETH-like tokens created by brokerage firms are called LST or Liquid Staking Tokens.

Restaking

We mentioned above that LST tokens provide passive income through Ethereum staking. Restaking, on the other hand, is a method that provides a new passive income in addition to ETH income from the staked token.

So how is this additional income generated?

The protocol called Eigenlayer, which operates on the Ethereum blockchain, offers a new staking infrastructure. Tokens called ETH or LST can be staked in this protocol. Tokens staked to the Eigenlayer protocol are staked to a second blockchain supported by Eigenlayer, apart from the Ethereum blockchain. In this way, passive income can be obtained from both the Ethereum blockchain and the other second blockchain through a single staking transaction. This process is called restaking.
What are the Advantages and Disadvantages of Restaking?

Thanks to Eigenlayer, since many different networks are supported on the Ethereum network, it may be possible for these networks to have a strong validator structure and provide a high level of security in a short time. Thus, the maturation of new initiatives and solutions can be accelerated through restaking.

Restaking can be attractive to users looking for long-term investments because it provides two separate passive income. Since the restaking process primarily involves staking on the Ethereum network, the entire demand for restaking will make the Ethereum network more decentralized and secure.

On the downside, there is the possibility of centralization of other networks that Eigenlayer supports other than the Ethereum network. If other supported blockchains cannot provide their own validator diversity organically, they may rely entirely on the validator power coming through Eigenlayer. In this case, yield rates on Eigenlayer may negatively impact blockchains other than Ethereum. For example, if a new blockchain promises higher returns, users may want to receive staking income on that network. In this case, the low-rate blockchain may be vulnerable if it depends entirely on Eigenlayer's validator power.

Another question mark arises from the “slashing” mechanism in the Ethereum blockchain. Slashing is a security mechanism that comes into play when validators act with bad faith or remain passive, and punishes the validator by burning a portion of the staked ETH amount.

LST tokens can be staked on the Eigenlayer network. Therefore, if the staked ETH tokens represented by LST tokens are burned due to slashing, some of the LST tokens will become unrequited. If these tokens are staked through Eigenlayer, there may be a chain liquidity problem.

Although the restaking process is an extremely popular topic as it creates new business lines and income mechanisms that improve the Ethereum ecosystem and the Ethereum blockchain, it should not be forgotten that this system is still quite new and still in an experimental phase.