Ethereum’s Proof-of-Stake (PoS) consensus mechanism represents one of the largest cryptoeconomic security funds in the blockchain space, valued at nearly $112 billion. While the network is secured by validators who earn rewards for staking their ETH, participants are no longer limited to simply locking up their assets. Liquid Staking Tokens (LSTs) have long allowed users to engage with decentralized finance (DeFi) applications while still earning staking yields. A new evolution—restaking—introduces another layer of opportunity and complexity through Liquid Restaking Tokens (LRTs).
Eigen Layer, building on Ethereum’s mature staking infrastructure, has grown into the ecosystem’s second-largest DeFi protocol with a Total Value Locked (TVL) of $12.4 billion. It enables validators to reuse their staked ETH to secure additional services called Actively Validated Services (AVSs), thereby earning extra rewards. As a result, liquid restaking protocols have emerged, driving the expansion of LRTs.
However, from both security and financial perspectives, restaking and LRTs may introduce risks beyond those found in traditional staking. As the number of AVSs grows and LRTs differentiate their operational strategies, these risks may become less transparent. Still, restaking rewards are laying the groundwork for a new class of DeFi applications.
The Fundamentals of Ethereum Restaking
Eigen Layer’s restaking protocol went live on the Ethereum mainnet in June 2023, with AVSs scheduled to launch in the second quarter of 2024. Essentially, restaking allows validators to use their staked ETH to secure new functionalities such as data availability layers, rollups, bridges, oracles, and cross-chain messaging systems—all while potentially earning additional rewards.
This concept introduces a “security-as-a-service” model, creating new revenue streams for validators. But why has it gained so much attention?
As the largest PoS cryptocurrency by economic security, Ethereum possesses a immense amount of staked ETH. However, the amount of staked ETH has grown significantly beyond what is strictly necessary to secure the network. At the time of The Merge in September 2022, 13.7 million ETH was staked—enough to secure the network’s then $22.1 billion TVL. Today, approximately 31.3 million ETH is staked, while Ethereum’s TVL denominated in ETH has actually decreased.
This overcollateralization, combined with Ethereum’s security, liquidity, and reliability, positions ETH uniquely to help secure other decentralized services. Restaking can be seen as an inevitable extension of Ethereum’s inherent value—but it is not without risks. To ensure honest behavior, restaked assets can be slashed, much like in traditional staking. (Note that slashing will not be enabled at the initial launch of AVSs.)
How Liquid Restaking Tokens (LRTs) Work
Eigen Layer’s rapid TVL growth is remarkable—second only to Lido, Ethereum’s leading liquid staking protocol. This growth occurred despite deposit caps and before any live AVSs were launched. While some of this demand may be driven by airdrop farming, the trend suggests long-term potential.
Eigen Layer builds on the existing staking ecosystem by accepting a variety of LSTs or natively staked ETH. Validators set their withdrawal credentials to EigenPods to accumulate Eigen points, which will later be redeemable for protocol rewards.
Of the 3 million ETH currently restaked on Eigen Layer, about 2.1 million (62%) is wrapped via secondary liquid restaking protocols. This mirrors patterns seen in the liquid staking market and highlights the importance of diversification as the sector grows.
If native staking yields decrease due to increased validator participation, restaking could become an increasingly important source of yield for ETH holders. Proposals to reduce native staking issuance could further amplify the significance of restaking rewards.
That said, initial AVS yields are expected to be relatively low—posing a short-term challenge for LRT protocols. For instance, some LRTs charge management fees that could outweigh early restaking rewards unless AVSs generate substantial revenue.
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The Emergence of Actively Validated Services (AVSs)
The first AVS set to launch is EigenDA, a data availability layer similar to Celestia or Ethereum’s blob storage. Following the Dencun upgrade, which reduced Layer-2 transaction fees by over 90%, EigenDA could offer another cost-efficient tool for modular blockchain architectures.
Initial yields for EigenDA are expected to be modest. Based on current Ethereum blob storage spending, early annualized rewards for restakers might be around 0.1%. However, yields could increase rapidly as more AVSs come online.
Other AVSs in development include interoperability networks, fast finality layers, proof-of-location mechanisms, and bootstrapping solutions for Cosmos chains. The opportunity space is broad and expanding.
Challenges and Strategies for LRT Protocols
LRTs must navigate several challenges:
- AVS Selection: How should LRTs choose which AVSs to support?
- Slashing Risks: How can they mitigate and communicate slashing conditions?
- Reward Distribution: How will rewards—both in ETH and AVS tokens—be distributed to LRT holders?
Different LRT providers may adopt varying strategies. Some may offer tiered risk profiles, while others might let users choose AVSs directly. Decentralized Autonomous Organizations (DAOs) could also play a role in governance decisions.
What is clear is that not all LRTs will be alike. Their reward structures, risk exposures, and tokenomics will differ—making due diligence essential for users.
Risks Associated with Restaking and LRTs
Restaking introduces new complexities and risks:
- Slashing Conflicts: If the same restaked ETH is used across multiple AVSs, slashing conditions could conflict.
- Opaque Risk Profiles: LRTs might prioritize high yields over sustainable risk management.
- Valuation Risks: LRTs could trade below their underlying value during market stress or validator exit queues.
- Systemic Risks: As Ethereum co-founder Vitalik Buterin has noted, large-scale restaking failures could potentially threaten Ethereum’s consensus layer.
Additionally, if LRTs need to sell AVS tokens to distribute rewards in ETH, continual sell pressure could affect token prices.
Frequently Asked Questions
What is restaking?
Restaking allows users to reuse their staked ETH to secure additional services or networks beyond Ethereum, earning extra rewards in the process. It is implemented through protocols like EigenLayer.
How do Liquid Restaking Tokens (LRTs) work?
LRTs represent a user’s restaked position. They can be traded or used in DeFi applications while still accruing staking and restaking rewards, offering liquidity and flexibility.
What are the risks of restaking?
Restaking introduces additional slashing risks, smart contract vulnerabilities, and potential overexposure to correlated failures across AVSs. It also adds complexity to reward distribution and risk assessment.
Can I lose my funds through restaking?
Yes. Improper validator behavior or AVS failure can lead to slashing. Additionally, LRT depeg events or protocol failures could result in financial loss.
How do I choose an LRT provider?
Consider the provider’s AVS selection strategy, fee structure, historical performance, and transparency regarding risk and rewards. Diversification across providers may also help.
Will restaking affect Ethereum’s security?
If restaking grows too large too quickly, it could theoretically concentrate risk or create economic incentives that conflict with Ethereum’s core security. However, many believe these risks are manageable with careful design.
Conclusion
Eigen Layer’s restaking protocol has the potential to become a cornerstone of Ethereum’s service infrastructure, providing validators with meaningful additional rewards and supporting open innovation. From EigenDA to Lagrange, AVSs can significantly enrich the Ethereum ecosystem.
That said, the proliferation of LRTs may introduce opaque risk strategies or temporary dislocations from underlying assets. How different issuers select AVSs and distribute risks and rewards remains an open question. Initial AVS yields may not meet market expectations, though adoption could improve returns over time.
Despite the challenges, restaking supports Ethereum’s role as a foundational security layer and is likely to become a core component of its ecosystem infrastructure.