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In the last couple of months, institutions have come to use staking their crypto assets in order to benefit from the protocol rewards. This is particularly visible on Ethereum, where the number of validators has doubled since the Merge in Sept 2022, with the ratio of $ETH staked respectively rising to 23%. The largest growth happened after the Shapella upgrade in April 2023 enabled the withdrawal of stake, removing an obstacle that had prevented particularly traditional institutions from staking earlier.
Image source: https://beaconcha.in/charts/validators
But with the increasing number of validators and the continuation of the bear market, protocol reward rates on Ethereum have gone down quite significantly. This led institutional stakers wondering how they could increase returns on their collateral.
Image source: PRR of Blockdaemon ETH validators
Restaking is a concept often mentioned to double-down on stakers’ locked capital and to provide higher returns for some additional risk.
It’s not completely new, as one could argue that using a liquid staking receipt token
are all examples of earlier forms of restaking.
Moreover, we have even seen certain counterparts exploring how to leverage legal structures from conventional finance, namely account control agreements (ACA), to accept traditionally staked Ethereum as collateral.
This article however will focus on EigenLayer onchain restaking, and look at it from the perspective of an institutional staker.
EigenLayer describes itself as, “the first generalizable network providing programmable trust from Ethereum.” Technically, a combination of smart contracts on Ethereum as well as offchain node software enables new distributed systems to tap into the security provided by the collateral of stakers.
Basically, EigenLayer extends the scope of these stakers to actively participate in new systems and use cases, which are called, “Actively Validated Services” (AVSs). Examples of AVSs are fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography schemes, AI inference/training systems, and more.
Instead of the stakers only guaranteeing to follow the Ethereum protocol rules, collateral pledged into the EigenLayer smart contracts will be subject to additional slashing conditions in a programmable manner, as defined by the respective AVSs. Stakers opt into them with their staked ETH or LST, and by running the additional node software. In an institutional setting, obviously Blockdaemon would operate this infrastructure for our customers.
As a result, the capital already staked on Ethereum can be used to “double-dip” to provide security for new projects in return for additional rewards.
Each AVS can mix and match the different types of programmatic trust that is provided via EigenLayer: 1) economic trust, 2) decentralized trust, and 3) Ethereum inclusion trust.
From the perspective of the Ethereum staker that wants to provide this trust via delegating his collateral to the individual projects (AVSs), it comes down to weighing the risks vs. the additional returns. Currently, both sides of this equation are largely unknown, and will vary per project.
It is also possible for AVSs to offer dual staking models, where parts of their security comes from staking with their own tokens, and other parts from $ETH restaking.
Institutions can rely on Blockdaemon’s expertise to run large-scale infrastructure for 60+ blockchains. Our proven uptime record and deep understanding of blockchain protocols helps to keep assets safe and provide reliable node operations. We also have partnered with EigenLayer early on to participate actively in their Node Operator Working Group, and being amongst the first to support their EigenDA AVS launch on testnet.
We also provide feedback and guidance on aspects particularly relevant for our institutional customers.
Image source: https://www.blog.eigenlayer.xyz/ycie/
One significant aspect for institutions, of course, is any commingling of assets, which is sometimes seen as problematic.
However, we confirmed with the EigenLayer team that commingling of funds is not the case in their architecture for native restaking. In this restaking variety, the collateral of Ethereum validators is pledged to secure AVSs by setting the withdrawalAddress to a EigenLayer smart contract.
Each customer then has their own contract (in this variety called “EigenPod”), for capital assigned to a certain (combination of) AVS and Blockdaemon as the node operator.
For native restaking of an existing Ethereum validator, it would need to be exited and redeployed, since the withdrawal credential cannot be changed per the protocol security rules.
Thankfully, there are currently no exit and no activation queues, so that the consequence of this reshuffling is only about 7-10 days of missed rewards. This would likely be made up for quickly with the additional rewards from restaking the ETH collateral.
The first AVS launched testnet operations mid-November 2023. It is the data availability protocol EigenDA, created by the EigenLabs team themselves. For both the EigenLayer and the EigenDA protocol, details are not yet set in stone and the mechanisms to restake and withdraw might change.
But the new restaking primitive opens up exciting additional reward potential in the future!
We’ll continue to work closely with the EigenLayer team and keep updating our customers about the emerging opportunities for institutions in the restaking field.