Cryptocurrency mining was introduced by Bitcoin, the first digital asset whose value reached worldwide adoption opportunities shortly after its release. The operation handles validation and verification of all transactions on the blockchain through miners’ input of solving complex mathematical problems with the help of computational power.
In time, mining has become less efficient, and since it’s only compatible with PoW mechanisms, a new solution arose for PoS blockchains ―staking. This method performed similarly to mining, only that it didn’t require the same amount of computational power because it relied on token ownership. Hence, people staking on Ethereum would need to invest 32 ETH to support the platform’s safety, boosting the Ethereum price.
Staking is much less energy-intensive and accessible than mining, but it might also pose certain risks to users, such as centralization and security. Therefore, a new version of staking was developed by a pioneering DeFi protocol, introducing restaking on the market. Here’s what it’s about.
Restaking Offers Lucrative Reward Opportunities
Staking maintains the network’s integrity and functionality with stakers’ participation in the process, so it can provide better returns in the long term. But restaking is about staking assets a second time on a different platform to multiply utility and rewards. By allowing other networks and platforms to benefit from already staked cryptocurrencies, both validators and stakers can take advantage of additional reward opportunities along with staking alone.
Restaking recently became popular as Ethereum validators were offered the opportunity to stake their ETH again on the Eigenlayer protocol. This innovative technology allows users to access various services and blockchains through its ecosystem to stake their Ether wherever they consider more profitable.
Restaking Benefits Users and Networks
Retasing on the Eigenlayer environment is done through AVS (Actively Validated Services), whose performance and security can be improved with the help of validators and stakers. Users choose these ecosystems based on preferences and risk tolerance but, most importantly, on the reward potential and contribute to staking their assets.
Users choose their staking strategy based on these factors as well. For example, some secure one or more AVS, depending on their risk tolerance, because each choice comes with various fees, incentives and slashing risks.
If the Eigenlayer ecosystem expands and more AVS approach these services, users can contribute to more restaking combinations that offer various profit opportunities. However, stakers must also upgrade their strategies in order to increase their contributions.
Restaking Types and Their Advantages
As a staker, you can either do native restaking or liquid restaking. The first implies using smart contracts to manage assets to enhance security by leveraging specific software nodes. The second uses Liquid Staking Tokens (LSTs), in which asset staking happens in an app in exchange for liquidity.
Generally, restaking comes with various benefits, such as:
- Flexibility in capital allocation and utility maximization since staked assets can be leveraged in numerous financial activities;
- Lowering traditional staking costs since users can use asset liquidity to their advantage instead of working with locked and inaccessible tokens;
- Scalable security through meeting network demands since validators contribute increasingly to these blockchains;
Restaking is Also Associated with Several Risks
Besides bringing innovation within the crypto sector and providing numerous benefits to users and applications, restaking can be risky from a few perspectives. One of the most problematic is the centralization fear, which has been prominent around Ethereum as well since some stakers have much more power than others, and this is the case here too.
Every validator can choose to work with their preferred restaking services. Still, some offer higher APY than others, so their contributions can control the stake in one way or another, leading to a lack of neutrality.
Slashing is also a common problem in restaking, because, despite being used as a corrective measure, it can become profitless. PoS ecosystems use this strategy to reduce stakers’ assets and ban them from the network for a specific timeframe if they’ve been found dishonest in their daily activities. However, since different protocols have diverse methods of doing it, some might take massive amounts of staked assets from one’s wallet without conducting the activity properly.
Restaking Challenges Similar to Staking
Staking has been considered a superior version of mining as it doesn’t require users to spend a lot of money on the latest mining rigs and doesn’t consume tons of electricity to mine one Bitcoin. However, staking has its own issues, and they’ve expanded since the Merge, Ethereum’s latest update.
Stake distribution, for example, was found to be considerably centralized since only three mining pools were leaders on the Ethereum blockchain in terms of hash rate. Although staking pools are the most comfortable to work with since they only require users to add their investments, they gain disproportionate control.
Censorship is another common problem with Ethereum staking since users practice the maximal extractable value (MEV) to collect some more profit from others by reordering transactions, for example.
These issues have increased after the Merge, because the update focused on sustainability and scalability rather than decentralization. However, future upgrades and fixtures might tackle these issues accordingly.
Restaking is an Emerging Crypto Activity
Restaking is part of the DeFi environment, and it has the potential to become something bigger since the ecosystem has been continuously developed in terms of technologies and strategies. The evolution of DeFi brought enhanced scalability and interoperability within the crypto market, but it has yet to solve the risks of schemes.
DeFi is, in a way, a safe and direct way for institutional investors to get into crypto because part of decentralized finance is the only future for companies to engage with innovative technologies. Unfortunately, the lack of regulation and legal framework might hinder DeFi’s evolution.
Bottom Line
As mining and staking are slowly becoming inefficient for users who want more from the crypto industry, restaking has been introduced by an innovative protocol that allows initial ETH funds to be staked twice to maximize profits and network contribution.
Restaking can leave behind traditional staking and its disadvantages, but since slashing and centralization risks are prevalent, it might take some time for this technology to lead the sector.