SSV Lianchuang: The risk of re-staking is extremely overestimated

Author: Adam Efrima, Co-Founder of SSV Core Team, Blockworks; Compiled by: Wu Baht, Golden Finance

EigenLayer is the largest supporter and implementer of re-staking, and it is starting to get off its training wheels . After the staking cap on Liquid Staked Tokens (LST) was briefly lifted, the total value of ETH locked for “re-staking” surged from $2.1 billion to $11.5 billion.

The core of re-pledge is to improve capital efficiency.

ETH is an extremely broad and liquid asset, making it an ideal choice for bootstrapping new Proof-of-Stake (PoS) protocols. The deal is simple: the new network gains significant security from day one, while ETH stakers can earn additional income leveraging the same assets they already hold.

Restaking is quickly becoming a buzzword, and the EigenLayer team’s current cautious approach is keeping its total value locked numbers relatively modest. As a relatively new staking mechanism that enhances existing liquidity staking protocols such as Lido, Rocket Pool, Frax and others, it has the potential to unlock billions of dollars in additional value within the broader staking industry. But as with any new cryptographic primitive, There are concerns that staking could threaten the stability of Ethereum and the cryptocurrency itself.

Some of these concerns may be unfounded – e.g. stability concerns. Other risks, namely technical risks, are legitimate but grossly exaggerated. Critics argue that injecting a large portion of Ethereum into the restaking protocol could lead to an unnecessary and dangerous accumulation of these technical risks. But the fact is that not accepting re-hypothecation may be a greater risk.

How re-staking improves the financial stability of Ethereum

Re-staking provides a great way to finally unlock the potential of LST, which can increase the security of ETH. It’s important to remember that besides convenience, LST exists for an important structural reason that directly benefits Ethereum’s security.

In short, Staking yield and DeFi on Ethereum Competition for yields. Lending protocols and liquidity pools can provide more significant returns than the roughly 4% ETH staking. If the average yield on ETH is significantly higher than this number (which can easily happen in a particularly active market), then only a small amount of the ETH supply will be dedicated to staking, making the network even more vulnerable.

With LST, ETH holders don’t have to make a choice: they can earn the baseline ETH staking yield at any time, or, if they’re willing to take the risk, boost their returns with DeFi yields.

Unfortunately, holding LST seems to be the only thing you can do in the current environment. The use of LST in DeFi is mainly limited to easy exchange for regular ETH, while DeFi trading use is extremely limited - according to Uniswap analysis, the trading volume of ETH is more than 10 times that of Lido's wstETH.

Re-staking can solve this problem and provide another potential revenue stream for ETH holders, which should make staking naturally more competitive than DeFi. The end result is that the network wins because more ETH is staked.

Are there financial risks in re-pledge?

It is worth noting that re-hypothecation is a strictly technical practice - assets deposited into EigenLayer remain in the system and will never be lent to anyone else. Although it sounds similar to “re-hypothecation”, re-hypothecation is a completely different mechanism and provides no financial risk surface at all. It is worth noting thatEigenLayer is currently the only significant player in the Ethereum re-staking space, and future protocols may offer different risk profiles .

EigenLayer is a decentralized protocol and there is a risk of losing LST values ​​if it is delegated to a flawed EigenLayer operator. Cumulative risk therefore also relies on the stakeholder community to conduct their own due diligence, similar to current LST market offerings.

Liquidity Collateralized Tokens (LRT), which may be confusing, are financialized EigenLayer positions - essentially LST of ETH LST deposited into the EigenLayer protocol. The EigenLayer FAQ mentions LST liquidation, which in this case may do more harm than good.

In practice, it is important to note that these risks are entirely outside the protocol. If a user deposits their LRT into a lending protocol to enter a leveraged position, its liquidation is a completely external event. While users are motivated to deposit LRT due to the potential for leveraged gains, this level of risk is unlikely to be catastrophic.

Just as no one should worry about the security of Ethereum or Lido during the stETH decoupling in 2022, no one should worry about EigenLayer users being liquidated. In this case, others will control their assets and the system will continue to operate. Additionally, the decoupling of stETH occurs before the staked ETH is withdrawn, meaning no significant arbitrage is possible.

Are the technical risks of re-pledge significant?

The technical concerns about restaking are legitimate. After all, the failure of the EigenLayer protocol (or other similar protocols) could result in significant losses for the entire community of ETH holders. Excessive slashing, loss of control over staking, malicious applications, etc. are all risks that ETH holders may face when re-staking.

But it is important to understand the context of technology risks. There is always a risk of technical glitches in the implementation of new protocols, and this is a risk that the community needs to understand and mitigate. Every upgrade to Ethereum raises similar concerns—that the merge itself can go wrong due to subtle bugs in the implementation.

Continuous auditing, bug bounties, training wheels, and proactive protocol monitoring are all part of a defense-in-depth security model that both prevents losses and minimizes them when they occur. Plain old redundancy achieved through competitor solutions can also be used to mitigate risks arising from poor implementation of re-hypothecation.

Some may argue that re-staking unnecessarily increases the complexity of the Ethereum consensus. This makes sense, but this risk must be viewed in the context of the general risk of not having enough ETH staked.

By controlling a certain percentage of active equity, Ethereum may gradually become paralyzed. When attackers control more than 50% of the stake, they can cause minor censorship and reorganization, while controlling more than 66% gives them full control. If only 1% of the ETH supply is staked, an attacker only needs to add another 1% to control 50% of the staking power.

With only 26% of the supply currently staked, in theory, an attacker would only need to acquire 13% of the total ETH supply to reach a 33% share of staked ETH, thus bringing the network to a standstill. That equates to just over $56 billion — less than three days of ETH’s daily trading volume. While this number comes with several caveats—for example, $56 billion in net buying pressure would push ETH prices significantly higher—these numbers are surprisingly low for a global neutral settlement layer.

Re-staking and DVT can completely reduce consensus risks

The greatness of re-staking The reason is that it is an extremely modular and decentralized architecture. All staking is segregated into their own applications, with a portion always dedicated to validating Ethereum. It is also easy to implement decentralized validator technology (DVT) for the set of operators involved in each EigenLayer service (which they call AVS).

DVT can disperse the control of a validator to multiple entities in a verifiable and cryptographically secure mechanism. Since validators are responsible for generating and accepting new blocks, they are the source of "power" in the Ethereum network. Attacks require control of validators, and while control of ETH stake is an important aspect of this, entities that accept other people's stake have more power on the network than intended.

If the set of validators bound to EigenLayer and the associated stakes are securely distributed and managed through the DVT protocol, the risk of overall system failure is significantly reduced. This will also greatly reduce the risk of large-scale validator outages resulting in large-scale slashing events.

If re-adoption resulted in a large portion of the ETH supply being staked—while being distributed to an organic and decentralized set of validators—Ethereum would likely be much more secure than it is now.

As with any new idea, restaking protocols require a long break-in period before they are technically safe, but beyond that, they are very promising to become the next major primitive of Ethereum infrastructure— —may even be necessary.