What is Restaking in crypto? What are the advantages and how can I restake my tokens?

21 SEP 2023
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What is Restaking in crypto? What are the advantages and how can I restake my tokens?

In the ever-evolving world of blockchain technology, a new concept has emerged that is piquing the interest of crypto enthusiasts worldwide: Restaking. But what exactly is restaking, and should you consider it as part of your cryptocurrency strategy? Let’s delve into this intriguing topic.

What is restaking?

Restaking is a novel concept in the world of cryptocurrency security that enables you to use your Ethereum (ETH) more than once at the consensus layer. For instance, if you're staking your Ethereum directly or using a liquid staking token (LST), you can opt to use a service like EigenLayer to earn additional rewards on your stake.

Through the restaking concept, EigenLayer and similar restaking services can facilitate an unlimited number of new permissionless services to be developed on top of Ethereum, using the same stake. This creates an infinite space for inventing new permissionless services built on top of Ethereum.

Here's a flowchart to understand this better

Working of eigenlayer restaking mechanism
Working of eigenlayer restaking mechanism

As with everything in the universe, nothing is as good or as bad as it seems. The same applies to the concept of restaking.

Although restaking seems beneficial, improves capital efficiency, and allows for new innovative services built on top of Ethereum, not everyone is pleased about it and is worried about the second and third-order effects of restaking.

One issue to mention is that restaking could lead to stake centralization because validators who tap into restaking services can offer higher APY to their delegators. This, in turn, attracts more delegation to specific validators, resulting in few validators controlling the stake, i.e., stake centralization, leading to a loss of neutrality and monetary premium.

Furthermore, there are concerns about restaking from the likes of Vitalik Buterin and Justin Drake of the Ethereum Foundation. Both of them have expressed concerns about the potential dangers of restaking, particularly regarding the loss of neutrality and monetary premium, and the compromise of protocol security through re-hypothecation of stake.

They believe that restaking could destroy centralization and affect the credible neutrality of the system. They also worry that re-hypothecating all the stakes could remove the security of the system by using stakes for something else.

Therefore, many in the Ethereum ecosystem share the view of taking a constrained approach to build restaking, with constraints being what is really good for the ecosystem and minimizing risks and contagion. It is also being discussed to emphasize the need to understand the sharp trade-off between security and risk contagion and to build systems that ensure a certain amount of innovation can be unleashed while satisfying the constraints of minimizing risks and contagion.

Remember, the world of blockchain is constantly evolving, and staying informed with your own research is key to navigating this dynamic landscape successfully.

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