Restaking and EigenLayer: understanding the new wave on Ethereum

In September 2022, Ethereum replaced its consensus based on Proof of Work (PoW = Proof of Work) with Proof of Stake (PoS = Proof of Stake), a system in which validators must tie up their ethers (ETH) within the network to participate in the validation of transactions in exchange for an annual reward, currently around 4.5% on average.

In mid-April, the "Shapella" update completed this consensus change by allowing investors to withdraw their stake, which had previously been impossible.

"The smooth technical operation of the transactions has enabled Ethereum to gain credibility with the traditional financial world, which increasingly sees staking as an interesting investment opportunity," explains Laszlo Szabo, founder and CEO of Kiln, a French start-up offering services for institutions and individuals around staking.

Result? In just over 7 months, the number of ethers held in escrow on the network has risen by more than 60% to almost reach the 30 million mark (out of 120 million in circulation).

A success that can be partly explained by the development of liquid staking, i.e. having a liquid representation of your investment via a token provided by protocols such as Lido, Rocket Pool or Diva Staking (readour article on the subject).

And some projects want to take advantage of this windfall of tokens to take the security of blockchains in the Ethereum ecosystem into another dimension thanks to restaking.

👉 EigenLayer, flagship restaking project

This is what EigenLayer is proposing, which published its white paper in February 2023 and closed a $50 million Series A the following month led by Blockchain Capital. The project is generating great anticipation in the ecosystem.

Launched on the Ethereum mainnet this summer, the protocol has already managed to attract more than $1 billion in assets according to data aggregated by DefiLlama. And this is despite the fact that, for the time being, the infrastructure is still in the development phase. The project was born in 2021 under the impetus of Sreeram Kannan, a former assistant professor at Washington State University, where he worked on blockchain issues in particular.

So why the hype?

"What EigenLayer is proposing could change the way we think about security on Ethereum and blockchains in general," explains Barnabé Monnot, a researcher at the Ethereum Foundation, the main structure supporting the protocol's development. "The team's reputation speaks for itself, it has long been identified by the community", notes this specialist who works directly on this subject.

"Restaking makes it possible, using funds staked in Ethereum, to secure other networks that might need it", explains Laszlo Szabo, CEO of Kiln, a French start-up that offers services touching on staking for institutions. "In this way, users who would have tied up ethers (ETH) could also participate in validating transactions on dozens of other blockchains that would not have the ambition to do this themselves," he continues.

To help you understand, EigenLayer should be described as a marketplace bringing together stakers, node operators and developer teams.

Its potential goes beyond securing other blockchains: EigenLayer could also help secure other infrastructure projects, dApps as well as layers 2.

It would then theoretically be easier to innovate since the project team would not have to deal with the whole security part to get started. This is a paradigm shift that has been explored for several years by the Cosmos ecosystem (via its ATOM token), which can be used to secure other blockchains.

"But unlike Cosmos and its hub, EigenLayer introduces the concept of a security marketplace, which is not exactly the same thing," points out Laszlo Szabo.

EigenLayer has no intention of stopping there: the project also plans to launch Eigen DA (a blockchain specialising in data availability), operating on the same narrative as modular blockchains, such as Celestia. The latter simply offer to store data from other blockchains, which would then only have to manage the execution of transactions, enabling greater scalability and lower transaction costs.

👉 The heavyweights of the sector are setting up

For the time being, investors already have the option of staking their ETH or liquid staking tokens with EigenLayer (an overall limit has been set at 500,000 ETH for this experimental phase). However, for the time being it is not possible to earn any associated returns, but rather 'Eigenlayer points', which holders hope will give access to an airdrop in the coming months.

In the meantime, staking heavyweights such as Lido are organising to facilitate access to EigenLayer for their users, which would make restaking more accessible for the uninitiated, insists Barnabé Monnot: "We noticed that many users staking their ethers were not using their liquid staking token because of the complexity that capital optimisation can represent. EigenLayer could simplify this procedure".

Thus, users of Lido Finance, the largest liquid staking protocol, could be directly connected to EigenLayer's restaking services. In the medium term, we could see the emergence of liquid staking tokens that automatically integrate rewards from EigenLayer. In the case of Lido, the token obtained would be the "LrstETH" (liquid restaking stake ether).

EigenLayer also offers the possibility for solo stakers, i.e. operating nodes themselves, to restake the 32 ethers immobilised within the network via a system of smart contracts provided by EigenLayer.

"We plan to offer the services provided by EigenLayer to any of our customers who wish to do so. It's quite revolutionary and all the specialists have identified it as a major innovation," enthuses Laszlo Szabo.

👉 A security risk for Ethereum?

In a blog post, Ethereum icon Vitalik Buterin nonetheless warned of both the security and economic dangers to Ethereum of practices such as restaking.

The first would obviously be the chain risk of slashing (a penalty if the validator does not do its job properly, ed. note) "If there is a problem on one of the networks, this could have cascading repercussions on all the networks it helps to secure and on Ethereum first and foremost", warns Laszlo Szabo.

The second risk would be that of the centralisation of Ethereum's security via Eigenlayer, a criticism also levelled at Lido Finance. "In the event of malicious action, not all of Ethereum would be directly threatened, but economic losses as well as the network's reputation could suffer," analyses Barnabé Monnot.

The entire ecosystem that would be created via EigenLayer's security could be directly threatened. But Laszlo Szabo is reassuring: "I have no doubt that there will be barriers put in place to the use of EigenLayer by the community to limit these systematic risks to Ethereum."