Crypto restaking: A complete guide

Restaking allows validators on blockchains like Ethereum and Solana to redeploy their staked cryptocurrency across other proof-of-stake (PoS) based services.

Staking is an important part of the PoS consensus mechanism used by many of the world’s largest blockchain networks. It involves people called validators locking away an amount of native cryptocurrency to help secure the network and participate in the block proposal process.

In simple terms, the larger a blockchain’s validator network (also known as a trust network), the harder it is to attack.

If you are unfamiliar with this process, check out our Kraken Learn Center article, What is crypto staking?

Prior to restaking, staked crypto assets could not be redeployed across other protocols. This restriction presented two problems:

• Validators were limited in the number of rewards they could generate from their staked assets.
• Network security could not be shared across different platforms.

Restaking focuses on aggregating and extending the security of large blockchain networks to other services such as oracle networks, data availability layers and blockchain bridges to name a few.

It also allows validators to generate multiple forms of rewards for helping secure several platforms concurrently using a single cryptocurrency.

Want to earn more rewards on the ETH you are staking?  Kraken gives you access to the restaking process, so you can earn more on your ETH, across more blockchain protocols.

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Restaking protocols provide an opt-in service where validators (called restakers) can redeploy their staked ETH, SOL or other cryptocurrency across multiple protocols at the same time.

This also includes liquid staked assets from protocols like Rocket Pool and Lido Finance.

EigenLayer, as a leading example, consists of a set of smart contracts that allow Ethereum validators to restake their assets and secure other Ethereum-based protocols. 

EigenLayer collectively refers to these protocols as “modules” or “actively validated services (AVSs).”

You can find the latest list of EigenLayer AVSs here.

When opting into restaking protocols, users accept additional slashing conditions set by each module, on top of Ethereum’s own slashing measures. 

Slashing is an important component of PoS systems whereby a validator’s staked assets are partially or wholly confiscated if the protocol detects malicious behavior.

Each AVS specifies its own slashing conditions to encourage validators to act within the best interests of their network. Without these additional penalties, malicious validators could collectively target and attack vulnerable modules.

Similar to delegated PoS models, validators can entrust registered operators to stake on their behalf.

This option offers restakers who may not have the time or equipment to meet the system resource requirements of certain modules a chance to participate in their networks and earn rewards (minus fees charged by the operator).

Beyond EigenLayer’s pooled security feature, it also introduces an open AVS marketplace where restakers can freely choose which modules they want to help secure.

Decisions may be influenced by several factors such as a module’s resource requirements, rate of rewards, perceived risk or what sector it caters to.

For example, a group of validators that believe in the future of oracle networks may decide to provide pooled security to oracle-based AVSs in exchange for their native tokens.

Others might specifically target high reward, high risk AVSs launched on top of EigenLayer in a bid to generate maximum rewards on their staked assets.

Liquid restaking protocols merge the benefits of liquid staking and restaking, offering enhanced liquidity, improved capital efficiency and additional yield-generating opportunities.

Liquid staking addresses the issue of illiquidity in traditional staking, where tokens are typically locked in smart contracts and cannot be used across other blockchain protocols until the staking period ends.

Through liquid staking, users receive a derivative token (such as Lido Protocol's stETH) that represents their staked assets. This derivative, sometimes referred to as a receipt token, can be traded, used in DeFi applications or leveraged in other ways, all while the original assets remain staked.

Liquid restaking advances this concept further.

With these decentralized protocols, users who stake their crypto assets using a liquid staking platform can then restake the derivative token they receive on EigenLayer's protocol, receiving a liquid restaking token (LRT) in return.

The LRT represents a person's staked and restaked assets across multiple protocols.

A significant advantage of liquid restaking is how it eliminates the need to run a validator node, while still allowing users to earn multiple staking rewards and maintain liquidity.

This addresses a key problem with restaking on EigenLayer, whether through native restaking or using liquid staking tokens, as it involves locking assets and sacrificing liquidity.

Popular liquid restaking protocols include Renzo Protocol, Puffer and Ether.Fi.

Any new technology presents its own set of unique risks.

Restaking is no different.

This list represents just some of the risks that restaking presents, and is by no means exhaustive.

Rigorous due diligence is always advised before interacting with any new cryptocurrency technology.

• Smart contract risk: Smart contracts can contain potential vulnerabilities or flaws in their code, such as coding errors, bugs and backdoors. These problems can lead to unintended consequences such as financial loss, security breaches or exploitation by malicious actors.
• Slashing risk: Slashing can occur without warning and result in considerable losses. Cryptocurrency opted into restaking protocols may face increased slashing risks due to the additional conditions imposed by each AVS.
• Counterparty risk (Operator): Dealing with third-party staking delegates requires restakers to entrust them with their deposited assets. Restaking operators must abide by each module’s network conditions or risk losing funds via slashing. In these scenarios, it’s unclear if restakers would receive any compensation from these events.
• Systemic risk: As higher concentrations of users' funds are locked in individual staking protocols, it creates vulnerable single points of failure and centralization issues that could threaten the broader crypto ecosystem if hacked or corrupted.

When Ethereum emerged in 2015, it became the first blockchain-based platform of its kind to allow developers to freely launch their own decentralized applications (dApps) on top of its infrastructure.

Doing so not only reduced the time and cost to develop new cryptocurrency projects, but also allowed projects to benefit from Ethereum’s underlying network security.

The Ethereum Virtual Machine (EVM) is a run-time environment that provides this functionality. While it offers several prominent advantages, it’s not without its limitations.

Namely, any dApp built on top of Ethereum’s blockchain that is not compatible with EVM does not benefit from its network security. This constraint, in turn, creates several other issues:

• Certain types of applications within the Ethereum ecosystem have to bootstrap their own trust networks.
• It can take a long time and a considerable amount of money before independent projects are able to establish their own sufficiently decentralized and secure set of validators.
• Investing and staking with new projects is perceived by some to carry higher risks compared to staking with well-known blockchains. To compensate for this, newer projects are often forced to pay out higher rewards to attract validators over to their networks, which can result in unnecessary value leakage.
• Overall, the incompatibility can create disparity among dApps in the Ethereum ecosystem, where some applications have greater cryptoeconomic security than others.

You might ask, why does it matter if certain applications are less secure?

Industry participants argue that dApps are only as secure as the middleware applications they rely on to function (blockchain bridges, oracles, etc).

Oftentimes, these smaller middleware services rely on their own trust networks and are secured by considerably fewer staked assets than the Ethereum blockchain. This makes them much easier to attack.

Consequently, they introduce inherent vulnerabilities or single points of failure that could significantly compromise the security of other dApps if they’re hacked or exploited.

For example, Axie Infinity (AXS) is a popular play-to-earn crypto game built on top of the Ethereum blockchain. However, in 2022, the project’s Ronin sidechain suffered a major breach, allowing hackers to steal over 170,000 ether (ETH) and 25 million USD Coin (USDC).

At the time, it was the industry’s largest ever DeFi hack.

Restaking protocols seek to address this sort of limitation by allowing validators to restake their crypto assets across a range of services, even those incompatible with a Layer 1’s virtual machine.

The result is shared cryptoeconomic security across multiple protocols and services, which proponents believe will ultimately result in a more robust ecosystem of decentralized applications.

Beyond EigenLayer’s Ethereum-based restaking protocol, other instances of the restaking protocols are in early development across other leading Layer 1 blockchains.

• Bitcoin: Babylon
• Solana: Picasso
• Near: Octopus 2.0

In summary, restaking represents a significant advancement in the realm of blockchain technology, particularly in proof-of-stake (PoS) based networks like Ethereum. 

By enabling validators to redeploy their staked cryptocurrency across various PoS services, restaking addresses key limitations in the traditional staking model. 

This innovation not only expands the potential rewards for validators but also enhances network security by aggregating resources and sharing them across different platforms.

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