Cryptocurrency Restaking for Beginners

Restaking in crypto is a relatively new service, launched less than 18 months ago. Let's explore this concept in more detail.

Both staking and restaking are mechanisms used in blockchain networks. Staking of cryptocurrencies has been around for more than a decade, more precisely since 2012 when Peercoin (PPC) was issued.

Regular staking locks up a certain amount of crypto coins such as Ether, Solana, Cardano or Avalanche to secure a single blockchain and validate transactions. Stakers or validators (if they actively validate transactions) earn rewards in return in the form of transaction fees, additional tokens in the staked cryptocurrency or as liquid staking tokens (LSTs). These LSTs can be used in other decentralized finance (DeFi) applications to restake, but also to provide liquidity, collateral in DeFi applications and more.

Only cryptocurrencies using a proof of stake (PoS) protocol can be staked. This is why Bitcoin, the leading cryptocurrency, cannot be staked, as it uses a proof of work (PoW) mechanism rather than PoS.

Crypto restaking, an extension of staking

Crypto restaking is a logical evolution of staking. The concept involves using already staked cryptocurrencies to secure additional blockchain protocols or services, beyond the core, initial blockchain. Restaking allows multi-layer security without having to lock up additional crypto coins or tokens. The concept also increases decentralization. In short, restaking extends the utility of staked cryptocurrencies.

Restaking is appealing as it amplifies rewards by allowing the restaked tokens to accumulate rewards from multiple sources simulateneously. Investors obtain additional yields on top of the base rewards they earn from regulator staking. These yields or rewards can take the form of fee sharing, yields from DeFi applications or liquid restaking tokens (LRTs).

Risks shouldn’t be overlooked

The risks associated with restaking are higher compared to regular staking, as several layers of protocols and dependencies between these are involved. In view of the many incidents that have marred the reputation of cryptocurrencies and blockchain, this increased risk connected to restaking’s operational complexity should not be underestimated.

Additionally, restaking currently operates in a grey zone, which is another major risk. An increasing number of regulators assert that restaking resembles traditional financial activities and should therefore fall under their oversight and be regulated. As restaking is a relatively new process, regulators might crack down on it in the near future.

EigenLayer dominates restaking today

Restaking platforms held roughly $13.5 billion of restaked crypto collateral (total value locked) on Sept 17, DeFiLlama data shows.EigenLayer is currently the largest and most renowned restaking platform, with an 80 percent market share. It is a decentralized Ethereum-based restaking protocol. Introduced on June 14, 2023, EigenLayer enables restaking on Ethereum and other platforms, including decentralized applications (dApps), oracles, and bridges (these two later categories connect decentralized blockchains to external data or to other blockchains). This results in a more efficient use of staked capital.

Future possibilities of restaking?

Restaking as a concept is still in its infancy and evolving. So, EigenLayer cannot rest on its laurel as competitors are likely to emerge to claim their share of the restaking cake. Some DeFi protocols, such as Lido and Ankr, are already exploring multi-layer staking, where users can stake tokens on Ethereum or Polkadot for example and then use these staked tokens for other DeFi-specific activities like lending or securing sidechains. Polkadot and Cosmos, which both offer cross-blockchain interoperability, may also introduce restaking. 

Layer 2 platforms such as Arbitrum, Optimism, and zkSync are other likely restaking candidates. In this case, stakers securing the base (Layer 1 blockchain such as Ethereum) would also secure Layer 2, Layer 3 chains or dApps built on top of these. Right now, Layer 3 platforms are not yet fully developed and in use, but have the potential to introduce restaking options in the future.