Liquid staking and restaking protocols have quickly gained traction in decentralized finance (DeFi), driven by their potential to enhance blockchain security and efficiency. But with rapid innovation come inherent risks.
While these protocols can offer users unprecedented yields, they also present potential systemic vulnerabilities. BeInCrypto spoke with different industry experts to better understand the intricacies of staking mechanisms and the challenges they pose for users.
The Rise of Restaking
Over the past year, staking has evolved from an emerging concept in the DeFi sector to a mechanism that has completely reshaped the idea of security across blockchain networks. Spearheaded by Ethereum, with EigenLayer taking the lead, this protocol has offered dynamic solutions to overcome the fragmented security of traditional Layer 2 blockchains.
When Ethereum transitioned to a proof-of-stake (PoS) ecosystem in 2022, it replaced mining with staking, opening new possibilities for staking rewards and ensuring mainnet security.
Traditionally, each decentralized network has been responsible for developing and maintaining its security measures, often relying on PoS mechanisms. This requires significant investment in security infrastructure, and it can be challenging for emerging networks to achieve the level of security offered by established networks like Ethereum.
To mitigate this downside, the concept of restaking soon appeared. This mechanism occurs when already staked Ethereum is used to lend security to other mainnet elements, such as bridges, protocols, oracle networks, and scaling solutions.
“Restaking is fundamentally about bootstrapping economic security for new protocols, often using liquid-staked tokens that are already tied to providing security elsewhere,” Laura Wallendal, CEO and Founder of Acre, told BeInCrypto.
Restaking offers a potential solution by enabling smaller networks to leverage the security of existing PoS chains, thereby enhancing their overall security posture.
EigenLayer Pioneers Restaking Protocols
Built on top of Ethereum in June 2023, EigenLayer has become the most-used restaking protocol today. As of writing, the protocol’s Total Value Locked (TVL) is weighed at over $15 billion.
Sreeram Kannan, the brain behind the protocol, developed this mechanism to reap the security benefits of the Ethereum network and extend the same to other protocols and blockchains.
EigenLayer lowers network startup and management costs and eliminates the complexities of bootstrapping security for new projects. By using their staked position to support additional applications on the Ethereum network further, restakers can repurpose their stakes assets and maximize their earnings.
“Restaking is an absolutely valid approach that helps make blockchain incentives more efficient; in the long term, it will become the established approach to securing multiple decentralized protocols based on the same set of economic incentives,” said Sasha Ivanov, Founder of Waves & Units Network.
However, since restaking has been around for less than two years, they are still in the early stages of development. As a result, protocols like Eigenlayer come with their fair share of challenges and concerns.
Security Risks
As the adoption of re-staking protocols increases, concerns regarding the potential security risks associated with these protocols are also emerging. The ability to reuse staked assets across different protocols may offer increased yield opportunities, but it also introduces new layers of risk within the blockchain ecosystem.
Though blockchains ensure security with smart contracts, these contracts can suffer vulnerabilities such as reentrancy attacks and gas limit issues.
“Each restaking layer introduces new smart contracts, increasing the attack surface for exploits,” said Matt Leisinger, Co-Founder and Chief Product Officer at Alluvial.
The complexity of restaking mechanisms further increases the potential for bugs and exploits in the smart contracts governing these protocols. If a contract is compromised, users may lose funds.
There are also slashing risks. If a validator is found guilty of malicious behavior, a portion of their restaked ETH can be cut.
“Restaked tokens are often exposed to multiple validator networks. If one network underperforms or violates protocol rules, slashing penalties can cascade across all restaked layers,” Leisinger explained.
Slashing risks can also weaken the security the restaking protocol aims to provide in the first place.
“Let’s say that you use staked ETH to secure multiple AVSs, and let’s say one of those gets slashed. Then essentially the ETH is held, and obviously penalized, and so someone who’s providing economic security may be less likely to provide economic security in the future,” Leisinger concluded.
When security is compromised, so does the overall backbone of the ecosystem.
Illiquidity During Times of Market Downturn
Increased risk exposure also brings increased return volatility. As with crypto in general, market downturns can cause significant financial losses.
“The opportunity to reuse staked assets across multiple protocols unlocks additional earning opportunities. However, this still carries the risk of volatility and cascading failures caused by interdependencies. Moderation is key here. Having in place sustainable strategies that pursue moderate yields can provide rewards in tandem with a manageable risk exposure. Moderation, when married to a clear understanding of risks, is crucial for the sustainable pursuit of yields for both users and the ecosystem alike,” said Ivanov.
Market volatility also causes liquidity risks.
“Restaking frequently locks assets in illiquid forms, making it harder to exit positions during market volatility,” said Leisinger.
According to Ivanov, this reduced economic incentive for users also compromises blockchain security during market downturns.
“If the native blockchain token is re-staked, there can definitely be an additional negative feedback loop during market crashes, which may diminish the economic incentives securing the blockchain. For instance, a crash in token value can result in forced liquidations, which increases sell pressure, thereby decreasing the economic value securing the blockchain, a fundamental incentive for validators to maintain operations.”
Given the financial architecture behind these protocols, restaking multiple times inherently amplifies liquidity challenges.
Risks Associated with High Yield Returns
While protocols like EigenLayer push the boundaries of yield maximization, the promise of higher returns also raises other considerations.
Since the concept of restaking surfaced, many protocols offer these services. Some do so more responsibly than others.
“A lot of these protocols rely on hype cycles to build traction, offering high short-term rewards while they work to grow their user base and validate their model. For example, new protocols might not generate enough transactions to pay validators sustainably, so they layer additional incentives to compensate early adopters. It’s a bet that the protocol will eventually achieve long-term stability—or a short-term play to collect rewards before moving assets to the next opportunity,” said Wallendal.
Though high rates of annual percentage yields (APYs) may seem appealing to junior investors, they may not fully understand the associated risks.
“With some restaking protocols offering APYs of 15-20% on assets like ETH, there’s a significant risk of investors chasing yields without fully understanding the associated risks. To address this, protocols could adopt graduated entry systems—for instance, starting users with simpler staking options offering 5-7% APY before granting access to more complex and higher-risk products,” said Marcin Kazmierczak, Co-founder & COO of Redstone.
To that point, Ivanov added:
“Re-staking protocols are akin to traditional compounded financial instruments, where value can sometimes be created out of thin air, and which Warren Buffett called ‘weapons of mass financial destruction.’ On the other hand, re-staking, of course, has valid use cases where new value is not created, but instead, established incentives are used to secure additional protocols. It may be a fine line between bad and good re-staking, so looking deeper at how the protocols actually work is essential.”
When protocols prioritize yield strategies over sustainability, the risk of speculation inherently rises.
“Restaking does provide economic security for bootstrapping networks, but it often veers into speculation. Without a clear, long-term value proposition, users are just cycling through protocols to maximize short-term rewards. It’s becoming less about supporting the ecosystem and more about chasing token exposure across multiple networks,” said Wallendal.
Speculation can also inadvertently affect the credibility of the foundational layer of any blockchain.
“If staking were to become equated with speculative yield, this would put in question its role as a foundation of blockchain security and decentralization,” Ivanov added to this point.
Building sustainable economic models will be crucial to their success as protocols refine themselves.
Centralization Concerns
EigenLayer was the first protocol to popularize the concept of restaking on Ethereum. Today, it has become one of the most widely adopted restaking mechanisms. As a result, it has faced growing centralization pressures.
“EigenLayer centralizes risk by serving as a critical hub for multiple protocols, making the ecosystem more vulnerable to systemic shocks.
Competition from other players is key to prevent this from happening.
Last June, Symbiotic made a notable entry into the DeFi sector with $5.8 million in seed funding from Paradigm and Cyberfund. Its debut marked a significant challenge to the existing restaking narrative currently dominated by EigenLayer.
Since then, other alternatives have also emerged.
“While EigenLayer currently dominates with over 80% of the restaking market share, we’re seeing emergence of alternatives like Symbiotic, Babylon or Solayer. The ecosystem needs this diversity – having over 90% of restaked assets controlled by a single protocol could create systemic risks and diversity sparks further innovation,” said Kazmierczak.
However, the fact that few players dominate restaking services currently provides an opportunity to analyze their pitfalls more closely.
“There’s also a flipside—having one big player can also help test the approach more quickly. EigenLayer’s current centralized position allows for observing how the system behaves in real-world conditions, with an opportunity to pinpoint vulnerabilities and inefficiencies faster than a fragmented ecosystem. The rapid testing by one big player facilitates the evolution of the broader ecosystem through the key learnings attained in said testing,” said Ivanov.
As these systems mature, the sector is showing promises of competitor diversification.
Accessibility Issues
Educational barriers and lack of knowledge surrounding restaking protocols amplify exposure to the main problems associated with this mechanism.
As restaking strategies become more complex, this concern will also rise.
“Recent surveys suggest only about 30% of DeFi users fully understand the mechanisms behind restaking. We need better educational resources and risk visualization tools. At RedStone, we’ve observed that users who understand the underlying mechanics are more likely to make sustainable investment decisions,” said Kazmierczak.
The more users restake, the more they expose themselves to risks.
“Having transparency into where participants’ stake is going will be important. There’s a little bit of a risk of shared security versus local security—one AVS that you’re securing versus multiple, and whether or not you’re sharing that security across multiple AVSs. This would be risky, because you could have a situation where a node operator that you may not even be staking to could impact your stake. This brings up risks that investors at face value maybe wouldn’t be aware of, and so there should be transparency into any risk vectors or activity like this that could potentially impact one’s stake,” said Leisinger.
Ultimately, only users themselves have the power to educate themselves before engaging with different restaking protocols.
“Only by looking deeper into what the protocol actually does can we truly understand it. Unfortunately, there’s no way around this. This entails due diligence through critical analysis of the protocol’s documentation, audits that uncover how rehypothecation is handled, and the safeguards in place that manage risks associated with leveraging user assets,” Ivanov explained.
Developing tools that facilitate access to these mechanisms for a wider range of investors will also help cultivate the long-term viability of restaking protocols.
“The key to long-term success is making these systems more inclusive and building infrastructure that supports new participants. While the path forward will take time, I’m optimistic that we’re heading toward a future where sustainable staking yield becomes the standard—not the exception,” Wallendal concluded.
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