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Featured at Daemon Day, September 2024, the following is an overview of how institutional stakers and node operators can evaluate Actively Validated Services (AVSs) and Liquid Restaking Tokens (LRTs). 

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Click here to download the full presentation delivered at Daemon Day, or read on for the in-depth recap. 

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What is Restaking?

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Restaking allows stakers to reuse their staked collateral to provide economic security to various projects. This offers:

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• Stakers: the opportunity for additional rewards but with higher risk exposure.
• Actively Validated Services (AVSs): a tailored "security as a service" model, helping projects like oracles or roll-ups secure their operations.

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Protocols like EigenLayer, Karak, and Symbiotic are leading the way in the Ethereum ecosystem, enabling stakers to leverage their assets for multiple use cases, including data availability, pre-confirmation, and other AVS services. Beyond Ethereum, the concept existed earlier in networks like Cosmos IBC and in traditional finance through mechanisms like account control agreements (ACA).

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All restaking protocols now support ERC-20 tokens beyond ETH and Liquid Staking Tokens (LSTs), enabling broader utility for securing protocols. However, as the ecosystem grows, so does the complexity of managing risk/reward metrics and reporting for institutional stakers and node operators.

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While restaking provides new opportunities, it requires careful evaluation by institutional participants, especially as the market and technology still continue to mature. This blog will cover the current restaking market, the risks, and what an institution should consider when evaluating AVSs and LRTs. 

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Restaking Market Overview

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The narrative around restaking has developed rapidly, which historically has signaled a need for caution. 

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However, before we reassess the risks, it's important to first understand the current landscape of Total Value Locked (TVL) across restaking platforms. Between June 2023 and September 2024, we’ve seen significant growth in TVL across multiple platforms, dominated by EigenLayer, Karak, and Symbiotic.

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EigenLayer leads the charge, with a TVL of $17.645 billion. Karak and Symbiotic, while smaller in share, have also seen notable growth. Outside Ethereum, ecosystems like Solana, Bitcoin, and NEAR show growing adoption of restaking services. Solayer, for example, holds $74.11 million in TVL on Solana, while Allstake spans both Solana and NEAR, locking in $12.72 million. 

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EigenLayer’s overall TVL reached 5 million ETH by April 2024, showing the pace of staking adoption in the Ethereum ecosystem since user deposits began in June 2023.

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Restaking’s Growth and Opportunities for Institutional Stakers

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Ethereum staking has matured, with 28% of ETH now staked, but there's clear room for growth in more advanced staking methods. As of September 2024, 41% of staked ETH is in Liquid Staking, while 16% is involved in Restaking. A smaller but notable portion, 12%, is in Liquid Restaking, a blend of liquid staking and restaking.

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As staking becomes commoditized, both stakers and providers will seek out additional revenue streams and reward opportunities.

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By generating commissions on restaking rewards, providers can unlock new revenue streams, particularly in areas requiring more infrastructure and expertise. Restaking also promotes permissionless innovation for projects needing security without launching their own blockchain, improving Ethereum’s network effects and increasing ETH's long-term value.

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However, in order to accelerate restaking adoption there must first be a decrease in the associated risks. This will depend on the maturity of restaking protocols and filtering out weak Actively Validated Services (AVSs). Just as with traditional staking, regulatory clarity, automation, and robust reporting remain critical. 

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The Hierarchy of Institutional Staking 

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Basic staking involves a single decision: choosing a node operator. Moving into liquid staking adds protocol selection, but the complexity multiplies with restaking, which requires ongoing decisions around protocol, asset, and AVS portfolio selection. Liquid restaking offers the potential benefit of having these portfolio decisions made by professionals, but in turn adds another layer, requiring ongoing adjustments and monitoring of multiple liquid restaking protocols.

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While these advanced staking models provide new opportunities, they also introduce greater risks, such slashing and downtime. Slashing in particular will be introduced with the upcoming EigenLayer Stage 3. 

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EigenLayer Stage 3

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Once EigenLayer Stage 3 is fully rolled out, it enables distributing restaking rewards while also introducing slashing risks, similar to traditional staking networks. For institutional stakers, choosing a reliable Node Operator will be key to mitigate the risk of slashing. 

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In the current phase 3a, restaking rewards are enabled on the EigenLayer protocol, but yet have to be implemented by the AVSs. To help bootstrap the restaking market, the recently launched $EIGEN token will be used to subsidize the reward flow.

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However, slashing will only be introduced at a later stage 3b. The details of these implementations are unclear at present, and will differ across each Actively Validated Service (AVS). The risk-reward rate for a restaker therefore will depend on the portfolio of AVSs supported, and how any penalties might be correlated.

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While no one can predict the exact rewards at this stage, the opportunity to reuse staked collateral for additional rewards (sometimes referred to as "double-dipping") makes restaking a compelling strategy to explore - provided the associated risks are understood and managed.

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How Does Restaking Compare to Bonds? 

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Liquid Restaking Tokens (LRTs), much like Liquid Staking Tokens (LSTs), offer enhanced liquidity but at the cost of higher risk. Recent capital inflows into LRTs reflect growing speculation on future rewards from restaking, mirroring bond markets where higher yields often come with greater exposure to default and market volatility. Some staking specific risks include: 

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1. Liquidity: LRTs, while more liquid than traditional staking positions, still face liquidity constraints during high volatility, and are therefore more risky than, for example, bonds or LSTs.
2. AVSs: Higher rewards come with additional risks, particularly due to varying maturity of Actively Validated Services and potential cross-dependencies between them.
3. Portfolio Management: LRTs involve juggling multiple AVS protocols, reward variability, and potential slashing events.

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Key Takeaways

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Right now, restaking is still in its infancy, meaning the risk outweighs the potential return. Over the next 6-12 months, we expect these risks to decrease as the software matures, regulations become clearer, and rewards become fully operational on networks - similar to the trajectory of traditional ETH staking.

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To secure more than the basic staking rate (around 3.5% ETH rewards), users must be willing to take on more risk. This includes smart contract risk, slashing risk, and regulatory uncertainties, especially in liquid staking and restaking ecosystems, which are still developing. We recommend caution until rewards become live and risks are better understood.

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For institutions, staking remains the safest option, but restaking and liquid restaking present future opportunities. Restaking could soon extend into Layer 2s and rollups, as these services require economic security, and platforms like EigenLayer are enabling this shift. By understanding the dynamics of restaking and Liquid Restaking Tokens (LRTs) now, institutions can be better positioned for the next wave of Ethereum’s evolution in the coming months.