When it was launched, the vision for Ethereum was simple. It was to be a smart contract platform with low fees that settled transactions occurring on other applications. That simple vision has transformed into a corporate juggernaut today.
Investors and stakeholders use the venue to boost staking rewards and prices for worthless tokens. Examples include the recent meme coin hysteria and the use of Maximal Extraction Value (MEV) applications to boost income for validators – systems responsible for assembling blocks of transactions – at the expense of users.
Meanwhile, the nonprofit foundation, an unofficial controlling entity for Ethereum, is intent on converting its native token, ether, into “ultrasound money”.
The latest detour from the original roadmap is restaking. As its name indicates, restaking involves reusing already staked ether. While Ethereum’s previous attempts to boost profits were financial trickery, restaking is an outright compromise of the blockchain’s security.
Restaking to Increase Yields
The idea of using staked tokens for other purposes is not new.
Liquid Staking Derivative (LSD) platforms exchange ether for another token that provides users with a claim on the original. LSD token work as an ether substitute in financial derivatives on decentralized finance (DeFi) platforms. Investors can, thus, boost yields and ensure liquidity for ether even as it is locked in a staking smart contract.
Restaking takes the idea further. It proposes to use staked ether on Ethereum’s validators to bolster security for other chains and middleware applications. Users and validators on Ethereum’s network can opt-in to deposit their tokens in smart contracts from EigenLayer, a restaking startup.
The staked tokens are used to provide security to other applications or blockchains. In return, users and validators can expect more staking rewards and revenues respectively.
Exporting Ethereum’s Security
Developing applications and infrastructure on ethereum is a costly affair. So, it comes as no surprise that startups developing scaling platforms and middleware solutions for the blockchain are generously funded by top tier venture capitalists. Optimism, a bridge that connects Ethereum to other blockchains, has raised $178.5 million from investors that include the likes of Andreessen Horowitz and Paradigm Capital. Arbitrum, another infrastructure company, has also raised more than $100 million for its operations.
Part of the reason for their massive raises is that adhering to blockchain’s decentralization paradigm is expensive. EigenLayer’s founders argue that pooling Ethereum’s security and importing it into startups will cut operation costs and enable greater decentralization among startups using the blockchain to settle their transactions.
A Decentralized Trust Market or Monopoly?
EigenLayer founder Sreeram Krishnan says that EigenLayer creates “a marketplace for decentralized trust”. And the keys to that marketplace are centralized at EigenLayer.
When users and validators deposit their staked tokens with EigenLayer, they sign away rights to the staked ether’s withdrawal credentials. This means that the staked ether can only be withdrawn on EigenLayer’s terms.
Already, there is a seven-day withdrawal delay for tokens in the protocol’s test environment. We have already seen a similar script played out at Lido, which did not allow users to take out their staked ether tokens for more than a month under flimsy pretexts.
The signing away of withdrawal rights by users also enables EigenLayer to dictate new slashing conditions for validators. Slashing is penalty imposed on validators that do not attest blocks according to pre-defined rules. This means that EigenLayer, and not Ethereum, determines the slashing rules for tokens that have been staked on other applications.
EigenLayer, thus, will function as an intermediate layer between Ethereum and other chains and applications. If it becomes sufficiently big, it could also end up controlling the underlaying blockchain’s mechanics and security.
No wonder, the startup is valued at $250 million in private markets without even launching a product.
Is a Market Necessary?
It is worthwhile to ask whether a market for the so-called decentralized trust is necessary.
EigenLayer proposes to pool security from Ethereum by assembling validators and staked tokens from users. Since the incentive to opt-in to EigenLayer is economic, higher rewards will attract more users and ether on the platform. To do that, the startup will search out protocols and applications that offer big staking rewards. The pooled security, thus, becomes available to the highest bidder.
By converting ether – a token that underpins Ethereum’s security – into an asset that can be rehypothecated across multiple chains and protocols, restaking also spreads it into risky corners of a nascent market where scandals and fly-by-night operators abound.
For example, a third-party application or chain could amass staked tokens by offering high rewards and launch an attack on the blockchain. Or EigenLayer’s could hold Ethereum to ransom by restricting or delaying withdrawals of staked tokens.
In a post cautioning against overloading Ethereum, Vitalik Buterin, Ethereum’s cofounder, has identified high- and low-risk scenarios for EigenLayer. That is a generous assessment.
Risk, whether low or high, has no place in a distributed database that wants to settle transactions across the globe. Besides, previous financial panics have already demonstrated that it doesn’t take long for a low-risk scenario to transform into a high-risk one.