By Kydo, Omid Malekan, and Brett Palatiello

The bitcoin inflation chart is one of the most iconic images in crypto, appreciated by many for its simplicity. The message it conveys is elegant yet powerful: that which changes a lot in the beginning barely changes in the end. We can add to that: the sooner you get there, the better.

This formula doesn’t have to only apply to monetary policy, it can apply to all the rules of a protocol, for any blockchain. The faster any decentralized platform gets to the point of minimum alteration, the sooner it can claim to be credibly neutral. Mass adoption can then follow, with users and entrepreneurs both secure in the knowledge that the proverbial rug can no longer be pulled; the protocol has ossified.

But ossification also requires sacrifice. A protocol that’s hard to change is also hard to evolve, and it’s impossible to account for all future scenarios. The road to ossification is clear but the path back is much more difficult. Ossification means the end of experimentation.

This natural tension between stability and progress can be resolved with the introduction of restaking.

What is restaking?

Restaking is an activity that increases the capital efficiency of staking while simultaneously extending the cryptoeconomic security of the native asset beyond its own blockchain. It’s an opt-in process where stakers willing to take on incrementally more risk can help secure services such as other layer 1s, oracles, data availability (DA), bridges and other proof of stake (PoS) systems. It can be done natively inside the restaking solution or via liquid staking tokens.

Restaking offers a convenient solution for decentralized service developers, sparing them the hassle of bootstrapping their own cryptoeconomic security using a native token. In the past, developers had to introduce a new native token for each decentralized service they wanted to launch. However, the fluctuating value of these tokens led to unstable cryptoeconomic security for their services, making it challenging for consumers to trust and use them reliably. Consequently, only a limited number of blockchain applications adopted these services.

With restaking, developers can build services without relying on a volatile native token, instead leveraging the existing cryptoeconomic security provided by the underlying chain. Ethereum brings the same security to all its smart contract applications; restaking brings the same security to all decentralized services.

One way to visualize restaking is as a new security layer sandwiched between the base layer and the application layer. While the services enabled can run the gambit, the best candidates are ones that need the most security because they are foundational to other applications.

How does restaking allow for faster ossification?

The cryptoeconomic security of restaking is closer to that of the base layer than any one application. It’s big, broad, and not as correlated to day to day user behavior. But unlike the base layer—which must always remain neutral—the function of restaking can be channeled in different directions. It can be utilized to secure a coprocessor today and a sequencer tomorrow. This flexibility allows the base layer to ossify faster than it could otherwise. New features deemed desirable down the road can be addressed with restaking.

That’s not to say that the base layer doesn’t still have to evolve, but the roadmap can focus on major changes deemed “must haves.” The middle layer can take care of the countless unanticipated “nice to haves” that are bound to come up as the ecosystem matures.

Restaking can also accelerate the base layer's development roadmap. There's an inherent tension between thorough testing and urgency when it comes to innovation in the base layer. The challenge lies in the testing phase, as it's difficult to replicate the base layer's operational state. Restaking offers a solution. Individual restaking validators can choose to offer services that would otherwise only be available in the future at the base layer. If all goes well, the activity can eventually be enshrined. This not only grants more features to the end user, but also collects valuable real-world testing data. Thus, restaking can speed up progress.

For instance, by restaking, Ethereum validators can begin to offer Danksharding services to rollups. Enhancing data throughput has been a priority In Ethereum's rollup-centric scaling roadmap. But the community has rightly been conservative in adopting an iterative roadmap. It will first adopt EIP-4844 (Proto-Danksharding), which is certainly an upgrade, but only provides a fraction of the throughput increase of full Danksharding. Full Danksharding via restaking will add value to today’s rollups while garnering insights for tomorrow’s Ethereum.

What are the limitations and risks?

There are limitations to how much restaking can take the burden of experimentation off the base layer, for the simple reason that certain changes can only be applied protocol-wide or not at all. Changes to the EVM for example, or a shift in monetary policy, cannot be tried in limited fashion. It’s also important to acknowledge that restaking-enabled versions of certain applications will not be as secure as the base layer applications. For example, EigenDA may inherit only a portion of  ETH’s cryptoeconomic security, since restaking is an opt-in feature for the validators and not all validators might opt into EigenDA.

There are no free lunches in crypto. The benefits of restaking have to be weighed against centralization risk and the inherent leverage in any kind of service-stacking utilizing the same asset. Today, a bug with a liquid staking token can negatively impact both its owners and the base protocol. With restaking, the problem can travel even further to other decentralized services. The governance of a restaking solution can also become a point of vulnerability, both for outright attacks or outsized influence.

Thankfully, all of these problems can be mitigated.

At the core of these risks is an innate tension between speed and precision, risk and innovation. EigenLayer, the first restaking protocol, aims to find the right balance between the two. In the early days, many of these risk vectors can be avoided with more opinionated control at the contract layer. A properly designed restaking solution is diversified across a range of liquid staking tokens and native staking nodes.

For example, at the time of its writing (January 2024), EigenLayer caps individual LST at 200,000 and the total LST cap at 500,000. This aims to remove the over reliance of the system on a single LST. This approach also alleviates the centralization pressure Ethereum has been facing since the merge.

None of these limitations eliminate all the risks of restaking, but we believe a slight increase in risk to Ethereum is worth a significant derisking of important services such as DA layers, oracles and bridges.

Conclusion

Ethereum already secures billions of dollars in value across an ecosystem of dApps and L2s used by millions of people. It’s not unreasonable to expect both numbers to become an order of magnitude higher in the coming years. A protocol with that much value needs to get to a point of credible neutrality and ossify before powerful forces try to sway its design. And yet, all of this is still new and there is much to figure out about protocol design. This tension can be resolved by moving experimentation onto the restaking layer.

Unlike ETH owners (or even stakers) those supplying assets to EigenLayer will be more sophisticated and understand that their capital is taking more risk to earn an even higher reward. Any experiments in restaking that don’t work out will only hurt them. But the lessons learned from those experiments and the benefits of the solutions enabled by restaking will be enjoyed by all.

Thanks to Dankrad Feist for feedback on this post