Hey Edge readers,

To restake or not restake. That is the question as EigenLayer approaches its mainnet launch in the coming weeks. Right now, the hype for airdrops is sustaining the high TVLs in EigenLayer. Once mainnet is live, we will start to see where yields will settle for restakers as well as the associated risks involved.

Here's what we're covering this week:

• EigenLayer and Restaking
  We dive into the basics of restaking.

• Gearbox pools are now live on Exponential ⚙️

  2 high-yield opportunities on ETH and USD!

• DeFi summer on the horizon ☀️

  Ether ETF, restaking hype, and Ethena airdrop.

Stay sharp. 🫡

-The Exponential team

EigenLayer and Restaking

Restaking is one of the hottest narratives thus far in 2024. We’re already seeing the demands for this service as investors have funneled over $12 billion in capital to EigenLayer without any clear ideas of the risks or yields. Obviously, part of this demand is driven by expectations of an airdrop down the line but there is also a yield component as well. Why earn only 3.5% yield on your ETH when you can possibly earn 5-10%+?

The question is how much additional risk are restakers actually taking here?

To get there, let’s start from the basics.

What is restaking?

Restaking is a new crypto primitive that has captured the attention of builders and investors. It is the idea that the same stake used to secure a PoS network, can also be used to secure several other networks.

With staking, validators are incentivized to act properly with slashing conditons. Similarly, with restaking, users opt-in to additional slashing conditions on top of the existing PoS slashing conditions.

This adds additional risk for ETH stakers.

So why would you opt-in to this?

Simply because you want to earn additional yields and incentives. Since the Merge, Ethereum staking has doubled, and the annualized staking APY has declined to ~3.5% today. With restaking, there is opportunity to earn enticing yields that could boost this higher. There is no good estimate at where yields could end up at this moment. This will ultimately depend on the supply and demand dynamics of the restaking market.

How does EigenLayer work?

In Proof-of-Stake (PoS) networks, node operators typically are required to stake a native token to incentivize their efforts. Launching a decentralized network requires designing an effective token, and ensuring fair tokenomics, among other things. This limits innovation at the infrastructure level.

That is where EigenLayer comes into play - it redefines the bootstrapping problem for PoS networks.

EigenLayer was the first to introduce this concept of reusing the established economic trust of Etheruem as a foundation for building additional decentralized infrastructure. This helps simplify the process of creating new trust networks by leveraging the already-established security of Ethereum. In essence, EigenLayer is creating a decentralized trust marketplace to sell Ethereum’s capital and validator set.

At its core, EigenLayer is a series of smart contracts that natively interact with the Ethereum staking contract.

• Native restaking: ETH stakers with their nodes can restake their staked ETH natively by pointing their withdrawal credentials to the EigenLayer contracts.

• LST restaking: Liquid Staking Token (LST) holders (i.e. stETH, rETH) restake their LSTs by transferring them into the EigenLayer smart contracts.

By restaking, you are essentially giving the EigenLayer contracts the authority to slash your stake and incentivize you through additional staking rewards.

Understanding AVS

Actively Validated Services (AVS) are services that require external node operators to their networks. Operators can opt into various AVS depending on their risk appetite. Examples of an AVS include data availability layers, decentralized sequencers, bridges, oracles, and more.

In EigenLayer, when stakers delegate their staked ETH, they are putting explicit trust that operators will act honestly. The slashing conditions are unique to each AVS and defined in the AVS smart contracts. Examples of actions that risk a slashing penalty include double signing for a blockchain or signing malicious bridging messages.

Restaking risks

For stakers, you can opt-in to as many AVS as you wish to boost your yields. The more AVS you delegate your staked ETH to, the more your risk compounds as you are exposed to greater slashing conditions. Some possible risk scenarios include:

• Collusion risk: Several operators could attack a set of AVS at the same time and compromise security. This would make economic sense as long as rewards > slashing penalties.

• Slashing risk: Restakers are subject to slashing penalties from both Ethereum and AVS. Specific slashing conditions are unique to each AVS and still TBD.

• Single point of failure: ETH stakers redirect their withdrawal credentials to EigenLayer which creates a systemic risk for Ethereum.

• Smart contract risk: Additional exposure to smart contract risk from EigenLayer, LST protocols, and Liquid Restaking Token (LRT) protocols.

• Operator centralization: This issue arises if there are high off-chain requirements for operators, potentially leading to concentration among a limited group.

• Additional risks to the stake-securing Ethereum: Vitalik wrote a piece discussing the potential risks of using Ethereum’s consensus mechanism beyond its intended scope.

Takeaways

EigenLayer introduces a middleware layer to Ethereum, aiming to commoditize decentralized trust and lower the barriers for protocol launch by leveraging Ethereum’s established security.

Despite offering opportunities for increased yields, restaking carries significant risks, from smart contract vulnerabilities to potential systemic threats to Ethereum itself, echoing Vitalik’s concerns about the implications of overly centralizing staking power.

We’ll continue to monitor the latest EigenLayer developments and update you when there is more clarity on AVS and their slashing conditions.

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