Restaking is an emerging practice (on the Ethereum blockchain) that enables network participants to earn yields on cryptocurrency pledged as a guarantee of security for services. It could prove integral to the Ethereum ecosystem's growth and, by offering different risk-return profiles, may create an 'internet bond' market. With exchange-traded funds (ETFs) backed by ether (ETH, Ethereum's native cryptocurrency) debuting in the U.S. this summer, understanding the Ethereum ecosystem will be increasingly important.
What's Happening
Restaking allows investors to earn a yield on ETH pledged to secure the consensus mechanism of blockchain-based services operating in the Ethereum ecosystem but not on the Ethereum blockchain itself. These services are referred to as actively validated services (AVS). The practice is called restaking because the system requires that the ETH has previously been staked in support of the Ethereum network itself(for more on how staked collateral secures proof-of-stake blockchains see "https://www.spglobal.com/en/research-insights/special-reports/what-can-you-trust-in-a-trustless-system," Oct. 11, 2023).
Why It Matters
As of June 19, 2024, the total amount restaked in EigenLayer (the most prominent restaking protocol) exceeded 5.3 million ETH (about $19 billion), representing over 16% of total ETH staked (up from 2% on Jan. 1, 2024.) Few AVS are live, so the growth is in anticipation of future rewards. As more AVS are deployed, investors will need to understand the different risk profiles.
The increasing number of transactions executed within the Ethereum ecosystem, and settled on the blockchain, will require an expansion of services. A key example of an AVS use case is making transaction data available and verifiable outside of the main Ethereum blockchain. Other examples will likely include oracles (which connect blockchains to external systems) and bridges (that connect different blockchains).
Restaking promises a more robust economic security market. It enables new services to be validated by Ethereum node operators using established tokens. That averts the need for the services to build their own validator set using their own tokens, whose illiquidity and volatility limit their effectiveness as an economic security tool.
Restaking risks are operational (and unique to each AVS) but financial risks could arise due to speculation. We do not currently foresee significant ecosystem-level financial risk as staking and restaking are generally non-custodial and there is no rehypothecation of the collateral. Node operators can only restake with the instruction of the staker. However, users of restaking protocols receive 'liquid restaking' tokens representing their restaked position. These tokens can function as collateral to borrow on decentralized lending platforms and could be used to build large leveraged positions, whose cascading liquidation has contributed to past crypto market crashes. The impact of restaking on system-level leverage must be monitored, particularly through borrowing and leverage metrics on decentralized finance (DeFi) lending protocols.
What Comes Next
Investors must consider the differing risks of AVS and watch for concentration risks. Each AVS will determine which tokens can be restaked to it, the restaking yield it will offer, and the slashing penalties (financial punishments) for dishonest validators. And each AVS will need to generate sufficient revenue to pay its restaking yield.
Concentration risks could emerge where:
- an AVS relies on a single node operator for a large share of its economic security, as disruptions affecting that operator could disrupt the AVS;
- many AVS rely on the same small group of node operators for a large share of their economic security, as the interests of those node operators may not align with an AVS and its users;
- major protocols in the Ethereum ecosystem come to rely on services provided by one AVS, meaning disruption to that AVS could cause cascading disruptions across the ecosystem.
ETFs won't bring new capital to restaking…yet. Current U.S. ETF filings do not contemplate staking their underlying ETH (those that did initially have removed this language.) If staking of ETFs emerges later, this will increase the capital available for staking and restaking and the need to understand the new operational risks and opportunities.
Related Research
- What Can You Trust in a Trustless System--Public Blockchains for Financial Applications, Oct. 11, 2023
- S&P Global Research Insights: Digital Assets
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrew O'Neill, CFA, London + 44 20 7176 3578; andrew.oneill@spglobal.com |
| Secondary Contact: | Lisa R Schroeer, Charlottesville + (434) 529-2862; lisa.schroeer@spglobal.com |
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