Viewpoint: The biggest pitfall of Ethereum / BTC - Restaking / Shared Economy Security
Recently, the narrative around Restaking has become very popular. However, when you delve into the design of Restaking middleware and break down the logic behind these reasons, you will realize that Restaking/shared economy security is the biggest risk for Ethereum/BTC.Author: 0xjames
Recently, the narrative around Restaking has become very popular. Various restaking projects, led by eigenlayer, have attracted attention due to their massive funding amounts. They advocate for shared security and Restaking, which have gained significant attention and widespread recognition in the market. The reason why restaking/shared economic security is so hot is that these projects use some very simplistic reasoning when describing the underlying logic; 1) The security of Ethereum's POS comes from the enormous economic value generated by Ethereum ---- in other words, Social Capital. If this economic security (Social Capital security) can be utilized by other projects through restaking, then any project would want to use such a restaking middleware. 2) By providing high incentives (High APY) through restaking middleware and the projects using it, these restaking middlewares can attract a large amount of TVL, which translates to high FDV and high prices. 3) Users can earn additional incentive returns by restaking LidoETH and other first-layer derivative assets, making capital utilization more efficient. Therefore, it can be very attractive to users. Some KOLs even believe that restaking is a killer middleware for Ethereum.
However, when you analyze the design of restaking middleware in depth and break down the logic of these reasons, you will find that restaking/shared economic security is the biggest landmine for Ethereum/BTC.
1) Providing shared economic security through restaking relies on establishing slash/reward rules and judging whether the behavior of Validators meets the goals according to these rules, while slashing/rewarding the restaked assets for economic punishment. However, these slash/reward rules are not controlled by the restaking middleware (eigenlayer) but are entirely determined by the project parties. In most cases, investors are only attracted by high APY and whether the project has significant funding. They do not carefully study the slash/reward rules, nor do they look at the code to determine if the Validator client of the projects needing shared economic security has any bugs. Therefore, project parties can slash those restaked assets at will according to their own ideas.
2) Project parties have the motivation to rug those restaked assets: Some may argue that slashing at will does not benefit the project parties. According to the design of eigenlayer, these slashed assets will be transferred to a black hole address starting with 00000, and the project parties cannot access these assets. Although this seems to be the case, project parties can gain substantial profits by shorting eigenlayer. The process is as follows: a project uses numerous star capital endorsements to create a sense of legitimacy. At the same time, it relies on high APY to attract users to restake assets for shared economic security. Meanwhile, the project party accumulates a large short position in eigenlayer. Then, they look for some loopholes that cause the validator not to complete tasks according to the design rules, thereby slashing these restaked assets. Users suddenly find that their restaked assets have been inexplicably destroyed, leading to a massive withdrawal of restaked assets from eigenlayer. The price of eigenlayer plummets, and the project party gains huge profits from shorting.
3) The mechanism of Restaking/shared economic security is actually a significant harm to Ethereum/BTC. The economic security value (social capital) of an ecosystem comes from long-term technological development, brand accumulation, and community building. If this kind of Social Capital can be casually used by anyone, it means that this social capital is cheap and useless. Arbitrarily using the economic security of Ethereum/BTC is a tremendous harm to Ethereum/BTC. Even if the projects using this economic security have good intentions, you cannot ensure that the technology of these projects, which have not been time-tested, is free of vulnerabilities. Hackers can exploit these vulnerabilities to attack and maliciously slash these restaked assets to gain profits from shorting eigenlayer. Moreover, when restaked assets are sent to a burn address, the originally staked assets become unowned. Thus, their economic security value instantly drops to zero. If a large amount of ETH becomes unowned assets, it will greatly impact the security of Ethereum's POS.
Therefore, Restaking/shared security is the biggest landmine for Ethereum/BTC.
I predict: 1) eigenlayer will not open the AVS interface for shared economic security without conditions; even so, can eigenlayer ensure that the projects allowed to use the AVS interface are technically perfect and reliable? 2) eigenlayer may establish a committee to review each slash, but this is not feasible. 3) Ethereum will be ready to roll back/hard fork in case restaked assets suffer from a large number of malicious slashes.
Please do not forget the 2008 subprime financial crisis; any layer of nested structures increases liquidity, but nesting N layers creates a grave for oneself, especially when the N layers are related to the security of the chain.
