Under the "vampire" attack of Restaking, how should Lido solve the problem?

Original Title: ReGOOSE: Updated goals for Lido in the light of MVI and restaking

Author: Lido Strategic Advisor Hasu

Compiled by: Odaily Planet Daily Azuma

Last weekend, Lido Strategic Advisor Hasu released the first update (reGOOSE #1) regarding the changes in the market environment over the past six months, in relation to the "strategic intent" (GOOSE) established by Lido last October.

In the article, Hasu mentioned two main challenges currently facing Lido:

• First, researchers from the Ethereum Foundation have begun discussing significant reductions in staking incentives for the Ethereum network, which could fundamentally threaten the economic viability of decentralized staking protocols like Lido;
• Second, with the development of the restaking narrative, subsidy-driven projects like EigenLayer and LRT have attracted over ten billion dollars in capital, causing stETH to passively encounter "vampire" attacks, with its market share dropping from 32% to 29%.

In light of these two challenges, Hasu provided his suggestions based on his understanding and community discussions on how Lido should respond to the changing market trends, which aspects should actively seek change, and which aspects should remain true to their original intentions.

This article will primarily focus on the second challenge mentioned by Hasu, specifically how Lido should address the "vampire" attacks from Restaking. As for the first challenge, since the Ethereum Foundation has yet to reach a consensus on whether to change the mainnet staking incentives, that proposal is still in the research and discussion phase. Hasu also believes that there will not be significant progress on this proposal for at least the next 12 months, so this article will not elaborate further on that. Readers interested in this part can go directly to the forum to read the original text.

Below is Hasu's original content (all from Hasu's first-person perspective), compiled by Odaily Planet Daily.

Lido and Restaking

Restaking is a new economic model that allows the same collateral to be used across multiple validation services (referred to as AVS in the context of EigenLayer), thereby improving capital efficiency. However, new slashing conditions also introduce corresponding risks. For instance, some ETH can be used both as staking assets for Ethereum PoS validation and to run a data availability node (like EigenDA).

Last October, when Lido formulated GOOSE, I discussed the narrative of Restaking. At that time, my view was that this indeed represents a promising underlying technology, but it may take several years to fully mature. Due to the existence of additional slashing conditions, Restaking brings new risks, but the returns from AVS services were negligible at the outset.

However, the above analysis overlooked a possibility: EigenLayer could hype the narrative during the pre-launch phase, using incentive subsidies to attract capital inflows early. At the time of writing, users have deposited approximately 5 million ETH (worth about $15 billion) into EigenLayer, with most of these deposits coming in even before the launch of AVS services. Additionally, liquidity restaking protocols (LRT) surrounding EigenLayer and other AVS partners also have their own subsidy plans, further boosting the incentives for the Restaking narrative.

While these subsidies are bound to be unsustainable in the long run, the current situation is that a large number of staking users have begun to choose the higher yields of EigenLayer + LRT over the higher security and network effects of stETH.

In response to this situation, I will propose updates to GOOSE from the following three aspects.

stETH should continue to exist as LST and should not be transformed into LRT

Although the narrative of Restaking / LRT is currently very popular, I still believe that stETH should not be transformed into LRT for two reasons.

First, as mentioned in the original GOOSE, it is expected that more institutional capital rather than retail capital will join Ethereum in the next three years. If the staking layer of Ethereum wants to maintain sufficient decentralization, it will be crucial for Lido or other decentralized staking protocols to win the favor of institutions. From my personal experience, the higher risk and actively managed nature of LRT do not align with institutional risk preferences. For stETH, the accumulation of massive funds will make it the safest and most liquid LST, and transforming it into LRT and increasing additional risks would undermine this foundation.

Second, while LRT can offer higher yields, its nature is closer to tokenized deposits in mutual funds or lending markets priced in ETH. The key attribute of liquid staking is that it is a commoditized software product, but for LRT, most people in the market may find it difficult to match their risk and return preferences. Therefore, LRT is unlikely to achieve significant network effects and deep liquidity, which will further limit its adoption. Additionally, the actively managed characteristics of LRT may lead them to be more easily viewed as regulated financial services.

However, Lido should remain open to the possibility of building additional products (like LRT) on top of stETH, as long as the market demand for such products aligns with Lido's vision. Nevertheless, stETH itself, as the cornerstone of Lido, should always remain as LST.

Seek staking services that can isolate slashing risks, such as "pre-confirmation"

Setting LRT aside, we can also explore deeper use cases for stETH around validator services for two reasons.

• First, AVS can be roughly divided into AVS that require validators and ASV that do not require validators, the latter of which can operate based on any type of collateral.
• Second, not every validator service needs a slashing mechanism to operate; in other words, slashing risks can be isolated to avoid affecting stETH holders.

I believe Lido should continue to be at the forefront of defining "what staking is" and actively explore validator services that contribute to Ethereum's scalability or security vision, thereby gaining support from the Ethereum community.

In 2022, Lido became the first staking protocol to commit to using mev-boost (off-protocol PBS) across all nodes, achieving a good balance between MEV maximization, node selection, and censorship resistance, positively impacting the staking services across the industry.

Today, running mev-boost has become a routine part of staking operations, indicating that the definition of "what staking is" can extend to more additional services.

In my view, "pre-confirmation" will be the next widely adopted validator service after mev-boost (although I expect they will evolve rather than replace mev-boost). "Pre-confirmation" allows validators to commit to including an additional transaction outside of all transactions in the current block, enabling faster sorting of Rollup or DEX transactions (compared to the next block time of 12 seconds), thus improving user experience, security, and interoperability.

Lido should become a leader in "pre-confirmation" services and start seeking partners. Additionally, it should achieve this goal by using dedicated funds set up for each new service, rather than opting for solutions that would impose additional risks on stETH holders.

Promote stETH to become the top collateral in the Restaking market

In addition to exploring validator services that align with Ethereum's vision internally (like "pre-confirmation"), becoming the top collateral for various AVS will also be an opportunity for stETH, whether these AVS do not require validators or cannot be built within the protocol due to excessive risks or misalignment with Ethereum's vision.

This choice aligns with the fundamental principle of "maintaining stETH as the safest and most Ethereum-aligned LST." Lido should not enter the realm of active risk management but should find ways for staking users to choose higher risk/return models through methods like depositing stETH into Restaking protocols or AVS.

This requires building a thriving application and partner ecosystem around stETH, similar to what Lido achieved through integration into the Ethereum DeFi and broader CeFi space, which falls under the category of ecosystem building. It also necessitates Lido to gain a deep understanding of the AVS and LRT ecosystems, build connections with key players in the system, and coordinate incentives through collaboration.

Given Lido's historically poor performance in strategic partnership negotiations, I recommend creating a new ecosystem building team within Lido for this purpose.