The re-staking gameplay has entered the second half. How to leverage LRT and AVS to seize the market?

Original Title: 《Reflections on Restaking》

Authors: Larry Sukernik & Myles O'Neil

Compiled by: Deep Tide TechFlow

"If only you could see yourself in my eyes" --- Lost by Dermot Kennedy

"If only you could see yourself in my eyes" ------ Dermot Kennedy Lost

At Reverie, we spend a significant amount of time researching restaking protocols. For us, this is an exciting investment category because the market outlook is unclear (opportunities often exist in ambiguous markets), and the activity is very vibrant (dozens of projects are set to launch in the restaking space within the next 12 months).

We have made some observations about the trends in the restaking market over the next few years, many of which are newly emerging, true today but may not be tomorrow. Nevertheless, we would like to share some of our preliminary observations on the business dynamics reshaping the market.

Liquid Restaking Tokens (LRT) as Leverage Points

Today, LRTs like Etherfi/Renzo occupy a significant position in the restaking supply chain: they are close to both the supply side (stakers) and the demand side (AVS), placing them in the middle of the transaction. If this continues to develop, it will enable LRTs to

(i) determine their commission rates,

(ii) influence the commission rates of the underlying markets (e.g., EigenLayer, Symbiotic).

Given their strong position, we expect the restaking market to introduce first-party LRTs to control the power of third-party LRTs.

AVS/Restakers as Leverage Points

The best markets in the world have two characteristics: a decentralized supply side and a decentralized demand side. To form an intuition about this, it is necessary to look at the concentration on either side of the market. Imagine a simple apple trading market where the largest apple seller controls over 50% of the apple supply. In this case, if the market operator decides to raise the market commission from 5% to 10%, the large apple seller might threaten to move their business elsewhere. Similarly, on the demand side, if the largest apple buyer controls over 50% of the apple demand, they can threaten to use another market (or buy directly from apple suppliers) if the market operator increases the market commission.

Returning to the restaking market, if the final market structure of the restaking market is concentrated on the AVS side (the top 10% of AVS accounts for over 50% of revenue) or the restaker side (the top 10% of restakers account for over 50% of deposits), then the natural result is that the market reduces its ability to extract commissions for itself (thus should have a lower valuation).

While there is not enough data for a rigorous analysis, our intuition is that power laws will apply here as well: large AVS will capture a significant portion of the total payment volume, thereby having bargaining power over the commissions the market ultimately wants to charge.

Competing for Exclusive AVS

From the perspective of each restaking market, any opportunity to do something that competing restaking markets cannot do is worth seizing. One of the simplest differentiation methods for restaking markets is to provide exclusive access to AVS for restakers—whether first-party like EigenDA or third-party obtained through exclusive partnerships. This conceptually resembles Sony developing games exclusive to the PS5 to drive hardware sales.

Due to these dynamics, we expect restaking markets to introduce more first-party AVS and/or enter into exclusive agreements with third-party AVS. In short, the coming months will see a battle for AVS.

AVS Subsidies

AVS need to pay operators/restakers for the services provided, which essentially means AVS need to be prepared to pay with their native tokens, ETH/USDC, or possibly points/future airdrops. However, since most AVS so far are early-stage startups without tokens, large balance sheets, or well-designed points programs/airdrops, signing on operators/restakers has proven to be a cumbersome process (most EigenLayer partnerships are negotiated in private custom contracts). Simply put, this is a situation where a customer wants to purchase a service, may have the ability to pay, but does not yet have the funds.

To facilitate business development, it is highly likely that restaking markets will "prepay" the payments to launch operators/restakers, whether through their native tokens, balance sheet assets, or possibly by issuing "cloud points" for AVS to use with operators/restakers. In return for the prepaid funds, you would expect AVS to commit to airdropping/distributing tokens to the restaking market. Alternatively, the restaking market could prepay this amount to AVS to persuade them to choose you over competing restaking markets.

In short, we expect the restaking market to engage in fierce competition over the next 12-24 months by subsidizing AVS expenditures. Similar to the market dynamics of Uber/Lyft, the restaking market with the most funds/tokens may ultimately become the winner.

White-Glove Service

Moving from "I want to launch an AVS" to "actually putting it into production" is much more difficult than it appears, especially for small teams with limited R&D bandwidth. For example, the questions the team needs to address include: How much security should I purchase, for how long should I purchase it, how much should I pay operators/restakers, what should I cut, and by how much?

Best practices will eventually emerge, but until then, the restaking market needs to guide AVS teams through these issues hand-in-hand (notably, EigenLayer has yet to establish a payment or reduction mechanism). To this end, we expect successful restaking markets to resemble enterprise sales businesses, providing customers with white-glove integration/service assistance to help them use their products.

Graduating from the Market

An interesting dynamic that may emerge is that the most successful additional validation services (AVS) in the restaking market, as projects grow and mature, may eventually leave the restaking market and manage their own security and validator networks.

Currently, restaking proposals are best suited for small projects that:

(i) lack the time/funds/brand/relationships to recruit a validator set,

(ii) do not have highly valued tokens to secure the network.

But as projects grow, their next step may be to leave the restaking market, recruit their own validator set, and secure it with their (now higher-valued) tokens.

Conceptually, this resembles dating market dynamics (like Hinge, Tinder), where the most successful customers eventually churn out of the market. However, for market operators, customer churn is bad news because you lose a customer (which is also one reason why dating market transaction valuations/multiples are lower than those of markets with repeat usage/low churn rates).

One-Stop Crypto SaaS

To illustrate this point, let’s first look at the history of software: Cloud providers like AWS have made it easy for developers to access everything needed to develop applications or web services (such as hosting, storage, and computing). By significantly lowering the cost and time required to develop software, a new class of web services has emerged that offers more specialized services. The combination of first-party cloud services with a plethora of "microservices" offered within the platform allows cloud providers to meet all needs beyond core business logic in a one-stop shop.

Restaking markets like EigenLayer aim to create a similar batch of microservices for Web3. Before EigenLayer, crypto microservices had the option to either fully centralize their offline components (passing that risk onto their customers) or bear the cost of launching a set of operators and economic shares to purchase security.

Restaking markets have the potential to break this trade-off of microservices—if everything works as expected, you will be able to prioritize security without compromising on cost and time to market.

Suppose you are developing a cheap, high-performance zk-rollup. If you go to a restaking market like EigenLayer, you will have multiple core service options, such as DA and bridging, for easy onboarding. In the process, you will also see many other AVS microservices that you can integrate with.

The more microservices offered by the restaking market, the better the customer experience, as instead of evaluating the service capabilities and security of dozens of independent providers, applications will be able to purchase all necessary services from one restaking market. Coming for service X, staying for services Y and Z.

Certain AVS Will Have Network Effects (e.g., preconfs)

So far, restaking use cases have primarily focused on exporting Ethereum validators and economic shares. However, there is another class of "inward" restaking use cases that can add functionality to Ethereum's consensus without changing the protocol.

The idea is simple—you allow validators to make additional commitments on the blocks they propose in exchange for payment, and if they fail to fulfill these commitments, they maintain their accountability through reductions. We suspect that only a few types of commitments will have enough demand to attract high levels of participation, but the value flowing through these commitments has the potential to be enormous.

Unlike "external" restaking use cases, the effectiveness of this type of use case is directly related to the participation of validators. That is, even if you are willing to pay to be included in a block, if only 1 out of 10 validators chooses to join this commitment, it is not very useful.

If every validator chooses to join a given commitment, then the guarantees behind it will be equivalent to the guarantees provided by the Ethereum protocol itself (i.e., valid blocks). Based on this logic, we can expect this category to have strong network effects, as users of AVS will benefit from each marginal validator choosing to join the commitment market.

While this AVS category is still developing, the logical distribution channels to facilitate these use cases are through Ethereum client sidecars and plugins (like Reth). Moreover, similar to proposer-builder separation, proposers may outsource this work to professional actors in exchange for revenue sharing.

What remains unclear is what form these AVS will take. While an entity could create a universal market applicable to any type of commitment, we suspect it is more likely that we will see some specialized participants emerge based on the source of demand (e.g., interoperability of L2 with L1 DeFi driven demand).

Conclusion

For students of business strategy, the business dynamics of the restaking market are a treasure trove of content worth exploring in depth.