When all coins are re-staked, what is guaranteed is not security but profit

Deep Tide TechFlow
2024-09-14 12:55:26
Collection
Re-staking allows holders of higher-risk preference crypto assets to earn additional returns.

Author: Marco Manoppo

Compiled by: Shenchao TechFlow

Hello everyone,

It's been a while since I last shared these thoughts with you. Recently, I've been contemplating the future of restaking, as it has been a dominant topic in the market for the past 18 months.

To simplify the discussion, I may refer to EigenLayer or AVS in this article to describe the broader concept of restaking, but I use this term broadly to encompass all restaking protocols and the services built on top of them, not just EigenLayer.

The concepts of EigenLayer and restaking have opened Pandora's box.

Conceptually, extending the economic security of a highly liquid and globally accessible asset makes a lot of sense. This allows developers to create applications on-chain without needing to establish an entirely new ecosystem for a project-specific token.

Source: EigenLayer White Paper

Ethereum (ETH) is regarded as a premium asset, based on the premise that:

  1. For developers, leveraging its economic security to build products is reasonable, as it not only enhances security and reduces costs but also allows the product to focus on its core functionalities.

  2. It provides end-users with a better product experience. However, after 18 months of development since the release of the EigenLayer white paper, the landscape of restaking has changed.

We now have Bitcoin restaking projects like Babylon, Solana restaking projects like Solayer, and multi-asset restaking projects like Karak and Symbiotic. Even EigenLayer has begun to support permissionless tokens, allowing any ERC-20 token to become a restakable asset without permission.

Source: EigenLayer Blog

The market has indicated: every token will be restaked.

The core of restaking is no longer just about extending the economic security of ETH, but about issuing a new on-chain derivative—the restaking token (and the resulting liquidity restaking tokens).

Moreover, with the rise of liquidity staking solutions like Tally Protocol, it is foreseeable that the future of restaking will encompass all crypto tokens, not just limited to L1 assets. We will see stARB restaked as rstARB and then further wrapped as wrstARB.

So, what does this mean for the future of cryptocurrency? What happens when economic security can be extended from any token?

Supply and Demand Dynamics of Restaking

These are the two key factors that will determine the future of restaking.

You could write lengthy posts delving into the complex issues of subjective tokens and human coordination, but that’s a bit beyond my capabilities. If a restaking project is willing to give me some advisory tokens, I would consider writing related content, but I digress.

In the crypto space, there are always two immutable facts:

  1. People always seek higher yields.

  2. Developers always want to create more tokens.

People seek higher yields.

Restaking protocols have the best product-market fit (PMF) on the supply side.

From the lessons of Wall Street predecessors, we see that the cryptocurrency market is rapidly evolving into one that constantly seeks higher risks. An example? Polymarket has already launched a derivatives market specifically for event news. We are all heading towards extremes.

Restakers gain more yield through AVS (services built on restaking protocols). Ideally, developers would choose to build projects on restaking protocols and attract restakers to invest their assets into these projects through incentives. To this end, developers might share a portion of their revenue or reward restakers with their native tokens.

Let’s do a simple calculation:

As of September 7, 2024,

  • There is currently $10.5 billion worth of ETH restaked on EigenLayer.

  • Assuming that most of this restaked ETH is liquid staking tokens (LSTs), they are already generating a 4% annual percentage yield (APY) and hope to gain more yield through restaking.

  • If they want to add an extra 1% APY each year, EigenLayer and its AVS need to create $105 million in value. This does not account for cuts and smart contract risks.

It is evident that if restaking can only bring an additional 1% APY, then the risk-reward (r/r) is simply not worth it. I would boldly say that at least 8% or higher is needed for capital allocators to consider the risk worthwhile. This means that the restaking ecosystem needs to create at least $420 million in value each year.

Source: KelpDAO

Currently, the high yields we see from restaking are primarily driven by the upcoming EIGEN token and the incentive programs of liquidity restaking protocols—compared to actual or expected revenue, these yields seem trivial.

Imagine a scenario where there are 3 restaking protocols, 10 liquidity restaking protocols, and over 50 AVS. Liquidity will be dispersed, and developers (here referring to consumers) will feel confused by too many choices rather than confident in the existing options. Which restaking protocol should I choose? What assets should I select to enhance the economic security of my project? And so on.

Therefore, we either need to significantly increase the amount of restaked ETH or accelerate the issuance of native tokens.

In summary, restaking protocols and their AVS need to maintain supply-side activity through the mass issuance of their tokens.

Developers Want to Create Tokens

On the demand side, restaking protocols believe that developers using restaked assets to drive their applications is more economical and secure than using their own issued dedicated tokens.

While this may hold true for some applications that require extremely high trust and security (like bridging), in reality, issuing their own tokens and using them as incentives is key to the success of any crypto project, whether it’s a chain or an application.

Using restaked assets as an additional feature of the product can bring extra benefits, but it should not dictate the core value proposition of the product, nor should it be designed to undermine the value of its own token. Some, like Kyle from Multicoin, even take a firmer stance, arguing that economic security is not a key factor driving product growth at all.

Integrated Kyle e/acc: "Multicoin may be the largest holder globally, with its market-cap-based tokens potentially qualifying as AVS.

Including Livepeer, Render, Helium, Hivemapper, Pyth, Wormhole, LayerZero.

There are also some other tokens that are not yet circulating or have not been announced.

None of these founders, or any of the 200+ founders in our portfolio, have ever called me and said, 'Kyle, I think one of the main factors limiting our growth is the quantity and quality of liquidity supporting the crypto-economic security of our system.'

Not once."

To be honest, it’s hard to refute his point.

I have been in the crypto space for 7 years and have never heard other heavy crypto users or industry friends—those who store most of their net worth on-chain—tell me that they chose one product over another because of its economic security.

From an economic perspective, Luca from M^0 wrote an excellent article explaining that due to market inefficiencies, projects using their native tokens may be cheaper than using ETH.

When are tokens issued? To be honest, whether these tokens actually count as securities, have some governance function, utility, economic value, or scarcity claims, project-specific tokens have always been seen by investors as a symbol of project success or notoriety. Even without any residual financial or control claims, this market sentiment persists. In a small industry like crypto, tokens are often more related to narratives or anticipated liquidity changes than to cash flow. No matter how we look at it, it is clear and well-documented that in the crypto space, the stock proxy market is far from efficient, and token prices above rational levels translate into capital costs for projects below rational expectations. **Lower capital costs often manifest as lower dilution in venture rounds or higher valuations compared to other industries. It can be argued that due to the inefficiencies of market layers in capital markets, native tokens actually provide developers with lower capital costs than ** $ETH.**

Fairly speaking, EigenLayer seems to have foreseen this situation and designed a dual-staking system. Now, its competitors even promote multi-asset restaking as a differentiating marketing point.

If all tokens will be restaked in the future, what is the real value of restaking protocols to developers?

I believe the answer lies in insurance and enhancement.

The Future of Multi-Asset Restaking Will Bring Diversity of Choices

If projects want to improve their products and achieve differentiation, restaking will become an integrable supplementary feature.

  • Insurance: It provides additional assurance that the products offered can operate as advertised, as more capital is backing them.

  • Enhancement: The best strategy for restaking protocols is to reshape the entire narrative and persuade developers to include restaking technology elements by default in any product, as this will make everything better. Oh, are you an oracle susceptible to price manipulation attacks? What if we are also AVS?

Whether end-users care about this remains to be seen.

All tokens will compete to become the preferred restaking assets, as this gives them perceived value and reduces selling pressure. AVS can choose from various types of restaking assets based on their risk preferences, incentive mechanisms, specific features, and the ecosystems they wish to align with. This is no longer just a core economic security issue, but about insurance, restaking, and politics. As every token gets restaked, AVS will have many options.

  • What assets should I choose to ensure economic security, what kind of political alignment do I want, and which ecosystem is best suited for my product?

Ultimately, this decision depends on what can provide the best functionality for my product. Just as applications are deployed across multiple chains and eventually become application chains, AVS will ultimately leverage the economic security of those assets and ecosystems that bring the most benefits, sometimes even using multiple at once.

Jai's tweet succinctly summarizes most developers' views on the advantages of restaking.

It must be mentioned that we have seen some projects, like Nuffle, working to address this situation.

Jai Bhavnani: "Jito announced support for restaking today. Now we have Eigen, Karak, Jito, Symbiotic, and possibly more. How long until we have an aggregator that AVS can connect to for the most economical security? And can actively rebalance across all restaking platforms based on cost?"

Conclusion

Crypto Twitter tends to think in absolutes. In reality, restaking is an interesting foundational tool that expands developers' choices and influences on-chain markets by issuing a new type of derivative, but it is not a revolutionary change.

At the very least, it allows risk-seeking crypto asset holders to gain additional yields while expanding technical choices and reducing the engineering burden on developers. It provides developers with a supplementary feature and creates a new derivative market for on-chain asset holders.

Many assets will be restaked, providing developers with multiple options when integrating restaking assets. Ultimately, when developers choose a restaking asset ecosystem, they will select the ecosystem that brings the most benefits to their products, just as they would when choosing a new chain for deployment, sometimes even opting for multiple.

Tokens will compete to become restaking assets, as the new derivative market created by restaked assets will benefit these tokens, enhancing their widespread usability and perceived value.

This has never been about economics or security, but rather about insurance, restaking, and politics.

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