Restaking is going to cause the next bear market.

Here are some thoughts behind the possibilities of Eigen Layer or Restaking in general going wrong.

Gm Degens

One thing many of you may be familiar with is the rise of Eigen Layer and the concept of restaking. 

Eigen layer have pioneered this innovation which we’re now seeing all over the crypto space. I’ve covered Eigen Layer and the concept of restaking a number of times in both tweets and videos that I’ve posted on YouTube. 

For anyone new to the idea, check out this deep dive which covers everything you need to know.

A quick summary for those interested:

• The Ethereum blockchain is incredibly secure because of the proof of stake system it now adopts. Currently around $120b of ETH is staked. 

• This provides incredible economic security because in order to attack the network, a 51% ownership of the staked amount is needed. This is over $60b worth of asset ownership 

• Whilst the Ethereum network is secure, the protocols and chains built on Ethereum don’t inherit this security and have to spin up their own validators often at the cost of valuable network resources that they could otherwise use elsewhere

• Eigen Layer is pioneering this new concept to solve this by restaking ETH to secure not only the Ethereum network but also the other middleware that’s built on Ethereum. This includes oracles, bridges, data availability layers and even other blockchains. 

• Users will be able to ‘opt-in’ to secure additional middleware layers which will give them the benefit of earning additional rewards and higher yields. 

Liquid Restaking

With Eigen Layer, ETH and liquid staked tokens (LSTs) deposits are essentially locked as a stake. This brings back the question around unlocking liquidity in the same manner as we saw with LSTs. So as you can imagine, we’ve since seen the rise of liquid restaking tokens (LRTs), which act as another layer of composiblity. Users can take these LRTs and use them across DeFi for things like Lending/Borrowing, Collateral, Margin or other strategies across a variety of applications. 

Their growth since inception only a few months back has been incredible as Eigen Layer itself has grown to $12b in FDV and the liquid restaking space growing to $6b and still increasing. Currently the main driver for the growth is likely due to the ‘points’ that can be earned when restaking your ETH. 

Eigen Layer currently offers these points to users who deposited their ETH and LSTs. Liquid restaking protocols have taken it a step further by not only offering Eigen Layer points but also points for their own native platform. 

Here are some of the leading protocols in the restaking space:

Etherfi - The leading LRT protocol with over $3b in TVL, lots of integrations and only just launched its governance token which skyrocketed to $8b in FDV in the first few days.

Kelp - From the guys at Stader Labs, now focusing on being the Lido for the restaking space. Again with over $1b in TVL and many integrations for its rsETH token.

Renzo - Arguably the second largest LRT with its presence across multiple chains including Mode. Recently had their airdrop and had some controversy causing a depeg.

Puffer - An ethereum aligned LRT also growing very fast!

Anyways, why are they going crazy? POINTS
Points mean prizes. Especially when it comes to 0 to 1 innovations in the space like with Eigen Layer.

As we’ve seen many times over the last 12 months, points programmes have been one of the ways to gamify and onboard users to their ‘airdrop campaigns’. Airdrops have been popular for the vast wealth they have made crypto users in this time period and the likelihood here is that users are speculating on some big airdrops coming for the restaking space as a whole. 

So why am I even writing about this? Eigen Layer and restaking sounds so good right?

I think one of the things users are not taking account of are the inherent risks that come with Eigen Layer and Liquid restaking protocols. 

Below we’ll cover some of the things I am particularly worried about. I’ll split them into risks with Eigen Layer and then risks with the current liquid restaking protocols.

Risks with Eigen Layer itself:

• Slashing 

• Unintentional slashing

• Operator collusion 

• Supply and demand mismatch

• Depreciation of current security solutions

Slashing

Slashing refers to the loss of collateral when it comes to ETH staking due to validators verifying incorrect blocks. This in my opinion is a small risk as if you look at all slashing events since Ethereum became proof of stake, the total amount of ETH slashed is very very small.

Unintentional slashing

This is something I think carries a little more risk where slashing events could occur by error or mistake. Eigen layer proposes to solve this by enabling the ability to veto slashing events. This introduces a massive centralisation risk. Who defines what gets vetoed? What if the committee members themselves are bad actors? There is something weird to me about the idea of having a centralised system within a decentralised system - especially when it comes to security.

Operator collusion

Refers to operators teaming up together to steal funds from an AVS. This can be more apparent when you think about how once you have re-staked funds securing not just 1 but 5,6,7 or even 10+ services, the incentive to act maliciously increases. With the same ETH you can attack not just 1 but many other services.

Eigen does try to limit this by restricting the cost of corruption to be proportional to the stake within Eigen Layer.

Risks with the current liquid restaking landscape include:

• Smart contract vulnerabilities

• Blockchain exposure

• Withdrawal risk

• Liquidity crisis

Smart contract vulnerabilities

Refers to exploitations in the code base for these LRT protocols. Hacks aren’t uncommon in crypto and with these LRT protocols reaching billions of dollars of deposits, one exploit could be a massive deal breaker.

Blockchain risk

Refers to an issue on the blockchain level. As we saw with Terra last cycle, now LRTs aren’t based on Ethereum alone. You can bridge them to other chains and with the expansion of tons of new L2 chains, I think as we see more L2s pop up, some of which don’t have the same security as they should, this risk will be important. Especially as LRTs go cross chain which we are already seeing today.

Withdrawal risk

As we’ve seen this week in fact, LRTs at times cannot be withdrawn! This is insane because it means the only way to exit is via the LP which is only a fraction of the total TVL. If a bank run ever comes, you are in big big trouble. Please be aware some of the biggest LRTs today do not enable withdrawals.

Liquidity Crisis

If on chain liquidity is low, which is the case for many of the LRT liquidity pools, if users want to exit (which they can’t because there is no unstaking on many of them), they have to sell via LPs. These make up only a small % of the total LRT TVL and so it can get ugly very quickly if there were to ever be a bank run.

As you can see in the above example, Renzo recently suffered big issues. A liquidity crisis saw 1 ezETH fall to 0.2 ETH, absolutely insane due to the liquidation cascades we had. Now it is almost bag at peg but still trades at over a 2% discount. That should hopefully change as Renzo are introducing withdrawals this month but goes to show the risks users are taking here with LRTs.

All in all, the risks mentioned above are not covered enough by content creators and so I didn’t want to fud anyones bag! I personally hold LRTs myself. I just wanted to make it clear so people really and truly understand the risks they are taking when it comes to use Eigen Layer and LRTs.

Let me know if you have any questions!