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The Evolution of Staking in Web3.0: From Staking to Self-Restaking Liquid Pools and Eigen Layer
In the era of Web3.0, where decentralization and blockchain technologies reign supreme, staking mechanisms have undergone a remarkable evolution. Let's trace this evolution together.
Genesis of Staking in Web3.0: Beyond Proof-of-Work
Web3.0 marks a paradigm shift from traditional web architectures, emphasizing decentralization and blockchain technologies. Staking, initially introduced as a key element of proof-of-stake (PoS) and delegated proof-of-stake (DPoS) consensus algorithms, became a cornerstone for participants to validate transactions, secure networks, and earn rewards by locking their cryptocurrency assets, with the solid ide.
As the Web3.0 ecosystem expanded, staking platforms emerged as intermediaries, simplifying the staking process for users. These platforms provided a user-friendly interface, enabling participants to stake their assets without the need for an in-depth understanding of the underlying blockchain infrastructure and without the need to code or to become a direct operator on those chains.
The advent and progress of decentralized finance (DeFi) brought forth the concept of liquidity pools. Users could now contribute their assets to smart contracts, providing liquidity for decentralized exchanges and earning a share of transaction fees. This innovation introduced a dynamic element to staking, allowing participants to engage in the broader DeFi ecosystem.
The first step - Liquid Staking
Liquid staking, also known as liquid proof-of-stake (liquid PoS), is a concept in the blockchain and cryptocurrency space that allows users to "stake" their tokens to participate in a proof-of-stake (PoS) consensus mechanism while still maintaining the liquidity of their staked assets. To understand this better, let's break down the key terms:
1. Staking: In a proof-of-stake blockchain network, validators (or nodes) are chosen to create new blocks and validate transactions based on the number of tokens they hold and "stake" as collateral. Staking involves locking up a certain amount of cryptocurrency tokens as collateral to support the network's security and consensus process. Validators who perform their duties correctly are rewarded with additional tokens.
2. Liquidity: Liquidity refers to the ease with which an asset can be converted into cash or other assets without causing a significant price change. In the context of cryptocurrencies, maintaining liquidity means being able to quickly buy or sell tokens without causing drastic price fluctuations.
In a traditional staking setup, when users stake their tokens, those tokens are locked up for a predetermined period. This lack of liquidity can be a drawback, as users are unable to use or trade those tokens during that time. Liquid staking addresses this issue by allowing users to receive "liquid staking tokens" (LSTs) in exchange for their staked tokens. These LSTs are representative of the staked tokens and can be freely traded on exchanges or used in other DeFi (decentralized finance) activities without affecting the staker's participation in the staking process.
The next step - Eigen Layer: New Paradigm?
EigenLayer is a protocol built on Ethereum that introduces restaking, a new primitive in cryptoeconomic security. This primitive enables the rehypothetication of $ETH on the consensus layer. Users that stake $ETH can opt-in to EigenLayer smart contracts to restake their $ETH and extend cryptoeconomic security to additional applications on the network. Part of EigenLayer’s potential, therefore, lies in its ability to aggregate and extend cryptoeconomic security through restaking and to validate new applications being built on top of Ethereum.
The Restaking Mechanism
EigenLayer's restaking mechanism leverages two fundamental ideas to overcome Ethereum challenges, namely pooled security and free-market governance.
First, restaking creates an optimized system of pooled security. Staked $ETH that used as collateral to secure Ethereum, and is otherwise locked into that singular function, is repurposed to provide validation services to other protocols. Again, this is done through an opt-in process on EigenLayer.
Once users opt-in, they agree to new slashing conditions to be imposed above the consensus layer in return for additional rewards. EigenLayer enforces this by obtaining the rights of the staked $ETH's withdrawal credentials. In addition, participating validators grant the ability to impose new slashing conditions on their stake. So stakers that opt-in to EigenLayer earn additional rewards on their staked $ETH, while the validators that participate gain additional revenue from the AVSs that utilize their services. There is thus a stronger incentive in-to restaking and in-to acting honestly, since on-chain verifiable slashing can be applied to capital.
Second, the notion of free-market governance allows protocols to actively control the amount of pooled security consumed while giving validators the same license over how much pooled security is supplied. So EigenLayer creates a competitive market for pooled security that is dictated by supply and demand. A key takeaway here is that validators are by no means required to provide pooled security without agency. Instead, they have the ability to determine their own preferred set of risk and reward parameters before providing services to a given protocol.
the EigenLayer’s idea of “Restaking” also fosters reinforced cryptoeconomic security since it aggregates and consolidates existing security into one place over time. So fragmented pools of capital move towards a more unified pool, making the model much more robust and resistant to financial attack, especially for smaller protocols, since the cost of corruption becomes substantially more expensive
After our presence at the “Staking Summit” in Istanbul, our ongoing commitment to innovation and staying abreast of developments in the Web3.0 landscape spiked up, and our company is keenly exploring the potential of the groundbreaking "Eigen Layer" restake technology. we are actively monitoring its progress and considering participation in upcoming protocols on the testnet, to venture in new and exciting projects and partnerships, as validators and custodians.
Stay tuned with us!