What is Restaking and Why Should You Care About It?

In recent years, staking has become one of the most popular ways for crypto investors to earn passive income. But as with the wider Web3 space, this scene has rapidly evolved. 

While staking involves users locking up digital assets in a blockchain, wallet or protocol to earn returns, restaking is a different proposition, one that promises to enhance capital efficiency while unlocking lucrative DeFi earning possibilities. 

Read on to learn whether restaking is something you should be taking a serious look at.

Restaking: How It Works

Sometimes known as liquid staking/restaking, restaking is essentially an advanced form of crypto staking that enables users to utilize their staked assets in other DeFi dApps while continuing to earn staking rewards. 

On the face of it, this doesn’t make any sense: how can you rehypothecate your staked assets if they’re, well, staked? It would be like loaning a buddy your last $100, then going out and immediately spending a hundred bucks on groceries.

Unlike in traditional staking, where locked assets cannot be used for other purposes, staking involves the use of derivative tokens which represent the underlying assets; after being issued to stakers, these can be used to take advantage of opportunities offered by different DeFi protocols for lending, borrowing, or yield farming.

The underlying staked assets, of course, continue to generate rewards while any additional revenue produced through DeFi activities is separate. Thus, savvy users can participate in restaking to maximize their returns while also securing a protocol or network they support.

In recent years, restaking has become the second-largest DeFi sector on Ethereum.

Restaking Challenges and Considerations

Restaking is clearly appealing because of the “have your cake and eat it” value proposition. But there are some serious challenges and considerations that would-be stakers would be wise to heed. Most obviously, the general risks associated with using any decentralized staking protocol that is potentially vulnerable to smart contract bugs or exploits. 

The liquidity of derivative tokens can also vary, thus affecting users’ ability to exit positions or realize gains quickly. Moreover, staking adds extra layers of complexity to what is, after all, an already fairly specialist endeavour. It’s not something novices should blindly start experimenting with. Indeed, it’d be analogous to a gambling noob entering a casino and taking the first free berth at the blackjack table.

Some networks and protocols also impose slashing policies which effectively allow them to ‘slash’ restakers’ stake for perceived misbehavior. In fact, there are several restaking systems that demand restakers surrender control of their underlying stake – which can itself also be slashed.

Restaking with SSV 

SSV is a scalable staking infrastructure dedicated to Ethereum staking and restaking. One of the biggest players in the overall DeFi landscape, it boasts over 800,000 ETH staked on its platform (TVL: $2.9 billion), providing yield opportunities for over 25,000 validators, a figure made up of restaking service providers, pools, and individual ETH holders.

SSV, which stands for Secret Shared Validator, allows for the splitting and distribution of a validator key into multiple KeyShares, making it possible to run an Ethereum validator across multiple non-trusting nodes.

Interestingly, the network protects users against the aforementioned risk by using Distributed Validator clusters that are resistant to nose operator faults, since they require a specific signature threshold. Because users never have to hand over their validator key to any operators, it is considered a highly secure solution.

The Future of Restaking

The future of restaking looks promising. In a relatively short time period, it has become a DeFi sensation with protocols attracting enormous inflows as well as substantial VC capital. So, how can we expect this space to evolve and mature in the years ahead?

Efficiency is a watchword of crypto: developers are continually working on ways to make processes faster, simpler, and more accessible. As such, we are likely to see the emergence of enhanced cross-chain solutions that allow restakers to restake across different chains. Advanced risk management protocols and insurance mechanisms are also likely to have a moment in the sun, as well as solutions that completely abstract the complexity of restaking.

It is not out of the question that tradfi institutions will gradually gravitate towards restaking in order to generate higher yields on their crypto portfolios. While some have espoused the claim that restaking is unduly risky, Andrew O’Neill, digital assets analytical lead at S&P Global Ratings, recently said there was no “meaningful risk of contagion from restaking issues to traditional financial markets.”

Ultimately, restaking remains a relatively new phenomenon, and as such its long-term prognosis is impossible to assess – although it certainly has a great deal of momentum. 

By enabling staked assets to be rehypothecated and deployed in DeFi, restaking has become the talk of the town and caused an ocean of liquidity to flow into the web3 ecosystem.

As with any emerging technology though, it’s important for users to approach restaking with a degree of caution. Follow best practices by familiarizing yourself with the risks, researching any yield-bearing protocol you hope to use, and staying abreast of regulatory developments.