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Restaking: Adding Token Utility

May 28, 2023 - 8 min read

Restaking effectively re-activates previously-staked tokens for scaling Web3 applications even further than previously imagined.

restaking

Perhaps the most eloquent and groundbreaking achievement of blockchain technology and related Web3 applications has been the crowdsourcing and broad cooperation of decentralized networks to recreate property rights in the digital realm. That is to say, the crowning jewel of our development and adoption of Web3 has been the decentralization of finance. That, and the knock-on effects of shared ownership, or stake, in that financial system. 

However, that is not news to many of our readers, as we’ve all heard the term DeFi enough times that it almost seems like it’s becoming stale antiquated. Perhaps low resolution is a better way to describe it, since a variety of tokens and use cases has made DeFi a far more nuanced landscape to describe nowadays.

Nevertheless, the way in which decentralized networks of independent nodes maintain shared ledgers and vote on new additions to them is still undergoing exploration and development in search for the safest and most efficient way to do it at scale. Without scalability, any project inherently limits its future and begs the question as to why we would accept such conditions.

This brings us to the concept of restaking, a novel cryptographic primitive which may serve to liquify capital markets in the digital asset space in ways which could accelerate the development and adoption of Web3 in the mainstream zeitgeist. The concept was first introduced as a way to add utility to previously staked Ethereum tokens.

While this is a welcome advancement in Web3 utility, the cost of using Ethereum simply cannot be ignored. The most elegant solution is often the most efficient, and this should translate to affordable fees for everyone involved in order to justify the adoption of Web3 and abandoning archaic, legacy systems. However, before we introduce the benefits of restaking, let’s first review a few fundamentals of cryptoeconomics for a little context.

Keeping Nodes Honest with Proof of Stake

Having a stake in something means that one has a vested interest in the well-being of a given organization or enterprise. Proving that one has a large stake is how developers arrange the cryptoeconomic incentives of their protocols to align with their desired outcomes. That is, how do devs set up parameters in such a way as to reward honest participation and dissuade dishonest or Byzantine behavior

Staking describes the deposit of digital assets into smart contracts as collateral in order to participate in the consensus mechanism of a Web3 protocol. Staking is how proof-of-stake (PoS) blockchains protect against Byzantine node behaviors on their networks. 

Traders and self-described “crypto degens” often go to great lengths to identify protocols which offer higher staking yields in order to maximize their returns. This can be accomplished by agile stakers as they look for special introductory yield offerings and pile into those staking contracts with the intent to move them when higher yields can be found elsewhere.

Proof-of-stake
The staking mechanism rewards participants for validating transactions, aggregating data, and maintaining the publicly shared ledger.

Validators are obligated to hold a financial “stake” in PoS networks in order to participate in the voting process each round as new blocks are added. Validators are commonly rotated to produce blocks, typically based on a stake-weighted randomness algorithm. By posting additional funds to stake, validators increase their chances to be selected as block leader during the addition of new blocks of transactions, earning them higher returns on their stake.

Staking also facilitates the provisioning of liquidity for dApps, incentivizes honest node behaviors, and voting power when it comes to on-chain governance. Staking has become popular for its distribution of token rewards to stakers in exchange for their participation in the blockchain’s functionality and key services. It might also be used for communities to crowdfund infrastructure projects or perhaps be used for the decentralized administration of public funds for similar purposes.

Delegated Proof of Stake

DPoS is arguably a more centralized iteration of the standard PoS approach, especially as time increasingly passes and the network scales. In DPoS networks, token holders delegate their voting responsibility (stake) to a validator pool, which is then collectively responsible for validating and appending new blocks. 

Typically, only a limited number of delegates are selected to validate the next proposed block, so some delegates might not participate in every block validation (and therefore are not rewarded). Since the number of validators participating in each round is limited, DPoS networks tend to reach consensus more quickly.

“According to DPOS proponents, these mechanisms are more democratic and smaller power distances, allowing for more distributed access to the consensus and rewards process.”

Delegates are often chosen based on their reputation as well as the amount of tokens staked, though parameters are adjusted on a case by case basis. Byzantine behavior results in slashed stakes, a harmed reputation, and/or decreased odds of being selected as block leader in subsequent rounds of consensus.

DPoS is faster and more efficient than PoS, but it could still lead to a small group of delegates holding too much influence over the network and its governance. In response to this, networks like Cardano have implemented certain parameters which disallow validator pools from growing too large, effectively forcing them to break up and decentralize via crypto-economic incentives

According to DPOS proponents, these mechanisms are more democratic and smaller power distances, allowing for more distributed access to the consensus and rewards process. This results from DPoS placing an increased weight on earned reputations as honest validators instead of oligarchic powers resulting from simply having staked more wealth than others.

An Introduction to Restaking

Restaking is essentially the process of re-staking tokens that have already been staked. That is, restaking is essentially accomplished via smart contract primitives in which token stakers can repurpose their staked tokens towards the provision of crypto-economic security for other protocols on a Layer 1 network. Ultimately, restaking allows staked tokens to serve as additional stake to provide validation services beyond just the parent blockchain itself. 

Restaking involves utilizing staked tokens and staking them again on middleware/dApps, thus the prefix re-. While this provides the flexibility for additional functionality with regards to token utility, staking nevertheless exposes the originally-staked tokens to additional slashing conditions. If you were waiting for the catch, that’s it. On the other hand, restaking allows for the originally staked tokes to generate additional yield for the restaker.

restaking simple
Before restaking, tokens which were staked on the consensus layer were only used for the functionality of applications on it. With restaking, tokens can be restaked and deployed for a variety of services by taking on some additional slashing risks.

By restaking, PoS blockchain validators can provide additional validation services like oracles, bridges, verifiable random functions, and much more- all without having to unstake the original tokens. This sort of programmability will accelerate development within the ecosystem by freeing up illiquid capital for multiple and simultaneous applications (and compounded yields). 

Furthermore, restaking doesn’t incur any significant marginal cost of capital for validators aside from that which would already be incurred from the originally-staked tokens. In fact, staking liquifies already-allocated assets and then pooling them again via restaking significantly increases the original capital’s efficiency. Of course, this is done mainly by leveraging the core trust that the Layer 1s provide and the robustness of their security guarantees.

Unlocked Opportunities and Key Takeaways

By implementing a secure pathway for community participants to restake their staked tokens, we open up avenues for additional utility. That is, tokens that would otherwise be illiquid, though nevertheless serve an important function in the operations of the blockchain’s consensus layer, may now be deployed in service of supporting additional DeFi services. 

While restaking doesn’t fundamentally make the staked tokens more liquid per se, it undoubtedly augments a participant’s ability to scale their footprint within the network and generate additional services (and yields) for themselves, the network, and other stakeholders. It is also a major breakthrough in scaling Web3 ecosystems. 

This adds major value for protocols which can successfully implement restaking. For example, protocols implementing restaking will get a cut of the yield generated by restaking. By restaking tokens alongside a paired native sidechain token, users can guarantee the security of both the originally-staked tokens as well as their own token community.  

This provides long-term upside exposure for restakers as they generate additional yields on their chosen protocol via the corresponding native tokens, benefitting all parties involved by simply leveraging the concepts of staking and slashing, compounding token utility, DApp composability, and price exposure. Consequently, network scalability is significantly improved, boosting the velocity of capital via the far more efficient use of staked assets.

Restaking is thus a promising cryptographic primitive which will likely be applied in many ecosystems as stakeholders look to provide additional services for their users and developers. Keep an eye out for more news on restaking as this is set to become a staple ingredient for any cutting edge Web3 stack.

Supra has published multiple whitepapers, and have more on the way. To keep up with the latest offerings at Supra, we recommend you check our docs page on a regular basis as we’re adding more quite frequently.

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