Original source: Binance Research Institute
Introduction
In 2024, the rehypothecation market is on the rise, rapidly moving from an emerging narrative to an innovative reality. So far, Ethereum re-staking has dominated the narrative, mainly due to the fact that EigenLayer, who pioneered this sub-section, is based in Ethereum.
EigenLayer is the most mature project in its restaking roadmap, accounting for the majority of the total value locked (“TVL”) in the restaking market.
Nonetheless, other projects are also working on developing re-staking or re-staking related projects on multiple chains, some of which are already online and some are about to be online. These projects include Picasso (Solana re-pledge) and Babylon (Bitcoin pledge), etc. The integration of the Cosmos Application Chain with EigenLayer is also a hot topic, and AltLayer has expanded its rollup-as-a-service (“RaaS”) protocol to include re-staking rollups (1). In addition, Liquidity Collateralized Tokens (“LST”) have achieved good development in 2023, and Liquidity Re-collateralized Tokens (“LRT”) have appeared this year.
In this report, we first provide a brief introduction to the basics of re-staking, and then take a detailed look at the development of EigenLayer and its ecosystem, re-staking on other chains, the liquidity re-staking protocol, and LRT. At the end of the report, we looked into the future of re-staking.
Review of re-staking knowledge
Before delving into re-staking, let’s review what “staking” is
At the most basic level, we can define a blockchain as an immutable transaction ledger with a requirement to track valid transactions in chronological order. To do this, a blockchain (“chain”) must perform four key functions:
1. Consensus: Verifiers or miners reach an agreement on transaction ordering, such as Proof of Stake (PoS), Proof of Work (PoW), etc.
2. Data availability: Ensure transaction data is viewable by the entire network
3. Execution: Process transactions to update blockchain status
4. Settlement: resolve disputes, verify transaction validity and ensure final confirmation of transactions
Consensus is sometimes considered the most basic of these functions and is crucial to the immutability of the chain. Essentially, under the Proof of Stake (PoS) consensus mechanism, there is a group of validators on the chain who propose, verify, and add new blocks to the blockchain. To become a validator, you must stake the native tokens on the chain. In return, validators will receive staking rewards in the form of new tokens and fees. However, if a validator behaves inappropriately or engages in any form of malicious behavior, it is likely that they will be subject to Forfeit”, that is, part of its pledged tokens will be confiscated.
The penalty mechanism incentivizes validators to run the network correctly. Additionally, the more validators that join (and therefore the more tokens that are staked), the harder it becomes to attack the network. For example, a typical way to attack a blockchain network is to try to gain control of a majority (51%) of the staked tokens in a proof-of-stake system, giving them the power to propose malicious blocks or reorganized blocks. The more tokens staked or the higher the value of the staked tokens, the higher the cost and difficulty of conducting such an attack. This is the fundamental reason why staking helps secure the blockchain.
How does re-staking work?
Re-pledge goes a step further, allowing users to pledge assets multiple times on their original blockchain and other protocols. For example, EigenLayer enables Ethereum stakers to repurpose their staked ETH to protect other applications built on the network. Stakeholders can choose the additional services they want to receive with their currently staked ETH and earn additional revenue from them. In return, they agreed to grant EigenLayer additional slashing rights on their staked ETH (in addition to the slashing rights of the underlying Ethereum staking contract).
Essentially, the re-staking protocol provides a set of smart contracts that allow staked tokens to be re-utilized and re-staking (i.e. re-staking), thereby providing security for applications outside the original blockchain. sex.
What problem does re-staking want to solve?
What re-pledge wants to solve is the problem of blockchain security and decentralization. Fundamentally, if builders want to create a decentralized network, they need to build some form of cryptoeconomic security. For example, in the Ethereum network, this is created by staking ETH tokens. However, if other services follow suit, the efficiency may be very low. For example, there are huge capital costs to build a new proof-of-stake (“PoS”) network like Ethereum or BNB Chain.
Assuming a project implements this security feature by issuing a token; then they must convince ecosystem participants to bear the price risk of staking this new token, as well as the opportunity cost compared to just staking ETH.
Additionally, generating a sufficiently secure process is time-consuming. And even if it is generated, its security may not be as good as Ethereum itself. This often results in many projects that dont necessarily need to issue their own tokens being forced to do so while painfully and slowly trying to create their own cryptoeconomic security. Re-staking attempts to solve this problem by pooling the security of large chains such as Ethereum and making it available to other applications.
Important items
EigenLayer
How does it work?
EigenLayer calls itself the Ethereum re-pledge aggregation platform and is committed to creating a decentralized trust market. It is the pioneering platform in the field of re-pledge and the largest and most important project in the field. We can think of EigenLayer as providing security as a service through Ethereum or Ethereum security as a service.
EigenLayer operates markets under three categories, including:
1. Re-stakeholders: People who use Liquid Staked Tokens (“LST”) to secure other applications on the network. They earn extra revenue from it, but are also subject to additional forfeiture conditions. Users can also choose to stake their ETH directly to EigenLayer (this process is called native re-staking).
2. Node operator (verifier): the person who runs EigenLayer software. Many re-stakers may choose to delegate to a trusted node operator rather than running the node themselves (similar to stakers delegating their tokens to a trusted validator). Node operators can aggregate delegated stakes, launch Ethereum nodes, and then earn fees from Ethereum Proof-of-Stake (PoS). They can also earn additional revenue from protocols they choose to protect through staking. After keeping some of the fees for yourself, the remaining fees will be handed over to the client. If an operator misbehaves with the EigenLayer modules they participate in, their stake (and their delegated stake) will be slashed.
3. Active Verification Service (“AVS”): A service built on EigenLayer that is dedicated to attracting re-stakeholders to help improve security. These AVS are sometimes called modules, and can be anything from new blockchains, data availability (“DA”) layers, virtual machines, oracle networks, to cross-chain bridges.
EigenLayer introduces two new concepts through this system: (1) pooled security through re-staking; (2) free market governance.
1. Pooled security through re-staking: EigenLayer achieves pooled security by protecting new modules with re-staking ETH (rather than its own tokens).
➢ Specifically, after stakers lock their LST or native ETH to a validator, the validator can decide to secure any module they choose.
➢ Verifiers set their withdrawal credentials to the EigenLayer smart contract, so that once they behave inappropriately, they may be automatically fined.
➢ In return, these modules will pay security and validator service fees to validators and re-stakeholders.
➢ The result is to bring together Ethereum’s extremely strong cryptoeconomic security onto other protocols built on top of it.
2. Free market governance: EigenLayer provides an open market mechanism that supports validators to weigh the risks and rewards on their own and choose which modules to provide security for.
➢ EigenLayer believes that this is similar to the services provided by investment companies. Its support is crucial to innovation, but profits come with risks (herein refers to penalty and forfeiture insurance).
Together, this creates an open and competitive market where validators can sell pooled security and protocols can purchase security for a price. This eliminates the huge capital cost of creating a new security model because the protocol can be purchased outright. It also helps create a wheel effect, that is, the higher the value of the module protected by EigenLayer, the higher the reward for ETH stakers. This will lead to a higher value of ETH, thus improving the security of Ethereum, which in turn creates better security for each EigenLayer module and further incentivizes users to create new modules on top of it.
The impact of trust aggregation
As shown below, the trust aggregation provided by EigenLayer is quite important. Because new AVS can be secured by a larger pool of funds than usual, the cost of corruption (“CoC”) is much higher than otherwise.
For example, a new Ethereum module no longer requires $1 billion in collateral to be secured, but can be secured by a larger pool of funds. This mechanism essentially increases the CoC from the minimum pledge amount to the total pledge amount.
timeline
EigenLayer adopts a phased rollout approach, divided into three stages. The aim is to ensure a smooth onboarding experience for all the different participants who hope to become part of the EigenLayer ecosystem.
Phase 1 focuses on stakers and was first launched in June last year. The idea behind Phase 1 is to get stakers accustomed to the re-staking process and become familiar with the EigenLayer module and interface. In addition to its native ETH, EigenLayer initially supports three types of LST for re-staking. After several months of gradual additions, EigenLayer now supports 12 types of LST.
Phase 2 focuses on operators, and the test network will initially go online in November 2023. Since its launch, operators have been able to register on the network and start validating for the first AVS, known as EigenDA. Of course, re-stakeholders will also be able to delegate to an operator of their choice in order to start using shared security. Rollup developers can also integrate EigenDA as a DA layer into rollups and try it out in testnet scenarios. The Phase 2 mainnet is expected to go online later in the first half of 2024.
The focus of Phase 3 will be on the onboarding of AVS (excluding EigenDA) and adding payment and slashing functionality. Phase 3 is expected to take place in the second half of this year. After all three phases are completed, the EigenLayer protocol will be officially fully launched.
Recharge limit
In order to ensure a smooth transition to the main network, EigenLayer has been using a deposit cap to manage the pledge amount on the protocol. When the Phase 1 main network is launched, the upper limit of the number of three LST tokens is 9,600, and the upper limit of the number of native ETH is 9,600. Over the past few months, the recharge limit and the number of LST accepted have been gradually increasing.
EigenLayer recently raised the recharge limit and temporarily canceled all TVL caps. This is also the first time that all TVL caps have been cancelled. The goal is to attract all natural demand for re-staking and observe interest in the product from an uncapped perspective. During the pause period from February 5 to 9, EigenLayer’s TVL increased by more than 180%, soaring from approximately US$2 billion to over US$6 billion, becoming the fourth largest DeFi DApp. As of the time of writing this article, EigenLayers TVL has exceeded US$7.5 billion, and the re-pledged ETH has exceeded US$2.6 million.
Ecosystem projects
One area of concern is the projects EigenLayer will bring to the ecosystem. EigenLayer attempts to change the functionality of Ethereum, especially from an infrastructure perspective. We will continue to pay attention to the different modules involved.
EigenLayer implementation possibilities are quite broad and can cover various protocols from Ethereum sidechains to oracles and bridge layers. Still, the most relevant protocols are probably the ones for which security is most difficult to build, and the ones with a certain degree of synergy with Ethereum, at least at this relatively early stage.
❖ EigenDA: EigenDA is the first AVS to use EigenLayer to protect itself. As the name suggests, this is a DA layer.
➢ What is the DA layer? Simply put, the idea behind DA is to ensure that blockchain transaction data is viewable by the entire network. This is particularly relevant to Ethereum L2 rollups, as L2 rollups send transaction data back to Ethereum L1, which has been using the native Ethereum DA layer for its DA needs. However, this is changing with the launch of other solutions such as Celestia and Avail, which are gradually realizing their vision. EigenDA is another player in this market and seeks to cooperate with various aggregators to provide them with lower transaction costs and higher transaction throughput.
➢ Mechanism: The proportion of DA cost to aggregate cost is usually relatively high. Therefore, a dedicated DA layer may be a relevant strategic move for many roll-ups, especially as the user base continues to grow. The following examples illustrate ways in which L2 might choose to use EigenDA and become part of the EigenLayer ecosystem:
i. Ethereum L2 may choose to use EigenDA as its DA layer instead of Ethereum L1.
ii. Taking Arbitrum as an example, every time it uses EigenDA, some $ARB tokens flow back to the validators who run the EigenDA software and help ensure its security.
iii. Validators retain some of the tokens, while another token will flow back to the underlying re-pledgers, providing additional income for both parties.
iv. To incentivize validators to act honestly, their staked ETH locked into EigenLayer will be subject to additional slashing conditions, as mentioned above.
➢ Partners: EigenDA has established cooperative relationships with many large-scale cryptocurrency projects. As the launch of the main network approaches, more cooperative projects will be announced. Important projects include:
i. Arbitrum Orbit: EigenDA announced support for the Arbitrum Orbit chain, and developers will be able to build Orbit aggregates based on EigenDA. The integration is made possible through a partnership with aggregation infrastructure provider AltLayer. To learn more about Arbitrum Orbit, check out our reportThe evolution of Layer-2: Superchains, L3, and more》。
ii. OP Stack: At the end of December, EigenDA open sourced a branch of OP Stack and integrated EigenDA support. OP Stack is the software that powers the OP mainnet and many new rollups including Base, Zora, and Mode. Please refer to our report OP Stack Latest Developments》 for the latest information.
iii. Launch Partner Program: EigenDA also recently announced its launch partner program, with eight aggregation infrastructure providers actively integrating EigenDA as a DA option for users.
➢ Outlook: The EigenDA testnet will initially go online in November 2023 (Phase 2 of the EigenLayer roadmap). Its mainnet is expected to be launched later in the first half of 2024.
❖ Other Active Verification Services (AVS): EigenDA will be the first AVS to go online, but many other teams have also been developing their modules. When the EigenLayer main network is about to go online, these teams are also preparing to go online with their AVS. Notable teams include Espresso (decentralized sorter), AltLayer (aggregation infrastructure), Lagrange (building a light client for optimistic aggregation), Hyperlane (interchain communication), Near (building a fast finalization layer to improve the overall composability of the Ethereum aggregate ecosystem), Omni (cross-aggregate communication), etc. Full details pleaseclick hereView it on the EigenLayer website.
Re-pledge summary using AltLayer
AltLayer is a rollup infrastructure provider that helps developers roll out and maintain their rollups. Originally a roll-up-as-a-service (“RaaS”) provider, AltLayer has recently been expanding its offering and entering into a key partnership with EigenLayer to further its vision. AltLayer maintains cooperative relationships with many leading Rollup teams in the industry and can help developers launch on OP Stack, Arbitrum Orbit, ZK Stack and Polygon CDK, etc.
In our recent report,Aggregation as a Service Getting Started GuideAltLayer and its RaaS platform are introduced in detail. We recommend readers review this report to obtain detailed background information about AltLayer and its various products. We will mainly discuss their new re-staking summary in this section, not all of their products.
❖ Re-hypothecation roll-ups: AltLayer’s re-hypothecation consists of three vertically integrated AVSs that can be created on demand for any given roll-up.
➢ VITAL: Help provide decentralized verification of summary status through validity proof challenges or the generation of zero-knowledge proofs.
➢ MACH: Helps provide rollups with fast finalization and cross-rollup interoperability, while also featuring the ability to reduce the Maximum Extractable Value (MEV) in rollups.
➢ SQUAD: Supports decentralized sorting of summary. Together, these features help create decentralized, interoperable, and efficient rollups that are secured using EigenLayer’s re-staking mechanism.
Together, these features help create decentralized, interoperable, and efficient rollups that are secured using EigenLayer’s re-staking mechanism.
❖ Outlook: The re-staking aggregation product is currently running on the test network while its existing RaaS product is online. AltLayer also provides temporary aggregation, which is a one-time aggregation customized for a specific App. Use cases include hot gate NFT minting, game and event ticketing, etc.
❖ $ALT: AltLayer also recently launched the $ALT token, which is used for economic bonds, governance, protocol incentives and protocol renewal fees throughout the AltLayer ecosystem.
Considerations
As with any new primitive in the rapidly evolving cryptocurrency market, especially an infrastructure protocol like EigenLayer, there are many risks to be aware of. Readers should note that this is not an exhaustive list, primarily because predicting future vulnerabilities in new technologies is nearly impossible. However, these are factors you may want to consider when analyzing EigenLayer.
Technology risk
❖ We can consider the risk of validators colluding to attack a group of EigenLayer protocols at the same time. This risk arises because a validator may choose to re-stake multiple times across multiple different services, which would theoretically make the attack financially feasible. EigenLayerwhite paperThis was discussed in more detail and a solution was proposed for an open source panel that monitors validator re-staking and enables protocols to incentivize validators who only participate in a limited number of protocols.
❖ The risk of accidental forfeiture is also worth considering. This risk may be caused by programming errors or smart contract security issues in the protocol built on EigenLayer. To solve this problem, we proposed two solutions: (1) security audit; (2) governance can veto slashing decisions through multi-signature (although this may cause centralization issues).
structural risk
❖ A popular topic in the community recently is whether re-hypothecation is a form of leverage. The answer to the question depends on a variety of factors, and both sides of the argument have their own considerations.
➢ At the current stage of development, AVS has not even been launched yet, and users only deposit funds into EigenLayer or the liquidity re-pledge protocol, so some people believe that there is no leverage. In essence, the concept of pooling security to ensure cryptographic security for other applications (i.e., re-staking) is not the same as borrowing funds to gain yield (i.e., using leverage).
➢ However, as all “gamblers” know, this can be a slippery slope. Once EigenLayer goes online, there will no doubt be a subset of users who borrow funds, re-pledge them (perhaps using a liquidity re-pledge protocol), and then use them as collateral in DeFi to continue the cycle. , which may be viewed as leverage in the system.
❖ It should also be noted that AVS is free to set its own unique different slashing conditions. What would happen if AVS could slash validators and distribute rather than destroy ETH for relatively minor reasons? If incentives for slashing suddenly appear, how will it change the system costs for validators and re-stakers?
➢ When the system comes online, AVS selection and slashing analysis will become critical factors for users and validators.
Other considerations
❖ The sustainability of the protocol is also a risk when applying EigenLayer. Tokens can provide useful monetary incentives and benefits to the protocol, and if all value is now accumulated in the form of ETH rather than the protocols native tokens, it may be difficult for some projects to thrive in the long term. However, we should note that EigenLayer may indeed implement double staking, a security consisting of re-staking ETH and AVS native tokens. Again, White Paper goes into more detail on this.
❖ We recommend readers to read Vitalik Buterin’s blog post “Don’t let the Ethereum consensus “overload”andShould the Ethereum protocol encapsulate more functionality?》. The former discusses the potential risks of building complex financial systems based on re-hypothecation. If these systems get out of control and cause a large loss of monetary value, some in the community may expect an Ethereum hard fork to fix these bugs. Vitalik believes that any such expectations should be resisted and it should be understood that Ethereum cannot be held responsible for any mishaps at the application level. This may limit the types of protocols that can be launched on EigenLayer and may cause some protocols to move to other platforms. Despite this, EigenLayer founder Sreeram Kannan has previously responded constructively, saying that EigenLayers basic ideas are consistent with Vitalik.
The second article discusses the idea of encapsulation, which is to internalize new technology developments into the Ethereum core protocol. With the rise of staking in recent months, some in the community have discussed the idea of encapsulating it into the core Ethereum protocol. Vitalik discusses many different features beyond restaking, and the article is helpful for understanding the philosophical reasoning behind Ethereum’s simplicity and how we should think about encapsulation.
prospect
As shown in the timeline section, EigenLayer expects to complete all three phases of the phased mainnet launch in the second half of 2024. Here are some other factors to consider:
❖ EigenLayer’s TVL has continued to rise over the past few months, and each increase in the recharge limit has met strong demand. The main driver of this capital inflow is the EigenLayer re-staking points program. Points measure a users contribution to the shared security of the EigenLayer ecosystem and are proportional to the pledge amount recharged by the user.
➢ The question we should ask is: How much of these funds will flow back after the main network is launched? Although it has not yet been confirmed, many users have anticipated that EigenLayer tokens may be issued; and there is a reasonable question: How much of EigenLayers more than $7 billion in TVL comes from possible airdrop mining? This issue is particularly important because while EigenDA is in the testnet, other AVS are still very much a work in progress. Therefore, after the main network goes online and the points program ends, many users may consider using their funds more efficiently, at least until AVS goes online in large numbers.
❖ It should be noted that Ethereum was originally a proof-of-work (PoW) chain. It was not until the launch of Beacon Chain at the end of December 2020 that it began to transition to proof-of-stake (PoS), and was merged with Ethereum in 2023 Only then is the transition completed. Therefore, it is not surprising that Ethereum’s staking rate is relatively low compared to similar products.
➢ As of now, approximately 25% of ETH is pledged (15). In comparison, companies such as Solana, Cardano, and Avalanche have this value exceeding 50%. Before the advent of re-staking and the popularity of LST, many in the Ethereum community believed that Ethereum staking would reach equilibrium around 20-30%. Given that this value has been reached and the concept of re-staking is relatively new, Ethereums pledge rate may exceed the 30% mark.
➢ Please note that re-staking adds another layer of returns to staking so it is quite logical to think that this might increase the proportion of ETH staked. At the same time, the more ETH staked, the lower the yield (because the staking rewards are distributed among the total amount of ETH staked). The relative strength of each impact deserves a closer look to better understand the impact restaking may have on Ethereum’s staking rate in the coming months.
❖ Finally, we should consider that projects may choose to launch on EigenLayer for reasons other than share security. Adding EigenLayer could be a distribution and marketing strategy for the project, especially given the amount of activity that restaking has generated over the past few months. This is an important consideration when analyzing the scale of EigenLayers growth and the extent of the network effects it can generate.
Redemption on other chains
While restaking is primarily on the Ethereum ecosystem, the idea of shared security exists on other chains as well. In our report Modular Blockchain: The Race to Top Security Providers》In this article, we studied the Cosmos ecosystem and its Replicated Security and Mesh Security models in detail. We also looked at Bitcoin-related solutions such as Babylon and Stacks. Here, we will review our understanding of Babylon and talk about Picasso’s Solana re-staking.
Bitcoin “re-pledge”: Babylon
Babylon is a Bitcoin staking protocol dedicated to utilizing the Bitcoin super$1 trillionCryptoeconomic security to enhance the security of other PoS chains. Babylon strives to create a two-sided market where Bitcoin holders can securely stake their BTC and choose the PoS chains and DApps they want to support and earn revenue from. PoS chains and DApps can choose to use BTC-backed security to create their cryptoeconomic security, which has been previously discussed in this report.
❖ How does Babylon work?
➢ Similar to EigenLayer, the key to the Babylon protocol is the enforcement of the slashing mechanism. If a staker behaves inappropriately, their staked BTC must be forfeited.
➢ However, the problem they face is Bitcoin’s limited performance. Bitcoin is very different from smart contract L1 such as Ethereum, BNB Chain and Solana, and does not have native smart contract functions. One solution is to connect BTC with other PoS chains and implement the slashing mechanism on the latter, but this requires trust in a third party.
➢ Therefore, Babylon overcomes the shortcomings of smart contracts by combining advanced encryption technology and optimizing the Bitcoin script programming language. Babylon uses UTXO transactions written into Bitcoin scripts to express pledge contracts. Please see theirSimplified version of white paper。
➢ It is worth noting that Babylon’s solution does not involve bridging BTC, but only requires locking it on the Bitcoin chain itself.
❖ Bitcoin timestamp
➢ One of the key features of Bitcoin used by Babylon is timestamps. Bitcoin forms the basis of PoW consensus by timestamping transactions and distributing them, thereby solving the double-spending problem. These timestamps provide an irreversible record of the time of the transaction and therefore can help resolve any security issues on the chain.
➢ Bitcoin can also be used to timestamp events from other chains in a process called marked checkpointing. Transactions that timestamp these events are called checkpoints.
➢ Babylon leverages this feature to regularly record checkpoints from other PoS networks on the Bitcoin blockchain, helping to provide a layer of security for transactions. If an attacker attempted to compromise a PoS network utilizing Babylon Chain, they would have to attack the Bitcoin blockchain itself, essentially creating a security equivalent to Bitcoin for these chains.
❖ Babylon Chain
➢ Babylon’s Bitcoin staking protocol essentially wants to leverage Bitcoin security to support the middleman between its own PoS chain and Bitcoin holders, or what they call the “control plane ”. The protocol is implemented as a chain, the Babylon Chain, to ensure its security, scalability and censorship resistance.
➢ Since the block space of the Bitcoin blockchain is efficient and expensive, it is unsustainable to directly timestamp every PoS using Babylon. To solve this problem, the Babylon team designed the Bitcoin timestamp protocol and ran it as the Cosmos-SDK chain, also known as Babylon Chain.
➢ Babylon Chain can aggregate the timestamps of any number of Cosmos SDK chains through the Inter-Blockchain Communication Protocol (IBC).
➢ Babylon will initially focus on the Cosmos application chain, but hopes to expand to all types of PoS chains in the future.
❖ Babylon architecture:
➢ Babylon uses an architecture composed of three parts: (1) Bitcoin, as a timestamp service; (2) Babylon Chain, as the middle layer and aggregator of the Cosmos Zone; (3) Other Cosmos Zones, as a security consumer.
➢ Checkpoints from participating Zones will be sent to Babylon Chain via IBC. Babylon Chain aggregates these checkpoints so that all transactions in different Zones can be timestamped by just putting one checkpoint group on the Bitcoin chain.
➢ This aggregate checkpoint will be sent to the Bitcoin chain. The final confirmation of the Bitcoin network is usually around six blocks (taking about 1 hour), after which transactions in this aggregate checkpoint can be considered protected by the full security of the Bitcoin chain. In return, participating Cosmos Zones receive Bitcoin timestamps with validity certificates from Babylon Chain.
➢ Participating validators can also download Babylon Chain blocks to verify all checkpoints to ensure that Babylon validators act honestly.
➢ Accelerate the unbinding period: Due to the characteristics of the PoS chain, especially the possibility of so-called remote attacks, the withdrawal of users’ pledged tokens (i.e., the unbinding period) may usually take several days or even weeks. Liquidity staking is a solution to alleviate this problem, although it comes with its own risks. A PoS network that utilizes Babylon to send checkpoints to Bitcoin can reduce this time from weeks to hours. technical details pleaseclick hereCheck.
❖ Differences from EigenLayer and Cosmos Mesh Security:
➢ In EigenLayer re-pledge and Cosmos Mesh Security, assets have been pledged to protect the security of the original chain. This is not the case with Babylons Bitcoin staking, as the Bitcoin chain is secured by PoW rather than PoS. So while the protocol meets some of the definitions of re-staking, it is somewhat closer to staking.
➢ Bitcoin does not implement the slashing mechanism through smart contracts like EigenLayer on Ethereum and Mesh Security on Cosmos, but uses Bitcoins scripting programming language and encryption technology to implement its slashing mechanism.
❖ Risk:
➢ A key point to remember is that Babylon Chain helps record checkpoints of past blocks in the Bitcoin chain and protects them with Bitcoin’s strong security. New blocks still rely on the validators of each PoS network, and neither Babylon nor Bitcoin can assume the responsibility of protecting these blocks.
❖ Integration and Timeline:
➢ Babylon has been integrated with more than 45 Cosmos chains on the test network, with a total market value exceeding US$7.4 billion. These include most of the top Cosmos application chains, such as Osmosis, Injective, Akash, Juno, Secret Network, Evmos, Stride, Sei, etc.
➢ As mentioned above, the Babylon test network will be launched in March 2023 and is a demonstration of Babylon’s Bitcoin timestamp technology. It is expected that the main network with the Bitcoin staking protocol will be launched in 2024.
➢ Babylon announced the completion of US$18 million in financing in December 2023.
➢ In mid-February, a proposal was launched on the Cosmos Hub forum, calling for formal integration between Babylon and Cosmos Hub. If approved, the proposal will install the Babylon plug-in on the Cosmos Hub and all its consumer chains. Bitcoin holders will then be able to delegate to Cosmos Hub validators to directly secure the Cosmos application chain. The application chain can then choose how to allocate transaction fees among ATOM stakers, native token stakers, and BTC stakers.
Babylon combines PoS and PoW, and adds IBC for communication, forming a hybrid model that we can think of as seeking to leverage the best parts of Ethereum, Bitcoin, and Cosmos. This is a promising new approach to blockchain design and relies on key features of existing platforms. We will wait and see how this approach performs in their current Cosmos series and whether the team can successfully expand to other PoS networks.
Solana re-staking: Picasso
❖ What is Picasso?
➢ Picasso is an infrastructure layer dedicated to improving DeFi interoperability. Picasso was initially built on the Kusama network, with the goal of fully migrating to the Cosmos application chain in the near future.
➢ Picasso is part of a broader composable ecosystem and is an L1 blockchain using the Cosmos SDK (Tendermint + IBC). Picasso successfully connects the Cosmos, Polkadot and Kusama ecosystems by extending the Inter-Blockchain Communication Protocol (“IBC”) beyond Cosmos. These connections have been implemented since the first quarter of 2023.
➢ Picasso also launched “Ethereum” in October 2023IBC test network, and plans to implement Ethereum and Solana IBC connections in the second quarter of 2024. Picasso uses its native PICA token to secure its network. For more information on how Picasso works and its goals, we recommendclick hereCheck out their recent blog posts.
❖Solana re-staking:
➢ Picasso built a re-pledge layer on Solana as a verification layer called Guest Blockchain. The chain will essentially be deployed inside Solana as a smart contract and will provide functionality to make Solana IBC compliant.
➢ The guest blockchain must be verified like any other PoS chain and will use previously staked assets to protect itself through a re-staking layer. Raw SOL and SOL LST such as $jitoSOL, mSOL, bSOL, etc. can be used as collateral.
➢ In order to first guide the liquidity on the re-staking layer, Picasso is launching an event called Mantis Games. The event is divided into three phases. The first phase involves the NFT auction, and the second phase (currently underway) is the team staking competition. The third phase will involve a swap contest with a scoring system to further help guide liquidity and get users accustomed to the protocol.
❖ Active Verification Service (AVS):
➢ The first AVS designed by Picasso was “SolanaIBC bridge, this AVS will enable the liquidity of the Solana ecosystem to interoperate with other IBC-enabled chains. This connection will also help further develop new cross-chain use cases between Solana and other ecosystems including Cosmos, Polkadot, Kusama, and more.
i. 20% of the fees generated by the bridge will be distributed to PICA stakers, and 40% will be distributed to re-stakeholders. This is in line with their basic guidelines, which states that 20% is distributed to PICA stakers and 30-50% to re-stakeholders (depending on AVS).
➢ Rome Protocol is a Solana shared sorter and will also become the second AVS to use the Picasso Solana re-pledge layer. More details are expected to be released in the coming weeks.
❖ Cooperation:
➢ In recent weeks, Picasso has also announced partnerships with some leading Solana DApps.
➢ Well-known platforms include Meteora (DeFi platform), Raydium (order book AMM), Kamino Finance (DeFi), MarginFi (DeFi), etc.
❖ Outlook:
➢ Last week, Picasso announced that existing Solana validators can now join as AVS node operators to help validate Solana IBC.
➢ After the third phase of Mantis Games’ onboarding campaign, the Solana IBC bridge is expected to enter the mainnet sometime in the second quarter of 2024.
➢ Picasso also recently published an introductory post on the forum of the well-known Solana DEX aggregator Jupiter. Picasso hopes to join Jupiters LFG Launchpad program to help bring PICA tokens to Solana.
Liquidity re-hypothecation
What is liquidity re-hypothecation?
First there was the concept of staking, and then there was liquidity staking. do you remember? Staking on Ethereum requires locking your ETH. Subsequently, liquidity staking protocols like Lido emerged, which helped users stake their ETH while providing them with liquidity tokens (“LST”) in return (stETH in Lido’s case). Users can maintain liquidity through LST and use this token to earn additional income in the DeFi field.
Liquidity Re-hypothecation essentially provides this service to re-hypothecaters. For example, users may typically deposit their ETH or LST to EigenLayer, and then their tokens will be locked and lose liquidity. On the other hand, users can deposit their ETH or LST through the liquidity re-pledge protocol, and the protocol will handle the re-pledge for them. In return, they will receive Liquidity Rehyping Tokens (“LRT”), which can be used to maintain liquidity and earn additional income in DeFi.
Different ways to re-stake
Before further researching different LRT platforms, it is important to understand the differences in various re-staking methods. There are three main methods of re-pledge: native re-pledge on EigenLayer, LST re-pledge on EigenLayer and liquidity re-pledge agreement.
Liquidity Re-Pledge Agreement
Now that we understand how liquidity re-hypothecation protocols work, let’s examine the major players and compare their key features.
Ether.fi
Ether.fi is the largest liquidity re-hypothecation protocol (as of this writing), with a TVL of over $1.2 billion. Ether.fis LRT is called eETH. eETH was first launched in November 2023 and was also the first LRT to enter the market.
❖ Details:
➢ It should be noted that Ether.fi only accepts ETH, not LST.
➢ After users recharge ETH and receive eETH tokens, they can use them freely in DeFi to maximize returns.
➢ Its pledged ETH will accumulate Ethereum PoS staking and EigenLayer re-staking rewards (once the EigenLayer re-staking rewards take effect).
➢ Users can also earn Ether.fi loyalty points, which will play a role in decentralized governance.
i. Ether.fi loyalty points = staked ETH x 1000 x number of pledge days
❖ Operation Solo Staker：
➢ This is Ether.fi’s approach to making Ethereum more decentralized.
➢ Ether.fi cooperates with Obol Labs, a developer of distributed validator technology (“DVT”), to jointly promote independent stakers.
➢ After Ether.fi collects the deposited ETH, it uses the 32 ETH block to create the validator key. These validator keys will be provided to node operators to perform their verification duties. However, Ether.fi does not leave it to a handful of the largest operators. Instead, DVT technology is used to split the key among multiple independent pledgers. This helps promote the decentralization of the Ethereum network, as the move helps create a more diverse group of validators. Details pleaseSee here。
❖ Ether.fan：
➢ Ether.fi also has a related NFT project called Ether.fan, where users can stake ETH and mint NFT to earn more points. Minted NFTs represent staked ETH, and staking rewards automatically accumulate and increase based on the users staking length.
➢ All ETH pledged through Ether.fan are allocated to independent node operators using DVT technology.
❖ Financing:
➢ Ether.fi completed a US$5.3 million seed round of financing in February 2023.
❖ Outlook:
➢ Ether.fi aims to further participate in the staking ecosystem by building its own AVS. Its CEO Mike Silagadze recently discussed this on The Edge podcast.
➢ The Ether.fi official website also has a detailed roadmap. In the next few months, DVT integration, DAO governance and software open source will be further implemented.
Puffer Finance
Puffer Finance is the second largest liquidity re-pledge protocol, providing pledgers with their native LRT—pufETH. Puffer was only launched in early February but has performed strongly, with TVL exceeding US$1 billion.
❖ Details:
➢ An important thing to note about Puffer Finance is that at this stage it only accepts stETH (Lido’s ETH LST) deposits. After Puffers main network goes online, they plan to exchange Lido stETH for ETH and then perform native re-staking on EigenLayer. This so-called blood-sucking attack strategy can be said to be one of the reasons why Puffer’s TVL has risen so quickly.
i. The success of Puffer has also had an impact on Lido’s dominance in the DeFi field, which has always been a hot topic in the community. In fact, Puffer has made it clear that the main goal of this strategy is to reduce stETHs dominance in the LST field.
➢ When EigenLayer’s LST deposit is open (before February 9), users who deposit stETH to Puffer will receive both EigenLayer points and Puffer points. Users who recharge after this will accumulate Puffer points before the main network goes online, and will also accumulate EigenLayer points afterwards. ➢ Puffer Finance has also committed to limiting the growth of the protocol to 22% of all Ethereum validators as a way to protect Ethereum’s decentralization.
❖ Anti-forfeiture technology:
➢ One of Puffer’s key innovations is its anti-slash mechanism. Specifically, the mechanism is called Secure-Signer and is sponsored by the Ethereum Foundation.
➢ This is particularly relevant for node operators. The technical details are beyond the scope of this report and you are advised toherecheck the detail information.
❖ Financing: ➢ Puffer Finance completed a US$5.5 million seed round of financing in August 2023.
❖ Outlook: ➢ Puffer Finance is expected to launch the mainnet in the next few weeks. The platform also discussed Puffer L2 (pufETH holders will earn revenue from L2 fees) as well as oracles and bridged AVS in a recent blog post.
Kelp DAO
Kelp DAOs LRT solution has over $490 million in TVL and supports liquidity re-pledge using its rsETH token. Kelp DAO and Stader Labs are built by the same team.
❖ Details:
➢ Kelp currently supports native ETH, Lidos stETH, Staders ETHx and Fraxs sfrxETH for liquidity re-pledge.
➢ When users recharge to Kelp, they can collect Kelp miles and EigenLayer points as liquidity re-pledge incentives.
i. Kelp mileage = (rsETH amount) x number of days x 10, 000
➢ Kelp also launched a referral program.
➢ In early February, rsETH also became the first LRT on Polygon zkEVM and cooperated with LayerZero to complete the integration with Arbitrum.
❖ DeFi integration: ➢ Kelp is currently integrated with Pendle, Uniswap, Curve and Balancer.
➢ Kelp rechargers can use their rsETH to interact with these protocols and receive incremental revenue and additional Kelp Miles/EigenLayer points.
❖ Outlook:
➢ Kelp expects more DeFi opportunities to emerge in the next few months. Renzo Renzo currently has more than $350 million in TVL through its $ezETH LRT.
❖ Details:
➢ Renzo currently accepts native ETH, stETH and wBETH. Similar to other protocols, users can earn Renzos ezPoints and EigenLayer points when using this protocol.
➢ Renzo cooperates with Figment to pledge native ETH. ➢ Renzo also launched a referral program.
➢ Renzo has DeFi integration with Balancer, Pendle, Curve and Uniswap, and users can use their ezETH to earn more income/points.
❖ BNB Chain re-pledge:
➢ In early February, Renzo became the first protocol to support BNB Chain re-staking, adding support for wBETH.
❖ Arbitrum re-pledge:
➢ Renzo also recently announced a partnership with Connext Network to introduce cross-chain re-staking to Arbitrum.
❖ Financing and Outlook:
➢ Renzo announced earlier this year that it had completed a US$3.4 million seed round of financing, with a valuation of US$25 million.
➢ Renzo plans to use the funds to conduct additional audits, increase bug bounty program rewards, integrate with more DeFi, and recruit. Renzos universal mainnet will also go online after EigenLayer Phase 3 is launched. Renzo also plans to develop cross-chain staking solutions and is already involved in this area through BNB Chain and Arbitrum integration.
other
This is a rapidly growing emerging market, and teams including Eigenpie and Swell are innovating and working on developing solutions. At the time of writing, these are the four largest liquidity re-hypothecation protocols, but we are sure that things will change a lot in the coming weeks and months.
One big point we should focus on is the early discussion about AVS selection. As AVS begins to go live during the rest of the year, (presumably) more and more different slashing conditions will become available, and carefully choosing which platform to re-stake with will become crucial. Liquidity re-hypothecation protocols can serve as an important guiding platform, helping users determine which platforms may offer benefits that are too good to be true, and which protocols are worth supporting. Additionally, we should note that the liquidity re-pledge protocol can handle large amounts of ETH (or LST) and delegate them to different validators. This means that these protocols can become key stewards of Ethereum’s decentralization if they choose to do so. For example, initiatives like Ether.fi’s Operation Solo Staker are very important here and can have a significant impact on the decentralization of Ethereum. The fact that they are promoting DVT technology through this initiative is also noteworthy because this will become an even more important conversation in the coming months.
Outlook and conclusion
Re-pledge is a rapidly growing sub-sector. Many in the community believe that this new set of developments will bring sea change to the ecosystem, especially in terms of infrastructure. Judging from the current market demand for EigenLayer and Liquid’s re-pledge protocol, we may be in for an interesting journey.
At the same time, the beginnings of new technology development and the emergence of a new set of companies are often fraught with risks, even if the underlying technology is not. Although surprises are not inevitable in this rapidly innovating and emerging market, their possibility needs to be carefully considered.
We will wait and see what protocols emerge on the other side of this wave. New and innovative AVS and how they integrate into the broader Ethereum value wheel will also be important issues to watch. The Binance Research team will continue to pay close attention as always and report the situation to everyone at any time.
