Blockchain innovation or dangerous house of cards? – Cointelegraph Magazine

Ethereum restaking — proposed by middleware protocol EigenLayer — is a controversial innovation over the past year that has some of the brightest minds worried about the potential ramifications.

Restaking involves reusing staked or locked-up Ether tokens to earn fees and rewards. The restaked tokens can then help secure and validate other protocols. 

Proponents believe restaking can squeeze additional security and rewards from already staked ETH and grow the crypto ecosystem in a healthier way based on Ethereum’s existing trust mechanisms. Restaking could serve as a security primitive for exporting Ethereum’s trust generated by its validators to other projects.

Yet Ethereum co-founder Vitalik Buterin and a number of key devs worry that restaking is a house of cards that will inevitably tumble. Some of those Ethereum devs have even proposed a fork to head off restaking platform EigenLayer. 

Why the project’s founders promote “trust as a service” from Ethereum without the Ethereum founder and others’ willingness to participate is still to play out. Will the whole concept result in an Ethereum fork to protect the network from catastrophic failure? 

Staking and restaking

Staking is a crypto-native concept. On Ethereum, it means putting up a security bond in ETH so that the validator (validators of new transactions who maintain the security of the blockchain) will behave honestly in verifying transactions rather than lose their staked tokens. Stakers are then paid rewards for locking up this ETH. 

In essence, stakers lock up their tokens to commit to producing Ethereum blocks — an on-chain way of supporting development, regardless of fluctuations in highly volatile token prices. 

So what is restaking?

In short, restaking works in that already staked Ethereum tokens can be rehypothecated (when a lender re-uses collateral posted from one loan to take out a new loan) to secure a wider variety of applications and accrue additional rewards.

But restakers also get penalized or slashed for non-performance of their staking tasks. (More on that below).

So restaking is a crypto primitive for generating economic security from Ethereum’s nine years of concerted developer activity and project track record. 

“It’s an extension protocol to extend what Ethereum can do, scaling out Ethereum stakers beyond Ethereum to other bridges and oracles that need to be secured,” EigenLayer founder Sreeram Kannan tells Magazine.

He says EigenLayer is commoditizing ETH staking to make it more general purpose, as, in crypto parlance, “staking is the root of trust.” 

Kannan is an academic on leave from the University of Washington, and EigenLayer began as academic research into “exported trust” as a consensus protocol. Basically, he sought to piggyback the trust generated by Ethereum to other ecosystems. 

Kannan essentially seeks to export the “trust” generated by Ethereum for other projects across the ecosystem and other chains. “In crypto, mechanisms for trust mean that investors need skin in the game. The pseudonymous world needs carrots and sticks whereby validators are distributed.” He calls it “permissionless innovation.” 

The best each chain has to offer

The big idea for EigenLayer is to bridge blockchains and create super applications, taking the best each chain has to offer. Kannan says “every ecosystem is better in some dimension, but not all dimensions,” and EigenLayer enhancing decentralized tech stacks will actually benefit the industry. 

Kannan said that what can be built with EigenLayer fits roughly into two categories.

Firstly, EigenLayer allows for the construction of bridges from chain to chain, say Ethereum to Avalanche. EigenLayer acts as a marketplace for “decentralized trust,” connecting stakers seeking yields, projects built on EigenLayer offering risk-reward structures for yields, and operators acting as bridges between stakers and projects.

Secondly, a set of smart contracts on Ethereum’s chain lets ETH stakers opt to run other software. EigenLayer could, for example, improve Ethereum transaction finality speeds. ETH stakers can now take the layer-1 blockchain Fantom chain (for better transaction finality times) and fork it on EigenLayer, thereby running a layer as a super fast finalization layer with an EigenLayer trust layer.

But it’s all still theoretical.  

The idea of restaking makes sense theoretically, helping projects build off Ethereum’s security layer — but the problems worry many. 

In theory, “it’s like the NATO security alliance; each country is…