Reassessing Restaking Risks -

How Institutional Stakers and Node Operators Can Evaluate AVSs and LRT

Daemon Day @TOKEN2049 Singapore - September 2024

Freddy Zwanzger

Ethereum Ecosystem Lead @ Blockdaemon

● Co-Founder & Chief Data Officer (2018 – 2021) at Anyblock Analytics GmbH
→ acquired by Blockdaemon (since Dec 2021)

What to expect

1. Why are we here? - State of Restaking
2. What is Restaking? - Brief Recap
3. Stacking of Considerations & Risks
4. Comparing to Bonds
5. Takeaways

Why are we here? - State of Restaking

Quickly developing narrative! → in crypto historically means to better proceed with caution…

What is Restaking? - Brief Recap

Restaking generally means reusing staked collateral to provide economic security to projects

● for stakers: additional reward opportunities for an increased level of risk

● for AVSs (Actively Validated Services): “security as a service” tailored to their needs

Note: All restaking protocols now allow many ERC-20 tokens beyond ETH/LSTs as collateral.

This can add utility to tokens of secured protocols and actually outsource their security as staking-as-a-service (so not just RE-staking anymore).

Stacking of Considerations

● Protocol Selection (continuous)
● + Asset Selection (continuous)
● + AVS Portfolio Selection (cont.)
● Node Operator Selection (1x)

Risks in (Re)Staking

01
Slashing (maliciously or stupid)
02
Downtime (offline penalty)
03
Liquidity (exit/withdrawal queue, peg/depth for LSTs/LRTs)

Correlations are the real danger!

● Staking: client bugs
● LST / LRT / Restaking platforms: smart contract bugs
● AVSs: correlated slashings

Modeling of Restaking Risks is Evolving

But early and mostly highly mathematical…

Comparing to Bonds

Non-liquid vs. liquid positions

Risk vs. Return of Restaking

● Restaking is new -> risk will be higher than potential return at the moment
● 6-12 months should see:

○ Risk reduced as software matures
○ Regulation is made clearer
○ Rewards begin to be earned in full on networks - just as we saw with traditional ETH staking

Staking options for institutions as of now:

| Staking | $ eq$~3.5% native ETH rewards $

eq$Lowest risk (“Internet bond”) | AVAILABLE NOW |
| --- | --- | --- |
| Liquid Staking | $ eq$Liquidity (swap in/out without delay) $ eq$Utility of LST (leverage, Defi, ...) $ eq$No 32 ETH increments needed* | AVAILABLE NOW (Permissioned for Institutions: LIQUID COLLECTIVE) |
| Restaking | $ eq$Developing opportunity for additional rewards (vs. risks) $ eq$Delegate to Blockdaemon or dedicated white-label set of AVSs | Ecosystem developing |
| Liquid Restaking | $ eq$Institutions need to understand risks and rewards | Ecosystem developing |

APPENDIX / BACKUP

Stacking of Considerations: Checklist

Staking - Liquid Staking - Restaking - Liquid Restaking

● Is the node operator a known and trusted entity, with reputation at stake?
● What is the node operator’s track record of performance?
● How ‘good’ of a job do they do operating infrastructure on the network, and receiving network rewards for doing so?
● What kinds of risk mitigations does the node operator have in place, to reduce the risk of slashing, mitigate operational or security risks, etc.?

Liquid Staking - Considerations of the LSP include:

● Are the liquid staking protocol’s smart contracts audited? Has the code deployed to mainnet received security reviews and/or code audits?
● How long does deposited ETH pass through the protocol before it is programmatically staked via Ethereum’s deposit contract?
● Has the liquid staking protocol’s code been made public, so that external security researchers and participants can evaluate it?

Restaking - Considerations of the AVSs and operators include:

● How long has the LSP been active without a meaningful security incident or loss of staked funds?
● What are the slashing risks and conditions associated with the AVS? Under what circumstances can staked tokens be slashed, due to the behavior of the restaking operators, etc?
● As with staking and liquid staking, are the AVS operators reputable and experienced?
● Do they have slashing mitigations in place that meet the slashing considerations of the AVS?
● What is the economic model of the AVS, and how does the AVS and the operators being delegated to manage economic incentives?
● Does the AVS have any governance mechanism?
● Does the AVS introduce any external risks due to the services it is offering, such as additional attack vectors or liquidation risks?

Liquid Restaking - Considerations of the LRTs include:

● All of the above, plus
● Diligence process of selecting and monitoring operators and AVSs (e.g. correlations, risk-reward trade-offs, liquidity)
● Compliance considerations