Products
Open-source
Restaking
dApp
Enterprise Dashboard
Validators
Connect
On-Chain
DeFi
Solutions
Protocols
Company
Docs
Products
Solutions
Protocols
Company
Docs
💡 TLDR:
Native Restaking is the act of restaking a ‘native’ ETH validator running on the Beacon Chain. First, users deploy an EigenLayer pod smart contract (one per user), then they have to set their validator’s withdrawal credentials to point to this previously deployed smart contract. This means the validator’s 32 ETH stake and rewards can be used by the EigenLayer protocol to secure additional protocols (AVSs), and earn additional rewards for restakers.
Liquid Restaking only requires the deposit of liquid staking tokens (LSTs) into the EigenLayer smart contracts, no changes need to be made on the underlying validators.
To understand the operational costs of native restaking, it’s important to list out all the steps involved and the associated transactions and proofs to be submitted.
We saw in several of the above steps that proofs needed to be submitted to the EigenLayer smart contracts - when restaking a new validator, and when skimming consensus layer rewards. What are these proofs and why are they needed?
In short, these proofs enable the EigenPod contracts to confirm that the ETH that comes into them is indeed linked to the consensus-layer activity of the corresponding validator, and not ETH that may have been sent to the EigenPod from another source. The proofs are generated off-chain using Consensus-layer data, and submitted to the EigenLayer smart contract which performs a cryptographic verification using Merkle Trees.
You can submit proofs in batches of up to about 25 in one single transaction - beyond this amount you start to hit the transaction gas limits (there is no limit in the EigenLayer contracts, the only limit is how much gas can be spent in a single tx). The gas cost of the transaction will increase linearly with the number of proofs you are submitting.
Note that you can only batch submit proofs into the same EigenPod.
Here is a quick breakdown of the expected gas cost of the previously detailed operations:
**Average gas used over 980 transactions batching 25 proofs of skimming events.
*Assuming gas price of 35Gwei and price of ETH of 3.000,00 USD
Let’s take an example of one natively restaked validator for 1 year:
The first question we look at is: how does the share of rewards I will spend on gas costs (”profitability”) vary with the length of restaking of my validator (”investment period”).
.png)
In the above chart, we can see that for low investment periods, over 30% of the rewards are used to pay for gas:
.png)
In this chart, we can see the percentage of rewards the restaker spent in fees to request the withdrawal of their total generated rewards. The majority of this cost is linked to the verifyAndProcessWithdrawals call where we need to upload proofs to request the withdraw of CL rewards or exited validators.
Impact on total rewards:
The next natural question is: how much restaking impact the net native staking performance, and how does the network gas price impact this reduction of rewards earned?
.png)
This chart presents the percentage of overperformance of native staking vs native restaking.
💡 In addition to the previous, if the network rewards rate drop over time, the profitability of native restaking will be highly impacted because of the fixed gas cost linked to the management of a native restaking position.
The high operational costs associated with native restaking on EigenLayer, particularly the substantial gas fees and labor-intensive process of frequent skimming events, significantly impact profitability and economic feasibility for institutional investors such as Digital Asset Managers, including issuers of Exchange-Traded Products (ETPs) and Exchange-Traded Funds (ETFs).
These costs add complexity and reduce overall returns on investment, making EigenLayer less attractive compared to more efficient and cost-effective staking solutions. For ETP and ETF issuers, the additional complexity and operational burden detract from their core business model, which relies on efficiency and minimal overhead.
How can we make this more sustainable over time?
verifyAndProcessWithdrawals transaction during times when gas price is low is the first action that needs to be taken.
At the time of writing, Native Restaked ETH represents 64% of the total value locked in EigenLayer, with the actual 4,873,558 ETH TVL, this means that 3,185,704 ETH are currently generating CL rewards that will need to be skimmed by restakers.
💰 Over one year, this represents a total of ~4,542,117 proofs, ~181,685 transactions; With a gas price at 35 Gwei and ETH at $3,172 it will result in a total of $107,240,129 spent in fees over one year to request CL rewards withdrawal.
Although this additional operational cost is only necessary for Native Restaking, restakers may prefer Liquid Restaking for better reward performance with less active management of their position. We hope to avoid seeing a significant amount of ETH flowing to Liquid Staking Tokens (LSTs), as this could lead to a concentration of staked ETH in a few liquid staking pools. Such a concentration would go against Ethereum's core principle of decentralization and could potentially put the network at risk.
The EigenLayer team has just announced they are planning an upgrade of the M2 EigenPod contracts to address this issue.
The proposed solution entails transitioning from the current proof system to a checkpoint proof system. This adjustment eliminates the necessity of individually proving each skimming event from validators in order to initiate either partial or full withdrawals.
This will have multiple benefits on the user experience and profitability of native restaking :
While restakers requiring liquidity will need to cover the current proving cost, others might want to keep their position open without withdrawing rewards & exited validators until the upgrade to see no impact on their native staking performance.
At the time of writing, the EigenLayer team is looking to get this release done after the “payments” milestone (distribution of AVS rewards), and before/alongside slashing, we can anticipate this upgrade happening sometime in the early part of Q4 2024.
In conclusion, the economic viability of native restaking on EigenLayer is currently challenged by the current proof system, largely due to the high operational costs of proving validator skimming. Indeed, with the current estimation, 30% of the generated staking rewards end up being paid in transaction fees while restaking native ETH. In addition, operational costs are amplified by high gas prices on the Ethereum network, which can make managing a native restaked position more expensive than the generated rewards.
While AVS rewards could potentially offset these costs, the lack of visibility on long-term AVS rewards makes it difficult to prove the economic benefit of native restaking at this time.
In addition to these significant operational costs, Digital Asset Managers have a fiduciary duty to minimize counterparty and liquidity risks. The continuous validation and periodic reward skimming events required by EigenLayer introduce significant operational risks and uncertainties. These processes complicate compliance with institutional risk frameworks, making it difficult to ensure asset security and stability. The constant need for verification and the potential for discrepancies in reward calculations can lead to increased scrutiny and hesitation from institutional investors.
Fortunately enough, EigenLayer's upcoming upgrade to the M2 EigenPod contracts marks a pivotal moment, offering simpler withdrawals and automated reward compounding. This advancement holds great promise for enhanced user experiences and increased profitability for native restakers, including digital asset managers. However, there will be other challenges for them to tackle, such as risk management frameworks.
CoinShares is the European leading investment company specialising in digital assets, that delivers a broad range of financial services across asset management, capital markets and hedge fund solutions to a wide array of clients that includes corporations, financial institutions and individuals.
Kiln is the leading enterprise-grade staking platform, enabling institutional customers to stake assets and whitelabel staking functionality in their offerings. Kiln runs validators on all major PoS blockchains, with over $8.6 billion in crypto assets being programmatically staked and running over 4% of the Ethereum network on a multi-client, multi-cloud, and multi-region infrastructure.
