Staking Explained: Dedicated vs Liquid vs Restaking — Benefits, Risks, and Providers in 2024

Dive into the world of cryptocurrency staking with our comprehensive guide. Explore the differences between dedicated, liquid, and restaking methods, understand their unique benefits and risks, and discover the leading restaking providers of 2024. Whether you’re a seasoned investor or new to crypto, this article provides essential insights to help you make informed decisions in the evolving landscape of blockchain technology and decentralized finance.

Photo by Shubham Dhage on Unsplash

The differences between dedicated staking, liquid staking, and pooled staking in the context of cryptocurrency and blockchain networks. These are different approaches to participating in proof-of-stake (PoS) systems. Let’s break down each type:

Dedicated Staking:

- Individual holders directly stake their tokens on the network.
- Technical knowledge and resources are required to run a validator node.
- Tokens are locked for a specific period and cannot be used for other purposes.
- Stakers receive full rewards but bear all risks and responsibilities.

Liquid Staking:

- Allows users to stake tokens while maintaining liquidity.
- Users receive derivative tokens representing their staked assets.
- These derivative tokens can be used in DeFi applications or traded.
- Provides flexibility and reduces the opportunity cost of locking up assets.
- Often managed by protocols that handle the technical aspects of staking.

Pooled Staking:

- Multiple users combine their tokens in a shared pool.
- Managed by a central entity or protocol that handles staking operations.
- Lowers the entry barrier for users with smaller holdings.
- Rewards are typically distributed proportionally to each user’s contribution.
- May offer lower returns due to fees charged by the pool operator.

Dedicated vs Liquid Staking:

Liquidity:

— Dedicated: Tokens are locked and illiquid during the staking period.
— Liquid: Users receive derivative tokens, maintaining liquidity and usability.

Flexibility:

— Dedicated: Limited flexibility; tokens can’t be used for other purposes while staked.
— Liquid: High flexibility; derivative tokens can be used in DeFi or traded.

Technical requirements:

— Dedicated: Often requires technical knowledge to run a validator node.
— Liquid: Usually managed by protocols, reducing technical barriers for users.

Rewards:

— Dedicated: Typically offers higher rewards as there’s no intermediary.
— Liquid: May have slightly lower rewards due to protocol fees.

Risk:

— Dedicated: Stakers bear full responsibility for node operation and associated risks.
— Liquid: Risks are often shared or managed by the liquid staking protocol.

A brief overview of Restaking

Restaking is a relatively new concept in the blockchain space. Here are its key features:

Definition: Restaking allows users to reuse their staked assets as collateral for other blockchain networks or applications.

Multi-chain utility: It enables a single asset to provide security for multiple networks simultaneously.

Increased capital efficiency: Users can earn rewards from multiple sources without increasing their initial stake.

Risk and reward: While it can potentially increase returns, it also introduces additional complexity and risk.

Implementation: Protocols like EigenLayer are pioneering this concept, allowing Ethereum stakers to restake their ETH for additional rewards.

Impact: Restaking has the potential to enhance the security of smaller or newer blockchain networks by leveraging the security of larger, more established networks.

Risks associated with dedicated staking, liquid staking, and restaking

Dedicated Staking Risks:

1. Lockup period: Funds are often locked for a set period, reducing liquidity.
2. Technical failures: If you run your own node, technical issues could lead to penalties.
3. Slashing: Validator misbehavior (intentional or not) can result in loss of staked funds.
4. Opportunity cost: Locked funds can’t be used for other potentially profitable activities.
5. Minimum stake requirements: High entry barriers in some networks.

Liquid Staking Risks:

1. Smart contract vulnerabilities: The protocols managing liquid staking could have bugs.
2. Centralization risks: Some liquid staking providers may accumulate too much power.
3. Derivative token volatility: The value of liquid staking tokens may not perfectly track the underlying asset.
4. Regulatory uncertainty: Liquid staking tokens might face regulatory challenges.
5. Counterparty risk: Reliance on the liquid staking protocol to manage staking operations.

Restaking Risks:

1. Increased complexity: More moving parts mean more potential points of failure.
2. Amplified slashing risk: Restaked assets could be slashed on multiple layers simultaneously.
3. Smart contract risk: Vulnerabilities in restaking protocols could lead to loss of funds.
4. Systemic risk: Issues in one layer or service could cascade through the system.
5. Illiquidity: Restaked assets may be subject to longer or more complex unbonding periods.
6. Regulatory uncertainty: The novel nature of restaking may attract regulatory scrutiny.
7. Governance attacks: Malicious actors could potentially use restaked assets to influence multiple protocols.
8. Economic attacks: The interconnected nature could create new vectors for economic exploitation.

Comparative Risks:

1. Complexity: Restaking > Liquid Staking > Dedicated Staking
2. Potential Returns: Restaking > Liquid Staking ≥ Dedicated Staking
3. Liquidity: Liquid Staking > Restaking > Dedicated Staking
4. User Control: Dedicated Staking > Liquid Staking > Restaking

It’s important to note that while restaking potentially offers higher rewards, it also comes with the highest level of risk and complexity. Users should carefully consider their risk tolerance and understanding of these systems before participating.

As of April 2024, restaking is still a relatively new concept in the blockchain space. However, here are some of the prominent providers and protocols that have been working on or offering restaking services. Please note that this field is rapidly evolving, and it’s always best to do your own research for the most up-to-date information.

EigenLayer:

— The pioneer in the restaking space.
— Allows restaking of ETH and liquid staking tokens.
— Supports various middleware services.

Polygon:

— Has been working on integrating restaking into its ecosystem.
— Aims to use restaking to enhance security and scalability.

Cosmos:

— The Cosmos ecosystem has been exploring restaking concepts.
— Some projects within Cosmos are developing restaking mechanisms.

Lido:

— While primarily a liquid staking provider, Lido has been exploring restaking options.
— Considering integrations with restaking protocols.

Rocket Pool:

— Another liquid staking provider that has shown interest in restaking.
— Exploring ways to offer restaking to its users.

StakeWise:

— Has been working on restaking solutions for its liquid staking tokens.

Ankr:

— Exploring restaking options for its liquid staking products.

Obol Network:

— Focusing on distributed validator technology, which has synergies with restaking concepts.

SSV Network:

— Working on distributed validator infrastructure that could support restaking mechanisms.

How do rewards on EigenLayer work?

EigenLayer generates rewards for restakers through a complex mechanism that leverages existing Ethereum staking while providing additional utility. Here’s a breakdown of how it works:

Base Layer Staking:

— Users first stake their ETH on Ethereum’s base layer or through liquid staking providers.

Restaking on EigenLayer:

— These staked assets are then “restaked” on EigenLayer, essentially extending their utility.

Middleware Services:

— EigenLayer allows the creation of middleware services that can use this restaked ETH as security.

Service Fees:

— These middleware services charge fees for their use, which forms a key part of the reward structure.

Reward Generation:

— Rewards come from two main sources:
a) The original Ethereum staking rewards
b) Fees generated by the middleware services secured by restaked ETH

Risk/Reward Balance:

— Higher rewards are possible due to the additional utility, but this comes with increased risk.

Slashing Conditions:

— If a middleware service misbehaves, the restaked ETH can be slashed, adding a layer of accountability.

Reward Distribution:

— Rewards are distributed to restakers based on their contribution to the system’s security.

Market Dynamics:

— The actual reward rates are determined by market forces, including demand for middleware services and the amount of ETH restaked.

It’s important to note that while EigenLayer aims to increase capital efficiency and rewards, it also introduces new complexities and risks. The system is still relatively new and evolving.