Author: Lawrence Lee
After receiving two rounds of financing, including a $12 million financing led by Polychain and financing from Binance labs, the restaking project Solayer on the Solana chain has become one of the few bright spots in the DeFi field in the recent market. Its TVL has also continued to rise, and has now surpassed Orca, ranking twelfth in TVL on the Solana chain.
Solana Project TVL Ranking Source: DeFillama
The staking track is a subdivided track of crypto-native and also the crypto track with the largest TVL. Its representative tokens LDO, EIGEN, ETHFI, etc. have struggled in this round of cycles. Apart from the Ethereum network they are in, are there other reasons?
How competitive are the staking and restaking protocols around user staking behavior in the entire staking ecosystem?
What is the difference between Solayer's restaking and Eigenlayer's restaking?
Is Solayer's restaking a good business?
I hope this article can answer the above questions. Let's start with staking and restaking on the Ethereum network.
In this section, we will mainly discuss and analyze the following projects:
The top liquid staking project Lido, the top restaking project Eigenlayer, and the top liquid restaking project Etherfi on the Ethereum network.
For Lido's business logic, we briefly describe it as follows:
Due to Ethereum's insistence on decentralization, ETH's PoS mechanism softly limits the upper limit of a single node's staking. A single node can only achieve higher capital efficiency by deploying a maximum of 32 ETH. At the same time, staking has relatively high hardware, network and knowledge requirements, and the threshold for ordinary users to participate in ETH staking is high. In this context, Lido has carried forward the concept of LST. Although LST's liquidity advantage has been weakened after Shapella upgraded and opened withdrawals, LST's advantages in capital efficiency and composability are still solid, which constitutes the basic business logic of the LST protocol represented by Lido. In the liquid staking project, Lido's market share is close to 90%, leading the market.
Liquid staking participants and market share Source: Dune
Lido protocol's revenue mainly comes from two parts: consensus layer revenue and execution layer revenue. The so-called consensus layer revenue refers to the PoS issuance revenue of the Ethereum network. For the Ethereum network, this part of the expenditure is paid to maintain the network consensus, so it is called consensus layer revenue, which is relatively fixed (the orange part in the figure below); while the execution layer revenue includes the priority fee and MEV paid by users (for the analysis of the execution layer revenue, readers can go to Mint Ventures' previous article to learn more). This part of the revenue is not paid by the Ethereum network, but by the user in the process of executing the transaction (or indirectly paid). This part changes with the popularity of the chain and fluctuates greatly.
Lido Protocol APR Source: Dune
The concept of restaking was proposed by Eigenlayer last year, and has become a rare new narrative in the DeFi field and even the entire market in the past year or so. It has also given birth to a series of projects with FDV exceeding 1 billion US dollars when they were launched (in addition to EIGEN, there are ETHFI, REZ and PENDLE), as well as many restaking projects that have not yet been launched (Babylon, Symbiotic and Solayer, which we will focus on below). The market heat can be seen (Mint Ventures once invested in Eigenlayer last year). Eigenlayer’s Restaking, according to its definition, means that users who have already staked ETH can stake their staked ETH again on Eigenlayer (thereby obtaining excess income), hence the name ‘Re’Staking. Eigenlayer named its service AVS (Actively Validated Services), which can provide services for various protocols with security requirements, including side chains, DA layers, virtual machines, oracles, bridges, threshold encryption schemes, trusted execution environments, etc. EigenDA is a typical representative of using EigenlayerAVS services.
Currently using Eigenlayer AVS protocol Source: Eigenlayer official website
Eigenlayer's business logic is also relatively simple. On the supply side, they raise assets from ETH stakers and pay fees; on the demand side, protocols with AVS demand pay to use its services, and Eigenlayer, as a "protocol security market", matches and earns a certain fee.
However, looking at all the current restaking projects, the only real benefit is still the tokens (or points) of the relevant protocols. We are not sure whether restaking has obtained PMF: from the supply side, everyone likes the extra benefits brought by restaking; but the demand side is still a mystery: are there really protocols that will purchase protocol economic security services? If so, how much will it be?
Multicoin founder Kyle Samani's doubts about the restaking business model Source: X
From the target users of Eigenlayer's tokens: oracles (LINK, PYTH), bridges (AXL, ZRO), and DA (TIA, AVAIL), staking tokens to maintain protocol security are the core use cases of its tokens. Choosing to purchase security services from Eigenlayer will greatly weaken the rationality of its token issuance. Even Eigenlayer itself, when explaining the EIGEN token, used very abstract and obscure language to express the view that "using EIGEN to maintain protocol security" is the main use case.
Eigenlayer supports two ways to participate in restaking: using LST and native restaking. The way to use LST to participate in Eigenlayer Restaking is relatively simple. After the user deposits ETH in the LST protocol to obtain LST, the LST can be deposited into Eigenlayer. However, the LST pool has a long-term quota. During the quota period, users who still want to participate in restaking need to perform native restaking as follows:
The user first needs to complete the entire process of staking on the Ethereum network by himself, including fund preparation, execution layer and consensus layer client configuration, setting withdrawal vouchers, etc.
The user creates a new contract account named Eigenpod in Eigenlayer
The user sets the withdrawal private key of the Ethereum staking node to the Eigenpod contract account.
It can be seen that Eigenlayer's Restaking is a relatively standard 're'staking. Whether the user deposits other LST into Eigenlayer or native restaking, Eigenlayer does not directly "touch" the user's staked ETH (Eigenlayer does not issue any LRT). The process of Native restaking is a "complex version" of ETH's native staking, which means similar funding, hardware, network and knowledge thresholds.
So Etherfi and other projects quickly provided Liquid Restaking Tokens (LRTs) to solve this problem. Etherfi's eETH operation process is as follows:
Users deposit ETH into Etherfi, and Etherfi issues eETH to users.
Etherfi pledges the received ETH, so that it can obtain the basic income of ETH staking;
At the same time, they set the node's withdrawal private key to the Eigenpod contract account in accordance with Eigenlayer's native restaking process, so that they can obtain Eigenlayer's restaking income (as well as $EIGEN, $ETHFI).
Obviously, the service provided by Etherfi is the best solution for users who hold ETH and want to earn income: on the one hand, eETH is easy to operate and has liquidity, which is basically the same as Lido's stETH experience; on the other hand, users deposit ETH into Etherfi's eETH pool and can obtain: about 3% basic ETH staking income, Eigenlayer's possible AVS income, Eigenlayer's token incentives (points), and Etherfi's token incentives (points).
eETH accounts for 90% of Etherfi's TVL, contributing to Etherfi's peak TVL of more than $6 billion and a maximum FDV of $8 billion, making Etherfi the fourth largest staking entity in just half a year.
Etherfi TVL distribution Source: Dune
Pledge ranking Source: Dune
The long-term business logic of the LRT protocol is to help users participate in staking and restaking in a simpler and easier way to obtain higher returns. Since it does not generate any income itself (except its own tokens), in terms of overall business logic, the LRT protocol is more like a specific income aggregator of ETH. If we analyze it carefully, we will find that the existence of its business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido is willing to "imitate" eETH with its stETH, Etherfi will find it difficult to match its long-term brand advantages, security endorsement and liquidity advantages.
Eigenlayer cannot provide liquid staking services. If Eigenlayer is willing to directly absorb users' ETH for staking, it will also greatly weaken Etherfi's value proposition.
From a purely business logic point of view, it is completely feasible for Lido, as the head of liquid staking, to provide users with liquid restaking services and provide users with a wider source of income. It is also completely feasible for Eigenlayer to directly absorb user funds for more convenient staking & restaking. So why doesn’t Lido do liquid restaking, and why doesn’t Eigenlayer do liquid staking?
The author believes that this is determined by the special circumstances of Ethereum. In May 2023, when Eigenlayer had just completed a new round of $50 million in financing, Vitalik wrote a special article titled “Don’t overload Ethereum’s consensus”, using a series of examples to elaborate on his views on how Ethereum’s consensus should be reused (that is, “how should we restake”).
As for Lido, since its scale has long accounted for about 30% of the Ethereum staking ratio, there have been constant voices within the Ethereum Foundation to restrict it. Vitalik has also personally written many articles to discuss the issue of staking centralization. This has forced Lido to make "aligning with Ethereum" its business focus. Not only has it gradually shut down the business of all chains except Ethereum, including Solana, its de facto leader Hasu published a statement in May this year, confirming the possibility of abandoning his own restaking business, limiting Lido's business to staking, and instead responding to the competition for its market share from LRT protocols such as Eigenlayer and Etherfi by investing in and supporting the restaking protocol Symbiotic, and establishing the Lido Alliance.
Reaffirm that stETH should stay an LST, not become an LRT.
Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.
Lido's position on restaking-related matters Source
On the Eigenlayer side, Justin Drake and Dankrad Feist, researchers at the Ethereum Foundation Dankrad Feist was hired as a consultant by eigenlayer very early. He said that the main purpose of his joining was to align "eigenlayer with Ethereum", which may be the reason why eigenlayer's native restaking process is quite contrary to the user experience.
In a sense, Etherfi's market space is brought about by the Ethereum Foundation's "distrust" of Lido and Eigenlayer.
Combining Lido and Eigenlayer, we can see that on the current PoS chain, around the staking behavior, in addition to the token incentives of related parties, there are three long-term sources of income:
PoS underlying income, the native tokens paid by the PoS network to maintain network consensus. The yield of this part mainly depends on the inflation plan of the chain. For example, Ethereum's inflation plan is linked to the pledge ratio. The higher the pledge ratio, the slower the inflation rate.
Transaction sorting income, the fees that nodes can obtain in the process of packaging and sorting transactions, including the priority fee given by users, and the MEV income obtained in the process of packaging and sorting transactions. The yield of this part mainly depends on the activity of the chain.
Pledge asset rental income, renting the assets pledged by users to other protocols in need, so as to obtain the fees paid by these protocols. This part of the income depends on how many protocols with AVS demand are willing to pay fees to obtain protocol security.
On the Ethereum network, there are currently three types of protocols around staking behavior:
Liquid staking protocols represented by Lido and Rocket Pool. They can only obtain the above-mentioned 1st and 2nd types of income. Of course, users can use their LST to participate in Restaking, but as a protocol, they can only extract the above-mentioned 1st and 2.
Restaking protocols represented by Eigenlayer and Symbiotic. Such protocols can only obtain the above-mentioned 3rd type of income.
Liquid restaking protocols represented by Etherfi and Puffer. In theory, they can obtain all three of the above-mentioned benefits, but they are more like "LST with aggregated restaking benefits"
Currently, the underlying income of ETH PoS is around 2.8% annualized, which means that it will slowly decrease as the staking ratio of ETH increases;
Transaction sorting income has been significantly reduced with the launch of EIP-4844, and has been around 0.5% in the past six months.
The base of the income from the rental of pledged assets is small and cannot be annualized. It is more dependent on the token incentives of EIGEN and the associated LRT protocol that make this part of the incentive considerable.
For the LST protocol, its income base is the number of pledges * the staking yield. The amount of ETH pledged is close to 30%. Although this number is still significantly lower than other PoS public chains, from the perspective of decentralization and economic bandwidth of the Ethereum Foundation, it does not want too much ETH to flow into staking (see Vitalik’s recent blog post, the Ethereum Foundation once discussed whether to set the upper limit of ETH staking to 25% of the total); and the staking yield is continuing to decline, from stabilizing at 6% at the end of 22, and often obtaining a short-term APR of around 10%, to only 3% now, and there is no reason to rebound in the foreseeable future.
For the above-mentioned protocol tokens, in addition to being constrained by the decline of ETH itself:
The market ceiling of LST on the Ethereum network has gradually become visible, which may also be the reason for the poor price performance of LST protocol governance tokens such as LDO and RPL;
For EIGEN, at present, restaking protocols on other PoS chains including the BTC chain are constantly emerging, which basically limits Eigenlayer's business to the Ethereum ecosystem, further reducing the potential upper limit of the market size of its AVS market, which is not very clear;
The emergence of the LRT protocol, which was not expected (the FDV of ETHFI at its peak exceeded 8 billion, exceeding the historical highest FDV of LDO and EIGEN), further "diluted" the value of the above two in the pledge ecosystem;
For ETHFI and REZ For them, in addition to the above factors, the overly high initial valuation brought about by the launch during the market boom is a more important factor affecting the price of its token.
The operating mechanism of the liquid staking protocol of the Solana network represented by Jito is basically the same as that of the Ethereum network. However, Solayer's restaking is different from Eigenlayer's restaking. In order to understand Solayer's restaking, we need to first understand Soalna's swQoS mechanism.
The swQoS (stake-weighted Quality of Service) of the Solana network officially took effect after a client version upgrade in April this year. The starting point of the swQoS mechanism is for the overall efficiency of the network, because the Solana network experienced a long period of network lag during the meme boom in March.
In simple terms, after swQoS is enabled, block producers determine the priority of their transactions based on the amount of stakers' stakes. A staker with x% of the entire network's stake can submit up to x% of the transactions (for the specific mechanism of swQoS and its far-reaching impact on Solana, readers can read Helius's article). After swQoS is enabled, the transaction success rate of the Solana network has increased rapidly.
Solana network successful and failed TPS Source: Blockworks
swQoS "floods" the transactions of small-amount stakers in the network, thereby giving priority to the rights and interests of larger-amount stakers in the network when network resources are limited, thereby avoiding malicious transactions from attacking the system. To some extent, "the more the stake ratio, the more network privileges you enjoy" is in line with the logic of the PoS public chain: the more the chain native tokens are staked, the greater the contribution to the stability of the chain and the chain native tokens, and the more privileges you enjoy. Of course, the centralization problem of this mechanism is also very obvious: larger stakers can naturally obtain more priority trading rights, and priority trading rights will bring more stakers, so that the advantages of the head stakers can be self-reinforced, further tending to oligopoly and even forming a monopoly. This seems to run counter to the decentralization advocated by the blockchain, but this is not the focus of this article. We can also clearly see Solana's pragmatic attitude of "performance first" on the issue of decentralization from Solana's consistent development history.
Under the background of swQoS, the target users of Solayer's restaking are not oracles or bridges, but protocols that have requirements for transaction passability/reliability, such as DEX. Therefore, Solayer calls the AVS service provided by Eigenlayer exogenous AVS, because the systems served by Eigenlayer are usually located outside the Ethereum main chain. The services provided by itself are called endogenous AVS, because the service objects are located within the solana main chain.
The difference between Solayer and Eigenlayer Source
It can be seen that although both of them are leasing the pledged assets to other protocols in need to achieve 're'staking, the core services provided by Solayer's endogenous AVS and Eigenlayer's exogenous AVS are different. Solayer's endogenous AVS is essentially a "transaction passability rental platform", and its demand users are platforms (or their users) that have a demand for transaction passability, while Eigenlayer is a "protocol security rental platform". The core support of its endogenous AVS is Solana's swQoS mechanism. As Solayer said in its documentation:
We did not fundamentally agree with EigenLayer’s technical architecture. So we re-architected, in a sense, restandardized restaking in the Solana ecosystem. Reusing stake as a way of securing network bandwidth for apps. We aim to become the de facto infrastructure for stake-weighted quality of service, and eventually, a core primitive of the Solana blockchain/consensus.
"We fundamentally disagree with EigenLayer’s technical architecture. So we re-architected, in a sense, restandardized restaking in the Solana ecosystem. Reusing stake as a way of securing network bandwidth for apps. We aim to become the de facto infrastructure for stake-weighted quality of service, and eventually, a core primitive of the Solana blockchain/consensus."
Of course, if there are other protocols on the Solana chain that have pledged asset needs, such as protocol security needs, Solayer can also rent its SOL to these protocols. In fact, by definition, any leasing/reuse of pledged assets can be called re-staking, not just limited to security needs. Due to the existence of the Solana chain swQoS mechanism, the scope of restaking business on the Solana chain is wider than that on the Ethereum chain. Judging from the recent hot on-chain activity of Solana, the demand for transaction passability is more rigid than the demand for security.
The business process for users to participate in Solayer restaking is as follows:
Users deposit SOL directly into Solayer, and Solayer issues sSOL to users
Solayer pledges the received SOL to obtain basic staking income
At the same time, users can entrust sSOL to protocols that have demand for transaction pass rates, thereby obtaining fees paid by these protocols.
Current AVS source of Solayer
It can be seen that Solayer is not only a restaking platform, but also a restaking platform that directly issues LST. From the perspective of business processes, it is like Lido that supports native restaking on the Ethereum network.
As mentioned earlier, there are three sources of income around staking behavior. On the Solana network, these three sources of income are as follows:
PoS underlying income, the SOL paid by Solana to maintain network consensus, this part of the annualized income is about 6.5%, and this part of the income is relatively stable.
Transaction sorting income, the fees that nodes can obtain in the process of transaction packaging and sorting, including the priority fee given by users for early transactions, and the tips paid by MEV searchers. The two parts add up to about 1.5% annualized, but the variation is large, depending on the activity on the chain.
Pledged asset rental income, renting the user's pledged assets to other protocols with demand (transaction passability, protocol security or other), this part has not yet reached scale.
SOL liquid staking (taking JitoSOL as an example) APY total income and MEV income Source
If we carefully compare the above three types of income of Ethereum and Solana, we will find that although the market value of SOL is still only 1/4 of ETH, and the market value of staked SOL is only about 60% of the market value of staked ETH, the staking-related protocols of the Solana chain have a larger market and a larger potential market than the staking-related protocols of the Ethereum chain, because:
1. In terms of PoS underlying income: the network issuance income that SOL is willing to pay has been higher than 50% since December 2023. ETH, and the gap between the two is still widening. Whether it is ETH or SOL staking, this accounts for more than 80% of its yield, which determines the income baseline of all staking-related protocols.
Ethereum and Solana token issuance rewards (i.e. the network's PoS underlying income) Source: Blockworks
2. Transaction sorting income: Blockworks uses transaction fees and MEV tips to reflect the real economic value (REV) of a chain. This indicator can approximately reflect the maximum transaction sorting income that a chain can obtain. We can see that although the REV of the two chains fluctuates greatly, Ethereum's REV has dropped rapidly after the Cancun upgrade, while Solana's REV has generally shown an upward trend and has recently successfully surpassed Ethereum.
Solana and Ethereum's REV Source: Blockworks
In terms of the rental income of pledged assets, compared with the Ethereum network's current security income, Solana's swQoS mechanism can bring additional transaction-through leasing demand.
Also, Solana's pledge-related protocols can expand their business according to business logic. Any liquid staking protocol can carry out restaking business, such as Jito we have seen; any restaking protocol can also issue LST, such as Solayer and Fragmetric.
More importantly, we currently do not see any possibility of reversal of the above trend, that is, the advantages of Solana staking protocol over Ethereum staking protocol may continue to expand in the future.
From this perspective, although we still cannot say that Solana's restaking has found PMF, it is clear that Solana's staking and restaking are better businesses than Ethereum.
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