Why ETH Restaking Is A Recipe For Disaster On The Ethereum Network

ETH restaking is a new concept that lets you leverage your existing stake in Ethereum (ETH) to earn rewards on other protocols on top of the Ethereum blockchain. Basically, you are putting your staked ETH to “work” in multiple places at once.

The idea behind it came from a protocol called EigenLayer. They figured that since Ethereum has a strong network of validators securing it, why not allow those validators to secure other developing protocols? This would save those new protocols the time and resources of setting up their own validator network and give stakers a chance to earn extra rewards.

While it may sound like a win-win on paper, in actuality, it might not work out that way.

What Is Restaking?

Restaking is a new concept that unlocks more utility for staked assets. Here’s the gist:

  • Traditional Staking – Proof-of-Stake (PoS) blockchains rely on users staking their tokens to validate transactions and secure the network. However, these staked tokens are typically idle and unable to generate additional rewards.
  • Restaking – Restaking allows you to use your staked assets again. You can stake them on different platforms or programs to earn extra rewards. It is like getting double duty out of your crypto.

There are two main ways to restake:

  • Native Restaking – This is for validators who run an Ethereum validator node (you need 32 ETH to become a validator of the Ethereum network). They can leverage restaking protocols to earn additional rewards while strengthening the network’s security.
  • Liquid Restaking – This is for regular users who do not run a validator node. You can use liquid staking tokens (LSTs) to participate in restaking and enjoy the benefits without the technical complexity.

This concept is a growing trend in DeFi as it claims to improve capital efficiency and offers potentially higher returns.

Restaking TVL

According to DefiLlama data, the total value locked (TVL) of restaking is now at $13.178 billion. As the TVL on restaking keeps increasing by the day, some experts warn that it could lead to inflationary pressures on Ethereum.

For context, when restaking Ethereum, you are not actually adding more ETH to the overall staking pool; you are just reusing the same ETH that has already been staked on the Ethereum network just so you could earn a yield.

But, Restaking Adds More Security To The Network

“But, when you restake, you add more security to the network.”

Suppose you entertain the fact that restaking is actually adding more security to the network. In that case, you also agree that the Ethereum being restaked is actually minting another Ethereum in the system, making it inflationary. In other words, you are creating money out of thin air.

If you print more and more of the same token within the network, Ethereum might lose its value. This is why the TVL of restaking should not increase any further.

Without restaking, Ethereum’s price could be higher than $4,000 today.

Node Validators Are The Only Ones Benefitting From Restaking

This could be an unpopular opinion, but the concept of restaking was just invented so node validators can make money from Ethereum.

To summarize, what restaking actually does is:

  1. It creates an inflationary risk;
  2. It also creates a scenario of centralization.

Therefore, the more Ethereum the node validators have, the more opportunities they will have to validate transactions on the network, making the network centralized.

You may be earning from yields, but realistically, you just created another Ethereum in the system. Therefore, the more Ethereum you have in the system, the lower its value will be.

Moreover, it will also pose a challenge to the blockchain trilemma: Scalability, Security, and Decentralization. While scaling may seem feasible, it risks compromising network security. Similarly, enhancing security through increased tokenization may jeopardize decentralization, allowing whales to wield disproportionate influence over the network through their ETH holdings and voting power.

Final Thoughts

In my perspective, the TVL of restaking must not increase any longer; otherwise, Ethereum might become an inflationary asset. Honestly, restaking was not even conceptualized before. It only gained traction because whales saw it as a way to increase their earnings.

I am aware that Ethereum has a burning mechanism. Still, you must admit that these Ethereum whales are playing around with small-time traders and investors, as their invention has an inflationary impact on the coin’s tokenomics.

What do you think about the concept of restaking? Is it causing more harm than good? Or will it be here to stay? Let us know through our official social media channels!

Via: 2Usethebitcoin.com

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