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Simplifying staking to restaking

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tammy
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3 min read

Introduction

In traditional finance we use different types of strategies to get additional yield on our funds. These strategies can be as simple as keeping funds in our bank account and earning an interest over it or as complex as F&O trading. Staking is quite similar to keeping funds simply locked in bank account and overtime it earns an interest, let's dive a bit deeper.

Why does the bank give us interest on our funds?

The answer is simple, banks give low interest on depositor's funds and lends funds at much higher income. Hence they are able to pay a percentage on the depositors funds as well as keep a profit in this process.

What is staking?

We Deposit our token in a protocol/ vault earn a percentage of yield on it. In return the protocol gives us staking token which represent our share. Similar to how banks give us interest on our deposited funds. There are more nuances and details on how staking protocols are able to give us yield which is a topic for another blog.

example :

  1. Jin deposits 10ETH to Lido.

  2. Lido gives Jin 10stETH (staked eth) which represents Jin's share.

  3. Now Jin can use stETH in other de-fi activities. One of which can be taking part in restaking protocols.

What is restaking?

Simply, taking the staked tokens and staking it again to earn additional yield. ( certainly it's much more complex than that, we are focusing on the basics here)

example :

  1. jin takes 10stETH and deposits it to EigenLayer

  2. EigenLayer gives Jin 10rsETH(restaked eth) back which represents Jin's share.

  3. Now Jin can use that rsETH can engage back in de-fi activities

Points to remember

  1. Firstly, restaking is an advanced use-case in de-fi, it has it's benefits and disadvantages. With the ever changing world of de-fi, as a layman it's difficult to understand all the concepts properly and use it. If not done rightly one can easily loose their funds.

  2. Secondly, it's difficult to manage and track funds when we are using it through multiple protocols. Buying tokens from once place, staking it to another, getting back staked tokens, depositing to another restaking protocol, getting back restaked tokens using it to some other de-fi activities in some other protocols. not to mention no one is using the exact amount of funds/ tokens for every use-case. Eg.

    • Alice deposits 10USDC to Lido.

    • Lido gives back 10stUSDC to Alice which represents her share.

    • Alice deposits 10stUSDC to EigenLayer for restaking.

    • EigenLayer gives back 10rsUSDC to Alice, which represents her share.

Now, the above situation is idealistic, there's a few things which we have neglected here :

  1. user won't necessarily deposit same amount/ all of their tokens to staking or restaking. Alice is free to deposit 5stUSDC to EigenLayer and engage in other de-fi activities with the remaining tokens. (as we can see things start to get complicated as user engages with more and more de-fi protocols.)

  2. we are not taking in slippage, hence user won't receive the 1:1 value of tokens to staked tokens and restaked tokens.

My thoughts

Am I against de-fi or de-fi innovations? Certainly not. With the ever changing world of web3, everyday a new product (good/bad) is shipped. That's the beauty of it. As much as it's exciting to be a part of this ecosystem we should also understand it's pros and cons, be responsible and DYOR before going all in in buying "$DOGETOTHEMOON" coin or putting money in a random protocol which promises to 100X your yield in the next 10mins.

Lastly, de-fi is here to stay. Web3 has encountered some of the biggest hacks in the history of finance and tech and still it's continuing to thrive. Hacks happen, rug pulls happen. But de-fi continues to thrive.

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