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In our recent gathering, we had the privilege of hosting TN from Pendle, Rok from Etherfi, and Ben from Mantle. Together, we embarked into the world of liquid restaking and decoding the hype surrounding this hot topic in 2024.

The panel delved into a myriad of aspects, ranging from challenges and opportunities, to risks and rewards. We also took a glimpse into the future of restaking, exploring the untapped potentials in this early landscape.

Whether you're a seasoned degen or just dipping your toes into liquid restaking, this discussion is a treasure trove of insights. So, grab a coffee and catch up on this engaging dialogue that unfolded during our session.

Let the exploration begin!

What do you think about the perception of restaking disrupting Ethereum?

Mohak: I have a slightly different perspective on this. Many discussions about restaking often center around Ethereum having staking. In my view, it's not just about Ethereum having a staking layer; we use Ethereum as the highest quality asset. Even if Ethereum didn't have staking, we could still build all the restaking layers. When sharing cryptoeconomic security, we aren't actually relying on Ethereum's staking. That's why I'm really excited because, even if you look beyond that, the number of applications built with ETH being the highest quality asset class is just incredible!

Rok: I think the current restaking hype is a bit insane, but the opportunity it presents is massive, and I'm super excited to see what comes out of it. However, this space is so niche, and that's what interests me a lot because I see restaking as the natural evolution of staking. I believe we'll eventually stop using the term 'restaking,' and it'll simply be 'staking.'

Liquid restaking protocols currently manage risks for stakers to generate yield. The thing this shows is that people in crypto crave rewards, no matter how they come. There's no question that restaking is the biggest narrative, but it's a bit critical, and there's a lot of work to be done. I look forward to some of these AVSs coming alive, and it looks like EigenDA should be coming in the upcoming weeks or months, which is super exciting. It's kind of the first AVS that will go online, but the security risk curve for restaking with EigenDA is pretty low. It's just a data center with no slash mechanism currently on it, so I am super interested to see where this space goes. There's so much building that needs to happen to make some of this stuff a reality and good for users. Right now, it's really just restaking points mania. It is what it is. It's certainly been fun to watch the community galvanized behind it.

Everyone here has been giving some form of rewards via points or extra yield. What is your plan for a sustainable ecosystem once the rewards are out of the picture?

Ben: Personally, I'd say the current points mania indicates users' interest in engaging with platforms that offer points. Many projects are introducing new elements to gain traction and loyalty through these points. At Mantle, we have ideas for providing incentives to mETH users on various Layer 2s. It would create a more holistic experience by involving restaking on Eigenlayer and different protocols. Eventually, we anticipate more use cases emerging with this narrative persisting throughout the year. It will be interesting to see how far this can go.

TN: I think that the points meta is a form of price discovery for an intangible asset and is expected to be produced in the future. So, all comes in the form of points, right? But, fundamentally, in regards to restaking assets, the incentive mechanism will still continue to exist even after the points sunset, and the actual tokens are introduced because there will be AVS, and the AVS will then be offering that extra yield to attract and sustain the risk-takers. I am of the opinion that multiple AVSs will compete, and then those who offer the higher yield will be able to attract validators, operators that will help secure the networks. This is a very likely scenario of how things will eventually play out, and it will contribute to a very healthy ecosystem. Restaking basically enables a place for renting security.

Rok: Adding to that, the Pendle pool is super sweet. I've seen these questions a couple of times, and the more I think about it, it was one of the first examples where you get the smart money or institutions taking this as a signal on how balanced the network is. Stuff like that is a huge evolution to grow that space because currently, the crypto space is all working with the same whales, right? There are the same whales going into this manhole that gets this massive increase in their TVL. We have to grow that pie, right? Currently, this pie should be moved into different areas, and how do we grow that pie? With protocols like Pendle and getting fixed yield out there, it brings some of the institutional stuff and gains more trust. So, this is super, super interesting to me. Once institutions get involved in the ETH game and realize that you can earn yield on top of this asset... I just think getting deeply involved on platforms like Pendle is super important, and that's kind of the thing I am watching.

Mohak: I want to start by adding one point that Ethereum staking, when it was designed, was not intended with the perception of restaking. So even once the points run out, once the extra yields run out, the Ethereum base staking yield will also go up. We have been looking at Ethereum's yield, which is around 3.3% or so. The whole Ethereum staking was launched in a bear market, so the network activity has obviously been much lower than expected. When the network activity increases, the base level yield goes up. As more and more DeFi applications come into play, then more MEV boost will be there. So I think the base layer yield will also increase.

Rok: I am on the other side; I think we are gonna go down. When people see what we have seen, the restaking rewards come up, more people will stake, and therefore, the denominator at some point is going to settle down. I think it'd be sub 2%, honestly, when it settles down, but who knows? I could be totally wrong. And that's why I think that restaking will just become staking because people are going to feel like 2% is not worth it, and the base staking rewards might not intrigue people.

Mohak: But in bull market, people might not want to be locked up. If ETH price goes up by 20% or maybe 200%.

Rok: Yeah, it's just that kind of thing, right? How speculative our market is. If you tell someone, "Hey, I am going to give you 5%," they'll be like, "Oh, shit! That's great!" But I remember when we were first trying to get up and going, and we were like, "Yeah, we can do like 4-5% rewards," it felt like blah to them. It's pretty funny, but it'll be interesting to see what happens in the next 12 months or so. I think leveling on restaking kind of will increase those rewards and the appeal.

Ben: I don’t think its important as you guys mentioned, weather its 5%, 4%, 3%. I think we have already had some kind of different idea of how much we want to make in a year or some kind of view. I am also just wondering weather its because of the narrative and everybody is hopping onto it or its going to be sustainable weather next year like you mentioned. I think it’ll be interesting to see what happens when the whole point system also slowly disappears over time.

What challenges do you all foresee in the adoption of liquid restaking and restaking in general? Do you foresee any potential black swan events that you think might impact this growing space?

TN: I think the primary concern regarding restaking is probably overloading the consensus, which Vitalik raised. I believe restaking expands beyond its primary function of lock validation and network security. So many other AVSs can exist on top of it. Therefore, I think there is a nonzero chance that things can get overcrowded. If Ethereum consensus failed, it could directly affect a 600 billion dollar worth of the ecosystem. Yeah, so the black swan is possible, even though the likelihood is relatively marginal.

Rok: I think there are going to be tons of flavors of restaking. Like I mentioned, in EigenDA, there is no slashing mechanism even on AVS. The really interesting thing is, as you go further on the risk curve, some of you are going to get rekt. You know, with base staking, everyone is very concerned about slashing to start with. For example, there are insurance protocols built around it to avoid that, but it's actually extremely difficult to get slashed. There have been a couple of events that have been close, but it's just really, really difficult. It's not a 0% chance, but it's a pretty low chance to get slashed. If you are competent, you won't get slashed. I think that changes with the AVS world, and I think that some people are going to get rekt. How crypto people work is that they are going to chase the rewards, so there is going to be some stuff where they are going to offer high rewards but with a high slash chance. So I don't know, just seeing how that goes. I think there is going to be a roller coaster of trust. That kind of happens from the user perspective, you know. TN mentioned kind of like the technical aspects of this, the risks to it. I am more talking about the user adoption side of things. It's pretty clear that people are going to ape in restaking in all the flavors. Even like post itinerant airdrop. AVSs are going to airdrop in the next 12 to 18 months. But then the actual fun starts when you actually start getting the restaked rewards and see who does well and manages risk well. Like who gets their ETH with the best AVSs.

Mohak: As Rok mentioned, in any layer 1 chain, it's usually very, very difficult to get slashed. But what's going to happen depends on when the AVS becomes permissionless. Also, this is very complex. What is going to happen is people are going to create another layer such as AVSs, and people are going to ape into these AVSs without understanding the rules of consensus of this second layer. And if they don't follow these rules, the original ETH will get slashed or taken. So a very ELI5 example of this is that you create a discord community. To enter this exclusive discord group, you need to have 100 ETH staked. It's your ETH; you keep the yield, but you have to redelegate the withdrawal keys, and then there are rules in the community. And one day, by mistake, you send some picture that is against the rules, there is a 10% slashing. And you will think, "Oh, shit! What happened? I just lost my money." This is a very, very simple example.

There’s this report that recently came up by Nethermind and Four Pillars called "Restaking in Shared Sequencers" that got me thinking how to make that layer more and more configurable. Because right now, we don't know who's underwriting the risk management. I think that will evolve, and it will be fun to see.

Rok: I think Mohak's certainly right. People don't really see the risk in this thing. That's actually why the Pendle pool is so intriguing to me because the risk is pretty minimal. One of the things, as far as trust and where people go, a lot of people have talked about it, the tail risk and the black swan event with Lido, as opposed to the amount of ETH that they have on Ethereum. I honestly think restaking is going to be a replatforming, which I think is super exciting and healthy for Ethereum as a whole. So that's one thing that I am probably the most excited about, that restaking is going to be the replatforming provider. It's going to be like the base from staking, and I think there are going to be multiple players again. Which is good and healthy. Like we have already said that we are going to limit ourselves to 25%. Hopefully, there are good protocols there that can kind of put stuff out like ClayStack and Mantle and others. There are going to be multiple layers of restaking, and it's good if there is not one dominant player. But I do think there is going to be replatforming.

How do you plan to avoid centralization of capital within a few AVSs?

Rok: I don’t know is my honest answer. The first thing, namely risk and what to do on the risk side of things and how we can protect people, but there's so much to be done. So it's all just a guess right now. It's all very academic and not in practice yet. So we'll see. We have a thesis and thoughts on it, but we'll get to see first and foremost we are focused on risk. It's one of those things we talk about. Decentralization is great in theory but becomes harder to do in application. And then people just lose focus on decentralization. So, we have always had decentralization as a big focus for us, but it's very hard to scale when you focus on it foremost. You just got to keep it ingrained as you grow and move forward. I don’t know what it’ll look like, but there will certainly be centralizing forces that happen. And then it's on good actors to self-correct and move forward. There's the best intent behind them. So hopefully, things are designed well with limitations put in. It's all TBD.

Mohak: What I feel is that, for example, if we go back a little bit, the same thing happened in liquid staking. Like you start with a very, very centralized approach, and someday go decentralized. But the problem is, if it is not well thought out and ingrained from the beginning itself, then the challenge is, you never can do it. Because the problem is when you have $16 billion dollars of TVL, it's very, very hard to make major changes to the protocol. That's why you'd have to be fully decentralized from the beginning; it's a journey but it has to be thought from the beginning. For example, what we did was when we created the whole validation layer with DVT, we introduced this model called VFP which is Validator Funding Provider. When solo stakers come to stake, you have to put a very high bond that is very high. These VFPs can underwrite the bond on the basis of reputation to other validators, and validators are happy to borrow these bonds for higher commissions. So this will at least decentralize the validator set. I have always tried to make sure that we have decentralization from the ground up while building ClayStack.

TN: I am of two minds, like whether there's a serious risk of centralization or not. So, on the one hand, I do think that some form of centralization of AVS is inevitable, and whoever becomes the winner will have a large influence on Ethereum validation. But this has also created opportunities for new protocols to emerge. For example, some protocols are exploring ways to help with the centralized situation by focusing on decentralization in the form of DVTs. The SSV network is addressing the LSD centralization. On the other hand, the restaking segment also happens in multiple different types of flavors. Ultimately, I think people will probably stake their assets with various protocols based on the various services offered. For example, I’ll probably stick my assets with protocols that maybe specialize in bridge validation, and then it might end up in a situation where users and people stake in accordance with their hobbies and interests in the different types of sub-segments as a result of AVS. This is slightly a different opinion from, I guess, what other people are expecting. But we’ll see how things will play out.

Mohak: Just wanted to add one analogy that I can think of is if you remember the early days of this blockchain called EOS, where it had a permissioned validator set. In the beginning, because these validators were making so much money from commissions, they were bribing. First of all, they were lowering the commission, but the protocol did not allow them to. So they started bribing different communities with extra yield, extra money, different others so users will come and delegate to them. And I think that's going to happen and to some extent, in the beginning, it will be inevitable with extra rewards and bribes.

How do you intend to communicate the risk reward tradeoff to the end users?

Ben: I guess education is definitely very important. Also, in general, users who get into this space naturally have a higher risk tolerance, but not taking it as an advantage. So, I think as a project, we have been doing restaking as a security. I mentioned earlier that security is so important as without it, people are eventually going to come and say, "Oh! you didn't do your due diligence, you didn't get it audited, or you don’t have a proper AVS system," and stuff like that. And also, I think getting bigger guys to speak about it more. This is such an innovative product and early narrative, which people should slowly pay attention to, but definitely also do more research before going into it. I’m personally still doing a lot of research on a day-to-day basis, trying to understand a little bit more because it's still fun to write, even though they call it the magic internet money. But do take precautions.

Rok: There are like two sides to this. I don't think it matters how much you educate people. When people see rewards or yields, they are gonna go. So it's really on the protocols to be very good actors. We have to do the job of doing that. The education of it, you know, maybe it's a tough myth to me, but I don't think it matters. People see a number, and they want to see the number go up, and they really don't care that much about the risk. The other side, I think, is that there's going to be institutions that want to get involved, and they're going to do a deep dive themselves of where they're going to deploy and where they're going to be like investors. You know, the AVSs that they are going to deploy with, so perhaps some of the education comes there. I just think the most important thing on this is being good stewards of capital. Protocols being good stewards of capital, right. Avoiding rugs and hacks and over time trust kind of will be gained. I don't think it matters how much education you do on the risk side of things. The majority of users, if you give rewards, that's going to be enough. So it's a futile effort, and I think that’s the reality.

Mohak: Yeah, the challenge is it's very, very, very hard for crypto protocols since the attention span of people is very, very low. I haven't found a single dapp that has web3-style tutorials. In crypto, people want to figure it out themselves; if you stop them for a few seconds, they are gone. At the same time, they want us to make it simple. You have to make them go through a journey, and people need the meat straightaway i.e. the rewards. You can do videos and education, but most people don't care. So the teams are always in a dilemma whether to spend more time and resources on education which gets the least reaction. Finding a good balance is very, very hard, but I am sure many protocols will try to educate their users.

TN: Yeah, it's actually extremely difficult. To that extent, we can do a simplified UI/UX to help users make better decisions to manage their risk appetite. Beyond that, I agree that we can put up as many different types of materials as comprehensive as they can be. But most of the time, people don't actually read materials. The other way I think, in order to disseminate this information is through maybe a network of influencers and thought leaders; they are probably more impactful than just written materials. And so if there are any kind of key points that a protocol or team wishes to highlight, it's best on through some of these outlets. But yeah, to the extent that we have experienced, these are probably some of the more effective avenues but they're not perfect.

Mohak: Actually, I wanted to add something on that. It is very challenging, let's say there are four protocols in one space, right? Maybe even beyond an LRT. If you spend too much effort in educating users about the risks, then some of the users will think, "Oh, okay. So this protocol has all these risks. Let me go to the competitors, who have no risk because they have not talked about it." That's why the balance is so hard.

TN: Yeah, sure enough, the balance is always very, very delicate, and we just need to be mindful of what we want to convey. Without over conveying risk and fault.

What are your emphasis on slashing protection and more security in the space? How are we working on solving this problem?

Rok: Yeah, again, I this stuff is just so new that I don't even know is my honest answer. You know, people bought up Nexus Mutual's and slash insurance, and you know, like I said, slashing events are nonexistent. So I do think it's gonna happen more in the restaking space, but like, how do you price that risk and whatnot and then like I mentioned EigenDA doesn't even have a slashing mechanism. So I don't know. Maybe on our end, we'll probably start conservative to start, in the interest of protecting capital as we learn more and more of the space and where we can take risk, but I don't know as far as like the, you know, the slashing of the stuff's gonna go. So many unknowns is my honest answer.

Mohak: Restaking is the subset of staking, right? Rok said in the beginning about fixed yield, so anyone who comes to this space for yield faces the three primary risks of staking itself, which are the price risk, then the smart contract risk, and the slashing risk. In the case of restaking, it's the same, which is like slashing of AVSs. Now, previously, it was very, very difficult for any insurance protocol to underwrite insurance for most smart contracts. It has nothing to do with TVL; rather, it has to do with how long the protocol has been alive. So for any new protocol, it was just like very, very difficult to get insurance. The reason being if your protocol gets hacked, then the insurance protocol is just like sitting ducks seeing all the money flowing out and then end up paying the boundary or whatever. And now what's happening is we've already been seeing so many alert monitoring protocols coming up or companies coming up, where the back data shows that a lot of times some of these projects have been able to highlight these hacks 20 to 25 minutes before even that or at least a few seconds before. I think there's one report which said 93% of the hacks were alerted at least a few minutes before. So, I think more and more companies will evolve in that space as more risk analysis frameworks will be made. And then it's much easier for any insurance protocol or insurance company to underwrite these protocols or to these risks. And then you can look at a structured environment once you overcome all these four risks.

Ben: There's so much unknown coming around. I think it will be more of learning as you go, continuing as you build, and you realize, okay, there are certain risks that will come. Yeah. I personally could not know much about what we can do other than mentioning insurance protocols, but it's also hard to have it completely protected. So it's more about managerial positions, being careful, and just getting to use and stuff but also still being conservative because it's still such a new innovative space.

TN: Insurance is somewhat of a baseline. And the other very important implementation is just getting multiple audits. So I'm talking about security from the perspective of the protocol. In terms of audits, definitely, I think as much as possible, have a mix of different types of auditors. Some auditors are probably more specialized in reviewing contracts of certain types of protocols. And then there are others that are more specialized in security and economic attacks. So just engage the different types of auditors to review the contract and make sure all the different grounds are covered. And then I think the other very important aspect is to have a venue for bond reportings through platforms like Immunify because ultimately, with the contracts being so open and public, many times I think there are good actors and good actors don't necessarily want to exploit the product, but they also want to be rewarded for the work that they've put in for identifying a security flaw. So having a venue for them to express a view and then get rewarded is a pretty important thing that I feel protocols should adopt. From a protocol perspective, I think these three are fundamentally very important in order to ensure secure platforms for users. I think beyond that, it's really just thinking about the types of infrastructure that we can potentially use. So like what Mohak has mentioned, with AI detection, most of the modern and recent exploits had been detected at least minutes prior to the actual execution. So I think things like Hypernative, they have been reporting some of these incidents with several minutes to spare. We've also seen very successful cases, funds getting withdrawn prior to an attack. So I think with time, these tools will become more sophisticated. And hopefully, we can offer a more secure environment for most users to participate in DeFi protocols.

We are overflowed with gratitude for each and every one of you who made it to the event! Your presence and engagement made the discussion insightful and meaningful. Looking forward to more fruitful discussions in the future. Stay tuned!

ClayStack is a modular DVT-based Liquid Restaking Protocol currently live on Ethereum mainnet. With ClayStack, you can now mint csETH by depositing native ETH and LSTs. csETH holders will automatically accumulate CLAY Points and EigenLayer Restaked Points, unrestricted by EigenLayer deposit caps. All while earning rewards on your staked assets.

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