One of the cornerstones of permissionlessness is that each participant must have something at stake. The standard thing at stake for almost every protocol, whether on-chain or chain-adjacent, is some provably scarce token that is subject to some kind of slashing condition. I commonly see this referred to as stake but that term is often overloaded. I call it hostage collateral. It exists to harm you in the event of misbehavior and it enables a system to trust some anon to make good on some kind of promise. The thing about hostage collateral today is we’re really overpaying for it as a whole ecosystem.
The final APR you pay a service provider includes:
- Operational costs of providing the service (operator time, equipment, power, etc).
- Contract risk. See my usual trust framework.
- Price risk of collateral. You either believe the collateral is going to outperform ETH or you’re paying me for how much money I’m expecting to lose holding your token. For example, looking at Secret or Regen Network’s price does not inspire confidence that the tokens I’m being paid in are going to even outweigh the monetary loss over time of my stake.
- Time cost of money. If the hostage collateral isn’t inherently interest bearing you’re going to have to make that opportunity cost up to me. Right now that’s about 4% for ETH because of staking yield and 5.5% for USD because the Fed says so. I sure as hell wouldn’t be a Chainlink node for 3% when I could make 4% staking ETH. Most service APRs today have a rate floor of the ETH staking rate.
When I look at most L1’s and chain-adjacent services today, even useful ones like Filecoin and Chainlink, and I see native token collateral in their tokenomic designs I just think how seasonal the designs we have today are going to look in another 5 years. In the same way no one makes utility tokens or Olympus DAO forks any more, no one in their right mind is going to launch a native collateral token in 5 years.
The cost minimizing strategy for protocols then is to use an interest bearing form of something people are willing to hold anyway. Generally speaking, this means interest bearing stablecoins or some variation of high market cap staked L1. This directly affects the latter two costs of your APR. In many cases, these costs dominate the service costs.
Nothing states that a protocol needs to be limited to one hostage collateral type or that hostage collateral can’t be reused. Unlike deposit collateral which is locked to secure something like a loan in Defi, hostage collateral isn’t owed to anyone. It’s just there so you have something to lose, it doesn’t have to be used to make someone else whole for whatever commitment you made and failed to fulfill. ETH from a misbehaving validator is just slashed, not given to whomever you inconvenienced. Because of this you can reuse hostage collateral several times and it still remains effective as long as you can be actively evicted from other services when your collateral is forfeit or otherwise no longer a sufficient guarantee for the protocol.
This gives rise to restaking as a service. Rather than just swapping out a collateral contract pointer in all your applications there will be hostage collateral market places that externalize the escrow, slashing, and eviction mechanics. Just as Gearbox is able to outsource deposit collateral and enable leverage on Uniswap, restaking services such as EigenLayer are going to outsource hostage collateral from everywhere else. Every protocol will be able to describe the collaterals they accept and the limits of how else that collateral is used. This will consolidate value to the collaterals the market settles on and increase effective APR for those tokens while driving the cost of each service down towards the operational and contract risk costs. The winners will be the collaterals the market consolidates on. The losers will be everyone else current using a native token as their hostage collateral.
Whether you are bootstrapping a project today or whether you already launched your collateral token you have to start designing for this paradigm shift now. You simply can’t afford not to. This is both because you are overpaying for services right now and because if you don’t someone is going to fork you and vampire attack you with the cost delta of services you are overpaying for. As we saw with food tokens in 2020, someone industrious will pave the way, people will see how easy it is to do, and then we’re going to have another mania on our hands with waves of grifters coming in and trying to steal the landscape from the people who put in all the hard work like Sushiswap tried to do to Uniswap. This is an existential threat to most of the web3 ecosystem we have today. If you’re a web3 developer, either start preparing now, or prepare to be forked.
This isn’t hypothetical; EigenLayer will be coming online in earnest next year. I hope we’ll see a bunch of competing restaking protocols just like we see a bunch of competing LSTs. It will be better for decentralization if the amount of ETH staked in any given restaking service remains below 33% of all staked ETH. So far, I’m not aware of direct competitors of EigenLayer. What I do see is a plethora of LRT (Liquid Restaking Token) protocols that build on top of EigenLayer:
These all follow the same sort of governance-heavy Lido model where governance approves a set of service providers and manages a treasury funded by a cut of the profits. Of the list above, my money would be on Stader and Ether.fi given their head start and quality of their documentation but they all more or less follow the same unimaginative template with cosmetic differences about what the protocol fee will be, how the token is issued, and what percentage of the protocol fees will go to incentivizing liquidity for their LRT. I’d personally be interested in seeing a permissionless solution where anyone can be a service provider. Instead of Lido clones, I’d like a Rocketpool for LRTs.
10/24/23