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More Yield, More Problems: The Restaking Risks You Can't Afford to Ignore

by maxo1stFebruary 14th, 2025

NSO

Too Long; Didn't Read

Congratulations, you get 0.05% yield more and farm some points! Sounds great? Sure – until you realize that you’ve just staked risks across multiple layers without even knowing it. But you can ignore that – just like everybody else – until you can’t.

featured image - More Yield, More Problems: The Restaking Risks You Can't Afford to Ignore

Time Leap
The Basics: Staking, Liquid Staking, Restaking - What The … ?
Risks - Building a House of Cards on Ethereum
The Renzo ezETH Crash: A Warning
Can the additional APY truly compensate for the risk? Not really.
Even Vitalik Is Cautious About Restaking
The DAO Hack: A Lesson from Ethereum’s Darkest Hour
Conclusion: Innovation Needs Transparency

Time Leap

It’s spring 2024, and we all think we have to use our ETH to farm EigenLayer Points - the feeling of FOMO is simply overwhelming. These EigenLayer points are the ultimate meta to qualify for the EigenLayer airdrop, so other protocols also jump on this bandwagon and promise airdrops [1][2]. To farm these points, everybody starts to liquid-stake their ETH, then restake it, then restake it again on another platform. Preferably you do this several times to qualify for more potential airdrops like Etherfi, KelpDao, or Renzo. At this time, very few people asked themselves what exactly they were doing and what risks this game-changing innovation may pose for them or DeFi or Ethereum. But let's start at the beginning with a brief explanation of what I am talking about.

The Basics: Staking, Liquid Staking, Restaking

What The ... ?

Before trying to explain the risks, it is important to understand what these essential terms actually mean.

Staking involves locking up ETH on a Proof-of-Stake blockchain like Ethereum to secure the network and earn an annual APY of 3–4%, similar to a term deposit at a bank [3].

Staking has the advantage over Proof-of-Work blockchains in that it is much more energy-efficient and also more inclusive, as you can quickly participate in staking without specific hardware. However, the disadvantage is that you have no access to the assets while staking and there are sometimes lock-up periods.

Liquid Staking provides a remedy. It allows users to stake ETH through protocols like Lido and receive a tokenized representation (e.g., stETH), enabling them to earn staking rewards while maintaining the liquidity to interact with DeFi [4]. They can now use this as collateral or simply swap it for other tokens. The advantage is the liquidity of their assets despite staking and thus a contribution to the security of the blockchain.

The last innovation that is now causing the most headaches is restaking. The concept is new and I think it's the most abstract topic:

Restaking allows users to leverage their already staked ETH without having to unstake it. While continuing to secure Ethereum’s network, restaked ETH also supports the security of other protocols (Actively Validated Services, or AVS) like bridges, oracles, or other dApps, earning additional APY of at least around 3% upwards [5].

Now that the basics have been explained, the next ‘logical’ step that we could observe in DeFi, was that the restaked ETH must also be liquid again, obviously... And so, of course, several protocols immediately emerged that made this their mission. And so everyone started to wrap and package the ETH in more and more layers, as the yield keeps increasing with each layer.

In general, the technology behind restaking is innovative and offers new opportunities. For the many users, it remains a no-brainer: more yield for the same ETH. However, this does not take into account that with each additional layer, new risk is piled up, which makes the additional yield possible in the first place. But how big is this risk? Could it be a ticking time bomb, an actual systemic risk for Ethereum and the whole of DeFi?

Risks – Building a House of Cards on Ethereum

Slashing – the OG staking risk

Let's start with the first ‘layer’ of the risks, where you stake your ETH the traditional way to secure the network and achieve a yield of 3-4% (as of February 2025) [3]. The only risk here is the risk of Slashing. This is Ethereum’s mechanism for keeping validators honest; break the rules (e.g., proposing conflicting blocks, too much validator downtime, etc.), and you lose part of your staked ETH and are thrown out of the network [6]. Slashing is very rare, as there are only minimal to no incentives compared to the severe punishment for the validator operators, and as of February 2024, less than 0.04% of all validators have been slashed. To be specific, only 414 validators out of approximately 1,174,000 active validators [7]. To become a validator and take the step of locking up your ETH, you need at least 32 ETH, which is at the same time the upper limit per validator.

Too Big to Fail? - The Centralization Dilemma in DeFi

The 32 ETH are too expensive for many users, so they resort to liquid staking, where you use a platform to stake, such as Lido [4]. Lido allows you to stake your ETH via their validators and then receive an equivalent representation of it, namely stETH. This is relatively unproblematic, as the user can always exchange their stETH for their ETH. However, the current situation in DeFi is somewhat more problematic, as Lido is dominating the market share and has a total of 27.58% (12. February 2025, chart below) of all staked ETH under the control of its validators [8].

This currently equates to almost 9.35 million ETH [9]. As I said before, only 32 ETH can be staked per validator, which fortunately means Lido cannot stake all the ETH in one validator. However, I probably don't need to explain here that Lido, as a centralized unit, still has a hell of a lot of power, and you don't even want to imagine what would happen if Lido made a mistake one day. The concentration risk is huge. This is particularly evident in the case of misconfigurations, such as an incident in October 2023 in which around 20 nodes operated by Lido were slashed [10]. It is precisely this centralization issue that might be replicated in restaking protocols. Let's take the largest restaking protocol Eigenlayer for instance. Eigenlayer currently has a TVL of $12.3 billion, at its maximum in June 2024 was almost $20 billion [11]. At the time of writing, around 10% of the total staked ETH is restaked on EigenLayer [12]. In Lido and EigenLayer, we see a high concentration and centralization risk for the fact, that we are pursuing the mission of decentralization in DeFi and crypto. This entails a high potential risk with single points of failure bundled in Lido and EigenLayer. Thus a single mistake can lead to slashing or liquidation cascades.

Restaking Adds More Layers of Complexity – And Aore Layers of Risk

Restaking, like any brand new innovation, is a new technology that uses unproven and new infrastructure, tech, and code that still need to be tested. One technical error could result in an ultimate super disaster where an entire restaking protocol goes down. The smart contract risk in innovation is unfortunately relatively high. This risk is then combined with the fact that in restaking slashing can occur not only in one validator but also within a restaking protocol like Eigenlayer. The validator must now adhere to the rules of the Ethereum blockchain to stay online and also adhere to the rules of EigenLayer [13]. If it makes a mistake on Ethereum, the validator goes offline, it is slashed and, logically, it also goes offline on EigenLayer. If it makes a mistake on the EigenLayer Protocol, its AVS rewards are canceled, but at least the validator remains online on Ethereum if it has not also violated the Ethereum rules.

Without a doubt, restaking is innovative and opens up many opportunities, but still, we have to take into consideration that with the possibility of restaking ETH again and again we also add risks again and again. So the risks I just described can be replicated as often as the ETH is restaked. So slashing one Ethereum validator could trigger a cascade of slashing events across restaking protocols and the going offline of many validators, depending on how often the ETH was restaked. In addition, the liquid restaked ETH is also used in DeFi dApps for lending and borrowing, for example, and used as collateral. Each new layer piles on risks like slashing and liquidity cascades, setting up chain reactions most users don’t even notice—until the whole house of cards comes crashing down, which happened for example in the Renzo ezETH crash.

The Renzo ezETH Crash: A Warning

On 24 April 2024, the depeg (loss of price matching to the price of the asset that is supposed to represent the liquid version of; in this case, the price of ezETH to ETH) of ezETH of the Renzo protocol occurred. The price of this version of liquid restaked ETH temporarily fell to just $688 [14]. At the time, Renzo was the largest liquid restaking protocol behind Etherfi, as they just announced their airdrop and so their TVL rose 126% to $3.3 billion within a month [14]. The reason for this depeg was due to the end of the airdrop phase which led to a huge sell-off [15]. (Airdrop metas is a topic which I will address in another article) This led to incredible liquidation cascades, for example on Morpho or Gearbox with hundreds of liquidated users. It is estimated that a total value of between $56 million and $340 million was lost through liquidations that day [14][16]. This emphasizes the risks listed above, which are accepted even though they are not properly priced into the APYs in some cases.

Can the additional APY truly compensate for the risk? Not really.

Many users completely underestimate this risk or are not aware of it. I am not saying that users are not properly informed and not doing their research. However, the barriers to understanding and the explanations are sometimes so abstract that a user who does not deal with it professionally is not sufficiently informed in my opinion. I'll pick up on a statement from my last post in which I claimed that some products are simply becoming too complex and make onboarding more difficult than it has to be [17]. With liquid staking, a user can continue to trade with their ETH and achieve an additional APY of up to 2% through borrowing and lending protocols (with single asset exposure to stETH, for example) [18]. The risk here is relatively moderate as long as the user does not borrow against his collateral and risks being liquidated (which is entirely up to him). However, if we go back to deeper layers, such as in restaking, then the user uses the same stake of ETH multiple times to leverage his exposure. This increases the risks dramatically due to the continued nesting of synthetic and derivative ETH to remain liquid, while the APY only increases marginally and is no longer in relation to this risk taken on. The user almost completely relinquishes actual control at this level of risk and is not sufficiently rewarded for these risks. To emphasize my point, here is a quote from Marcin Kazmierczak, Co-founder & COO of Redstone:

“With some restaking protocols offering APYs of 15-20% on assets like ETH, there's a significant risk of investors chasing yields without fully understanding the associated risks.” [19]

Even Vitalik Is Cautious About Restaking

Vitalik Buterin, the father of Ethereum, has a critical view on restaking himself and expresses concern. He naturally promotes innovation around the Ethereum ecosystem, which is understandable and good, but says himself:

“We should be wary of application-layer projects taking actions that risk increasing the ‘scope’ of blockchain consensus to anything other than verifying the core Ethereum protocol rules.“ [20]

I believe many personalities within crypto and Web3 agree with this and share this opinion, as you can read in many articles. Ethereum shines because it is a trustworthy blockchain and efforts are being made to keep it that way. After all, there has already been the DAO debacle in 2016, a repetition that should be prevented at all costs in which Ethereum had to be forked. Vitalik Buterin says in his blog post:

“If, on the other hand, you have the intent to rope in the broader Ethereum ecosystem social consensus to fork or reorg to solve your problems, this is high-risk, and I argue that we should strongly resist all attempts to create such expectations.”[20]

The DAO Hack: A Lesson from Ethereum’s Darkest Hour

Hands up anyone who can either remember the DAO hack or still knows what it is. It remains a showcase argument for Ethereum, that despite the upgrades and the many years of steady uptime, the blockchain runs smoothly! (I look at you Solana; the blockchain that celebrated at the beginning of February that the blockchain has been running for a year without downtime... [21].) However, one should not forget that there was a hack on Ethereum in 2016 at The Dao, in which 14% of all ETH tokens in circulation were stolen [22]. The decision was made to fork Ethereum to the Ethereum blockchain we know today and Ethereum Classic, on which the reality after the hack still exists and 14% of the ETH was lost (I will also shed light on this story in another article, DeFi History so to speak). This underlines the fact that there are events that could threaten Ethereum and this should not be underestimated. It should be avoided that by stretching the consensus on Ethereum or centralization risks we need another fork in the future to bail us out.

Conclusion: Innovation Needs Transparency

So what is the conclusion from all this? Well, ultimately it is now technically possible to optimize the yield you could get from Ethereum by taking more risk, but the APY hardly reflects this risk at all in my opinion. The users are barely or not at all aware of the possible risks because the restaking yields don’t sound like that much for DeFi, so the risks might be underestimated. For me, restaking is worrying until we have reasonable and transparent risk metrics in DeFi that can help users understand them. As in my first article, I am concerned about this development and I doubt that it is reasonable to take this risk without taking DeFi and Web3 “to the next level” from the users perspective [17]. Maybe I am biased because as a finance student, my alarm bells are ringing when I see concepts that strongly resemble rehypothecation; or in other words what led to the collapse of the financial system in 2008. The consequence of the financial crisis was the birth of crypto, DeFi, and the Web3 through the revolution initiated by Satoshi Nakamoto with Bitcoin and the world-famous inscription in the Genesis block “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, i.e. a direct criticism of the existing financial system [23]. Are we moving towards a system like the one we originally wanted to replace with a better system? Judging by the current state of this potential ticking time bomb in DeFi, I would say unfortunately yes. We need decentralized and transparent risk metrics - otherwise, DeFi will crash like the financial system did in 2008. So here I share Vitalik Buterin's opinion because it was only during my research that I came across this quote from him:

“Incorrect answers could lead Ethereum down a path of centralisation and ‘re-creating the traditional financial system with extra steps’[…].” [24]

Restaking is an innovation and we need those as a driver for DeFi and its adoption, but I remain cautious until the concept has proven itself. Primarily, I am concerned with investor protection because I believe many users don't realize what risks they are exposed to. That's why I agree with Marcin Kazmierczak, Co-founder & COO of Redstone that new and interested users need to be introduced to this topic gradually:

“[…]To address this, protocols could adopt graduated entry systems-for instance, starting users with simpler staking options offering 5-7% APY before granting access to more complex and higher-risk products.” [19]

To me, this seems like a sensible approach that should be used more often in DeFi to make investors aware of the risks. Protocols should introduce transparent risk metrics and educate users more about potential dangers. If we want to build a new and inclusive alternative financial system in a decentralized way, then it is not only necessary to be innovative, but also inclusive and partly educational. Everyone should be able to benefit from it without users falling by the wayside due to a lack of financial knowledge. DeFi is for everyone and therefore it is also the task of all of us to provide the necessary protection and education for everyone.

Do you agree with Vitalik’s concerns about restaking? Do you think that it is important for the adoption of DeFi to provide risk metrics? What do you think about restaking and were you aware of its potential risks? Share your perspective in the comments!

This article is the first one of a series about “Ticking Timebombs in DeFi”. If you liked the article don't hesitate to follow me here on Hackernoon and read my other stories too!

If you want to talk to me or collaborate on an article you can also write me on my X/Twitter or Bluesky, my username there is @Maxo1st as well.

Cheers, xx