Amberdata Podcast Featuring Zack Pokorny, Blockchain Researcher at Galaxy Digital

Welcome to Amberdata's Podcast series featuring leaders in the digital asset space where we explore the intersection of finance, blockchain, and technology! In this episode, Pat Doyle, Director of Product Management at Amberdata interviews Zack Pokorny, Blockchain Researcher of Galaxy Digital.

In this episode discuss Liquid Staking, Restaking, and Eigenlayer with Zack Pokorny, Blockchain Researcher at Galaxy Digital. Zack walks us through liquid staking and restaking. We discuss the journey it took for the restaking landscape to come into existence. We cover Ethereum's move from proof of stake, the growth of liquid staking, and new opportunities for the new restaking primitive.

Introduction

Welcome to the Amberdata podcast, where we dive into the intersections of finance, technology, and blockchain. Today, we're thrilled to host Zack Pokorny, a blockchain research analyst at Galaxy Digital. Our discussion will focus on the evolving landscape of Ethereum staking, liquid staking, and re-staking, exploring the innovations that have emerged and their implications for the blockchain space.

The Evolution from Proof of Work to Proof of Stake

The journey from Bitcoin's proof of work (PoW) to Ethereum's proof of stake (PoS) has been marked by significant technological advancements. Bitcoin, launched in 2008-2009, introduced the concept of a blockchain with no smart contracts or programmability—simply a system for transferring coins. This changed with Ethereum in 2015-2016, which brought smart contracts and programmable value, attracting a wave of new users and developers. This influx highlighted the scalability bottlenecks of PoW systems, leading to Ethereum's transition to PoS and the rollup-centric roadmap, which is a modular approach to scaling blockchains.

The Rise of Liquid Staking

Ethereum's transition to PoS and the need for economic security across various blockchains created the demand for innovations like liquid staking. Liquid staking allows users to stake their ETH and receive a liquid representation of their staked assets, which can be used within the broader DeFi ecosystem. This approach addresses the high threshold for participating in network validation (32 ETH) and the technical complexities of running a validator node, making staking accessible to a larger pool of market participants.

Liquid staking tokens (LSTs) provide an efficient way for users to earn staking rewards while maintaining liquidity. The most notable example is Lido, which issues stETH (staked ETH). These tokens are integrated into various DeFi applications, enhancing their utility and adoption.

The Emergence of Liquid Re-staking

Liquid re-staking builds on the concept of liquid staking by using staked assets to secure networks beyond the Ethereum protocol. Re-staking involves depositing assets into applications that exist on top of Ethereum, such as EigenLayer, which then uses these assets to secure new networks or middleware services.

In the re-staking landscape, node operators play a crucial role. They run and validate a wide range of chains and middleware services, creating a unified security layer for various blockchain applications. Users can delegate their staked assets to these node operators, who then secure multiple networks, enhancing the overall economic security of the ecosystem.

Technical and Economic Implications

The technical implementation of liquid staking and re-staking protocols involves several layers of interaction. Users start by staking their ETH, receiving LSTs in return. These LSTs can then be deposited into re-staking protocols like EigenLayer, which issues liquid re-staking tokens that represent the value of the staked ETH. These tokens can be delegated to node operators, who secure various middleware services and applications.

Economic incentives play a significant role in driving the adoption of these protocols. Re-staking introduces new opportunities for users to earn rewards by securing multiple networks with their staked assets. This layered incentive structure creates a robust ecosystem where users are motivated to participate in securing the network, while also earning yields from various sources.

The Role of Middleware Services

Middleware services, such as data availability layers, shared sequencers, oracles, and bridges, are critical components of the re-staking ecosystem. These services act as the glue connecting different blockchains and enhancing their interoperability. Re-staking protocols leverage the economic security of Ethereum to secure these middleware services, ensuring their reliability and performance.

Adoption and Market Dynamics

The success of liquid staking and re-staking protocols hinges on their integration into the broader DeFi ecosystem. Early entrants like Lido have benefited from a timing advantage and network effects, becoming deeply embedded in DeFi applications. The utility and acceptance of LSTs in various DeFi protocols drive their adoption and usage.

Re-staking protocols like EigenLayer are gaining traction, with significant total value locked (TVL) and a diverse range of applications being secured. The recent token launch and deposit mechanisms of EigenLayer highlight the nuanced dynamics of this ecosystem. Despite initial concerns of capital flight post-token launch, the data shows a stable and engaged user base, with substantial assets delegated to node operators.

Future Outlook and Expansion

Re-staking represents a fundamental shift towards modularity and scalability in blockchain technology. The concept aligns with broader trends of resource renting, similar to real-world economic models. The potential for re-staking extends beyond the EVM ecosystem, with similar implementations in networks like Cosmos. In the long term, the space holds significant promise, albeit with inherent risks that require careful management and innovation.

Evolving Ecosystem

The growth of re-staking is paralleled by the evolution of other blockchain innovations, creating a layered ecosystem where new applications can thrive on the security provided by established networks. The interview underscores the importance of ongoing research and development to address the challenges and maximize the opportunities within this dynamic landscape.

Conclusion

The landscape of Ethereum staking, liquid staking, and re-staking is evolving rapidly, driven by technological innovations and economic incentives. Liquid staking has democratized access to staking rewards, while re-staking is leveraging Ethereum's economic security to secure a broader range of blockchain applications. As these protocols continue to mature, their integration into the DeFi ecosystem and the development of middleware services will play a crucial role in shaping the future of blockchain technology.

This podcast episode provides a comprehensive overview of these developments, offering insights into the technical and economic intricacies of staking and re-staking. We look forward to exploring these topics further and witnessing the continued growth and innovation in this dynamic space.