The Risk To Reward Tradeoff of Restaking

Transcript

welcome back to the rollup High Roller Community as always nothing on the rollup is to be construed as Financial advice we are just an Educators in the defi space toss us a quick like give us a share a repost send it to a friend who may want to watch this and finally give us a sub or a follow it means the world to help support credibly neutral educational content in def5 we're here to educate Empower and enrich you and let's jump in what is going on guys welcome back to the rollup Walter is here he's joining us today from Gauntlet um and we're going to be talking about reaking um so let's let's jump jump right into it I'll kind of give like my

like quick and dirty understanding of reaking and then hopefully Walter can uh Crush my dreams and tell me why I'm I'm totally wrong I'm way off and uh fill in all the gaps in my understanding um so so here's like my my understanding of reaking is going to be like you know eth is proof of stake since the merge it means that uh no longer are uh no longer is the ethereum blockchain being maintained by uh like these proof of work miners now uh it is crypto economically maintained uh as a result of incentive mechanisms meaning that

validators have eth staked inv validators um they get incentives if they act uh uh benevolently and they're they're friendly to the ecosystem they are maintaining consensus with all of the other validator nodes then they get these uh staking rewards which is like somewhere between like three and five% uh APR um y if they act maliciously these validators are going to get slashed and that's what prevents them from trying to double spend or trying to contradict any of the changes to the state of ethereum um and this is kind of like what maintains homeo like ethereum's

homeostasis so like keeps ethereum out equilibrium um and it keeps all of these validator nodes uh cooperating with one another okay so that's like that's staking right now that ethereum is proof of stake I'll take it one step and I'll try to take it two steps further and then and then we're going to we're going to bring Walter into the fold here um so then we've got liquid staking liquid staking is basically like well I have 32 eth in a validator node and all my friends are getting rich off meme coins so I don't I I want to like participate like I wanna I want to use the 32 eth uh and and use it in Defi and

kind of like participate in the ecosystem as well but I don't want to like just stop contributing to ethereum's consensus uh and its proof of stake Network um so to get the best of both worlds I can get a receipt token and it basically says that I can use this thing in defi it has value because it's like a ticket that I can cash in for the eth in my validator and I can spend uh that liquid staked token on whatever I want um and it has value so I can I can use it to trade the the like next the next step that I'm going to attempt to go but I even started to like lose my grasp when I started to explain liquid staking is

liquid raking and this is when like yes ethereum is proof of stake I have 32 eth in a validator node I I I deposit that into a liquid staking uh protocol so now I have I have these liquid staking tokens that represent eth in the the ethereum validator uh consensus Network so I've got these liquid staking tokens they represent eth and then I'm going to take this and I'm going to restate them and then we're going to deploy an entirely new network that uses the same eth that I have in that original validator that is contributing

uh to the homeostasis of the ethereum network it's also now going to uh contribute to to uh the equilibrium of another rollup um and help to cryptoeconomic secure uh the state changes in the state of this other blockchain this is like my understanding of reaking and like maybe I'll stop there I I have a question as far as like kind of the down uh kind of like the Domino effects of doing this and using the same eth that I have in a in a like main net eth validator using that to uh secure

another Network I've got like there's like these Downstream consequences that are maybe good maybe bad maybe you know neither or both um and we'll get into that but Walter welcome to the Channel I want to give you a chance to at least introduce yourself what you do at Gauntlet and uh and uh yeah just uh your you also add your perspective on reaking yeah for sure hey guys my name is Walter I help lead some of our reaking work here gtet um but yeah I think Robbie like I think that was a pretty good overview of the reaking space in general um really good high level on basically that flow

from native East to actual stake teeth to the liquid part of it and then finally the reaking part of it as well um I guess the primary focus for the reaking like you said is to help crypto economically secure a lot of rups um stous rollups of course there are other services as well like dat availability Services different types of bridges virtual machines co-processors and of course each of these different types of services like there's going to be a lot of transactions on them down the line there's going to be space for people for users of these separate what we call on I abss um let's just use that terminology for now um a lot of people

using these abss you know to perhaps post transactions or do things that they couldn't do necessarily very coste efficiently on the native L1 so these apss definitely help to um basically broaden the use case of the of the etherum L1 make a lot of the stuff that we want to happen via blockchain happen a very crypto crypto econ economically secure way make that possible so in a sense like because it's opening up a whole broad spectrum of use cases naturally there's going to be a whole broad spectrum for yield generation as well which is exactly what what we call reaking what that is hoping to achieve in the

end and of course like you said a lot of downside effects as well that we can touch on later not necess downside effects but like downside risks in that regard right because it's a whole new space we have to consider like a whole new aspect of these things but we can touch on that in a bit yeah yeah we'll we'll certainly get into the tradeoffs of uh uh reaking this eth to uh earn some more of these incentives um for contributing that that stake um and the tradeoff of the additional risk that you take on once you start to uh kind of like stretch uh the the eth that you have um exactly okay so so you mentioned avss that's

going to be a really important term uh when it comes to reaking um AVS meaning actively validated service um and this is going to be the acronym that uh we use for the collection of services that run on top of these consensus mechanisms and you mentioned a whole slew of them and it's the co-processors it's the rollups it's the VMS it's it's all of these things the application layer if you will that that run on top of uh the blockchains themselves okay now I guess like why like before we get into the risks like

why is it important for avss why do they need some proof of of stake like I kind of hit on it at a high level but like we essentially need to secure um or make sure that we're verif in all of the uh the transactions that go through these avss right is there is there more to that or is it is it just like we need to we need to arrive at the consensus of these transactions yeah essentially right we need to be able to secure the set of transactions be able to secure like anything that's possible on these abss or like effectively l2s in general right so like without without igen layer it's

it's a little difficult to like you know bootstrap and L2 right I mean sure you can spin up like a whole new token you can spin up for the for this token you can use that to like help secure as well but like of course the whole security of proof of stake is like that economic aspect of it right like if prices are super volatile if they can go down with a big draw down then you know it's not that valuable yet so like essentially we need to solve that fundamental problems how do you actually make that proof of stake secure and how do you do that over like a wide variety of different services that we need to enable so in the end right you can the one General solution is like you can share that

security and that's what Ian later is hoping to achieve in the end yeah very cool and you mentioned like these l2s or these avss like they they could launch a token but like why why would one of these Services choose to launch a token versus choose to launch with a a restate e mechanism yeah of course um the N the the native ethereum and the staked aspect of it well as well it's definitely a lot more secure it's a lot more robust to Market changes and we all know like we're in crypto especially in a ball market now

you see like every other day it's like up 10% or down 10% it's like a idiosyncrasy that you definitely don't see it be when it's just like down like one every day right so like of course if you can see like down 10% down 20% Then naturally even if it's macro long macro bll then there will still definitely be shocks in the system and for an ABS to spin up its own token it has to number one bootstrap the liquidity on dexes or possibly centralized exchanges that in itself is a is a pretty big effort I would say it's definitely not impossible but there's a there's a huge overhead to that for sure um with that liquidity you have to support the volume as well if you cannot generate natural volume for a

lot of for your token then over time even if you offer incentives for providing that liquidity those incentives necessarily dry up because you can it's difficult to continuously fund that and if those incentives are gone no volume that means the liquidity dries up as well so you sort have to balance both the short-term and the long-term risks with providing your own token naturally of course the benefits are sure you can probably like Adit more of your token you can print more to perhaps in the short term sort of give sort of like an insurance or a boost strapping type of thing but in the end it is that balance and that decision variable between whether you want you want to use like super hard money like ethereum or you want to use your own

token right and if you're if you're launching an ecosystem um and the uh ambition is to uh have a bunch of ations on in this ecosystem have a bunch of um users and capital uh flowing through this ecosystem's economy um you want to make sure that you're uh your the the stake that secures your entire ecosystem is very robust um and it can it can uh withstand um any any kind of attacks uh that that might come from the assets on in this ecosystem okay so so that that all makes sense now um these attacks and these risks like I

layer and reaking like it's still so new we haven't seen it done successfully yet um so um like let's let's kind of like get into like the things that could go wrong and then why maybe they will or or won't happen um so like my mental model for uh for reaking is something like this it's kind of like um I've got you know let's say okay I've got eth Stak in a validator that's going to be kind of like our base case here sure um there is uh a cost to uh securing the network and it it costs you know so

however much it it uh like what I'm trying to get out is that there there is a uh cost of security and then you have to make sure that the the Capital you have at stake um supersedes this cost it pays this cost and then some so that someone else can't come in and attack the network well when I am supplying my eth um to a validator and it's securing ethereum the validator set is very robust uh there's lots of capital um in these validators and uh it is very expensive to 51% attack or corrupt ethereum in in some way now if I was to then take the ethereum that I have in my

eth node and use it to restake another roll up I'm I'm literally stretching like this stake across another ecosystem um so that now with the same Capital let's say you know 32 eth worth I'm now securing ethereum and I'm also securing another Network and this other network also has costs um to to secure that Network and what happens when these costs um are are higher than the amount of value that I have in these nodes that's the risk that I think is in my mind and

maybe um is the one that we haven't seen tested yet essentially like like what happens when uh the like the the value that I have on these chains exceeds the amount of uh stake that I have to secure those chains to me that's like like my chain is going to get margin called like my proof of stake is g to get liquidated and then what happens to the rollup like what happens to the to the value that um is on this Ledger that my eth validator is is reaking to secure like that is the I think that's this the precarious

scenario that like at least is like a little bit concerning but we haven't seen whether or not like it will happen if Ian layer is ready for that or like maybe there's a case on on why it's inevitable or or why it won't happen at all and and that's where i' I'd love to kind of like get your perspective as far as like what's the likelihood of one of these reaking chains getting margin called is that is that possible or is that kind of like am I I not really looking at things the right way here yeah I mean it's a like I said before it's a whole new space and as you touched on we've never seen anything like this before we're basically developing like a

whole new technology here in a sense and with that comes of course like that whole Pandora's Box in the sense of what could go wrong in the end right we T you touched on the fact that oh there are these slashing RIS with the L1 and of course we can generalize that further to the slashing risks on the ABS and in the end certainly these things are very possible to attack an ABS is quite possible because number one what is what is securing these abss it's the lsts that are securing these abss and it's the native Beacon chain that is securing these abss so of course the health of the ABS itself is pretty dependent on

the health of these lsts as well as the health of the operators I guess maybe taking a step back basically high level users stake into igen layer they have to give it to the operator first and then the operator is what delegates or like puts that e to use so users generally have to go through an operator just like as a as a as a side note so in the end the ABS security is pretty dependent on the health of the LSD and the health of the operator like is this operator trustworthy um has it been slashed before how reliable is it stuff like that on the LSD front like we've seen dpeg happen in crypto before we've seen

dislocations of LST happen lsts happen before some of it's pretty minor some of it can be pretty severe I don't know if anything super severe is happening with at LSD um but like certainly like we all know what happened with steep two years ago in the spring of 2022 where it went down to like 89 889 89 cents on the dollar relative to Ether something like that can't remember exactly what it was um and of course you see an igen layer where there's like what like eight nine 10 different types of lsts being listed as valid collateral a lot of these things are super small super small TV pretty low liquidity as well it's what you know what happens to these avss if

the lsts deviate from par yeah basically you could see potential adversarial agents you know noticing these dislocations on the secondary they they buy a lot on the secondary you know they can run that profitability calculation they buy a lot and they notice hey I see this particular I see Absa you know I can I can definitely be 51% right now just based on market conditions so I'm going to do that I'm going to be that 51% and oh there's a lot of like the cost of my Capital to actually manipulate the ABS definitely less than what's on the ABS already so I'm incentivized to do that essentially um of course like it's not

just limited to the secondary dislocations as well like secondary I mean the marketplace but also like the L1 slashing events as well right you can imagine perhaps less experienced lsts with newer operators or operators that haven't been around as long like the L1 sling on these operators is Al also poses a risk right like the natural value of the LST probably goes sub one as well and that that in itself is a concern for sure H could you could you kind of like illuminate like more on on these operators what what role do they almost sound like the equivalent of uh

validator nodes for igen layer uh uh chains that are using these this restake eth could you kind of like expand more on like what role the uh the IG layer operators play in this in this mechanism yeah sure so the operators are the ones that run each of the avss software for a lack of a better word to help secure those abss naturally the the bottleneck for a lot of individual people for like individual retail users to looking to participate in IG ler is basically how can I get that yield from helping secure all these

different abss so operators help serve as the intermediary between that in return like they have to they have to actually host the software that actually secures abss but they might also take like a certain cut of the fees that the abss generate in the end as well so of course the more abss you help secure for the from the operator's perspective the more software you run as well if your if your machine can't handle it or something or I don't know maybe you're you have downtime or something or you have a software bug or something then you could get slashed on the ABS you could lose a part of your part of

your stake you could harm the the the users that are delegating to you in the end they serve as an intermed intermediary if you get slash too much as probably re probably rakers are not willing to like actually delegate their e or their LSS to you in the future got it got it okay so like as we kind of like uh look at like you know what's coming up next igen layer's got these like points you don't want to spend too much time on that but like what what is all right they're going to launch a token right like that's what these points are for so so like what what role and I like you're you're on the outside looking in

so like you know it's not like you have any like at least I imagine like any like uh definitive say on whether or not like they launch a token or what they use it for but like from your perspective what could an igen token provide to this mix certainly I mean the use case of the igon of a potential igon token I mean you can probably draw parallels from the rest of defi as well right like you have your AES you have your compounds their governance token is pretty important for you know soliciting Community feedback actually voting on snapshots actually voting on aips to make improvements to

the obate protocol you know whether it's to launch a new type of collateral whether it's whether it's to raise like liquidation thresholds um raise Supply borrow caps on ob3 stuff like that you can imagine a potential igen token to sort of facilitate similar types of use cases on IG layer you know whether it's to in this case we want as a community we want a new type of LST to be valid as collateral for abss or oh maybe we're interested in different types of tokens to be used as collateral for ION L as well or oh we want to raise the Caps because the Caps are full right now and we want to participate in in the yield generation of course on the ABS front as

well maybe a potential I token could have use cases there as well especially like we talked about before perhaps launching their own token for an ABS to launch their own token naturally a lot of headwinds there a lot of hurdles to pass through so perhaps the igen token could help resolve some of those governance issues as well okay um I guess like kind of as like as we wrap up like looking a little bit of a bigger picture like uh is there is there any possibility that like some some shenanigans on igen layers AVS would impact uh main net

ethereum and uh and kind of like the organization of eth's validator nodes at the base level yeah so that's that's been the that's been the Hot Topic on crypto Twitter at least for the past couple of weeks is you know if if my eth is being used if everyone's eth is being used to help secure all these aps's naturally one would think that oh the risk is going to trickle Upstream to the to the L1 as a whole um so yes there potentially is that concern but as long as we don't overload the L1 consensus as is probably not too much of the beacon chain eth on the L1 is being

used to secure the abss I personally think the risk of this is probably minimized or can be can be controlled or can be mitigated right like one one natural way to do it is probably just you know impose reasonable Caps or upper bounds on the amount that can be used for like the amount of native Beacon chain that can be used to secure abss for that matter um I guess El Illuminating more on like the actual scenarios that might occur that could impact the O consensus right so like um yeah you can cons consider the majority of the beacon chain eath being

used to secure the abss and suppose like those abss undergo some sort of correlated slashing naturally like a big portion of the the can chain e is slashed these validators are not happy and they you know they're like you know what I want to Fork the chain so I can preserve my e of course that's like the Doomsday type of scenario that definitely erods a lot of like the capital A lot of the worth that so far um the L1 has built up so far so that's definitely like sort of like that doomsday that really worst case scenario that people are trying to avoid in the end got it yeah yeah that makes that makes sense I mean the hard Fork soft Fork like which

Fork which chain is the real chain yeah saw ethereum classic man uh it's not like we haven't seen this before so yeah it I mean in the end like with the merge like what September 2022 something like that like the proof of work was still trading at what like five cents on the dollar relative right I think yeah yeah it definitely has a lot of value as well so definitely like of course hypothetically speaking should something like we just discussed actually happen who knows what the what the ratios of the prices are going to be but like definitely not a good situation for

sure yeah I think that's a pretty good place to leave off uh because it feel that feels like the vibe around around reaking right now is like cautiously optimistic like there's some doomsday scenarios out there and it's very important to think carefully about the architecture of these mechanisms to avoid those uh those unfortunate scenarios where consensus is fractured and chains are split um and it sounds like there's measures to be taken to avoid those scenarios but uh it's still very very important to cognizant of

those risks yeah for sure I mean that's probably one of igen layer's priorities as you know as the year goes on as IG da is moving towards a main net launch as you know the yield generation actually goes live it's going to be an iterative process for sure like we're probably going to see slashing events happen on different abss especially if you know that whole set of slashing rules is quite different I know S talks a lot about you know good slashing rules being ones that are attributable that are objective some abss might not be adhering to that so in the end what you don't want as one ABS to be actually impacting like the whole

universe of avss that's the that's a bad part so hopefully within the As It Gets launched in the coming months after that release the community as a whole can work towards like some sort of iterative improvement some sort of like decentralized process where you see a bug hopefully it's not too big of course you want to reduce the risk of like worst case scenarios happening but like you see a bug you fix it and over time like of course we're all optimistic that this can really Drive Capital efficiency throughout ethereum and you know once it's become a more mature product you can definitely see Integrations with um with I layer and the rest of the def EOS system as a whole for

sure yeah it would be would be very cool to see like how this uh how this could underscore some like the app chain thesis um to see if like right like we'll see we'll see what that happens um but yeah I mean what you you mentioned kind of like one one AVS becoming a monopoly and uh dictating the rest of the network that is something that we uh we ought to avoid and um it sounds like correct me if I'm wrong here but it sounds like uh objective um slash rules is going to be how we prevent one AVS from becoming Monopoly yeah that's a pretty good way

to put it um I think Monopoly in this instance can probably take two different aspects of well of course you can have like Monopoly of the state uses secure it and probably an unintended Monopoly is like oh Monopoly on the actual slashing events because you designed your abs poorly for that matter um like I don't know supposing ABS were penalizing for downtime naturally downtime is a pretty probalistic process as well like sometimes you're up sometimes you're down imagine if salana penalized for downtime like everyone be slash on salana right so like you can't something like that happening is pretty bad so salana is broken yeah dude so like naturally um these are the types of

things that individual rakers or like the market or the community as a whole to be aware of when you know choosing who when where what how much to delegate yeah securing different abos yeah yeah salon's uh got good memes they've got dank memes but that chain needs some work ever since Sam got done with it just keeps on keeps on breaking keeps on going down well uh Walter man this was a pleasure I feel like I learned I learned quite a bit and I think there is going to be plenty more to uh to discuss and explore around the AVS ecosystem and and the reaking landscape so uh thank you for for

introducing the concept and uh for taking us through some of the risks and uh some of the tradeoffs yeah for sure thanks for having me on the show Robie it was a pleasure man hope to see you again soon yeah for sure