Restaking, the concept of using staked crypto funds to secure decentralized applications, is coming to Bitcoin. Itโs one of the hottest trends on Ethereum right now, where in less than two years, the restaking protocol EigenLayer has attracted more than $9.79 billion in restaked ETH deposits.ย
The idea of restaking derives from Proof-of-Stake blockchains, which are run by groups of validators who โstakeโ the platformโs native cryptocurrency as a form of collateral to help secure the network. The more funds they stake, the more rewards they can earn for validating transactions, but the deposit also serves as a kind of guarantee โ if they try to cheat in any way, they risk having those staked funds revoked, in a process known as slashing.
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The major downside of staking is that those staked funds cannot be used for anything else as theyโre locked inside smart contracts. Restaking changes that by issuing users โreceipt tokensโ such as โstaked ETHโ or stETH, which can be reutilized to secure decentralized applications and services hosted on the underlying blockchain. These dApps, which rely on restaking, are known in the Ethereum ecosystem as โActively Validated Servicesโ.
Staking With Bitcoin
Bitcoin is not a proof-of-stake blockchain, but recent developments have enabled BTC staking โ not to validate Bitcoin itself, but to provide security to third-party PoS blockchains that struggle to attract sufficient capital on their own. Thatโs the core purpose of Babylon Chain, a protocol thatโs leading the Bitcoin staking revolution.
Once staking had been established on Bitcoin, it was almost inevitable that restaking would emerge too. SatLayer was one of the first projects to seize upon the opportunity to maximize the power of staked BTC, enabling Bitcoin stakers to retain liquidity and secure other applications via โBitcoin Validated Servicesโ.
By using SatLayer to restake their staked BTC, investors can effectively engage in compounding and earn increased rewards beyond what they receive for staking. SatLayer does this by deploying smart contracts on Babylon, allowing them to extend the crypto-economic security of their original collateral to BVS. For the dApps that take advantage of this, the benefit is they donโt need to worry about attracting their capital for security.
SatLayer Restaking Mechanics
With SatLayerโs Bitcoin restaking ecosystem, there are three key participants โ the Bitcoin restakers, the BVS developers, and the network operators, who perform the role of deploying and running the BVSs that benefit from Bitcoinโs staked collateral.
It can be argued that the Bitcoin restakers are the most important of them all, for itโs them who make the wheels go around by providing the economic heft needed to secure each BVS. When these participants restake their BTC through SatLayer, they delegate their tokens to the operators, who are tasked with managing the BVS they back.
The BVS developers are the ones that use SatLayer to obtain crypto-economic security for their BVS dApps. For them, SatLayer provides an elegant solution to the so-called โcold startโ problem, where any newly launched dApp is initially seen as a big security risk due to the lack of collateral backing it. Instead of trying to attract their capital โ which is increasingly challenging as the crypto ecosystem grows โ they can instead use a BVS, which relies on restaked BTC instead. This is beneficial because there is only a limited amount of crypto capital to go around, and itโs not sufficient enough to secure every new decentralized service. BVS essentially reuses already utilized capital, in a sense killing two birds with one stone.
Developers are required to maintain the on-chain smart contracts and the off-chain operating software for each BVS they create, while also ensuring the rewards are fairly distributed across validators.
The smart contracts are vital as they define the slashing conditions for the BVS. Itโs important to be able to โslashโ the restaked BTC in case the BVS operator attempts to act maliciously and somehow cheat other dApp users. The developer must create a list of rules under which the operatorsโ collateral can be confiscated. They must also decide what happens to this slashed capital. Either they can redirect it to SatLayer to be used for the good of the ecosystem, or they can send it to a non-existent Bitcoin address to โburnโ those funds.
The fundamental role of BVS operators
Operators thus have a strong incentive to maintain good behavior and act responsibly, for by doing so, theyโll earn regular rewards based on the amount of capital staked on their BVS. However, if they try to get up to no good, theyโll almost certainly be caught in the act, and forfeit all of the funds they restaked.
The other role of operators is to essentially govern each other by monitoring the other operatorsโ behavior. Should they spot another operator engaging in any wrongdoing, theyโll earn a reward once the slashing conditions are triggered.
Because the Bitcoin restakers are effectively entrusting their restaked funds with an operator, they too bear the burden of the slashing risk. If the operator is slashed, it means theyโll lose their funds too. However, the rewards provided by the BVS are tempting enough that most are happy to accept this risk.
The exact nature of the rewards is determined by the BVS developer, who can choose to pay retakers in the BVSโs native asset or another token. Restakers will also earn SatLayer points, which may enable them to receive tokens from a future airdrop. These rewards will be distributed to each restaker based on the proportional size of their stake.
Becoming an operator is not easy, for there are some significant hardware requirements, with the need to provide a secure execution environment for the BVS and maintain a stable network connection at all times. Running this hardware requires both time and knowledge, but operators will be reimbursed with a greater share of the rewards.
One of the things about SatLayerโs ecosystem is that each operator can choose which BVSs they want to secure. Because each BVS developer specifies their minimum stake and rewards, the amount of restaked funds they attract is determined entirely by market forces. The higher the rewards on offer, the more capital they should attract, boosting their crypto-economic security.ย
Enhancing Bitcoinโs Value
While some critics of restaking continue to argue against it, citing the risk of endlessly rehypothecating billions of dollars worth of capital, the concept brings much-needed utility to the Bitcoin ecosystem.
SatLayer uses slashing and reward incentives to extend Bitcoinโs security to dApps, helping developers secure their projects while allowing BTC holders to earn additional yield.
