Author: Lawrence Lee, Research Fellow at Mint Ventures
After receiving two rounds of financing, including a $12 million round led by Polychain and financing from Binance labs, the restaking project Solayer on the Solana chain has become one of the few bright spots in the DeFi field in the recent market. Its TVL has also continued to rise and has now surpassed Orca, ranking twelfth in TVL on the Solana chain.
Solana project TVL ranking Source: DeFillama
The staking track is a crypto-native sub-track and also the crypto track with the largest TVL. However, its representative tokens such as LDO, EIGEN, and ETHFI have struggled in this cycle. Apart from the Ethereum network on which they are located, are there other reasons?
How competitive are staking and restaking protocols surrounding users' staking behavior in the entire staking ecosystem?
What are the differences between Solayer's restaking and Eigenlayer's restaking?
Is Solayer's restaking a good business?
I hope this article can answer the above questions. Let's start with the staking and restaking on the Ethereum network.
The competitive landscape and development pattern of Liquid Staking, Restaking, and Liquid Restaking on the Ethereum network
In this section, we will mainly discuss and analyze the following projects:
Top liquid staking projects on the Ethereum network: Lido, top restaking project Eigenlayer, and top liquid restaking project Etherfi.
Lido's business logic and revenue composition
We summarize Lido's business logic as follows:
Due to Ethereum's insistence on decentralization, the PoS mechanism of ETH has soft limits on the staking cap of a single node. A single node can only deploy a maximum of 32 ETH to achieve higher capital efficiency. Additionally, staking has relatively high hardware, network, and knowledge requirements, making it difficult for ordinary users to participate in ETH staking. In this context, Lido has promoted the concept of LST. Although the liquidity advantage of LST has been weakened after the Shapella upgrade opened withdrawals, the advantages of LST in capital efficiency and composability remain solid, forming the basic business logic for LST protocols represented by Lido. Currently, Lido occupies nearly 90% of the liquid staking market.
Liquid staking participants and market share Source: Dune
The revenue of the Lido protocol mainly comes from two parts: consensus layer revenue and execution layer revenue. The so-called consensus layer revenue refers to the PoS issuance revenue of the Ethereum network, which is considered a payment for maintaining network consensus, hence called consensus layer revenue. This part is relatively fixed (orange part in the diagram below); execution layer revenue includes user-paid priority fees and MEV (for an analysis of execution layer revenue, readers can refer to previous articles by Mint Ventures for more information). This part of the revenue is not paid by the Ethereum network, but rather paid (or indirectly paid) by users during the transaction execution process, which varies with on-chain activity and is subject to significant fluctuations.
Lido protocol APR Source: Dune
Eigenlayer's business logic and revenue composition
The concept of restaking was proposed by Eigenlayer last year and has become a rare new narrative in the DeFi space and the entire market over the past year or so. It has also spawned a series of projects with FDVs exceeding $1 billion upon launch (besides EIGEN, there are ETHFI, REZ, and PENDLE), as well as many restaking projects that have yet to launch (Babylon, Symbiotic, and Solayer, which we will focus on below). The market's enthusiasm is evident (Mint Ventures previously researched Eigenlayer, interested readers can check it out).
Eigenlayer's Restaking, as defined, refers to users who have already staked ETH being able to stake their previously staked ETH again in Eigenlayer (thus obtaining additional yield), hence the name 'Re'Staking. Eigenlayer names its provided service AVS (Actively Validated Services), which can offer services to various protocols requiring security, including sidechains, DA layers, virtual machines, oracles, bridges, threshold encryption schemes, trusted execution environments, etc. EigenDA is a typical representative using Eigenlayer AVS services.
Protocols currently using Eigenlayer AVS Source: Eigenlayer official website
Eigenlayer's business logic is also fairly straightforward: on the supply side, they recruit assets from ETH stakers and pay fees; on the demand side, protocols with AVS needs pay to use their services, and Eigenlayer acts as a 'protocol security market' to facilitate and earn a certain fee.
However, looking at all current restaking projects, the only real revenue remains the tokens (or points) of the related protocols. We cannot yet determine if restaking has achieved PMF: from the supply side, everyone likes the additional income brought by restaking; however, the demand side remains a fog: are there really protocols that will purchase protocol economic security services? If so, how many?
Questions raised by Multicoin founder Kyle Samani regarding the restaking business model Source: X
Looking at the target users for tokens already issued by Eigenlayer, such as oracles (LINK, PYTH), bridges (AXL, ZRO), and DA (TIA, AVAIL), staking tokens to maintain protocol security is a core use case for their tokens. Choosing to purchase security services from Eigenlayer would significantly undermine the rationale for issuing their tokens. Even Eigenlayer itself, when explaining the EIGEN token, used very abstract and obscure language to express that 'using EIGEN to maintain protocol security' is the main use case.
The survival path of Liquid restaking (Etherfi)
Eigenlayer supports two ways to participate in restaking: using LST and native restaking. Participating in Eigenlayer Restaking using LST is relatively simple; users deposit ETH into the LST protocol to obtain LST, then deposit LST into Eigenlayer. However, LST pools have long-term limits, and users who want to participate in restaking during the limit period need to follow these steps for native restaking:
Users first need to complete the entire process of staking on the Ethereum network by themselves, including fund preparation, configuring execution layer and consensus layer clients, setting withdrawal credentials, etc.
Users create a contract account named Eigenpod in Eigenlayer.
Users set the withdrawal private key of the Ethereum staking node to the Eigenpod contract account.
It can be seen that Eigenlayer's Restaking is quite standard 're'staking; whether users deposit other LSTs into Eigenlayer or engage in native restaking, Eigenlayer does not directly 'touch' the ETH that users stake (Eigenlayer also does not issue any LRTs). The native restaking process is a 'complex version' of ETH's native staking, meaning similar funding, hardware, network, and knowledge thresholds.
Thus, projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to address this issue, with the operation process of Etherfi's eETH as follows:
Users deposit ETH into Etherfi, and Etherfi issues eETH to users.
Etherfi stakes the received ETH to obtain the basic staking income from ETH;
At the same time, they set the withdrawal private key of the node to the Eigenpod contract account according to Eigenlayer's native restaking process, thus obtaining Eigenlayer's restaking revenue (as well as $EIGEN and $ETHFI).
Clearly, the services provided by Etherfi are the optimal solution for users holding ETH who want to earn income: on one hand, the operation of eETH is simple and also provides liquidity, with an experience similar to Lido's stETH; on the other hand, users depositing ETH into Etherfi's eETH pool can obtain: approximately 3% basic ETH staking income, potential AVS income from Eigenlayer, incentives (points) from Eigenlayer's tokens, and incentives (points) from Etherfi's tokens.
eETH accounts for 90% of Etherfi's TVL, contributing over $6 billion in peak TVL and a maximum FDV of $8 billion, making Etherfi the fourth largest staking entity in just six months.
Etherfi TVL distribution Source: Dune
Staking volume ranking Source: Dune
The long-term business logic of the LRT protocol lies in helping users participate in both staking and restaking more easily, thereby obtaining higher yields. Since it does not generate any income itself (other than its own token), the overall business logic of the LRT protocol is more akin to a specific yield aggregator for ETH. If we analyze closely, we will find that its business logic relies on the following two premises:
Lido cannot provide liquid restaking services. If Lido is willing to 'mimic' eETH with its stETH, it will be very difficult for Etherfi to match its long-term brand advantages, security endorsements, and liquidity advantages.
Eigenlayer cannot provide liquid staking services. If Eigenlayer is willing to directly accept users' ETH for staking, it will greatly undermine Etherfi's value proposition.
From a purely commercial logic standpoint, Lido, as a leader in liquid staking, providing liquid restaking services offers users a broader range of income sources. Eigenlayer's direct absorption of user funds makes staking & restaking more convenient. Why then does Lido not engage in liquid restaking, and why does Eigenlayer not provide liquid staking?
I believe this is determined by the special circumstances of Ethereum. In May 2023, when Eigenlayer had just completed a new round of $50 million funding and sparked numerous discussions in the market, Vitalik specifically wrote an article (Don't overload Ethereum’s consensus) to elaborate on how Ethereum's consensus should be reused (i.e., 'how should we restake').
Regarding Lido, due to its long-term scale accounting for about 30% of Ethereum's staking proportion, there has been constant internal pressure within the Ethereum Foundation to constrain it. Vitalik has also personally written several articles discussing the issue of staking centralization, which has forced Lido to make 'alignment with Ethereum' a focus of its business, gradually shutting down all businesses on chains other than Ethereum, including Solana. Its de facto leader Hasu confirmed in an article this May the possibility of giving up its own restaking business, limiting Lido's business to staking and responding to competition from LRT protocols like Eigenlayer and Etherfi by investing in and supporting the restaking protocol Symbiotic and establishing the Lido Alliance.
Reaffirm that stETH should stay an LST, not become an LRT.
Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.
Lido's stance on restaking-related matters Source
In terms of Eigenlayer, researchers from the Ethereum Foundation, Justin Drake and Dankrad Feist, were hired as consultants early on by Eigenlayer. Dankrad Feist stated that his main purpose for joining was to align 'eigenlayer with Ethereum,' which may also explain why Eigenlayer's native restaking process is quite contrary to user experience.
In a sense, the market space for Etherfi is brought about by the Ethereum Foundation's 'distrust' towards Lido and Eigenlayer.
Analysis of Ethereum's staking ecosystem protocols
Combining Lido and Eigenlayer, we can see that currently on PoS chains, there are three long-term sources of revenue surrounding staking behavior, excluding token incentives from related parties:
PoS underlying revenue, the native tokens paid by the PoS network to maintain network consensus. The yield from this part mainly depends on the chain's inflation plan, for example, Ethereum's inflation plan is linked to the staking ratio; the higher the staking ratio, the slower the inflation rate.
Transaction ordering revenue, the fees that nodes can obtain during the transaction packaging and ordering process, including priority fees (paid by users) and MEV revenue obtained during transaction ordering. The yield from this part mainly depends on the activity level of the chain.
Staking asset rental income involves lending users' staked assets to other protocols that have demand, thus obtaining fees paid by these protocols. This income depends on how many protocols with AVS needs are willing to pay fees to secure protocol safety.
On the Ethereum network, there are currently three types of protocols surrounding staking behavior:
Liquid staking protocols represented by Lido and Rocket Pool. They can only obtain the above-mentioned first and second types of revenue. Of course, users can take their LST to participate in Restaking, but as protocols, they can only earn the aforementioned 1 and 2.
Restaking protocols represented by Eigenlayer and Symbiotic. These protocols can only obtain the third type of revenue mentioned above.
Liquid restaking protocols represented by Etherfi and Puffer. They can theoretically obtain all three types of revenues mentioned above, but they are more like 'LST that aggregates restaking revenue.'
Currently, ETH PoS underlying yield is around 2.8% annually, which gradually decreases as the staking ratio of ETH increases;
Transaction ordering revenue has significantly decreased since the launch of EIP-4844, recently hovering around 0.5%.
The base for staking asset rental income is still small and cannot be annualized yet; more relies on EIGEN and the associated LRT protocols' token incentives to make this part of the incentive substantial.
For LST protocols, their revenue baseline is the amount staked * staking yield. The amount staked in ETH is approaching 30%. Although this value is still significantly lower than that of other PoS public chains, the Ethereum Foundation does not wish too much ETH to flow into staking from the perspective of decentralization and economic bandwidth (refer to Vitalik's recent blog, where the Ethereum Foundation once discussed whether to set a cap on ETH staking at 25% of the total supply); however, the staking yield has been continuously declining, from stabilizing at around 6% at the end of 2022 to only about 3% now, with no reason for recovery in the foreseeable future.
For the tokens of the above protocols, aside from being constrained by the general downturn of ETH itself:
The market ceiling for LST on the Ethereum network is gradually becoming visible, which may also explain the poor performance of LDO and RPL's LST protocol governance tokens.
For EIGEN, other PoS chains including restaking protocols on the BTC chain are emerging continuously, which has basically confined Eigenlayer's business within the Ethereum ecosystem, further lowering the potential upper limit of its already unclear AVS market size.
The emergence of the LRT protocol, which was not originally anticipated (with ETHFI's peak FDV exceeding 8 billion, surpassing LDO and EIGEN's historical highest FDV), further 'diluted' the value of the two mentioned in the staking ecosystem.
For ETHFI and REZ, in addition to the factors mentioned above, the excessively high initial valuations brought by launching during market booms are more important factors affecting their token prices.
Solana's staking and restaking
The operational mechanism of the liquid staking protocol on the Solana network represented by Jito is fundamentally no different from that of the Ethereum network. However, Solayer's restaking differs from Eigenlayer's restaking. To understand Solayer's restaking, we first need to grasp the swQoS mechanism of Solana.
The swQoS (stake-weighted Quality of Service) mechanism of the Solana network officially came into effect after a client version upgrade in April this year. The starting point of the swQoS mechanism is the overall efficiency of the network, as the Solana network experienced prolonged network congestion during the meme frenzy in March.
In simple terms, after the activation of swQoS, block producers determine the priority of their transactions based on the amount staked by the stakers. Stakers with x% staking ratio across the network can submit up to x% of the transactions (for details on the specific mechanism of swQoS and its far-reaching impact on Solana, readers can refer to Helius's article). After swQoS was activated, the transaction success rate of the Solana network improved rapidly.
Success and failure of TPS on the Solana network Source: Blockworks
swQoS ensures that smaller stakers' transactions are 'drowned out' in the network, thus prioritizing the interests of larger stakers when network resources are limited, avoiding malicious transactions from attacking the system. To some extent, the logic of 'the more you stake, the more network privileges you enjoy' aligns with the logic of PoS public chains: staking a higher proportion of the chain's native tokens contributes more to the stability of the chain and deserves more privileges. However, the centralization issue of this mechanism is also very apparent: larger stakers can naturally gain more priority in transactions, which will attract more stakers, thus self-reinforcing the advantages of top stakers and further leaning towards oligopoly or even monopoly. This seems to contradict the decentralization advocated by blockchain, but that is not the focus of this article. We can clearly observe Solana's pragmatic attitude of prioritizing performance in its development history regarding decentralization issues.
In the context of swQoS, Solayer's target users for restaking are not oracles or bridges, but protocols that require transactional throughput/reliability, typical examples being DEXs. Therefore, Solayer refers to the AVS service provided by Eigenlayer as Exogenous AVS because these systems serviced by Eigenlayer typically exist outside the Ethereum main chain. The services it provides are called Endogenous AVS because its service objects are located within the Solana main chain.
Differences between Solayer and Eigenlayer Source
It can be seen that although both involve leasing staking assets to other protocols with demand to achieve 're'staking, Solayer's endogenous AVS and Eigenlayer's exogenous AVS provide different core services. Solayer's endogenous AVS is essentially a 'transaction throughput leasing platform,' whose demand users are platforms (or their users) that require transactional throughput, while Eigenlayer serves as a 'protocol security leasing platform.' The core support of its endogenous AVS is Solana's swQoS mechanism. As Solayer stated in its documentation:
We did not fundamentally agree with EigenLayer’s technical architecture. So we re-architected, in a sense, restandardized restaking in the Solana ecosystem. Reusing stake as a way of securing network bandwidth for apps. We aim to become the de facto infrastructure for stake-weighted quality of service, and eventually, a core primitive of the Solana blockchain/consensus.
We fundamentally disagree with EigenLayer's technical architecture. Therefore, in a sense, we have restructured restaking within the Solana ecosystem. Reusing stake as a method to secure APP network bandwidth. Our goal is to become the de facto infrastructure for swQoS and ultimately a core primitive of the Solana blockchain/consensus.
Of course, if there are other protocols on the Solana chain that require staking assets, such as security needs, Solayer can also lend its SOL to these protocols. In fact, by definition, any lending/reutilization of staking assets can be called restaking, without being limited to just security needs. Due to the existence of the swQoS mechanism on the Solana chain, the range of restaking business on the Solana chain is broader than on the Ethereum chain, and from recent high on-chain activity on Solana, the demand for transactional throughput is more rigid than for security.
Is Solayer's restaking a good business?
The business process for users participating in Solayer restaking is as follows:
Users directly deposit SOL into Solayer, and Solayer issues sSOL to users.
Solayer stakes the received SOL to obtain basic staking income.
At the same time, users can delegate sSOL to protocols that require transactional throughput, thus earning fees paid by these protocols.
Current sources of Solayer's AVS
It can be seen that Solayer is not only a restaking platform but also a platform that directly issues LSTs, which in terms of business processes, is akin to Lido, which supports native restaking on the Ethereum network.
As mentioned earlier, there are three sources of income surrounding staking behavior, and the situation of these three incomes on the Solana network is as follows:
PoS underlying yield, the SOL paid by Solana to maintain network consensus, has an annual yield of about 6.5%, and this income is relatively stable.
Transaction ordering revenue, the fees that nodes can obtain during the transaction packaging and ordering process, including priority fees paid by users to expedite transactions, as well as tips paid by MEV searchers. Combined, these two parts amount to about 1.5% annually, but can vary greatly depending on on-chain activity.
Staking asset rental income entails lending users' staked assets to other protocols that have demand (for transactional throughput, protocol security, or others). Currently, this part has not yet scaled.
The total yield and MEV yield of SOL liquid staking (taking JitoSOL as an example) Source
If we carefully compare the three types of returns from Ethereum and Solana mentioned above, we will find that although SOL's market capitalization is still only 1/4 of ETH's, and the market cap of staked SOL is about 60% of staked ETH's market cap, Solana's staking-related protocols have a factually larger market than Ethereum's staking-related protocols, as well as a greater potential market, because:
1. In terms of PoS underlying revenue: the network issuance revenue that SOL is willing to pay has already begun to exceed that of ETH since December 2023, and the gap between the two is still expanding. Whether for ETH or SOL staking, this part accounts for more than 80% of their yield, which determines the income baseline for all staking-related protocols.
Ethereum and Solana token issuance rewards (i.e., the network's PoS underlying revenue) Source: Blockworks
2. In terms of transaction ordering revenue: Blockworks uses transaction fees and MEV tips to reflect the real economic value (REV) of a chain, which can approximately reflect the maximum value a chain can obtain from transaction ordering revenue. We can see that despite the significant fluctuations in REV for both chains, Ethereum's REV sharply decreased after the Cancun upgrade, while Solana's REV has generally shown an upward trend and successfully surpassed Ethereum recently.
Solana and Ethereum's REV Source: Blockworks
In terms of staking asset rental income, compared to the Ethereum network which currently has only security income, Solana's swQoS mechanism can bring additional rental demand for transactional throughput.
Furthermore, Solana's staking-related protocols can expand their business according to commercial logic; any liquid staking protocol can conduct restaking business, such as Jito we see; any restaking protocol can issue LSTs, like Solayer and Fragmetric.
More importantly, we currently do not see any possibility of reversal for the above trends. This means that the advantages of Solana's staking protocols relative to Ethereum's staking protocols may continue to expand.
From this perspective, although we still cannot say that Solana's restaking has found PMF, it is clear that Solana's staking and restaking are better businesses than those on Ethereum.
