Staking/restaking 101

For this "Prosper 101" edu-series, we are collaborating with @Stake_Stone, an adaptive staking network for liquid ETH and BTC. Learn more: https://stakestone.io/.

Staking is a process that allows cryptocurrency holders to earn additional income by locking up their digital assets to help secure blockchain networks while restaking allows participants to secure multiple blockchain networks simultaneously.

In this article, we explain exactly what staking and restaking are, how they work, and their respective benefits.

What is Staking?

Staking is a way for cryptocurrency holders to help secure the blockchain, verify transactions and earn additional income by locking up their cryptocurrency tokens for a set period of time. Individuals act as validators within Proof of Stake (PoS) networks (which will be explained in more details below), without bank or payment processors in the middle, competing to verify and process new blocks of transactions in exchange for financial rewards.

Why do some cryptocurrencies allow staking and some don't?

Different cryptocurrencies use different consensus mechanisms to maintain their decentralized networks. Bitcoin, for instance, uses the energy-intensive Proof of Work (PoW) mechanism, where "miners" compete to solve cryptographic puzzles in order to validate transactions and add them to the blockchain. This approach works well for a relatively simple blockchain like Bitcoin's, but can cause scalability issues for more complex networks like Ethereum. To address these challenges, some cryptocurrencies have adopted alternative consensus mechanisms, such as Proof of Stake.

What is Proof of Stake?

In the PoS mechanism, validators stake their own digital assets to validate transactions and add new blocks to the blockchain. The likelihood of being selected to validate a block is proportional to the amount staked.

Successful validators are rewarded with newly minted tokens and transaction fees, which they can then share with "delegators" who have delegated and staked their assets with the validator. These staked assets are usually subject to a "lockup" period, during which they cannot be used.

What is Liquid Staking?

Liquid staking provides all of the same benefits as regular staking, but allows participants (i.e., validators and delegators) to unlock the value of these staked assets for use across the DeFi ecosystem.

Participants will delegate and stake their assets with a validator, receiving a token that represents their staked position. This token, known as a liquid staking token (LST) can be traded or used as collateral in DeFi protocols, which helps to unlock the liquidity and maximize the efficiency of the staked assets.

There are a number of protocols that enable liquid staking. For example, Lido is a liquid staking protocol that provides users with stETH (staked ETH), stMATIC (staked MATIC) and stSOL (staked Solana), all of which can then be used on their respective networks. Another example is our partner StakeStone, which is an omnichain liquidity infrastructure that introduced STONE and STONEBTC (coming soon), liquid versions of ETH and yield-bearing version of liquid BTC respectively that can also be restaked. We will dive deeper into what is restaking below.

What are the Benefits of Staking?

Staking provides several key benefits:

• Security – Staking incentivizes validators to help secure the network, reducing the risk of a 51% attack. Malicious actors need to acquire more than half of the staked tokens in order to compromise the network
• Speed – PoS networks can process transactions more efficiently than PoW alternatives given PoS networks are less-resource intensive
• Additional Income – Validators and delegators can earn rewards for contributing to network security

What is Restaking?

Restaking expands on the concept of staking, allowing participants to “restake” their staked assets and LSTs to secure multiple blockchain networks simultaneously and earn additional rewards. Restaking is very similar to liquid staking but the assets can be used specifically for staking across different protocols at the same time.

Some restaking protocols, such as EigenLayer, will provide users with liquid restaking tokens (LRTs), which represent ownership of the underlying restaked assets. The terms “restaking” and “liquid restaking" are often used interchangeably.

What Are the Benefits of Restaking and Liquid Restaking?

Restaking provides several key benefits:

• Higher Returns – Participants can earn additional rewards by utilizing their restaked tokens in separate DeFi protocols
• Greater Security – In theory, the more assets staked on a network, the greater its resilience to attacks
• Additional Liquidity – Restaking allows staked assets to remain active in the market, rather than being locked away for extended periods

Staking vs Restaking

Both staking and restaking contribute to blockchain security and decentralization by having participants lock up their assets, hence, encouraging integrity of participants through a “skin in the game” approach. For staking and restaking, the potential yields tend to surpass those of traditional investments, making them attractive options for crypto holders.

The key differences lie in factors like liquidity, complexity, and risk exposure. Liquid restaking provides added flexibility but also introduces additional DeFi-related volatility such as counterparty and smart contract risks.

What is the Future of Staking and Restaking?

The future looks bright for staking and restaking, especially as the DeFi industry, layer 2 solutions and cross-chain functionality continue to evolve. Increased interoperability, liquidity, and reduced transaction fees could help drive further mainstream adoption of staking and restaking, potentially drawing attention away from traditional finance as investors seek higher yields.