Faced with regulatory pressure, how will the re-pledge market develop in the future?

Original title: "Reflections on Restaking"

Original author: Larry Sukernik, Myles O'Neil

Original translation: Frost, BlockBeats

At Reverie, we spend a lot of time researching restaking protocols. It's an exciting investment category for us because everything is fuzzy (opportunities exist in fuzzy markets) and there's a lot going on (dozens of projects will launch in the restaking space in the next 12 months).

In our work researching restaking mechanisms, we've gained some insights, so we wanted to predict how the restaking market will develop in the next few years.

A lot of things are new, so what works today may not work tomorrow. Nonetheless, we wanted to share some initial observations about the business dynamics of the restaking market.

LRTs as Leverage Points

Today, LRTs like Etherfi and Renzo hold a powerful position in the re-staking supply chain: due to their proximity to both the supply side (stackers) and the demand side (AVs), they are in a privileged position on both sides of the transaction. If operated in this way, LRTs are able to determine their commissions, as well as influence the commissions of underlying markets (e.g. EigenLayer, Symbiotic). Given their powerful position, you can expect to see re-staking markets launch first-party LRTs to control third-party LRTs.

AVs and Re-staking Users as Leverage Points

The best markets in the world have two characteristics: decentralized supply and decentralized demand. So what happens when there are not-so-good markets, where one or both of the supply and demand sides are concentrated?

Imagine a simple apple trading marketplace where the largest apple seller controls more than 50% of the apple supply. In this case, the largest apple supplier has the ability to threaten to stop trading on the platform if the marketplace operator decides to increase the marketplace commission from 5% to 10%.

Similarly, on the demand side, if the largest apple buyer controls more than 50% of the apple demand, the buyer also has the ability to threaten to stop trading on the platform (or perhaps contact the apple supplier directly) if the marketplace operator increases the marketplace commission.

Back to the re-pledge market, if the final market structure of the re-pledge market is concentrated on the AVS side (the top 10% of AVS account for more than 50% of revenue) or the re-pledger side (the top 10% of re-pledgers account for more than 50% of deposits), then the natural result will be that such trading platforms will be restricted in extracting their own service fees (commissions) (so their value pricing should also be relatively low).

Although there is not enough data to prove it here, from our intuition, there may also be some major players in this industry. Monopoly law: large AVS accounts are likely to occupy the main transaction volume, thus forming a certain negotiation advantage in the service fee rate that the market may charge in the future.

Fighting for exclusive AVS

From the perspective of each re-pledge market platform, anything that can be done that competitors cannot do is worth doing. The easiest differentiation strategy for re-staking platforms is to provide users with exclusive access to AVS, either by developing first-tier AVS such as EigenDA or providing third-party AVS through exclusive partnerships. Conceptually, this is similar to Sony launching exclusive games only on the PlayStation platform, with the goal of driving user growth for the platform.

Based on this information, we expect the re-staking market to take some measures, such as launching more first-party AVS or reaching exclusive agreements with third-party AVS. In short, in the coming months, we expect a round of competition among platforms for more AVS resources, and we may see AVS become the focus of competition among platforms.

AVS Subsidy

AVS needs to pay service fees to operators and re-stakers, which essentially means that AVS needs to pay with its own ether and stablecoins, or possibly points and future airdrops. However, considering that most AVS are still in the early stages, lack tokens, have small balance sheets, and have incomplete points programs and airdrop designs, it is cumbersome to attract operators and re-pledgers to sign contracts (most EigenLayer collaborations use customized contracts negotiated privately). Simply put, this is a situation where a customer wants to buy a service and has sufficient payment ability in theory, but actually lacks funds at present.

To facilitate the operation of this market, the re-pledge market is likely to "advance" the initial payments to operators and re-pledgers, either through its native tokens, on-balance sheet assets, or possibly through the issuance of "cloud credits" for AVS and operators and re-pledgers to consume. In return for the prepaid funds, we expect AVS to commit to airdrops and token distributions to the re-pledge market. Alternatively, the re-pledge market can prepay this money to AVS to encourage AVS to choose to work with you instead of other competitors.

In short, we expect to see competition between re-staking markets over the next 12-24 months by subsidizing AVS spending. Similar to the market dynamics of Uber and Lyft, the re-staking market with the most dollars and tokens to spend will likely be the ultimate winner.

White Glove User Onboarding

Going from “I want to deploy an AVS” to actually running it is harder than it looks, especially for a small team with limited RD capabilities. There is no standard answer to how to determine security configuration, duration, operator compensation amount, penalty items and standards.

Best practices will eventually emerge, but for now, re-staking markets need to help AVS teams solve these problems (it is worth noting that EigenLayer does not yet provide payment or slashing functions).

Therefore, we expect successful re-staking markets to have some flavor of enterprise sales, providing “white glove” integration and service support to new customers, similar to enterprise sales, to help new customers quickly complete in-product user onboarding.

Graduating from the Marketplace

The most successful AVS projects will likely “graduate” from the re-staking market.

Today, re-staking publicity is most relevant to small projects that do not have the time, money, brand and connections to recruit validators, or a high-value token to secure the network. But as projects grow in size, they will naturally choose to leave the re-staking market and recruit their own validators and secure the network with their own tokens.

Conceptually similar to dating apps, successful users leave the platform (e.g. Hinge, Tinder). However, for the market operator, this churn is bad news because you are losing a customer.

One-stop crypto SaaS shop

To illustrate this observation, let’s take a deep dive into history: Cloud service providers (such as AWS) provide developers with efficient access to all the resources they need (such as hosting, storage, and computing power) to develop apps or web services. It significantly reduces the cost and time of software development. This has led to the emergence of a new category of highly specialized web services. Cloud service providers have become a "one-stop" service provider for developers to access all non-core business logic needs through their own cloud services and a large number of third-party "microservices."

Re-staking markets like EigenLayer aim to create a group of similar microservices for the blockchain space. For example, before EigenLayer, crypto microservices could either fully centralize their off-chain components (and pass this risk on to their customers) or bear the cost of initializing a group of operators and incentive mechanisms to "buy" a certain amount of security.

For microservices, restaking markets have the potential to solve this problem, and if they work as expected, they can prioritize security over cost and speed to market.

Let’s say you are developing a cost-effective zk-rollup. If you enter a restaking market like EigenLayer, you will have multiple core service options, such as DA and bridge, to easily get started. Through this process, you will see dozens of other AVS microservices that can be integrated.

The more microservices that the restaking market offers, the better the user experience will be, and users will no longer have to choose between multiple independent providers, but can buy all the services they need from a single restaking market. Users can come for service X and stay for services Y and Z.

Some AVS will have network effects (such as pre-provisioning)

So far, the restaking scenario has mainly focused on exporting validators and economic incentives out of Ethereum. However, there is a class of “inward” restaking scenarios that could potentially add new features to the Ethereum consensus mechanism without requiring changes to the Ethereum protocol.

The idea is simple — allow validators to choose additional commitments to add something to the blocks they propose in exchange for a reward. If they do not follow through on these commitments, they will be held accountable. We expect that demand for only a few types of commitments may be sufficient to attract significant participation. Although the types are small, the value flow potential of these commitments is huge.

Unlike the “outward” restaking use case, the effectiveness of this type of use case is directly related to validator participation. That is, even if you are willing to pay to join a block, it will not be of much use if only 1 out of 10 validators choose to follow this commitment.

But if every validator chooses a certain type of commitment, then the guarantee provided by this commitment will be equivalent to the guarantee given by the Ethereum protocol itself (i.e. valid blocks). Following this logic, we can expect this type of scenario to have strong network effects: as more validators join a certain commitment market, AVS users will benefit from it.

Given the nascent nature of this type of AVS scenario, the most logical channel to promote its adoption seems to be through sidecar software and plugins for Ethereum clients (such as Reth). Similar to the separation of proposers from builders, proposers will likely outsource this work to specialized organizations and be rewarded through a cut of the revenue.

It is unclear what form this type of AVS will take. While it is possible that a single entity could establish a general marketplace that could be used by any commitment type, we expect that several players may emerge that focus on different sources of demand (e.g., those focused on L2 interoperability vs. those focused on L1 decentralized finance needs).

To sum up

For students of business strategy, the business dynamics of the restaking market are a treasure trove of information to delve into. As you can probably tell from the above, we had a lot of fun digging into these projects.

Further, we believe that building first-party infrastructure that allows third parties to build LRTs within the protocol makes more sense than building authoritative first-party LRTs.

An analogy we find helpful is to think of L1s like Ethereum as physical clouds, and protocols like EigenLayer as virtualizations of those physical data centers. Similar to building data centers around the world, it is nearly impossible to replicate the number of operators and economic interests that protect Ethereum. Some are trying to do this on a smaller scale (e.g. Cosmos), but similar to cloud vs. on-premises, renting security from an existing network will always win on cost and speed to market. Restaking markets like EigenLayer are designed to drive the emergence of similar classes of crypto microservices to accelerate development, just as the cloud did for Web2.

We are already seeing the effects of this unlocking, as there are about 40 microservices under development on EigenLayer alone. For example, if you are a Rollup developer, you can integrate oracles to power your DeFi ecosystem, opt-in privacy services to protect user transactions, integrate off-chain coprocessors to give my application superpowers, integrate policy engines to ensure compliance, integrate security services to protect users. The result is that your Rollup can provide a more fully featured development platform than anything on the market today. Importantly, everything works as expected, and you will be able to get these features at a fraction of the cost and time required to develop in-house.

Examples might include L2s looking to pre-confirm inclusions to speed up their finalization time, DEXs auctioning the right to be the first transaction in the next block, lending protocols auctioning liquidation rights (i.e., transactions are placed directly after the next oracle update), or searchers and builders looking to purchase entire blocks from future proposers.

「 Original source 」

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