Proof-of-Stake is Evolving Into a World of Derivative Layers

Native staking locks up $100B+ in TVL, creating massive opportunity cost and illiquidity. This capital cannot be used for DeFi, collateral, or hedging, forcing a trade-off between network security and capital efficiency.

• Capital Silos: ETH staked on Lido cannot be used as collateral on Aave.
• Slashing Risk: Idle capital is exposed to punitive penalties without offsetting yield.
• Validator Centralization: High capital requirements push staking towards a few large pools.

Protocols like EigenLayer and Lido separate staked capital from validator duties, creating a liquid, programmable asset layer. This unlocks capital for a derivative security market.

• Capital Rehypothecation: stETH can be restaked to secure AVSs (Actively Validated Services).
• Yield Stacking: LSTs enable yield from base staking + additional AVS rewards.
• Security as a Service: A new market where protocols rent economic security from pooled ETH.

The monolithic validator splits into three distinct markets: Base Consensus (Ethereum), Derived Security (EigenLayer, Babylon), and Specialized Execution (Alt-L1s, Rollups). Each layer optimizes for a different resource.

• Layer 1: Provides final, canonical settlement and censorship resistance.
• Security Layer: Sells cryptoeconomic security to new protocols via restaking.
• Execution Layer: Leases security to focus purely on speed and low-cost transactions.

Validators are no longer generic. They become operators choosing specific Actively Validated Services (AVS) based on risk/reward, leading to a marketplace for validator services. Think AWS for blockchain ops.

• Risk Segmentation: Operators can opt into high-reward, high-slashing AVSs.
• Service Bundling: A single operator can provide sequencing, oracles, and bridging.
• Decentralized Task Runtimes: Networks like Espresso or Astria provide sequencing-as-a-service.

LSTs like Lido's stETH and Rocket Pool's rETH create a false sense of liquidity. During a market crisis, the rush to exit the derivative can outpace the underlying chain's unstaking queue, creating a depeg risk. This is a systemic liquidity mismatch.

• Key Risk: ~$40B+ LST TVL vs. Ethereum's ~30-day unstaking period.
• Historical Precedent: The stETH depeg during the Terra/Luna collapse.
• Systemic Linkage: LSTs are collateral in DeFi protocols like Aave and MakerDAO, amplifying contagion.

Liquid Restaking Tokens (LRTs) from EigenLayer, Kelp DAO, and EtherFi stack leverage on leverage. Users stake ETH -> receive LST -> restake for LRT -> use LRT as DeFi collateral. This creates a nested dependency where a failure in any layer (AVS slashing, oracle attack) triggers a cascade.

• Key Risk: Single ETH collateral backing multiple yield-bearing and security promises.
• Opacity: Real-time risk exposure across EigenLayer AVSs, LRT protocols, and lending markets is untracked.
• Contagion Vector: A major LRT depeg could simultaneously cripple restaking networks and DeFi liquidity.

LST protocols naturally centralize validator control. Lido dominates with ~30% of Ethereum validators, creating a single point of failure. The economic efficiency of large staking pools creates a winner-take-most market, undermining Proof-of-Stake's decentralized security model.

• Key Risk: A governance attack or technical bug in a major pool could threaten chain finality.
• Metric: Lido's >33% validator share is a critical threshold for potential chain attacks.
• Solution Space: DVT (Distributed Validator Technology) from Obol and SSV Network is critical to decentralize the node layer beneath derivatives.

The derivative stack (LST -> LRT -> yield strategies) compresses native staking yield while adding smart contract risk. This creates perverse incentives where users chase points and airdrops over sustainable yield, masking underlying risk. The system becomes vulnerable to economic attacks targeting the weakest yield-bearing link.

• Key Risk: Collapse in "points farming" demand could trigger a mass unwind of restaked positions.
• Attack Surface: Complex yield strategies on Pendle or EigenLayer become targets for manipulation.
• Real Yield: Native staking yield is diluted by the fees extracted at each derivative layer.

EigenLayer's restaking model treats cryptoeconomic security as a fungible resource, enabling ~$20B+ in TVL to be repurposed. This creates a new market for Actively Validated Services (AVS) but introduces systemic slashing risks.

• Key Benefit: Unlocks permissionless innovation for new middleware (e.g., oracles, bridges).
• Key Benefit: Monetizes idle stake, boosting validator yields by 5-15% APY.

Babylon uses Bitcoin's timestamping and finality to secure Proof-of-Stake chains without liquid staking derivatives. It turns Bitcoin into a universal slashing engine, solving the 'weak subjectivity' problem for new chains.

• Key Benefit: Eliminates the 7-day unstaking delay, enabling instant stake portability.
• Key Benefit: Provides $1T+ of Bitcoin's security to any PoS chain, reducing startup costs.

Karak extends the restaking primitive beyond Ethereum to any asset (e.g., stablecoins, LSTs) and any chain. It abstracts security into a generalized yield layer, competing directly with EigenLayer and liquid restaking tokens (LRTs) like Ether.fi.

• Key Benefit: Multi-asset collateral diversifies risk and expands the addressable security market.
• Key Benefit: Native cross-chain architecture avoids the bridging risks of Ethereum-centric models.

Liquid Restaking Tokens (LRTs) like Ether.fi's eETH and Renzo's ezETH abstract restaking complexity but create a new layer of risk. They introduce depeg risk, points farming meta-games, and opaque AVS exposure, fragmenting Ethereum's security.

• Key Benefit: Provides liquid, tradable exposure to restaking yields, fueling ~$10B+ DeFi TVL.
• Key Benefit: Democratizes access for small stakers but centralizes delegation power in a few node operators.

Chains like Sui and Aptos are exploring native restaking to bootstrap their own security and ecosystem services. This creates a captive market for their stake, reducing reliance on Ethereum's security exports and fostering chain-specific AVS ecosystems.

• Key Benefit: Increases chain sovereignty and captures more value within the native token economy.
• Key Benefit: Reduces competitive leakage to Ethereum LRTs, but may limit interoperability.

The future is a competitive marketplace where security is provisioned on-demand from providers like EigenLayer, Babylon, and Karak. Execution layers will lease security, and stakers will optimize yields across a portfolio of slashing conditions, creating a true security yield curve.

• Key Benefit: Drives efficiency, lowering security costs for new chains by ~30-50%.
• Key Benefit: Forces specialization, with providers competing on slashing enforcement and risk pricing.