Why the Howey Test Is a Poor Tool for Assessing Restaking Vaults

Howey requires an "investment of money." Native ETH staking is a network security function, not a capital allocation. Restaking vaults like EigenLayer accept staked ETH—an asset already locked in a utility contract. This is a capital re-use mechanism, not a fresh capital raise from the public.

• Key Benefit 1: Reframes asset from passive investment to active, productive network resource.
• Key Benefit 2: Distinguishes protocol-native activity from third-party security offerings.

Howey hinges on profits derived from a "common enterprise." In pooled restaking, the "enterprise" is a decentralized, permissionless set of Actively Validated Services (AVS). Profits (slashing penalties & rewards) are algorithmically determined by individual operator performance and AVS adoption, not managerial efforts of a central promoter.

• Key Benefit 1: Operator rewards are non-guaranteed and tied to verifiable, on-chain service provision.
• Key Benefit 2: Profit source is fragmented across dozens of independent AVS networks like EigenDA and AltLayer.

The correct analysis is a work vs. yield spectrum. Simple token staking for yield is investment-like. Providing cryptoeconomic security for middleware is work. Restakers perform the work of extending Ethereum's trust layer. This aligns with the Major Questions Doctrine—regulators shouldn't apply old rules to fundamentally new technological functions.

• Key Benefit 1: Creates a clear, tech-native regulatory bright line.
• Key Benefit 2: Protects core innovation in decentralized infrastructure without creating a security law loophole.

The SEC's non-action on Uniswap LP tokens sets a crucial precedent. Like LP tokens, restaking positions (LRTs like Kelp DAO's rsETH) are derivative yield-bearing receipts for providing a service (liquidity/security). Their value accrues from automated, decentralized fee markets, not corporate profit-sharing. Applying Howey here would invalidate the entire DeFi primitive stack.

• Key Benefit 1: Leverages existing regulatory tacit acceptance of DeFi mechanics.
• Key Benefit 2: Highlights inconsistency in targeting restaking while ignoring analogous yield-bearing vehicles.

The Howey Test evaluates a static investment contract, not a dynamic, multi-role cryptosystem. Restaking vaults like EigenLayer and Karak are coordination layers for active, permissionless participation.

• Misaligned Scope: Tests for passive income expectation, not active validation work.
• False Positives: Would incorrectly flag core DeFi (e.g., Uniswap LP positions) under the same logic.
• Ignores Utility: Fails to distinguish between a financial yield and a fee-for-service payment for securing AVSs.

The existential risk isn't legal classification; it's smart contract and cryptoeconomic failure. A bug or coordinated attack on a major Actively Validated Service (AVS) could trigger mass, correlated slashing across the restaking ecosystem.

• Systemic Risk: A single AVS failure could slash a ~$20B+ restaked capital base.
• Liquidity Black Hole: Forces mass, simultaneous unbonding and withdrawals, crippling Ethereum consensus.
• Contagion Vector: Parallels to Terra/Luna collapse, but embedded in Ethereum's core security layer.

The market, not the SEC, will price and manage risk through operator reputation scores and dedicated insurance pools. Platforms like EigenLayer and Symbiotic are evolving into risk coordination layers.

• Reputation as Collateral: High-performing operators attract more stake; poor performance is penalized.
• AVS Risk Grading: Independent auditors (e.g., UMA's oSnap) will emerge to rate AVS slashing risk.
• Native Insurance: Protocols like EigenLayer plan slashing insurance, creating a $B+ market for risk underwriting.

Regulatory clarity is emerging around the distinction between securities and decentralized software utilities. The Uniswap and Coinbase cases establish that protocol fees for network use are not necessarily investment returns.

• Fee-for-Service Model: Restaking rewards are fees for providing validation services to AVSs.
• Decentralization Threshold: Highly decentralized operators and AVS networks weaken the "common enterprise" prong of Howey.
• Pathway: Follows the Filecoin precedent of a functional utility token with secondary market dynamics.

The Howey Test's four prongs—investment of money, common enterprise, expectation of profit, efforts of others—are fundamentally misaligned with restaking's mechanics.

• Key Misalignment: Restakers are not passive investors; they are active, slashed security providers for networks like EigenLayer, Babylon, and Karak.
• Regulatory Reality: The SEC's focus is on the 'efforts of others' prong. A vault's design must minimize reliance on a central promoter's managerial efforts.
• Builder Imperative: Architect systems where profit is a function of cryptoeconomic security provisioning, not promotional hype.

For investors and regulators, the critical failure mode isn't 'security-ness'—it's systemic risk concentration.

• Core Concern: A vault aggregating $10B+ TVL creates a single slashing vector that can cascade across dozens of Actively Validated Services (AVSs).
• Investor Lens: Evaluate a vault's risk engine and operator set diversification, not its tokenomics brochure. Look for models inspired by Lido's stETH or Coinbase's cbETH decentralization playbooks.
• Red Flag: Vaults where withdrawal liquidity is gated or delayed, creating de facto investment contract lock-ups.

The winning legal and product strategy is to architect vaults as permissionless, composable security middleware.

• Design Principle: Emulate Uniswap's immutable core or MakerDAO's decentralized governance. Profit must accrue from automated, code-defined services.
• Technical Mandate: Build for EigenLayer native restaking, not just liquid restaking tokens (LRTs). Direct integration reduces legal 'wrapper' risk.
• VC Takeaway: Back teams building robust cryptoeconomic safety modules, not financialized yield products. The moat is in risk management, not APY.

Lido's success provides a blueprint. stETH is widely treated as a commodity, not a security, due to specific architectural choices.

• Critical Factor: stETH is a non-custodial, direct representation of validator ownership and rewards. Profit derives from Ethereum's protocol, not Lido's 'efforts'.
• Applied Lesson: A restaking vault must be a transparent conduit to the underlying cryptoeconomic security layer (e.g., EigenLayer).
• Metric to Watch: The ratio of vault-native 'points' vs. protocol-native rewards. Higher native rewards dilute the 'investment contract' argument.