In-depth Analysis Report on Re-staking and Hong Kong Virtual Asset ETF

Introduction to Re-staking

Since the launch of the Ethereum POS-based Beacon Chain on December 1, 2020, the Ethereum staking track has officially begun, and on September 15, 2022, the Paris upgrade was completed, merging the Beacon Chain with the main chain and ushering in the PoS era of Ethereum.

Even if you transition from PoW to PoS, it does not mean that there is no need to "work" to run nodes. It's just that previously work didn't require permission for entry, but now you need to first spend money to "purchase" the qualification to operate a node. Staking means you need to deposit 32 ETH to activate the validator, which qualifies you to participate in network consensus.

So we can roughly divide Ethereum staking into two roles: the validators who put in money and the operators who do the work.

Six Development Stages of Ethereum Stake

Native stake → stake as a service → joint stake → liquid stake → decentralized stake → re-stake

Native staking: Pay for it yourself, operate the node yourself, and be responsible for all the hardware and software maintenance and costs of the clients.

• Benefits:

1. More secure and decentralized for the Ethereum network.

2. Earn 100% stake rewards, no intermediaries.

• Disadvantages:

1. Technical threshold, requires understanding of technology to install and execute the client oneself.

2. Hardware threshold, you need to have a fairly good computer and at least a 10MB network.

3. Capital threshold, requires staking 32 ETH.

4. There will be penalties for not having issues; if there are problems with the software, hardware, or network that lead to node instability, the staked collateral will be penalized.

5. Risk issues, you need to manage the security of your private keys and mnemonic phrases yourself, and periodically upgrade the nodes.

Staking as a Service: Just invest money to become a validator, with a third party responsible for running the node operations.

• Benefits: Eliminates technical barriers, only invests money without effort.

• Disadvantages:

1. Capital threshold, requires staking 32 ETH.

2. There is no problem with the penalty; if there is an issue with the software, hardware, or network of a third party, the staked amount will be penalized, but the third party will not.

3. Risk issues, it may be necessary to entrust the private key and mnemonic phrase.

4. Give a little profit to third parties.

5. Centralization poses a threat to Ethereum's security.

Joint Stake: Multiple individuals pool together 32 ETH to collectively purchase validator qualifications, with a third party responsible for running the node. This is essentially akin to the nature of a mining pool. Correspondingly, the earnings obtained from operating the node are also distributed based on the proportion of the staked funds from the crowd.

• Benefits:

1. Eliminates the technical barrier, only investing money without putting in effort.

2. Reduced the threshold to 32 ETH.

• Disadvantages:

1. Although the investment threshold has been lowered, the funds are still locked in liquidity due to staking.

2. There will be no penalty issue; if there is a problem with the third-party software, hardware, or network, the stake will be penalized, but the third party will not.

3. Risk issues, it may be necessary to entrust the private key and mnemonic phrase.

4. Give a little profit to a third party.

5. Centralization poses a threat to Ethereum's security.

The development of Ethereum staking has reached a point where the three major barriers of technology, hardware, and funding have basically been resolved, and it seems to be approaching saturation. However, in reality, there is still a significant issue that has not been addressed, which is the liquidity problem. Essentially, regardless of the staking method mentioned above, it occupies the validators' funds, and as a node on Ethereum, daily entries and exits require queuing, making it impossible to access funds on demand, especially in the case of joint staking. Therefore, this effectively locks up the liquidity of the validators.

Liquid Staking ( LST ): Multiple people pool together 32 ETH to collectively purchase validator qualifications, with a third party responsible for running the nodes. Additionally, the platform will provide 1:1 stETH to release liquidity, representing the projects Lido, SSV, and Puffer.

• Benefits:

1. Eliminates technical barriers, only requires money without effort.

2. Reduced the threshold to 32 ETH.

3. No need to lock liquidity, improving capital utilization rate.

• Disadvantages:

1. There is no problem with punishment; if there is an issue with the software, hardware, or network of a third party, the stake will be punished, while the third party will not.

2. Risk issues, you may have to entrust the private key and mnemonic phrase.

3. Give a little profit to a third party.

4. Centralization poses a threat to the security of Ethereum. ( The issue of centralization can easily bring unrest and anxiety to the entire industry, thus solving the centralization problem has become the next direction for the staking track ).

Decentralized staking: Achieve permissionless access for third-party operators through technologies such as DVT and remote signing.

• Benefits:

1. Removes the technical barrier, just invest money without effort.

2. Reduced the threshold to 32 ETH.

3. No need to lock liquidity, improving capital utilization.

4. Improve the degree of decentralization of operators, reduce the risk of user stake being penalized, and enhance the security of Ethereum.

• Disadvantage: Give up a little profit to a third party.

Re-staking Introduction

The concept of re-staking has gradually developed with the popularity of the PoS( proof of stake) mechanism. In PoS systems, staked funds are used for network security and achieving consensus. Compared to traditional PoW( proof of work), PoS focuses more on the locking of capital rather than computational power. With the rise of DeFi, the market's demand for capital efficiency has increased, thus giving rise to the need for re-staking.

The purpose of staking is to allow users to deposit a certain amount of funds as collateral and become a node to maintain the security of a certain project, thereby earning profits. If a node acts maliciously, the collateral will be penalized. Therefore, it is not only POS chains that require staking to ensure security; cross-chain bridges, oracles, DA, ZKP, and others also require staking to ensure the safety of participants, a professional term called AVS (Active Verification Service).

For project parties, the purpose of staking ( is to ensure security, while for users, the purpose of staking is to earn returns. Therefore, the relationship between funds and projects is 1:1, meaning that for every new project launched, it needs to find a way to get users to invest real money in staking from scratch to ensure security. However, the money in users' hands is limited, and project parties need to compete for the limited staking funds in the market for their own security, while users can only choose to stake their limited funds in a limited number of projects to obtain limited returns.

The essence of ReStaking ) is to establish a shared staking pool, allowing a single fund to simultaneously stake for multiple projects, ensuring security and achieving the effect of maximizing returns, transforming the relationship between funds and projects from 1:1 to 1:N, thus enabling users to gain excess returns and alleviating the pressure on projects competing for staking funds. For example, people now choose to stake their funds in Ethereum, reaching 30 million, which has already demonstrated strong security, but other projects still need to build their own AVS. Therefore, efforts can be made to allow other applications to inherit and share Ethereum's security.

![ReStaking ( and Hong Kong Virtual Asset ETF Depth Analysis Report])https://img-cdn.gateio.im/webp-social/moments-b0d7d3a2fae860d05189b33270de6365.webp(

) The technical principles of re-staking

When discussing the principles of re-staking technology, we need to understand how it is implemented in blockchain networks. Re-staking technology is based on a smart contract system that can program and manage the status and permissions of staked assets. On a technical level, re-staking involves several key components:

- Staking Proof Mechanism(Staking Proof Mechanism)

This is a mechanism that verifies that users have staked assets, usually through a tokenized approach, such as creating a token corresponding to the original asset ### like stETH(. The staking proof mechanism provides a starting point for the entire re-staking process, ensuring that the staking status of user assets can be verified and tracked on-chain through tokenized staking proof.

- 跨协议互操作性)Cross-Protocol Interoperability(

Re-staking requires the circulation of staked assets across different protocols and platforms, which necessitates strong interoperability support to ensure that assets can move safely and effectively between various systems. Cross-protocol interoperability ensures that staked assets can flow freely between different blockchain protocols. This is crucial for enabling the re-staking of assets across multiple projects, as it relies on robust technical support to ensure the security and efficiency of asset transfers.

- Consensus Algorithm Extension )

In the POS system, re-staking may require modifications or extensions of the existing consensus algorithm to support new staking and validation mechanisms. The expansion of the consensus algorithm provides the necessary network security guarantees for re-staking. By adjusting or extending the existing consensus algorithm, new staking and re-staking activities can be supported while maintaining the decentralization and security of the network.

- On-chain Governance and Automated Execution(

Smart contracts also allow for on-chain governance, which means that the terms of the contract are automatically executed through code, managing various conditions and rules during the staking process. On-chain governance and automated execution automatically manage the rules and terms during the staking process through smart contracts, ensuring that staking operations comply with predefined governance policies while enhancing the transparency and predictability of operations.

- Security and Isolation Guarantees)Security and Isolation Guarantees(

To prevent security issues during the re-staking process, it is essential to ensure the isolation and security of assets when transferring between different projects. This is typically achieved through cryptographic techniques and dedicated security modules to avoid potential security vulnerabilities. Security and isolation guarantees are an indispensable part of the re-staking system, especially when assets are circulating among multiple staking protocols and projects. It is crucial to ensure that every operational step is conducted in a secure environment to prevent improper access or theft of assets.

Overall, the implementation of re-staking not only requires a high level of technical expertise but also needs to consider the safety of funds, the transparency of operations, and the stability of the system. Through these technological means, re-staking can enhance capital utilization efficiency while contributing to the security and decentralization of the blockchain network.

The path from Ethereum → Eigenlayer → AVS → DApps is implemented as shown in the figure below.

The left side represents the previous staking method. Assuming the Ethereum network has 10 Billion in funds, staked to provide security for upper-level applications, along with some oracles, cross-chain bridges, etc., each staking 1 Billion to provide services to the same application, there would then be a total of 13 Billion in funds.

However, some projects may not require so much funding, just like companies in the past that needed to buy a cabinet from companies like Lenovo and Dell to place in their offices. However, the company's business is unstable, and sometimes they can't use that much capacity, which leads to cost waste. This is where services like AWS and Alibaba Cloud come in, allowing companies to purchase services on-demand at any time. In this process, the actual hardware servers used behind the scenes have not decreased; they are just uniformly maintained and managed by AWS and Alibaba Cloud.

The part on the right side of the diagram has a similar meaning, where people put their funds into Ethereum, and on top of Ethereum, there is a staking layer called Eigenlayer. Eigenlayer provides staking funds to oracles, cross-chain bridges, and others that need staking to ensure security, allowing everyone to provide services for the upper-layer applications together. In this way, the utilization of funds is greatly improved.

The essence of the concept of re-staking is shared security. Yield farming is an additional result after shared security, but most people only see this result and ignore the premise that generates it. Ethereum, being the most secure POS chain currently with tens of thousands of nodes, has security spillover, which gives it the ability to provide security to third parties, and thus release that ability through re-staking. However, BNB has only 48 nodes, and other POS chains have far fewer nodes than Ethereum. Even if they really try to implement re-staking, they are powerless, as they themselves do not possess security. Compared to Ethereum (, how can they provide shared security to other third parties? Even if they do share, the third parties may not dare to use it.

The structure of Eigenlayer mainly consists of four layers. The bottom layer is the Ethereum mainnet, above that is the unified AVS layer, and then there are three roles: stakers, consumers, and developers.

Stakers provide funds to AVS to earn returns,