One of the significant innovations in the cryptocurrency world in 2024 was restaking, allowing projects to borrow security from staking protocols like Ethereum. However, this practice raises concerns similar to those associated with rehypothecation.
Restaking and rehypothecation: key differences
Restaking and rehypothecation differ in their structure, obligations, and risks. Rehypothecation involves borrowing and increases returns but amplifies risks when things go wrong. Restaking relies on smart contracts and liquidates arrangements rapidly, providing significant asset protection.
Technical risks of restaking
The primary difference between restaking is the lack of financial obligations. It entails contractual obligations to service delivery. If validators fail their duties, stakes may be “slashed,” creating technical rather than financial risks. Instability from bugs is possible, as seen with Ankr in 2022 and Lido's dominance in 2023.
Advantages of restaking
Restaking and rehypothecation both amplify systemic risk but in different ways. Rehypothecation can leave creditors without collateral if defaults occur, while restaking raises technical risks without financial holes. It supports capital efficiency without internal system issues.
Restaking is an innovative approach enhancing security and capital efficiency. While considering its technical risks, it’s crucial not to overlook its benefits that strengthen cryptocurrency systems' fundamental capacities.
