Restaking makes sense for lending markets but not for protocol governance

I've spoken lightly on restaking in the past, but I won't link back to keep the flow here consistent with what I want to discuss:

"The poor choice of embracing restaking as a security and governance tool within protocols."

For those unaware, restaking is simply the process of taking previously staked assets in a blockchain network or DeFi protocol and staking them again to earn additional rewards, effectively compounding more returns over time.

As my title suggests, it makes sense for this to exist for lending markets, but when it comes to governance of a protocol, it's more of a significant risk factor than a solution.

Just to clarify, restaking doesn't end with earning yield through DeFi apps, in fact, Restaking is most popular for being a means for validators to provide security and governance to third-party networks using derivatives of native tokens on their primary blockchain.

For instance, an Ethereum validator could stake ETH on Ethereum, but use a Restaking service that allows it to use that same ETH deposit, via a derivative, to secure another blockchain and in the process, earn additional rewards.

What happens here is that a single ETH deposit becomes counted as collateral for two separate chains and the fact is that this concept, when built-out, is generally aimed at ultimately reaching a point where a single Ethereum validator could use one deposit position to secure multiple networks.

Stacking risks not rewards

And definitely not offering security.

You see, this is often discussed as a means for validators to earn more and for more protocols or networks to be secured by Ethereum, given its place as the most secured network in the decentralized finance ecosystem.

However, the reality is that this is more a risk-compounding tech, than it is a means to create and attract more value.

When we enable a single capital deposit to be passed along multiple chains via debt instruments to secure said chains, we bring more risk to not just the capital in utilization, but all the networks being supposedly secured.

A simple way to prove this is that if a validator were to found to be malicious on one network and a slashing event is triggered, that is, parts or all of the staked derivative tokens gets taken as penalty, every other network will be affected by this because all chains are dependent on those tokens remaining accessible.

A liquidation on one network, means that all networks become at risk because every derivative ties back to your original staked ETH.

But what is the actual risk these other networks incur?

Besides the capital risk, which is that the native asset may lose value during a liquidation event depending on how it is implemented on the external network, there's also the governance risk.

In an event of a slash or liquidation, power on other networks become more concentrated, because your previously held position no longer exists.

This, is a much larger risk than mere capital exposure because it directly puts the sovereignty of networks on the line, when it was supposedly designed to offer extended security.

Posted Using INLEO