This is the first part of our research into staking primitives, and Interchain Security, Ethereum restaking, and Bitcoin staking in particular.
Staking primitives and their use cases have evolved in several new ways over the past three years. The primitives we will focus on are Interchain Security, Ethereum restaking, and Bitcoin staking.
Interchain Security is a Cosmos-native idea and one of the early attempts at a shared security model. Ethereum and EigenLayer present yield-hunting opportunities with their new restaking approach. Lastly, the bounds of Bitcoin technology are pushed by leveraging inscriptions and other creative solutions to economically secure and further generate new economic opportunity.
All three claim to while simultaneously increasing economic activity on blockchains. The two goals combined should generate a positive feedback loop to sustain different blockchains long term—this is the good.
I’ve mentioned the goals of economic activity and security initially because I believe those are intentionally set goals that were meant to be improved upon over time. Improvement of decentralization is prevalent and considered a goal in all three mechanisms, but it is the least visible and prioritized goal (in my opinion). It seems like the level of decentralization is a byproduct of how the systems are designed rather than having that be the north star of these solutions.
It is also essential to look at these from a critical lens, which could depict these new mechanisms as a way for projects to squeeze yield from different ecosystems. This is the bad—these new primitives, if not developed with intention, can reinforce unsustainable ponzinomics. It is ugly because the nuances of each solution determine whether they bring value to or suck value out of the ecosystems they support.
This spotlight over the past three years shines on Interchain Security, Restaking, and Bitcoin Staking. In this first part we will look at the benefits and risks of each staking primitive. It’s important to understand how the solution’s architecture affects stakeholders and decentralization. In the second part we’ll analyze how each strategy compares to one another by assessing system security/integrity and utility.
What is Interchain Security?
The Cosmos ecosystem was a first mover when it came to exploring the concepts of shared security because it is a smaller ecosystem with fragmented liquidity and it is populated with many smaller chains. They rely on their symbiotic relationships with other chains, especially the Cosmos Hub, to survive the unforgiving jungle of the cryptosphere.
As the importance of the Cosmos Hub dwindled, Cosmos was in dire need of a fresh perspective and unified vision. This sparked the idea of Interchain security. Trying to leverage the economic security and technical acumen of pre-existing validator sets on the Cosmos hub was the approach for this form of shared security. This was an attempt to breathe life back into the main chain and the entire ecosystem of Cosmos.
Interchain Security (ICS) initially followed a Replicated Security model, where all validators on the Cosmos Hub were required to validate consumer chains unless they explicitly opted out. This model was designed to provide strong security guarantees by ensuring that every consumer chain shared the same validator set as the Cosmos Hub.
However, this approach faced challenges, particularly for smaller validators who found it economically unsustainable to validate multiple consumer chains due to high operational costs. The Soft Opt-Out feature was introduced to address these challenges. This mechanism allowed the bottom x% of validators (by voting power) to opt out of validating specific consumer chains without being penalized for downtime. The SoftOptOutThreshold parameter, typically set at 5%, enabled smaller validators to avoid the financial burden of running additional nodes while still participating in the Cosmos Hub's validator set. However, this feature had limitations, such as potential liveness issues if too many validators opted out, and it did not fully resolve the economic pressures on smaller validators.
This led to the development of Partial Set Security (PSS), which shifted the paradigm from an opt-out to an opt-in system. Under PSS, validators could choose which consumer chains to validate, with only the top N% of validators (by voting power) required to validate certain chains. This change reduced the burden on smaller validators and made it easier for new consumer chains to join the ecosystem without requiring approval from the entire validator set. For more details on the shared security model, follow this link: Interchain Security
Smaller consumer chains benefit from a high degree of decentralization from the outset under ICS. Opt-in chains allow validators to choose whether to participate, ensuring that only those with the capacity and interest validate the chain. This flexibility prevents validator burnout and maintains a healthy distribution of validation responsibilities across the network.
Additionally, consumer chains can design their governance systems independently of block production, which is handled by the Cosmos Hub's validators. This separation enables more decentralized governance models, such as proof-of-authority (PoA) or token-based governance, without compromising the security of block production.
However, while ICS leverages the Cosmos Hub's validator set, it also creates a significant dependency on this set, which can lead to centralization risks if only a small number of large validators choose to participate. A handful of well-resourced validators managing multiple chains could accumulate excessive control over validation and governance. ICS governance, therefore, requires careful management to prevent validator dominance while ensuring that security remains decentralized.
What is restaking?
Ethereum restaking, pioneered by EigenLayer, is a protocol that allows staked ETH or liquid staking tokens (LSTs) to be reused to secure additional protocols beyond the Ethereum network. This process, known as restaking, enhances capital efficiency by enabling stakers to earn rewards from multiple sources without requiring additional stake.
By leveraging Ethereum's robust security model, EigenLayer extends its benefits to Actively Validated Services (AVS) such as data availability layers, cross-chain bridges, and oracles, thereby reducing operational costs for developers and fostering more innovation in decentralized ecosystems. The benefits of restaking include increased yield opportunities for stakers, improved security for AVS, and a more interconnected blockchain ecosystem.and and and and and and and and and and and
However, restaking also introduces risks such as additional slashing conditions, where validators may lose a portion of their staked ETH if they fail to meet the requirements of the protocols they secure.
EigenLayer's restaking mechanism has a dual impact on decentralization within the Ethereum ecosystem. On the one hand, it promotes decentralization by enabling smaller protocols and AVS to leverage Ethereum's existing validator set, reducing the need for them to bootstrap their own security infrastructure. This lowers entry barriers for new projects and fosters a more collaborative and interconnected ecosystem.
On the other hand, EigenLayer introduces centralization risks, as a significant portion of Ethereum's staked ETH could become concentrated within its ecosystem. If EigenLayer attracts a large share of staked ETH, it could create a single point of failure, potentially undermining Ethereum's decentralized ethos.
Furthermore, the opt-in nature of EigenLayer's restaking model means that validators and node operators must voluntarily participate, which could lead to an uneven distribution of power and influence within the EigenLayer ecosystem. The opt-in system is favorable over an opt-out model because some smaller operators may not have the expertise or capital to support all the AVS.
Centralization risks are another concern; the interconnected slashing risk might deter smaller validators from participating, potentially consolidating restaking among larger operators who can absorb such risks. A high concentration of staked ETH in EigenLayer could pose systemic risks to Ethereum's security.
EigenLayer competes for ETH against Ethereum’s native staking yield. Validators will migrate their stake to EigenLayer if the additional yield from AVS significantly exceeds the base staking rewards on Ethereum. Restaked ETH operators in EigenLayer can define their own slashing conditions, and if an operator fails to meet these conditions, they may get slashed at the Ethereum consensus level. This could cause mass unstaking events, liquidity crunches, and extreme volatility in ETH prices.
If a subset of EigenLayer operators controls a significant fraction of Ethereum’s stake, they might enforce governance policies that affect Ethereum’s broader security landscape because the interests may eventually get intertwined with all the capital flowing in the EigenLayer ecosystem. Lastly, liquidity risks arise due to the mandatory seven-day withdrawal delay, which restricts immediate access to restaked assets.
What is Bitcoin Staking?
Bitcoin staking is a concept that extends the traditional Proof-of-Stake (PoS) mechanisms to the Bitcoin ecosystem, which originally operated on Proof-of-Work (PoW). While Bitcoin itself does not natively support staking, various protocols and layers built on top of Bitcoin enable staking-like functionalities. These mechanisms allow Bitcoin holders to earn rewards by participating in network security, validation, or other consensus-related activities without energy-intensive mining.
Bitcoin staking, depending on its implementation (e.g., with sidechains or Layer 2s), may struggle to maintain the same level of decentralization found in Interchain Security or Ethereum’s restaking due to Bitcoin's conservative governance model and design philosophy. These Bitcoin staking projects introduce the novel use case where BTC acts as collateral to secure external PoS networks. However, this does not directly enhance Bitcoin’s own decentralization but rather extends its utility.
While Bitcoin’s base layer remains decentralized, Layer-2 staking systems may introduce centralization risks through assets like wBTC (Wrapped Bitcoin), which relies on custodians and creates trust dependencies. Alternatively, protocols like Babylon offer noncustodial staking options, removing some of the trust dependencies associated with custodial solutions. Bridges also pose centralization risks at another level, as they require intermediaries to facilitate the movement of BTC between networks.
As mentioned before, there are different mechanisms to achieve Bitcoin staking. For example, Babylon uses cryptographic techniques and smart contracts to facilitate Bitcoin staking. Bitcoin holders lock their coins in a Bitcoin-compatible smart contract, which is then used as collateral to participate in the consensus mechanism of a connected PoS blockchain. Validators on the PoS chain can use the staked Bitcoin to secure their network, and in return, Bitcoin stakers receive rewards.
The protocol ensures that the staked Bitcoin can be reclaimed by the original holder after the staking period, maintaining the security and integrity of both chains. With the world of Bitcoin staking growing, multiple solutions such as Botanix, Core, and Mezo have emerged, offering various approaches to staking and security models.
Bitcoin purists may oppose Bitcoin staking because, while it increases Bitcoin's utility, it also exposes it to more volatility and external dependencies. Expanding staking solutions introduces additional risk vectors, including bridge security flaws, centralized custodians, and potential governance challenges. However, as demand for Bitcoin's integration with DeFi and PoS ecosystems grows, these staking models may be crucial in expanding Bitcoin’s economic utility beyond simple transactions and store-of-value functions.
The Future of Staking Primitives—A Balancing Act
Interchain Security, Ethereum restaking, and Bitcoin staking each represent innovative attempts to redefine blockchain security, capital efficiency, and economic activity. While their approaches differ, they all seek to address the fundamental challenge of sustaining decentralized ecosystems in a capital-efficient manner. However, their effectiveness hinges on a delicate balance between security, decentralization, and sustainability.
Interchain Security in Cosmos offers a pioneering shared security model, but its reliance on the Cosmos Hub creates centralization risks if validator participation becomes too concentrated.
Ethereum restaking through EigenLayer expands Ethereum’s security model to external applications, yet it introduces economic leverage risks, validator centralization, and governance entanglement that could affect Ethereum’s long-term stability.
Bitcoin staking, despite its efforts to integrate BTC into PoS frameworks, struggles with trust dependencies, bridge vulnerabilities, and Bitcoin’s inherently conservative design philosophy, which resists these staking innovations.
Each mechanism provides an opportunity for increased economic activity, but the question remains: are these innovations truly enhancing blockchain ecosystems, or are they creating fragile, yield-driven economies that reinforce ponzinomics? The potential for staking primitives to extract value rather than create it is a pressing concern that must be addressed through careful design, risk mitigation, and governance frameworks.
Ultimately, the success of these models depends on whether they can sustain long-term security and decentralization without compromising the trust assumptions of their respective ecosystems. As the industry continues to iterate on these solutions, it will become increasingly important to refine staking mechanisms in a way that prioritizes resilience over short-term yield. Whether these primitives drive the next phase of blockchain innovation or expose systemic vulnerabilities will depend on how well these risks are managed in the years to come.
The evolution of staking is far from over—this is just the beginning.
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