Ethereum and Solana Staking Business Model Difference: A Perspective from Lido and Solayer
Solana's swQoS mechanism enables its restaking business scope to be broader than Ethereum's, with transaction liveness requirements being more rigid than security requirements.
Original Article Title: "Difference in Staking Business Models Between Ethereum and Solana: A Discussion on Lido and Solayer"
Original Article Author: Lawrence Lee, Mint Venture
Following two consecutive rounds of funding, including a $12 million investment led by Polychain and funding from Binance Labs, Solayer, a Solana-based restaking project, has emerged as one of the few recent highlights in the DeFi space. Its TVL has continued to rise, surpassing Orca and currently ranking twelfth in TVL on the Solana chain.
Solana Project TVL Ranking Source: DeFillama
Staking, as a crypto-native niche track, is also the largest crypto track by TVL. However, tokens representing this track, such as LDO, EIGEN, and ETHFI, have struggled in the current cycle outside of the Ethereum network. Are there reasons beyond this?
· How competitive are staking and restaking protocols focused on user staking behavior in the entire staking ecosystem?
· What are the differences between Solayer's restaking and Eigenlayer's restaking?
· Is Solayer's restaking a good business model?
Through this article, we hope to address the above questions. Let's start with staking and restaking on the Ethereum network.
Ethereum Network Liquid Staking, Restaking, and Liquid Restaking: Competitive Landscape and Development Trends
In this section, we will mainly discuss and analyze the following projects:
The leading liquid staking project on the Ethereum network, Lido; the leading restaking project, Eigenlayer; and the leading liquid restaking project, Etherfi.
Lido's Business Logic and Revenue Model
For Lido's business logic, we summarize it as follows:
Due to Ethereum's decentralization ethos, the ETH PoS mechanism soft-caps the staking limit of a single node, with each node needing to deploy a maximum of 32 ETH to achieve higher capital efficiency. Additionally, staking requires relatively high hardware, network, and knowledge requirements, making it challenging for the average user to participate in ETH staking. In this context, Lido has promoted the concept of Lido Staked Ether (LST). Despite the liquidity advantage of LST being diminished after the Shapella upgrade enabled withdrawals, LST still maintains its strengths in capital efficiency and composability, forming the fundamental business logic of the LST protocol represented by Lido. In the liquid staking space, Lido's market share is close to 90%, leading the market.
Liquid Staking Participants and Market Share Source: Dune
Lido Protocol's revenue mainly comes from two parts: consensus layer revenue and execution layer revenue. The so-called consensus layer revenue refers to the PoS issuance revenue of the Ethereum network. For the Ethereum network, this expenditure is paid to maintain network consensus, hence called consensus layer revenue, which is relatively fixed (orange part in the following image). On the other hand, execution layer revenue includes user-paid gas fees and MEV (for an analysis of execution layer revenue, readers can visit Mint Ventures' previous article to learn more). This revenue is not paid by the Ethereum network but by users during the transaction execution process (or indirectly), and it fluctuates significantly with on-chain activity.
Lido Protocol APR Source: Dune
Eigenlayer's Business Logic and Revenue Model
The concept of Restaking was proposed by Eigenlayer last year and has become a rare new narrative in the DeFi space and even the entire market over the past year. It has given rise to a series of projects with initial FDV exceeding $1 billion (in addition to EIGEN, there are ETHFI, REZ, and PENDLE), as well as many upcoming restaking projects (Babylon, Symbiotic, and the Solayer project we will focus on below). The market frenzy is evident (Mint Ventures previously conducted research on Eigenlayer last year; interested readers can check it out).
Restaking on Eigenlayer is defined as the ability for users who have already staked ETH to restake their previously staked ETH on Eigenlayer (thus earning additional rewards), hence the name "Re"Staking. Eigenlayer names the service it provides as AVS (Actively Validated Services), which can serve various security-demanding protocols, including sidechains, DA layers, virtual machines, oracles, bridges, threshold encryption schemes, trusted execution environments, and more. EigenDA is a typical example of a protocol utilizing Eigenlayer AVS services.
Protocols currently utilizing Eigenlayer AVS Source: Eigenlayer Website
The business model of Eigenlayer is relatively simple. On the supply side, they collect assets from ETH stakers and pay fees, while on the demand side, protocols in need of AVS pay to use its services. Eigenlayer acts as a "protocol security marketplace," facilitating and earning a certain fee from these interactions.
However, when we look at all existing restaking projects, the only real gain is still the protocol's related token (or points). We cannot yet confirm if restaking has achieved PMF: on the supply side, everyone enjoys the additional revenue from restaking, but the demand side is still a mystery. Are there really protocols willing to purchase protocol security services? And if so, how many?
Multicoin Founder Kyle Samani's Doubt on the Restaking Business Model
Source: X
Looking at Eigenlayer's target users who have already issued tokens: oracles (LINK, PYTH), bridges (AXL, ZRO), DAs (TIA, AVAIL), staking tokens to secure the protocol constitute the core use case of their tokens. Choosing to buy security services from Eigenlayer would greatly undermine the rationale behind issuing their tokens. Even Eigenlayer itself, when explaining the use of the EIGEN token, expressed in very abstract and cryptic language that the "use of EIGEN for maintaining protocol security" is a primary use case.
The Survival Guide of Liquid Restaking (Etherfi)
Eigenlayer supports two ways to participate in restaking: using LST and native restaking. Participating in Eigenlayer Restaking using LST is relatively simple. After a user deposits ETH into the LST protocol to receive LST, they can then deposit LST into Eigenlayer. However, the LST pool has a long-term quota. Users who still wish to participate in restaking during the quota period need to follow the native restaking process as follows:
1. Users first need to independently complete the entire staking process on the Ethereum network, including fund preparation, execution layer and consensus layer client configuration, and setting up withdrawal credentials.
2. Users create a new contract account named Eigenpod in Eigenlayer.
3. Users set the withdrawal private key of the Ethereum staking node to the Eigenpod contract account.
It can be seen that Eigenlayer's Restaking is a relatively standard "re"staking process. Whether users deposit other LST into Eigenlayer or perform native restaking, Eigenlayer does not directly "touch" the user's staked ETH (Eigenlayer also does not issue any LRT). The process of native restaking is a more complex version of ETH's native staking, indicating similar fund, hardware, network, and knowledge thresholds.
Therefore, projects like Etherfi quickly provided Liquid Restaking Tokens (LRTs) to address this issue. The process of eETH in Etherfi is as follows:
1. Users deposit ETH into Etherfi, and Etherfi issues eETH to the user.
2. Etherfi stakes the received ETH to earn the underlying staking rewards.
3. At the same time, following Eigenlayer's native restaking process, they set the node's withdrawal private key to the Eigenpod contract account to receive Eigenlayer's restaking rewards (as well as $EIGEN, $ETHFI).
Clearly, the service provided by Etherfi is the optimal solution for users holding ETH and seeking to earn rewards: on the one hand, eETH is easy to operate and provides liquidity, offering a staking experience similar to Lido's stETH; on the other hand, users depositing ETH into Etherfi's eETH pool can receive: around 3% base ETH staking rewards, potential AVS rewards from Eigenlayer, Eigenlayer's token incentives (points), and Etherfi's token incentives (points).
eETH accounts for 90% of Etherfi's TVL, contributing to Etherfi reaching a peak TVL of over $6 billion and a maximum FDV of $8 billion, making Etherfi the fourth largest staking entity in just half a year.
Etherfi TVL Distribution Source: Dune
Staking Amount Ranking Source: Dune
The long-term business logic of the LRT protocol is to help users participate in staking and restaking in a simpler way to earn higher rewards. Since it does not generate any revenue by itself (other than its own token), the overall business logic of the LRT protocol is more akin to an ETH-specific yield aggregator. Upon closer inspection, we find that its business logic relies on the following two assumptions:
1. Lido does not offer liquid restaking services. If Lido were willing to have its stETH "mimic" eETH, Etherfi would find it difficult to match its long-standing brand advantage, security endorsement, and liquidity advantage.
2. Eigenlayer does not offer liquid staking services. If Eigenlayer were willing to directly absorb users' ETH for staking, it would greatly undermine Etherfi's value proposition.
From a purely business logic standpoint, Lido, as the leader in liquid staking, could provide liquid restaking services to users to offer a broader range of revenue sources, and Eigenlayer absorbing user funds directly for staking & restaking would be entirely feasible. So why doesn't Lido do liquid restaking, and why doesn't Eigenlayer do liquid staking?
The author believes that this is a special case of Ethereum. In May 2023, when Eigenlayer had just completed a new $50 million round of financing, sparking much discussion in the market, Vitalik specifically wrote an article titled "Don't overload Ethereum's consensus," using a series of examples to elaborate on his views on how Ethereum's consensus should be reused (i.e., "how exactly should we restake").
On the Lido side, due to its long-term scale accounting for about 30% of Ethereum's staking ratio, there have been continuous internal constraints within the Ethereum Foundation. Vitalik has also personally written multiple articles discussing the centralization issues in staking. This has forced Lido to make "alignment with Ethereum" a focus of its business. Not only has it gradually shut down its operations on chains other than Ethereum, including Solana, Hasu, its de facto leader, confirmed in May this year that it is possible to abandon its own downstream restaking business, limiting Lido's business to staking. Instead, it will invest in and support the restaking protocol Symbiotic and establish the Lido Alliance to address competition from protocols like Eigenlayer and Etherfi in the LRT space.
"Reaffirm that stETH should stay an LST, not become an LRT.
Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk."
"Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum."
Lido's Stance on Restaking Matters Source
On the Eigenlayer side, Ethereum Foundation researchers Justin Drake and Dankrad Feist were brought on as advisors to eigenlayer very early, with Dankrad Feist stating that his main goal in joining was to align "eigenlayer with Ethereum," which may also be why eigenlayer's native restaking process is quite contrary to user experience.
In a sense, Etherfi's market space is influenced by the Ethereum Foundation's "distrust" of Lido and Eigenlayer.
Ethereum Staking Ecosystem Protocol Analysis
Combining Lido and Eigenlayer, we can see that in the current PoS chain, surrounding the staking behavior, apart from related-party token incentives, there are three long-term sources of yield:
1. PoS Base Reward, the native token paid by the PoS network to maintain network consensus. The yield rate of this part mainly depends on the chain's inflation schedule, such as Ethereum's inflation schedule being linked to the staking rate; the higher the staking ratio, the slower the inflation rate.
2. Transaction Ordering Reward, the fees nodes can earn during the transaction packaging and ordering process, including priority fees paid by users, as well as MEV rewards obtained during the transaction packaging and ordering process. The yield rate of this part mainly depends on the chain's activity level.
3. Staked Asset Rental Yield, renting out users' staked assets to other protocols in need to earn fees that these protocols pay, this yield depends on how many protocols with AVS demand are willing to pay fees to obtain protocol security.
On the Ethereum network, there are currently three types of protocols surrounding the staking behavior:
· Liquid staking protocols represented by Lido and Rocket Pool. They can only receive the above-mentioned first and second types of yield. Of course, users can use their LST to participate in Restaking, but as a protocol, they can only take a cut of the above-mentioned first and second types.
· Restaking protocols represented by Eigenlayer and Symbiotic. Such protocols can only obtain the third type of reward mentioned above.
· Liquid restaking protocols represented by Etherfi and Puffer. They theoretically can obtain all three types of rewards mentioned above, but they are more like "LST with aggregated restaking rewards."
The current underlying ETH PoS reward is around 2.8% annually, which gradually decreases as the ETH staking ratio increases;
The transaction ordering reward has seen a significant decrease with the launch of EIP-4844, hovering around 0.5% in the past six months.
The staking asset leasing reward base is relatively small and cannot be annualized yet, relying more on EIGEN and associated LRT protocol token incentives to make this part of the reward substantial.
For the LST protocol, its revenue base is Staked Amount * Staking Reward Rate. The ETH staking amount is already close to 30%, although this figure is still significantly lower compared to other PoS public chains. However, from the perspective of Ethereum Foundation decentralization and economic bandwidth, it is not desirable to have too much ETH flowing into staking (see Vitalik's recent blog post; the Ethereum Foundation has discussed whether to set the ETH staking cap at 25% of the total supply); and the staking reward rate has been continuously decreasing, stabilizing at 6% by the end of 2022, often able to achieve around 10% short-term APR, decreasing to only 3% now, with no foreseeable reason for recovery in the near future.
For the aforementioned protocol tokens, apart from being limited by ETH's own decline:
The Ethereum network's LST market ceiling has gradually become visible, which may also be the reason for the lackluster performance of LST protocol governance tokens like LDO and RPL;
For EIGEN, currently, restaking protocols on various PoS chains, including BTC chain, are constantly emerging, limiting Eigenlayer's business mostly within the Ethereum ecosystem, further reducing the potential ceiling of its AVS market with an already unclear market size.
The unexpected emergence of the LRT protocol (with ETHFI's FDV surpassing 8 billion during its peak, exceeding the all-time high FDV of LDO and EIGEN) further "diluted" the value of the aforementioned two projects in the staking ecosystem;
For projects like ETHFI and REZ, in addition to the above factors, the overvalued initial valuation brought about by listing during a market frenzy is a more significant factor affecting their token price.
Solana's Staking and Restaking
Represented by Jito, the operational mechanism of Solana network's liquid staking protocol is not fundamentally different from that of the Ethereum network. However, Solayer's restaking differs from Eigenlayer's restaking. To understand Solayer's restaking, we first need to understand Solana's swQoS mechanism.
After a client-side version upgrade in April of this year, Solana network's stake-weighted Quality of Service (swQoS) mechanism officially came into effect. The starting point of the swQoS mechanism is to improve the network's overall efficiency, as the Solana network experienced prolonged network congestion during the meme frenzy in March.
In simple terms, with swQoS enabled, block producers determine the priority of transactions based on the staked amount of stakers. Stakers holding x% of the total network stake can submit up to x% of the transactions (for details on the swQoS mechanism and its profound impact on Solana, readers can refer to Helius's article). Following the activation of swQoS, Solana network's transaction success rate rapidly increased.
Source of Solana network's successful and failed TPS: Blockworks
Through "flooding" the network with transactions from small stakers, swQoS prioritizes safeguarding the interests of larger stakers in times of limited network resources, thus preventing malicious transactions from attacking the system. To a certain extent, "the more staked, the more network privileges enjoyed" aligns with the logic of a PoS public chain: staking a higher percentage of the native token contributes more to the chain's stability and the native token, hence deserving more privileges. Of course, the centralization issue of this mechanism is also very apparent: larger stakers can naturally gain more priority transaction rights, and these rights bring more stakers, further reinforcing the advantage of top stakers, leading to oligopoly and even monopolization. This may seem contrary to the decentralization advocated by blockchain, but this is not the focus of this article. From Solana's consistent development trajectory, we can clearly see Solana's pragmatic attitude of "performance-first" on decentralization issues.
Within the context of swQoS, Solayer's restaking is not aimed at oracles or bridges, but rather at protocols that require transaction throughput/reliability, such as DEXs. Therefore, Solayer refers to the AVS service provided by Eigenlayer as Exogenous AVS, because these systems typically exist outside the Ethereum main chain. On the other hand, Solayer's own service is referred to as Endogenous AVS, as its service targets entities within the Solana main chain.
Difference Between Solayer and Eigenlayer Source
It can be seen that although both are engaging in restaking activities by leasing staked assets to other in-need protocols, the core services provided by Solayer's Endogenous AVS and Eigenlayer's Exogenous AVS are different. Solayer's Endogenous AVS is essentially a "transaction throughput leasing platform," catering to platforms (or their users) in need of transaction throughput, while Eigenlayer operates as a "protocol security leasing platform." The foundational support for its Endogenous AVS is Solana's swQoS mechanism. As Solayer states in its documentation:
We did not fundamentally agree with EigenLayer's technical architecture. So we re-architected, in a sense, restandardized restaking in the Solana ecosystem. Reusing stake as a way of securing network bandwidth for apps. We aim to become the de facto infrastructure for stake-weighted quality of service, and eventually, a core primitive of the Solana blockchain/consensus.
「We fundamentally disagree with EigenLayer's technical architecture. Therefore, in a sense, we have rebuilt the restaking in the Solana ecosystem. Reusing Stake as a way to protect APP network bandwidth. Our goal is to become the de facto infrastructure of swQoS and ultimately become a core primitive of the Solana blockchain/consensus.」
Of course, if there are other protocols on the Solana chain with staking asset demands, such as protocol security requirements, Solayer can also lend its SOL to these protocols. In fact, by definition, any lending/reuse of staking assets can be called restaking, not just limited to security requirements. Due to the existence of the Solana chain's swQoS mechanism, the business scope of restaking on the Solana chain is broader than on the Ethereum chain, and based on the recent high on-chain activity of Solana, the demand for transaction throughput is more rigid than the demand for security.
Is Solayer's restaking a good business?
The user's participation in the Solayer restaking business process is as follows:
1. The user directly deposits SOL into Solayer, and Solayer issues
2. sSOLSolayer stakes the received SOL to earn basic staking rewards
3. At the same time, the user can delegate sSOL to protocols that require transaction throughput, thereby receiving fees paid by these protocols.
Currently, Solayer's AVS Source
It can be seen that Solayer is not only a restaking platform but also a restaking platform that directly issues LST. From a business process perspective, it is similar to Lido on the Ethereum network that supports native restaking.
As mentioned earlier, there are three sources of rewards around the staking behavior. On the Solana network, the situation of these three rewards is as follows:
1. PoS Base Reward, the SOL paid by Solana to maintain network consensus. This part of the annualized reward is around 6.5%, and this reward is relatively stable.
2. Transaction Ordering Reward, the fees that nodes can receive during transaction packaging and ordering, including the priority fee given by users for expedited transactions, and the tips paid by MEV searchers. The sum of these two parts is approximately around 1.5% annually. However, this reward varies significantly and depends on the on-chain activity level.
3. Staked Asset Leasing Reward, leasing out the assets staked by users to other protocols in need (e.g., transaction throughput, protocol security, or others). Currently, this part has not yet reached scale.
Total Yield and MEV Revenue of SOL liquid staking (using JitoSOL as an example) Source
If we carefully compare the above three types of rewards on Ethereum and Solana, we will find that, although the market value of SOL is still only one-quarter of ETH and the market value of staked SOL is only about 60% of the staked ETH market value, the staking-related protocols on the Solana network have practically a larger market and a greater potential market compared to the staking-related protocols on the Ethereum network because:
1. Regarding the PoS Base Reward: SOL's willingness to pay network inflation rewards has been higher than ETH since December 2023, and the gap between the two is continuously widening. Whether it's ETH or SOL staking, this accounts for over 80% of their yield, which determines the revenue baseline for all staking-related protocols.
Ethereum and Solana Token Inflation Rewards (i.e., the network's PoS base reward) Source: Blockworks
2. Transaction Ordering Revenue: Blockworks uses transaction fees and MEV tips to reflect a chain's Real Economic Value (REV). This metric approximately reflects the maximum value of transaction ordering revenue that a chain can obtain. We can see that although the REV of two chains fluctuates significantly, Ethereum's REV plunged rapidly after the London upgrade, while Solana's REV generally shows an upward trend and recently successfully surpassed Ethereum.
Source of Solana and Ethereum's REV: Blockworks
3. In terms of staking asset leasing revenue, compared to the Ethereum network, which currently only has security revenue, Solana's swQoS mechanism can bring additional leasing demand for transaction throughput.
4. Moreover, Solana's staking-related protocols can scale business according to commercial logic. Any liquid staking protocol can engage in restaking business, as we can see with Jito; any restaking protocol can also issue LST, as Solayer and Fragmetric do.
5. More importantly, we currently do not see any possibility of a reversal of these trends. In other words, the advantage of Solana's staking protocol over Ethereum's staking protocol may continue to expand in the future.
From this perspective, although we still cannot say that Solana's restaking has found PMF, it is clear that Solana's staking and restaking are superior businesses to those on Ethereum.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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