The re-staking game has entered the second half. How to use LRT and AVS to seize the market?

Original title: "Reflections on Restaking"

"If only you could see yourself in my eyes" — Lostby Dermot Kennedy

"If only you could see yourself in my eyes" - Dermot Kennedy "Lost"

At Reverie, we spend a lot of time studying the re-pledge protocol. For us, this is an exciting investment category because the market outlook is unclear (opportunities often exist in ambiguous markets) and activity is very active (dozens of projects will be launched in the next 12 months). Launched in the pledge field).

We found some observations about the development trend of the re-staking market in the next few years. Many things are new. What is true today may not be true tomorrow. Nonetheless, we would like to share with you some of our initial observations on the business dynamics reshaping the market.

Liquid Restaking Token (LRT) as a leverage point

Nowadays, LRTs like Etherfi/Renzo are Rehypothecation occupies an important position in the supply chain: since they are close to both the supply side (stakers) and the demand side (AVS), they are on both sides of the transaction. If continued, this would enable LRTs to

(i) determine their commission rates and

(ii) influence the underlying market The commission ratio (such as EigenLayer, Symbiotic).

Given its strong position, we expect the re-hypothecation market to launch first-party LRT to control the power of third-party LRT.

AVS/Rehypothecaters as Leverage Points

The best markets in the world have two characteristics: Decentralized supply-side and decentralized demand side. In order to form an intuition on this point, it is necessary to look at situations where one or both sides of the market are concentrated. Imagine a simple apple trading market, where the largest apple seller controls more than 50% of the apple supply. In this case, Big Apple sellers may threaten to take their business elsewhere if the market operator decides to increase the market's commission from 5% to 10%. Likewise, On the demand side, if the largest apple buyer controls more than 50% of apple demand, she can threaten to use another market (or buy directly from apple suppliers) if the market operator increases the market Take a commission.

Back to the re-pledge market, if the final market structure of the re-pledge market is concentrated on the AVS side (the top 10% of AVS account for more than 50% of the revenue) or the re-pledger side (the top 10% of the AVS rehypothecaters account for more than 50% of deposits), then the natural consequence is that the market reduces its ability to extract commissions for itself (and therefore should have lower valuations).

While there is not enough data to conduct a rigorous analysis, our intuition is that the power law will apply here as well: large AVS will account for the majority of total payment volume, thereby increasing the market share. Have bargaining power on the commission you ultimately want to collect.

Fighting for Exclusive AVS

From the perspective of each rePledge market, any competitor that can do so Opportunities to do things that the staking market cannot do are worth taking. The simplest way to differentiate as a restaking market is to provide restakers with access to exclusive AVS – whether it’s a first party like EigenDA, or a third party acquired through an exclusive partnership. This is conceptually similar to Sony developing games exclusive to PS5 to drive hardware sales.

Due to these dynamics, we expect the rehypothecation market to see more first-party AVS launches and/or exclusive agreements with third-party AVS. In short, the coming months will see a battle for AVS.

AVS ​​Subsidy

AVS ​​needs to pay operator/re-hypothecater fees for the services provided, which effectively means AVS ​​needs Be prepared to pay in its native token, ETH/USDC or possible points/future airdrops. However, since most AVS so far are early-stage startups without tokens, large balance sheets, or well-designed points programs/airdrops, signing up operators/re-stakers has proven to be a tedious process Process (most EigenLayer partnerships are custom contracts negotiated privately). Simply put, This is a situation where a customer wants to purchase a service and may have the ability to pay, but does not yet have the funds.

In order to promote business, it is highly likely that the re-staking market will "pre-pay" the launch operator/re-stakeholder, whether through their native token, balance sheet assets, or Possibly by issuing “cloud points” for use by AVS and operators/re-hypothecaters. In return for upfront funds, you would expect AVS to commit to airdropping/distributing tokens to the restaking market. Alternatively, the rehypothecation market can advance this money to AVS to convince it to choose you over a competing rehypothecation market.

In short, we expect the re staking market will be intense over the next 12-24 months by subsidizing AVS payouts compete. Similar to Uber/Lyft market dynamics, the restaking market with the most funds/tokens may end up being the winner.

White glove door-to-door service

Going from “I want to launch an AVS” to “actually putting it into production” is harder than it looks Much more, especially for smaller teams that don’t have much R&D bandwidth. For example, questions the team needs to address include: How much security should I buy, for how long should I buy it, how much should I pay the operator/re-hypothecater, what should be cut, and by how much?

Best practices will eventually emerge, but until then, the re-hypothecation market needs to guide the AVS team through these issues (it is worth noting that EigenLayer does not yet have a payment or reduction mechanism). To that end, we expect successful rehypothecation markets to look a bit like enterprise sales operations, providing white-glove integration/service help to customers using their products.

Graduating from the market

An interesting development that may occur is the staking market The most successful additional verification service (AVS) eventually left the restaking market and instead managed its security and validator network itself as the project grew and grew.

Nowadays, re-staking offers are best suited for small projects that:

(i) Don’t have time/funds/brand /relationship to recruit the validator set,

(ii) There are no highly valued tokens to secure the network.

But as the project gets bigger, their next step may be to leave the re-staking market and instead recruit their own set of validators and use their own (now higher valuation) Tokens for security.

Conceptually, this is similar to dating market dynamics (e.g. Hinge, Tinder), the most successful customers will eventually drop out of the market. However, churn is bad news for marketplace operators because you will lose a customer (which is one of the reasons why dating marketplaces trade at lower valuations/multiples than marketplaces with low reuse/churn rates ).

One-Stop Encryption SaaS

To illustrate this point, let’s first look at the history of software: Cloud providers like AWS let developers Everything you need to develop an application or web service—such as hosting, storage, and compute—is easily available. By drastically reducing the cost and time required to develop software, a new class of network services has emerged that offers more specialized services. First-party cloud services combined with the large number of "microservices" provided within the platform enable cloud providers to meet all needs except core business logic from a single source.

Rehypothecation marketplaces like EigenLayer aim to create a similar batch of microservices for Web3. Before EigenLayer, crypto microservices could choose to fully centralize their offline components (and pass this risk on to their customers), or bear the cost of launching a set of operators and economic stakes to purchase security.

The Redemption Market has the potential to disrupt this trade-off with microservices - If everything works as expected, you will be able to prioritize security without compromising on cost and speed to market .

Suppose you are developing a cheap, high-performance zk-rollup. If you go to a restaking marketplace like EigenLayer, you will have multiple core service options like DA and bridging for easy listing. Along the way, you'll also see a number of other AVS microservices that you can integrate with.

The more microservices the rehypothecation market offers, the better the customer experience will be. Instead of evaluating the service functionality and security of dozens of independent vendors, applications will be able to start from one Purchase all needed services on the re-hypothecation market. Come to serve X, stay to serve Y and Z.

Some AVS will have network effects (e.g., preconfs)

To date, restaking use cases have mainly focused on exporting Ethereum’s verification investors and economic shares. But there is also a class of “inward” restaking use cases that can add functionality to Ethereum’s consensus without changing the protocol.

The idea is simple - You allow validators the option to make additional commitments to their proposed blocks in exchange for a payment, and if they don't fulfill those commitments, keep theirs by slashing responsibility. We suspect that only a few pledge types will have enough demand to attract high levels of participation, but the value flowing in these pledges has the potential to be significant.

Unlike the "external" re-staking use case, the validity of this type of use case is directly related to the participation of the validator. That is, even if you are willing to pay to be included in a block, it is not very useful if only 1 out of 10 validators opt-in to this commitment.

If every validator chooses to join a given commitment, the guarantees behind it will be equivalent to the guarantees provided by the Ethereum protocol itself (i.e. valid blocks) . Following this logic, we can expect this category to have strong network effects, as users of AVS will benefit from every marginal validator opting into the pledge market.

While this AVS category is still evolving, there are logical distribution channels to facilitate these use cases through Ethereum client sidecars and plugins such as Reth. And, similar to the proposer-builder separation, the proposer may outsource this work to professional actors in exchange for a share of the revenue.

What’s less clear is what form these AVS will take. While one entity could create a general market that works for any commitment type, we suspect we are more likely to see a few players emerge that specialize based on the source of demand (e.g., L2 interoperability vs. L1 DeFi driving demand).

Conclusion

For students of business strategy, the business dynamics of the rehypothecation market is a treasure trove of content worthy of in-depth study.

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