The beauty of decentralized blockchain networks is that trust is no longer guaranteed by centralized institutions such as banks or the government. Instead, cryptoeconomic security mechanisms are used to protect these networks by defining the cost of corrupting them. The more cryptoeconomic security a network has, the greater its resilience to malicious activity.
Cryptoeconomic security is what defines the economic resources needed by an attacker to compromise a blockchain system. The greater the amount of resources needed, the more expensive it becomes to pull off an attack, meaning the more secure the system is.
How does it work?
We can liken crypto economic security to a high-tech vault in a bank. By adding more layers of protection to the vault, the bank can increase its security. So if it employs biometric access systems, reinforced walls, camera surveillance, and hires armed guards to patrol the perimeter, a bank robber would need immense resources – including technology, weapons, and men – to break into that vault.
Similarly, blockchains increase their cryptoeconomic security by attracting more capital, increasing the amount of funds required by an attacker. The idea is that it would cost more to hack the network than an attacker could ever hope to gain from pulling it off.
The best example of this is Bitcoin. To “hack” the Bitcoin network, an attacker would need to gain control of the majority of its hashing power to pull off a “51% attack”, where they could theoretically edit Bitcoin transactions and alter the history of its ledger.
But to gain 51% of Bitcoin’s hashing power, an attacker would have to spend ridiculous amounts of money. According to the Crypto51 website, which measures the cost of 51% of attacks against decentralized networks, an attacker would need to spend $2.1 trillion on the required hardware and electricity. With Bitcoin’s current market capitalization of just $1.7 trillion, such an attack is not feasible – hence, the beauty of cryptoeconomic security models.
We can thank Satoshi Nakamoto for creating this ingenious model, which eliminates the need for intermediaries and makes Bitcoin decentralized. However, the problem with this model is that the capital that backs Bitcoin cannot be reused by other applications, which must instead create their blockchain and an independent trust network.
Ethereum evolved cryptoeconomic security, creating a kind of shared security layer through the Ethereum Virtual Machine. This allows dApps to build on the Ethereum blockchain and tap into the capital that secures its network. Still, it’s not a perfect solution, and many kinds of services, including data availability layers, oracles, and cross-chain bridges, need their own, independent networks of validators.
A Shared Security Model
The more independent networks there are, the harder it becomes to attract sufficient crypto economic security, as it becomes increasingly fragmented across the ecosystem. To compete, different protocols are forced to offer bigger incentives to “stakers”, who provide this capital, leading to unsustainable token emissions and spiraling operating costs. It’s highly inefficient
Once again, we can liken this to a real-world scenario. Imagine you have a rich neighborhood in a crime-ridden city. To begin with, each household will establish its security, by installing locks, fences, walls, and security cameras. Such an approach protects some of the individual homes within that neighborhood, but not all.
However, if that neighborhood later decides to pool its resources to hire professional security guards and shared surveillance systems that secure the entire perimeter, every home within it becomes more secure.
This shared neighborhood security is the fundamental idea behind what’s known as “restaking”, a new crypto-economic security primitive where users who stake their crypto gain a “derivative token” such as stETH, which can then be restaked to secure a different application or protocol. By doing this, they can earn additional yield beyond their basic staking rewards in return for protecting other dApps.
The best-known example of this is EigenLayer, which provides Ethereum stakers with the chance to secure multiple dApps simultaneously by restaking their staked ETH. It offers two key benefits – reducing the capital costs of stakers while improving the security of individual services on Ethereum. It eliminates the need for certain kinds of dApps to create an individual trust network by instead tapping into a shared security model.
In a nutshell, shared security models leverage the economic might of established cryptocurrencies, providing a robust and essentially unhackable security layer for new dApps that dramatically increase their trust.
The Most Secure Foundation Of All
The best-protected dApps leveraging shared security are not found on Ethereum, but rather on Bitcoin, thanks to the emergence of SatLayer, a fast-growing alternative to EigenLayer.
SatLayer allows dApp developers to tap into Bitcoin’s robust crypto-economic security by creating a “Bitcoin Validated Service”, similar to EigenLayer’s “Actively Validated Services”.
Bitcoin Validated Services utilize restaked BTC to validate their operations. They’re deployed as smart contracts on the original Bitcoin staking protocol, Babylon Chain, and enable programmable slashing conditions that allow this restaked BTC to be confiscated in the event of malicious activity. Moreover, the smart contracts ensure that everyone who restakes on a BVS receives a share of the rewards. It’s a carrot-and-stick approach that incentivizes users to provide security with the threat of being punished if they attempt to game the system.
SatLayer’s Bitcoin Validated Services can be used to provide crypto-economic security to everything from DeFi protocols to network bridges and data oracles. For Bitcoin restakers, the main benefit is being able to reinvest their staked Bitcoin and increase their rewards potential, while for dApp developers, they no longer have to worry about bootstrapping their secure network.
There’s a third participant in SatLayer too, namely the node operators, who are similar to validators. They must provide the required hardware, and software capital to validate the Bitcoin Validated Services. Besides putting up their funds, operators must compete with other operators to attract Bitcoin restakers. They’ll have to give those restakers a portion of the rewards they earn, but they can keep a larger slice of the profits for themselves.
While EigenLayer can be credited with pioneering the idea of shared crypto-economic security, SatLayer’s decision to build on Bitcoin staking gives it the potential to offer something that’s much more robust. That’s because there’s far more idle capital locked into the Bitcoin ecosystem than any other decentralized network, and many of those holders are crying out for more utility.
SatLayer transforms BTC into a yield-generating asset, giving Bitcoin holders the option to do more than sit and “hodl” their funds, as they’ve always done in the past. Instead, they can now generate significant rewards by forming part of the new umbrella that spreads Bitcoin’s secure foundation to the wider crypto economy.
