K2 Protocol

We have our favorite here at Eigen Hub, but it is always important to keep an eye on potential competitors and potential collaborators! As more individuals in the Web3 ecosystem come to understand the potential ETH rehypothecation holds, they're contributing valuable ideas and the re-staking arena is becoming increasingly vibrant! Let us introduce the Eigen community to one of the newest re-staking services, the flagship protocol of Re-staking Cloud, K2 protocol!

The K2 protocol represents a decentralized open market re-staking platform that caters to both Web2 and Web3 solutions, both on and off-chain. Through the protocol's native asset known as kETH, participants in K2 protocol, similar to re-stakers in Eigen, have an opportunity to reap yields and partake in K2’s inventive lending program, enhancing yields for kETH holders. We'll dissect K2 by exploring kETH, its market participants, dip our toes into how K2 works and then compare and contrast it with Eigen.

TLDR

The primary utility token for K2 is kETH. It cultivates yield via LST revenue, DeFi incentives, and through kETH lending pool that middlewares can pay to borrow from for security.
Middleware entities on K2 "borrow" security from a kETH security pool, though not in the traditional sense of ownership in a wallet said middleware controls. They also pay a fee upon participation in the protocol.
Payouts in K2 are in ETH for Restakers and Reporters.
kETH has some unique properties that unify liquidity for LSTs and change the interplay between market players. This is where different dynamics from Eigen emerge.

About kETH

kETH stands as the native token of the protocol. In our assessment, it's arguably one of the most distinctive assets available. Users deposit their LST, like Lido’s stETH, into K2, receiving an equivalent amount of kETH as collateral, accompanied by a variable APY. kETH holders consistently secure the base ETH APY, enhanced by extra yield from DeFi pools and other incentives. kETH adapts to ETH staking APY, inclusive of additional incentives and acts to unify LST liquidity for a benchmark rate. After a re-staker deposits LSTs, they may take the kETH received and deposit it into a common pool as a lender. Lenders that deposit into the common pool earn even more yield and are not subject to slashing conditions, a key difference from Eigen. You deposit LSTs such as the ones above, but all kETH revenues are in ETH!

Community contributions have already begun on K2, which is always a positive sign. One of these called kHOLE, provides strategies to amplify the yield of your kETH through arbitraging different protocols and LSTs. The other protocol, kompound, speed runs the ETH activation queue. Head to the 16 min mark in the video link at the bottom of this article if you are interested in those.

Market Participants

Lenders: These are kETH re-stakers entering the K squared protocol, offering security for Service Providers (borrowers). Any validator, solo staker, DVT, or LST staker can participate in Restaking Cloud’s K2 protocol by lending their ETH security. The only lender cost we see is the opportunity cost. Your ETH is in the lending pool getting the APY from K2, missing out on any other source. Lenders can withdraw anytime. Also, lender ETH is not at slashing risk as it is in Eigen Layer.
Service Providers: The borrowers, they establish a position in kETH to pay for validation services through interest on that position. Service Providers are often called “borrowers” but never custody the kETH, they merely claim it as security for their protocol from the lending pool. The borrowed kETH will never actually leave the lending pool. They also create the slashing conditions reporters implement to ensure there are no corruption or uptime issues. Borrowers can withdraw from the service easily at any time as long as all debts to the protocol (i.e. slashing debts) are paid. They pay lenders and the reporters to watch for slashing and liveness Unique from Eigen, they are the ones responsible for slashing debt not validators. They are also responsible for writing the slashing contracts that reporters implement. “Slashing” in a way becomes a sigh of relief for the middleware, they have to pay a fee, but a corruption or liveness issue was caught through a reporter avoiding consequences more dire than the slash fee.
Reporters: They scrutinize the system according to the slashing contracts written by the middle-wares and ensure the integrity of the system, receiving compensation in ETH.
Validators: Integral to K2, validators stake their kETH to authenticate the network. Their role ensures added ETH yield surpassing regular kETH stakers. The easy setup for validators and the MEV+ tool promise a seamless experience. Validators are a key component of K2 and are probably a participant to watch early on. K2 needs to get traction here to be successful. Validators are the ones implementing the ETH protocol for Lenders and Service providers. They do not need to change withdrawal credentials or delegation to stake. Any validator, solo staker, DVT, or LST staker can participate in Restaking Cloud’s K2 protocol.

Eigen Layer and K2: Points of Intersection

K2's open-source nature leaves room for diverse integrations with Eigen. Notable existing protocols like kHOLE and kompound hint at the potential. It will be exciting to see what can be built utilizing both protocols. The allure of K2’s native kETH lies in its unified liquidity representation across all LSTs. If kETH were to serve as sole collateral for an Eigen AVS, it would partially nullify any protocol risks from any specific LST token. This could be a powerful collateral addition to an AVS and the Eigen ecosystem more generally.

Validators on K2 may join the network as a native node, nodes have no change to their withdrawal credentials or software to download. EL node operators point their node withdrawal credentials to the EL smart contracts. Eigen layer operators could actually point their Eigen Pod to K2 as native ETH stakers, servicing both protocols. Just like defi summer had defi legos we may be headed for a form of node operator “legos”, or other market participants in re-staking becoming Legos for different protocols at the same time, stacking rewards. So this could be more co-operation rather than competition yet again. Let’s note once more that withdrawal credentials are required for EL but not K2.

Reporters are unique to K2 and do not really have an analog to EL, they function as watchdogs. Reporters ensure standards are adhered to by the protocol operators according to the slashing contracts from “borrowers”, i.e., Service Providers, before taking action. The zk slashing gadget can take any input off or on chain and ensure data integrity.

Lastly, the system of Service Providers borrowing security from a shared lending pool is also unique. With Eigen, AVSs make their own slashing conditions to impose them on the operators. AVS then predetermine how much ETH they need as security and incentivize re-stakers to fill that need. The K2 lending pool is fully visible and already set which is a large difference from Eigen, an Eigen AVS does not know how much security is actually available to it and uses APY rates to incentivize the re-staker market to service it. K2 Service Providers have more control over how much security they rent but lack a market mechanism to entice re-stakers should the lending pool be unable to meet that demand. In other words, if there is not enough ETH security to service a provider they cannot entice more ETH to the protocol cause they don’t control APY rewards to the same degree as AVSs in Eigen. Both systems would have strengths and weaknesses.

So in conclusion, I hope our growing ETH rehypothecation ecosystem can see the re-staking threads beginning to intertwine. Markets are being made and there will be some competition. However, let’s all step back and take notice on how ETH re-staking also leaves so much room for co-operation. The interplay between K2 and Eigen layer is already beginning to take shape before the test nets have got going. What an exciting time to be in ETH. Cheers all!