On EigenLayer

A Deep Dive Into Ethereum's Restaking Primitive

“You cannot eat your cake and have it!” so they said — but then it happens sometimes that even the most valid rules have exceptions. Particularly in crypto, where innovation is supercharged, and the limits of what is possible are being pushed continually. There's always that one-in-a-million possibility of a breakthrough, against all odds, even in the most technologically impossible situations. One of such intriguing cases is EigenLayer — a claim that has grown into a ~$11.5b stake.

Bootstrapping a new innovation in the crypto space is incredibly challenging; pioneering a whole new frontier is even more so. Yet, EigenLayer burst onto the scene and quickly grew into a behemoth, becoming the second largest protocol by TVL on Ethereum. This uncommon feat speaks volumes about the compelling vision and narrative EigenLayer has championed.

By introducing a novel mechanism in crypto-economic security that was deemed impossible before, EigenLayer has cracked open a discovery that feels like opening up a Pandora's box. Similar to the discovery of MEV, EigenLayer prompts several questions about its profound implications and risks. This article is a venture deep down into the EigenLayer rabbit hole, analyzing its operation logic, the opportunities, and the risks involved.

Source: DefiLlama

The Background

To appreciate the full breadth of EigenLayer, we need to zoom in on the current state of crypto-economic security to see how EigenLayer's idea fits in the big picture.

At the inception, it all started with Bitcoin. Being the first iteration of decentralized trust and security, pioneering peer-to-peer payments rails without third-party coordination. Bitcoin’s security model however, had its own flaws — it was app-specific in its design. As such, any new decentralized application that builds on top of the network also needs a new blockchain and its own trust network — This impeded innovation and growth on the network.

Ethereum’s genius was pivoting away from Bitcoin’s application-specific approach, by enabling flexible smart contracts that allow developers to explore a new frontier of permissionless applications. This makes it possible for developers to build complex systems that leverage the underlying blockchain’s security and computational resources, establishing trust and security at the base layer. This model had huge implications for the design space — opening the floodgates for innovation upon which most of the things we know and use today are built on.

While Ethereum’s programmability signaled a breakthrough for a new set of applications, its security model is also not without its own caveat — applications that require their own actively validated system (AVS), cannot utilize the Ethereum settlement layer. Akin to the original Bitcoin security model, this creates a hostile for environment for a new AVS. Furthermore, it encourages an ecosystem of smaller, fragmented pools of security and an inherent value leak within Ethereum's security model.

In a perfect world, developers should have the flexibility of creating decentralized applications without the hassle of creating their own blockchain from scratch. EigenLayer makes this possible — Being a network for programmable trust, EigenLayer lowers the entry-barrier for creating decentralized applications by orders of magnitude. Allowing developers to bypass the difficulties associated with bootstrapping and operating their own trust network.

Enter EigenLayer

EigenLayer is a set of smart contracts on Ethereum that creates a marketplace for decentralized trust, enabling Ethereum validators to rehypothecate their trust and allows new chains to benefit from the same trust. Think of it this way — EigenLayer takes the security of Ethereum, and allows other emergent applications (decentralized oracles, bridges, rollups) to use it.

At its core, EigenLayer leverages two fundamental ideas. On one hand is the concept of pooled security via restaking — this involves multiple parties combining their staked ETH together to provide greater security. And on the other hand, it employs free-market governance. These mechanisms enable the extension of Ethereum's base layer security to protocols built on the network. This is elegantly explained in the project's Whitepaper.

What Problem Does EigenLayer Solve?

On a basic level, EigenLayer aims to solve the age-long crypto-economic security challenge that has plagued blockchain networks. Particularly, the Ethereum network is plagued by fragmented security — because non-EVM applications built on top of the Ethereum network are responsible for bootstrapping their own trust network. This has proven inefficient, because as more applications are built, crypto-economic security becomes more fragmented across the network.

One of the central bottlenecks to innovation in today’s crypto ecosystem is the requirement for projects to bootstrap trust, or crypto-economic security. We started working on EigenLayer in the hopes of creating a new model in which developers can easily consume trust, instead of needing to build trust, and design powerful systems of assurances that make the crypto ecosystem safer and more useful." — Sreeram Kannan, Founder, EigenLayer

EigenLayer tackles the challenge of fragmented security in the Ethereum ecosystem by introducing a novel concept: restaking. This mechanism, implemented through a network of smart contracts, unlocks the potential of staked ETH. Users can contribute their already-locked ETH to bolster the security of other applications built on Ethereum. In essence, EigenLayer facilitates a system where staked ETH can be "redeployed" for additional purposes.

Users essentially grant EigenLayer temporary control over their staked ETH, allowing it to be effectively "restaked" on other applications. This opt-in feature is crucial because it establishes additional slashing conditions for staked ETH, even beyond the base Ethereum consensus layer. This flexibility in slashing conditions is key for extensible security. New conditions can be implemented to address the specific needs of various projects built on top of Ethereum, such as bridges and data availability layers.

Source: EigenLayer

By strategically deploying restaked ETH and leveraging customizable slashing conditions, EigenLayer effectively incentivizes honest behavior and discourages malicious activity. This ultimately allows staked ETH to provide validation services beyond the confines of the Ethereum network itself.

EigenLayer’s Pitch — Restaking

Across podcasts and articles, EigenLayer's core messaging is consistent — enabling restaking. Much of what makes restaking interesting is that it taps into something fundamental to every human — the pursuit of profit. Let's unpack this.

Ethereum staking involves committing your Ether to participate in securing the Ethereum network and earn rewards in the ETH. Basically, it is like putting your ETH to work for the network's benefit. Classically, the motive behind validators’ participation in Ethereum consensus is profit-driven — Ethereum validators stake their Ether (ETH) either natively or with a liquid staking token (LST) to earn yield. However, this comes with an opportunity cost of not being able to re-use their staked Ether elsewhere (the ETH is locked).

Of course, validators can take their assets elsewhere if there's a promise of better yield. For instance, if the interest rate on providing ETH as liquidity on Uniswap is “significantly” higher than the validator rewards, validators would rather opt for being a LP on Uniswap.

Currently, over 31.5 million ether, currently valued at $115 billion, is staked on Ethereum. But, what if all of that ETH could do more? This is where EigenLayer enters the picture. In this context, the opportunity cost is taken away. Instead of just chasing limited yield (Ethereum has a low staking rate of ~4.56%), validators are offered alternative revenue sources to increase yield, which is crucial for maintaining Ethereum’s security.

In its most simplified form, restaking is the idea that the same stake that is used for securing the Ethereum proof-of-stake network (PoS), can be used to earn rewards from multiple sources simultaneously.

Security Risks?

EigenLayer has profound implications for the EVM, with the potential to unlock a new paradigm of innovation on top of Ethereum. However, amid the excitement and optimism, there are potential systemic risks that should not be sidelined. Critics have collectively lent their voices, and rightfully so. Ethereum’s founder, Vitalik Buterin, recently brought to light critical concerns about systemic vulnerabilities resulting from spreading ETH stakes across EigenLayer’s services.

Two primary areas of potential vulnerability exist within EigenLayer. The first concerns collusion among validators. A group of malicious validators could potentially coordinate an attack on multiple middleware services simultaneously. The second vulnerability stems from integrated protocols. Protocols built on top of EigenLayer might introduce unintended weaknesses, potentially leading to the slashing of innocent nodes.

Additionally, EigenLayer's success hinges on its rebalancing algorithm. This algorithm considers factors like validator stake, security capacity, and usage patterns to ensure balanced distribution. However, if the rebalancing mechanism malfunctions (latency issues, or incorrect parameter settings), EigenLayer's crypto-economic security could be compromised. This could lead to vulnerabilities similar to those addressed by the merge-mining feature it aimed to solve. Therefore, it's crucial to ensure the system accurately tracks and updates restaked ETH, maintaining full collateralization at all times.

EigenLayer Points — What’s the Point?

Being one of the most anticipated launch of 2024, EigenLayer has already attracted over $1.8B $ETH capital via its points-based incentive program. You ask, what's the big deal about points? Actually, it's a big deal. You’ve probably heard that points are the new meta in crypto.

While the concept of points systems might seem fresh in the crypto world, a closer look reveals a familiar pattern. Traditional loyalty programs for airlines, hotels, and credit cards have been using points for decades. The key difference lies not in the points themselves, but in how they're implemented. What sets the crypto points system apart from traditional finance is the likely potential for tokenization.

The anticipation of these points eventually converting into tradable tokens adds a layer of excitement and opens doors to greater utility. Given the massive reputation EigenLayer has built, users have huge expectations of an EigenLayer token. Currently, over 2.82b restaking Points have been accrued by users. Of course, there is no guarantee that points will be converted to tokens. However, given the recent trend in the crypto space, users are expecting the TGE to happen in Q2, 2024. As a matter of fact, it is one of the most anticipated airdrops of the year. The image below shows the point tiers of each user cohort (according to count) and their share of points.

Zooming out

Without doubt, restaking presents a significant improvement in value accrual for end users. Traditional staking is not capital efficient. Token holders essentially lock their capital into a given contract to earn a reward for contributing to network security. The result? A more robust blockchain landscape, fueled by advancements in security and innovation, is on the horizon. This bodes well for attracting new users to the ecosystem, as it fosters a more trustworthy and dynamic environment.

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