Original author: Siddharth Rao, IOSG Ventures
Special thanks to Kratik Lodha of Renzo for his valuable feedback on this article, and to the IR team for their contributions.
Re-pledge part
Introduction to EigenLayer
About a year ago, EigenLayer embarked on a new journey designed to help understand network security in a new paradigm, and the concept of re-pledge came into being. All in all, ETH validators can now secure multiple networks, including base layers like the DA layer, compute networks, etc., as well as middleware like shared sequencers. Essentially, any network requires some form of consensus without the need for startup capital to be secure. These networks are called Actively Validated Services (AVS) on EigenLayer.
Without EigenLayer, any operator who wants to become a system (such as a DA) would need to invest in related hardware, as well as initial staking. This forces projects that require a validator set to issue tokens at very high (sometimes unreasonable) valuations in order to obtain high inflation rewards. This could lead to massive speculative selling that would be very detrimental to validator operators.
It is true that there is a risk of leverage reduction by a single operator, but there will always be validators that perform well and want to gain some additional income.
EigenLayer allows native re-staking of Ethereum by creating EigenPods or using liquid staking tokens (LSTs) like stETH, rETH and cbETH to ensure the security of the AVS network. Anyone who owns LST is effectively a contributor to Ethereum’s security and decentralization and receives rewards from the Ethereum network. Liquid Staked Tokens (LSTs) are further pledged to provide security to the AVS network in exchange for AVS earnings. As a result, LST restakers will be eligible for network rewards (minus operator fees).
Since staking and re-staking is beneficial, why is it liquid?
If you believe in liquid staking on Ethereum, then you will also believe in liquid re-staking. Liquid staking on Ethereum actually involves two parties: Lido and retail participants. A retail participant might say, I don’t have enough ETH, hardware, or even time to run a validator, but want to make my ETH more profitable. The staking company will say, I can help you; I charge part of the return as operating expenses, and do it in a completely transparent manner.
This eliminates five overheads for the public: hardware cost, hardware maintenance, time, energy, and mind space.
For EigenLayer, in addition to the above-related overhead, there is additional delegation overhead. In Ethereum, every node run by an operator is fungible, meaning the network treats every node as the same, whether running on bare-metal infrastructure, the cloud, or elsewhere.
With EigenLayer, there is a network that secures other networks, and each operator in the network can choose which other networks they wish to authenticate. This basically means that no two operators are the same. Therefore, it is wise for experienced teams or associations to choose operators with good strategies in order to solve the worries of retail participants~
Flow part
All-year-round opportunities to earn higher ETH returns than any staking protocol on Ethereum.
If you only focus on returns, there are approximately 1,748 ways to get higher returns on your ETH.
The real value lies in the almost risk-free rate of return, which refers to the least risky way to earn ETH. For liquid tokens, the smaller the risk, the greater the possibility that the LST will be included in other protocols, the stronger the combination, and the greater the demand for LST. All of this starts with trust, which means minimal risk.
For LST, risk assessment is not that difficult. You have operator based risks (operator shutting down validators, operator quality, hardware quality, etc.) as well as network based risks (smart contract risks). The consensus mechanism is the same for all risks, as are the minimum hardware requirements for all operators.
In re-staking, there are more factors to consider, including hardware requirements (whether expansion is needed), security audits of AVS, practical testing of new consensus mechanisms, the economic model of AVS itself, and the supporters gained by AVS (investors, smaller factors such as the type of backers (investors, partners, etc.) AVS has received. With just 15 AVS running on EigenLayer, there are 32,767 possible strategies. We cannot expect retail investors to make educated decisions.
Retail participants will not do this, and if they simply imitate any operator strategy and are reduced, it will result in a loss of trust, which will affect the liquidity of the network. If operators launch their own LST, it will lead to too much fragmentation or too much staking concentration in the early stages. Even if multiple operators use the same strategy but have different Liquid “re-stake” tokens (LRTs), this can lead to unnecessary fragmentation. A common LRT with unified strategy and operator decentralization is critical to EigenLayers success.
This ensures a minimum risk positive feedback loop, which can be thought of as:
Best Risk Management → More Liquidity → Most Whitelisted → Most Used → Most Liquid → Most Popular → Lowest Risk
The reason this is minimal risk is because 1 ETH being liquidated from 100,000 validators is much less risky than 1 ETH being lost from 1 validator. This is why people still choose to stake with Lido. Lido recently experienced a liquidation event in which more than 20 validators liquidated approximately 1.1 ETH each (totaling approximately 20 ETH). While their infrastructure partners have taken the loss, it is very minimal compared to Lido’s 8.83 million ETH staked. This demonstrates the importance of having a trustworthy partner.
How does liquid re-staking work?
Users send their LSTs/ETH into the liquid re-pledge platform’s pool contract. Re-stakers will receive equivalent amounts of LRT (Liquidity Heavily Collateralized Tokens). The contract then assigns these tokens to the policy management contract in the EigenLayer protocol. The policy management contract entrusts these tokens to node operators and ensures that node operators adhere to the policy. LRT governance can choose specific strategies. Operators verify the underlying AVS and retain a portion of the rewards. The rest is then transferred to the LRT protocol, which takes a portion and eventually distributes the rest to re-stakeholders. This is significantly more withdrawable than LST (Liquidity Staked Token), but requires more work and maintenance.
How attractive is the yield?
We don’t know how AVS (Active Validation Service) incentives will be distributed, nor how each consensus mechanism will work. But based on some basic written mathematical calculations, here are several possible scenarios that are valuable for calculating EigenLayers yield.
Taking FDV (fully diluted valuation) into account, referring to a projects last known FDV figure, those project tokens will likely launch at a higher valuation, making the yield significantly more attractive. As a conservative estimate, we assume that the FDV values announced for all partners on the EigenLayer ecosystem page are the valuations of their last funding round. As of October 19th, Eigen Layer’s TVL (Total Locked Value) is about 172k ETH, Lido’s base yield is about 3%, and according to our calculations, there is about $62 million in emissions (both are subject to TGE Price and emissions impact, which is a conservative figure of 2.5% of token supply and FDV), roughly equates to an average 9% APY enhancement benefit, potentially totaling 12%.
In a more aggressive scenario, Boosteds earnings APY could be as high as 15%. Of course, these are based on assumptions. If you want to discuss in-depth calculation methods, you can send me a private message on Twitter (@Rao_Sidd).
LRT ecosystem
Ion Protocol: A lending protocol that can use LSTs and LRTs to lend and borrow assets;
Renzo: A platform specializing in liquidity re-pledge. Accept all EL LSTs (EigenLayer Liquid Staking Tokens) and ETH in exchange for their LRT ezETH (Liquid Restaking Token ezETH);
Rio: A platform specializing in liquidity re-pledge. Accept all EL LSTs and ETH in exchange for the platform’s LRT reETH;
Puffer Finance: LRT protocol based on DVT;
Inception LRT: LRT protocol focused on ensuring L2s security;
Swell: The LST protocol is also creating its own LRT. Swell’s LST was also shortlisted for EigenLayer’s re-staking JokerAce competition;
Stader Labs: Stader Labs also has its own LST ETHx and is also creating its own LRT;
Genesis LRT: Provides customized LRT, allowing each customer to create their own LRT based on their required risk profile, mainly for large customers and institutions entering this field;
Astrid Finance: Using the rebase model, users receive rstETH, rrETH or rcbETH based on the content pledged in the fund pool and the users balance. As rewards accumulate, the users balance will be automatically adjusted;
KelpDAO: similar to Renzo and Rio’s models;
Ether.Fi: Allows users to deposit only ETH into the fund pool in exchange for the platform’s LRT eETH.
How might space evolve in the future?
In this space, becoming a real winner starts with establishing the highest level of trust. LRTs will also follow the same positive feedback loop as LST. Risk management is the most important factor in attracting re-hypothecaters, liquidity providers and partners.
At some point in the future (timeline undetermined), the yield may be slightly higher than that of ETH, but this will depend on the design and usage of the economic model of the underlying AVS. The use of AVS may become the lowest-risk return option for users on Ethereum, which is the combination of Ethereums consensus reward and the AVS yield.
Mantle recently pledged 40,000 ETH from BitDAO funds to Lido. In the foreseeable future, this means that they will receive a large amount of stETH, which may be listed on Mantle, and some will also be re-staking on EigenLayer ( When the supply limit of LST is increased). For example, if Mantle chooses to use EigenDA as the DA layer, in this case they will be heavily biased towards choosing the lowest risk strategy because these AVS protect the treasury while also supporting Mantles overall strategy and goals.
Mantle can also encourage the use of their platform’s LST: mntETH and build LRT (liquidity recollateralized tokens) to match. This will help Mantle utilize their funds efficiently while helping ensure the security of their committed DA layer. The fees earned can be given back to their users as Gas.
Due to the competitive environment, power law will play a certain role (the competition pattern of the market tends to be a winner takes all model), and the first 1-2 protocols may eventually control 80-90% of the market. I think that only those protocols that are completely focused on developing this market are expected to succeed, because this market requires a high degree of concentrated investment. It is also possible that some large LST protocols may integrate upstream in the supply chain like Swell, but there are no more signs yet.
It is also critical that the LRT protocol is available on day one on the market. The greatest trust in the retail market comes from TVL (Total Locked Value). Projects that attract good TVL on day one or two of EigenLayer launch are likely to be leaders for the foreseeable future.
There will always be people pursuing high returns, especially high-risk investors. As the LRT protocol becomes more widely adopted, there will be more DeFi integrations and many strategies will be unlocked exponentially, or will create a positive flywheel effect.
We believe that over time, all operators will choose to use more similar strategies and achieve the lowest returns. This will largely depend on the old and new designs of the underlying AVS and its economic model. In order to avoid too many large LST whales and liquid staking protocols controlling EigenLayer, there are controls at the protocol level. If restaking returns become less risky, the liquid staking protocol will become the center of power in the Ethereum ecosystem. This can be mitigated by early adoption of a version of Jon Charbonneaus concept of proof of governance.
