After the Ethereum upgrade, a staking frenzy is sweeping through! And in this wave, there is a protocol that catches people's attention: EigenLayer. It not only allows you to earn additional income through re-staking, but also greatly enhances the security of Ethereum. How does it do that? Let's explore the infinite possibilities brought by EigenLayer together.

Background

A Staking Craze Follows the Ethereum Upgrade

After the Ethereum Shanghai upgrade on April 12, 2023, it further activated the vitality of the Ethereum network and attracted more validators to stake ETH. According to data from beaconcha.in, as of July 24, the total staked amount of Ethereum reached 21,923,231 ETH, and the staked amount continues to rise.

At the same time, according to data from EOK Cloud Chain, after the Shanghai upgrade, the daily increase in staked amount exceeded the withdrawal amount, and this is the largest and longest-lasting staking craze in Ethereum since "The Merge" on September 15, 2022.

These two sets of data not only reflect investors' optimism about the future development of Ethereum, but also stimulate the development of the ETH re-staking track. With the growth of staked ETH, ETH stakers are not satisfied with the staking annualized returns alone. They are also looking for ways to earn higher returns, and EigenLayer can meet their needs.

A Broken Trust Network

Through the full programmability of the Ethereum Virtual Machine (EVM) and the concept of a modular blockchain, Ethereum supports developers to build DApps on the consensus layer of Ethereum without permission. Ethereum's consensus network provides trust and security for all DApps built on it.

However, many protocols or middleware currently do not fully utilize the trust network of Ethereum. For example, Rollup, although it expands the performance of Ethereum by detaching the execution of transactions from EVM and returning to Ethereum for transaction settlement, it cannot fully utilize the trust network of Ethereum because it is not deployed and proven on EVM.

Not only Rollup, other non-Ethereum applications such as sidechains based on new consensus protocols, data availability layers, new virtual machines, oracles, cross-chain bridges, etc., cannot directly use Ethereum's consensus. Therefore, in order to ensure security and prevent malfeasance, they must build their own trust layer, which is Active Verification Service (AVS).

However, building AVS has the following four shortcomings:

• Difficult to launch a new consensus network: Building a new consensus network is not easy, and it also requires the cost of guiding users to trust the consensus network, which will occupy a team's considerable resources and energy, which small teams cannot afford.

• Loss of value: With the increase of AVS, it means that in addition to paying interaction fees to Ethereum, users also need to pay trust fees to these AVS.

• Excessive capital cost burden: AVS validators bear significant capital and opportunity costs. In order to incentivize AVS validators, AVS must provide high staking rewards to cover the opportunity costs of stakers. However, for most operating AVS, the capital costs to be covered are already much higher than the operating costs.

• Lower security of DApps: Using AVS weakens the security of DApps because the security of DApps that use or rely on middleware is essentially maintained by the consensus layer of Ethereum and AVS together. However, compared to Ethereum, the cost of hacking middleware is lower and the likelihood of success is higher. For example, for critical modules that are only protected by a small amount of staking or nodes, Ethereum may not provide much security guarantee, as the cost of attacking AVS is much lower than attacking Ethereum.

What is EigenLayer

Simply put, EigenLayer is an Ethereum-based Restaking protocol that allows users to re-stake ETH, lsdETH (liquid staked ETH), and LP Tokens on other side chains, oracles, middleware, etc., as nodes to receive verification rewards. This allows third-party projects to benefit from the security of the Ethereum mainnet, and ETH stakers can earn more profits, achieving a win-win situation.

The following will provide a detailed introduction to the three parts of EigenLayer's operation: Restaking Modes, Free Market Governance, and Delegation Model.

Restaking Modes

EigenLayer also offers various restaking options.

1. Native ETH Restaking:

This mode is suitable for independent ETH stakers who can re-stake their staked ETH and earn rewards by directing their withdrawal certificates to EigenLayer's smart contract. If independent stakers misbehave or act dishonestly, EigenLayer can directly confiscate their withdrawal certificates.

2. LST Restaking:

LST stands for "Liquid Staking Token," which represents liquidity staked tokens. Ordinary investors who do not have 32 ETH can "carpool" through liquidity staking protocols like Lido or Rocket Pool. They deposit ETH into a staking pool and receive LST tokens, which represent the right to claim their ETH and staking rewards.

Users who have already staked ETH in Lido or Rocket Pool can transfer their owned LST tokens to EigenLayer's smart contract for restaking and earning rewards.

3. LP Token Restaking:

LP Token restaking can be divided into ETH LP restaking and LST LP restaking.

ETH LP Restaking: Users can re-stake a pair of LP Tokens that include ETH, from DeFi protocols, on EigenLayer.

LST LP Re-repledge: Users can re-pledge a pair of LP Tokens containing lsdETH on EigenLayer. For example, Curve's stETH-ETH LP Token can be re-pledged on EigenLayer.

Decentralized Marketplace Governance

Building on re-pledging, EigenLayer establishes a trusted decentralized marketplace. ETH re-pledgers, as suppliers, and application layer protocols, as demanders, determine transaction content and prices through the marketplace mechanism. Re-pledgers can choose to join or exit a protocol based on their risk preferences. Protocol developers can also choose which collateral tokens to accept and how to allocate rewards for different types of collateral tokens. For example, a protocol that favors decentralization may only accept native ETH as collateral.

Delegation Model

Many users who hold ETH or lsdETH want to participate in re-pledging for rewards but do not want to incur the cost of acting as protocol validation nodes. These users can delegate their ETH or lsdETH to other EigenLayer operating nodes, who will charge a portion of the rewards as fees. Delegation can be done in two modes:

• Individual Pledge Mode: Suitable for native ETH re-pledgers, who can delegate operations on EigenLayer to other operators while continuing to act as Ethereum validation nodes themselves.

• Full Delegation Mode: Users choose trusted operators to fully operate on their behalf. If the chosen operator engages in dishonest behavior, the delegated funds will be forfeited.

In addition, re-pledgers need to consider the fee ratio with the delegators. This could create a new market, where each EigenLayer operator establishes a delegation contract on Ethereum, specifying how fees are distributed to the delegators.

Advantages and Risks of EigenLayer

Advantages

• Efficient utilization of resources by leveraging the differences among re-pledgers

Ethereum considers decentralization and sets block limits based on the performance of the weakest node, so validators with more computational power cannot utilize their excess resources. EigenLayer can utilize surplus computational resources by creating verification tasks that can only be executed by nodes with higher performance.

At the same time, Ethereum nodes have differences in risk preference, profit preference, and identity characteristics. EigenLayer can also use these differences to recruit node validators.

• Enhancing decentralization and security of AVS and Ethereum consensus layer

Through EigenLayer, AVS can explicitly specify that the nodes participating in its verification tasks must be native ETH stakers or be assigned higher reward weights to native ETH stakers, thereby helping to maintain AVS decentralization. Higher staking rewards will incentivize more people to participate in independent Ethereum staking and run Ethereum nodes, thereby improving the decentralization of the entire Ethereum trust layer.

At the same time, the security of AVS and Ethereum is also improved. For example, in the figure below, assuming that ETH is re-staked through EigenLayer to three AVS modules, attacking one of the AVS would require tampering with the Ethereum consensus layer, which obviously increases the cost and difficulty. The additional income opportunities for the three AVS modules also stimulate an increase in ETH staking, thereby enhancing the security of the entire network.

• Accelerating protocol innovation

By establishing a trusted transaction market, application-layer protocols can conveniently purchase "trust" at market prices, enabling them to focus on protocol innovation and operation, achieving a balance between their own security and performance.

• Breaking the compromise between democracy and flexibility in Ethereum

The governance and upgrading of Ethereum are slowly progressing through a robust off-chain democratic process, but lack of flexibility has resulted in a slow pace of innovation in Ethereum. EigenLayer can enable Ethereum to have the best of both worlds. With EigenLayer, innovative ideas can be quickly deployed based on Ethereum's consensus layer. Under this configuration, long-term stability is still provided by the Ethereum mainnet, while the agility and flexibility needed for short-term innovative projects are allocated through the free market of EigenLayer.

Risks

Everything has two sides, and while EigenLayer brings additional earning opportunities, we cannot ignore some risks.

• Excessive leverage caused by re-staking

In the design of EigenLayer, the earnings from re-staking are market-driven, and different AVSs provide different interest rates. When a certain AVS offers a significant yield, re-stakers may continuously add funds to it to obtain more earnings. This may attract more attackers to steal funds due to excessive leverage, thus reducing the economic security of AVS.

• Risk of accidental confiscation

Confiscation refers to the freezing of a node's assets in the staking pool when it behaves dishonestly. However, in real-world scenarios, there may also be accidental confiscation due to code bugs or protocol issues, resulting in the freezing of honest nodes' funds. This greatly compromises the security of Ethereum's consensus layer.

To address this risk, EigenLayer has implemented two approaches. First, it conducts strict audits of AVS code. Second, it provides a veto system for confiscation, where the governance layer composed of distinguished members from the Ethereum and EigenLayer communities can veto confiscation through multi-signature. However, both of these approaches rely on subjective governance by EigenLayer and do not fundamentally eliminate this risk.

• Collusion among operators for malicious activities

In an ideal scenario, an AVS would have multiple nodes for verification services, making collusion attacks difficult. However, in reality, some AVSs only have a few operators acting as validators, which could potentially lead to collusion among operators to steal funds.

To address this issue, EigenLayer proposes two solutions. One is to limit the amount of funds that can be withdrawn by specific AVSs. The other is for EigenLayer to actively increase the cost of malicious behavior by operators and monitor their staking validation on other AVSs. However, these approaches cannot completely eliminate the risk of operator misconduct at its root.

Funding Situation

So far, EigenLayer has completed two rounds of funding.

In August 2022, they completed a seed round of financing, raising a total of $14.5 million. The lead investors were Polychain and Ethereal Ventures, with participation from Figment Capital, Robot Ventures, P2P Validator, and others.

On March 28th of this year, they completed a Series A round of financing, raising $50 million and being valued at $500 million. The lead investor was Blockchain Capital, with participation from Coinbase Ventures, Hack VC, IOSG, and others.

Team Situation

The founder of EigenLayer, Sreeram Kannan, is an information scientist, entrepreneur, and associate professor at the University of Washington. He has previously worked at Qualcomm and Microsoft. Other members of the team also have extensive entrepreneurial and professional experience, with the chief engineer having spent 9 years as a senior software engineer at Google and the chief strategist having served as director of strategy at Compound Labs.

Prospects and Conclusion

The new re-pledging scheme proposed by Eigenlayer can form a positive closed loop, providing additional benefits for re-pledgers while also offering higher security for Ethereum and on-chain protocols, which is very appealing. Although the main network is expected to fully launch in the first quarter of 2024, EigenLayer has already opened up native ETH re-pledging and a total re-pledging limit of 45,000 LST. As of July 24, a total of 8,320 ETH tokens have been re-pledged in the native ETH re-pledging pool, and the 45,000 LST re-pledging limit has also been filled in a short period of time.

However, it is worth considering that currently there are no substantive application projects on EigenLayer, and many application scenarios exist only in the concept of the whitepaper. Moreover, according to official statements, EigenLayer currently has no plans to issue any tokens. It is difficult to say whether it will be able to attract more protocols and clients in the future competition. At the same time, due to the instability of the cryptocurrency market, no one can guarantee whether the ETH staking track will still be as popular as it is today by 2024.

In conclusion, the impact of EigenLayer on Ethereum and L2 will not be immediately apparent, and its development still faces many challenges and a long road ahead.

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