Original author: Jack Inabinet, Bankless

Original translation: Baishui, Golden Finance

EigenLayer is undoubtedly the most anticipated airdrop opportunity in the history of cryptocurrency, but is the token drop after the airdrop inevitable for EIGEN and the wider Ethereum ecosystem?

EigenLayer is at the forefront of restaking, creating a shared security market that allows developers seeking to create decentralized networks to circumvent the difficulties associated with bootstrapping and operating their own trust networks, lowering the barrier to entry for creating these networks and empowering the long tail of cryptographically secure applications.

The EIGEN airdrop alone is expected to rank among the largest airdrops ever in crypto, and depositors can easily receive increased allocations from the Liquidity Re-Pledge (LRT) protocol and Active Validation Services (AVS)!

In anticipation of these upcoming airdrops, nearly 5 million ETH (worth approximately $15.5 billion) has been reallocated to EigenLayer, but there are growing concerns that the yields generated by the protocol’s AVS will not satisfy depositors in a post-Eigen airdrop world.

Market participants deposit into EigenLayer not out of the generosity of their own hearts, but because they believe that doing so will generate financial returns that exceed their opportunity costs, or through alternative strategies (e.g., to decentralized exchanges).

While EigenLayer currently supports delegation for AVS, they do not yet generate yield, meaning that depositors are simply speculating on what future airdrops will compensate them.

In the absence of actual revenue, imaginations can run wild when predicting valuations, but their inevitable arrival may pour cold water on the collective delusion that EigenLayer is easily worth tens of billions of dollars; if AVS yields disappoint, the protocol will find it increasingly difficult to justify high valuations.

Many AVSs are not directly comparable, however, Celestia (a blockchain that provides a data availability service similar to EigenDA) only generates a few thousand dollars in revenue per year, which is a pittance for a network valued at $12 billion that relies on high levels of token inflation to attract investors to protect its network.

AVS must employ its own inflationary token economics to provide security, which only exacerbates the oversupply of alternatives that the market has been struggling to digest in recent weeks.

To avoid a massive exodus of TVL in the event of insufficient AVS yields, EigenLayer will likely only distribute a small fraction of the total tokens it intends to airdrop in the first round, thereby fulfilling the promise of future EIGEN rewards as a carrot to incentivize depositors.

Unfortunately, if the market begins to scrutinize the sustainability of this, it may view EigenLayer as overvalued, negatively impacting the perceived value of future airdrops and causing TVL to drain from the protocol until an equilibrium is reached where remaining depositors feel they are adequately compensated for their opportunity cost of capital.

Speculators seeking to maximize EigenLayer opportunities often do so with high leverage, fueling demand for a variety of crypto applications ranging from general money markets to revenue-splitting protocols.

While high-yield EigenLayer opportunities benefit the entire Ethereum DeFi ecosystem, depositors dissatisfied with implied returns could close their positions, eroding yields and triggering negative consequences for projects that rely on the success of re-staking.

Furthermore, EigenLayer has been a major sink for ETH since December, with deposits growing 6,100% in less than 5 months. If marginal inflows of ETH from EigenLayer users seeking airdrops are diverted to sales while abandoning DeFi protocols that facilitate speculative activity, the price of Ethereum and other related crypto assets will be adversely affected.

By aiming for greatness and catalyzing a revolution in cryptoeconomic security, EigenLayer makes its airdrop front-running an obvious strategy, but the rewards of cryptocurrency do not come without risk, and it is questionable whether EigenLayer's current deposit levels are sustainable.

While the protocol is free to mint and inflate its tokens, market participants must buy the increasing supply or the token price will fall.

While the concept pursued by EigenLayer is certainly laudable, it remains to be seen whether restaking is truly the next great crypto innovation or just another crypto pipe dream that relies on unsustainable token inflation and generates little to no real income.

If the latter scenario proves to be true, EigenLayer will be relegated to the “bad idea” bin, dealing a major blow to the Ethereum ecosystem and the loss of a key shared narrative.