EigenLayer: Leveraging Capital on Ethereum
The next Ethereum narrative currently receiving much attention in the Ethereum community is EigenLayer (pronounced I-gen-layer - you are welcome). Developed by EigenLabs, led by University of Washington professor Sreeram Kannan, with team members from AWS, Compound, ConsenSys, Facebook, Microsoft, and Protocol Labs, EigenLabs has raised ~$65m so far including their most recent Series A funding round early this Spring. Their partners and investors include: a16z, Blockchain Capital, Polychain Capital, Ethereal Ventures, Electric Capital, Figment Capital, and Coinbase Ventures et al. We wanted to go beyond the hype to look at what it’s all about, how it can benefit different network participants (stakers, validators and developers) and what it could mean for Ethereum.
ReStaking ETH
EigenLayer is an opt-in protocol for Ethereum ReStaking. Similar to MEV, this project has the potential to radically alter Ethereum's structure by allowing stakers to secure new protocols by reusing staked ETH. The protocol will allow you to stake your ETH across multiple protocols simultaneously. In essence, EigenLayer allows stakers to put their Staked ETH back to work.
This restaking will enable staked ETH to be used as crypto-economic security for protocols other than Ethereum in exchange for protocol fees and rewards. Restaking is available for natively staked ETH and liquid staked tokens like stETH, rETH, cbETH, and LsETH.
For reference, there’s currently 21.7 million ETH enlisted to keep Ethereum secure, or about $31b at today’s prices—that’s more than 18.2% of all Ethereum currently in circulation. Yes, it’s no small change in terms of capital, especially if it could be re-allocated. This would mean that Validators could:-
- Validate more networks with lower marginal costs.
- Provide new protocols with validation services to complement their Ethereum validation operations.
- Optimise usage across their nodes, and maximise capital efficiency with minimal incremental cost.
Basically, EigenLayer could use this $31b staked ETH to serve the same security purposes for other, newer projects. Most importantly, validators would earn more fees from increased transaction volumes and increased network fees as a result. Since the asset staked is ETH but in derivative form, these other projects would also be Ethereum-based. EiginLayer plans to include bridge technologies and oracle providers, who could use this double-dipped Ethereum to secure their networks too. The result: permissionless Trust would be finally born across chains, courtesy of Ethereum.
‘Blockchain-security-as-a-service’
What if, instead of having to gather funds, hardware, and a series of validators to keep your newly-launched crypto project/protocol from getting 51% attacked (or worse), EigenLayer could put staked Ethereum back to work for you. In essence, EigenLayer would provide developers access to the Ethereum staked capital base and decentralized validator set. If it goes according to plan, it will democratise access to bootstrapping a network on Ethereum and redeploy a large amount of capital into Ethereum’s ecosystem.
For example, if you were looking for an alternative route to bootstrap your new project/protocol; you build a network, launch mainnet and open your door for Ethereum's stakers to 're-stake' to your network using Eigen-security. Your new network grows through development improvements, restaking security and ultimately through consumering your ‘product’ (whatever that may be). It would create permissionless interoperability (being cross-chain) and offer blockchain-security-as-a-service to you at a fraction of the cost of building your own validator network.
How will this change the dynamics around the long-term equilibrium of Ethereum staking and its derivatives, i.e. can Ethereum secure a multiverse of networks built upon its capital and security (its PoS validator network) alone?
No one has properly modelled what this will do to the risk profile of Ethereum as an L1. It feels like leveraged sub-prime but for ETH. Whilst CDOs are good in some case, we need to actually think this through and the possible ramifications to network security. A functioning EigenLayer would create a secondary derivatives market on top of Ethereum with its capital being leverage to provide security to other networks.
Leverage is always a dangerous roulette wheel of risk when it comes to financial markets. This feels like leverage risk built on Ethereum’s network security infrastructure. It's still too early to tell if restaking is more than just another narrative or hype cycle. However, capital flows to where there is value; there are many VC’s betting on EigenLayer’s ability to deliver more than just hype for Ethereum network. This is definitely one to watch as it plays out.
CeAnn Simpson
