EigenLayer: An Open Marketplace for Decentralized Trust

Research Analyst/
Jun 22, 2023

Translated by Lyne Choi

Table of Contents

1. Intro

2. Limitations of the Current Ethereum Structure in Terms of Security and Cost: Key Players and Issues 

3. EigenLayer: Enabling Decentralized Trust Trading via Restaking 

4. Highly Anticipated Flagship Service EigenDA to Launch in 2023

5. Closing



1. Intro

In anticipation of Ethereum's upcoming Shanghai/Capella upgrade, Liquid Staking Derivatives (LSD) protocols, including Lido ($stETH), Coinbase ($cbETH), and Rocket Pool ($rETH), are experiencing a surge in popularity. This trend is partly attributable to the release of EigenLayer's whitepaper, which is being touted as an evolved iteration of LSD.  In this article, we will explore the creation of EigenLayer and its potential implications for the Ethereum network ahead of its launch on the mainnet.

2. Limitations of the Current Ethereum Structure in Terms of Security and Cost: Key Players and Issues

As Ethereum's consensus algorithm transitions to PoS, network security has become reliant on the amount of ETH staked rather than hash power. This is a significant advancement as it enhances network decentralization and security while reducing the energy consumption of mining activities. Nevertheless, staked ETH is locked up by a smart contract, rendering it unusable as collateral or tradable assets.

LSD initiatives, which convert staked ETH into liquid assets, have arisen as a solution to these inefficiencies and have gained momentum since Ethereum's PoS transition. As of March 20th, the total value locked (TVL) in LSD projects was over $13.9 billion, corresponding to roughly 7.8 million ETH or about 43% of the total ETH deposited on Beacon Chain (17.6 million ETH).

Nonetheless, LSD tokens are predominantly utilized in the DeFi realm and are unable to participate in the validation of Actively Validated Services (AVS) or Ethereum-based middleware and infrastructure, such as sidechains, DA-layers, new VMs, keeper networks, oracles, storage, bridges, and TEEs, each of which has its own trust network. Consequently, even with the emergence of LSD, AVSs must still establish their own trust networks, which are typically achieved through either 1) token issuance or 2) a permissioned structure. In this scenario, token issuance raises the following concerns:

2-1. The Burden of Capital Cost

To secure the necessary funding for constructing their own trust networks, AVSs that pose a greater risk than Ethereum PoS staking must provide staking yields that correspondingly exceed those of Ethereum PoS staking APR (averaging at 4-5%). This implies that AVSs must offer higher yields, particularly for new and riskier protocols, to raise funds smoothly. This framework heightens the cost burden on AVS and ultimately triggers competition between AVS and L1 in terms of crypto-economic security, as elaborated in the Xangle research article, "Exploring Liquid Staking: A Comprehensive Guide to Understanding the Concept." In other words, in the event that an AVS presents a high APR, stakers will naturally prefer to stake on that platform instead of L1, resulting in a lower L1 staking rate, which increases the potential cost of attack relative to a higher Total Value Locked (TVL), ultimately compromising the security of the Ethereum network.

2-2. Fragmented Security

The security of the Ethereum network and the security of the AVS and the underlying dApps are distinct from one another. In other words, even if Ethereum is considered secure with a market cap of $31B (as of March 20, 2023), if the AVS is secure only up to $1B, the dApps depend on it are also only as secure as the AVS. This is because dApps rely on the security of the AVS, as demonstrated by the numerous projects that have failed due to bridge hacks and oracle issues.

Consequently, even if a project has excellent ideas and capabilities, it will ultimately fail if it cannot bootstrap a new AVS on Ethereum. Ultimately, the fragmented security structure of Ethereum can also impede innovation and growth.

3. EigenLayer: Enabling Decentralized Trust Trading via Restaking

3-1. What is EigenLayer?

EigenLayer is a set of smart contracts that allows cryptographic security to be shared between L1 and AVS. Simply put, it supports the security of AVS services through ETH staked on the Ethereum network. The main idea behind it is to provide ETH stakers with the ability to opt into the AVS trust network, which can be compared to the consensus structure allowing Avalanche validators to act as subnet validators or the Interchain Security (ICS) concept of Cosmos. ICS allows appchains to incentivize Cosmos validators to participate in validation by offering them block rewards. ICS is particularly appealing to newly established appchains, as it provides security to Cosmos from the very beginning. EigenLayer aims to transform Cosmos into a security-sharing network by introducing 1) a restaking mechanism and 2) free-market governance.

Restaking: This concept involves restaking ETH that has already been staked on the Ethereum PoS chain. Ethereum validators can download and run the node software, and validate both the Ethereum PoS chain and AVS simultaneously, provided they use the EigenLayer contract. ETH stakers can also participate in restaking, which will be further discussed in sections 3-4.

Free-market governance: EigenLayer creates an environment where validators can freely participate in the AVS validation process based on risk/reward preferences. This is similar to how early-stage startups and VCs bootstrap their investors in the early days. Validators can maximize their returns by staking in the AVSs they want to support, while AVSs can build a stable network of trust early on.

3-2. EigenLayer's Solution to Ethereum's Challenges

EigenLayer addresses the structural issues of Ethereum, including the lack of trust and security for AVSs, by establishing an open marketplace for decentralized security. This solution addresses the issues mentioned above, including:

Capital Cost: One of the benefits of EigenLayer's solution is that it helps to mitigate capital costs. Instead of Ethereum L1 and AVS competing for limited capital, they can now cooperate and share resources. ETH stakers can now stake on both the Beacon chain and the AVS, doubling their profits. Additionally, AVS no longer needs to offer an aggressive staking pool during the initial bootstrapping phase, which reduces the cost burden.