- EigenLayer is a new protocol that allows ETH stakers to restake ETH
- Implementation of EigenLayer will result in a substantial increase in the level of security of Ethereum
- The Stage 1 Mainnet launch of EigenLayer has just gone live, and it allows users to restake ETH and LSTs
- The next stage of the EigenLayer launch will onboard operators, who will perform validation tasks for AVSs (actively validated services)
- The final stage of the launch will see the launch of several AVSs on EigenLayer
EigenLayer is a new protocol that aims to address Ethereum’s fragmented security and capital inefficiencies by introducing restaking. By leveraging ETH staked directly on the beacon chain, EigenLayer seeks to transform Ethereum into a security-sharing network with enhanced levels of protection. This article explores the concept of EigenLayer, its implementation, benefits, risks, and its potential impact on the Ethereum ecosystem.
The Stage 1 Mainnet launch of EigenLayer has just gone live, and it allows users to restake ETH and LSTs. During the first day of the EigenLayer launch, the protocol clients staked the maximum allowable amount: 9600 ETH worth $16 million at the current exchange rate.
What is EigenLayer?
EigenLayer is a protocol that allows ETH stakers to restake their ETH and participate in the AVS trust network. Similar to the Interchain Security (ICS) concept of Cosmos, EigenLayer incentivizes validators to participate in validation tasks by offering block rewards. Through restaking, ETH stakers can validate both the Ethereum PoS chain and AVS simultaneously, contributing to the security of the network. EigenLayer aims to create a free-market governance environment where validators can maximize their returns and AVSs can build a stable network of trust.
Here’s how it works:
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.
2. Free-market governance
EigenLayer creates an environment where validators can freely participate in the AVS validation process based on risk/reward preferences. 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.
EigenLayer brings several advantages to the Ethereum ecosystem. It alleviates capital costs by enabling cooperation and resource sharing between Ethereum L1 and AVS. This allows ETH stakers to increase their profits by staking on both the Beacon chain and AVS. Additionally, EigenLayer reduces the cost burden for AVS during the initial bootstrapping phase. By providing a mechanism for pooled security, EigenLayer enhances the level of security in the Ethereum ecosystem.
EigenLayer provides a new mechanism for pooled security. For example, let’s look at the scenario where $13B is injected into the Ethereum ecosystem. In the left scenario where EigenLayer is not implemented, the cost of corruption (CoC) of AVS is $1B, whereas, in the right scenario with EigenLayer, the CoC is increased to $13B due to the improved security mechanisms.
With the implementation of EigenLayer, AVS will have access to this significant sum, resulting in a substantial increase in the level of security.
What are the benefits of EigenLayer?
Some of the benefits of EigenLayer are:
- It provides cheaper and higher bandwidth than the Ethereum mainnet.
- It increases the interoperability of protocols on Ethereum and, thus the rate of innovation.
- It attracts more capital into the Ethereum ecosystem to take advantage of the extra yield.
- It increases security for protocols that can leverage the mainnet by using EigenLayer.
- It reduces the capital cost for protocols that need to bootstrap their own validator set.
- It allows users to restake their ETH and receive double staking yield from both Ethereum and other protocols.
What are the risks of EigenLayer?
Also, there are some risks of EigenLayer:
- Collusion risk: Many operators could collude to attack a set of AVSs at the same time and compromise their security.
- Slashing risk: Users who restake their ETH could face slashing penalties from both Ethereum and the AVSs they secure, depending on their restaking method and the slashing conditions of each protocol.
- Single point of failure risk: EigenLayer receives the withdrawal credentials from ETH stakers. If it is exploited and has a significant amount of ETH staked, this creates a systemic risk for the mainnet.
- Centralization risk: If many stakers secure one app and get slashed, that could have bad consequences for Ethereum.
EigenLayer restaking primitive is a new mechanism in crypto-economic security that allows users to reuse their staked ETH or liquid staking tokens on the consensus layer. Users who stake ETH can opt-in to EigenLayer smart contracts to restake their ETH and extend security to other applications built on the network, such as bridges, data availability layers, oracles, etc.
By doing so, they can earn additional rewards from both Ethereum and the applications they secure. However, they also face additional slashing risks from both layers. Restaking is a novel way of rehypothecating staked ETH and creating a marketplace for decentralized trust.
Restaking influence on APY
If staking rewards are regularly collected and restaked, then the total percentage of income will grow. EigenLayer will ask permission to move the specified token from your wallet to compound your profit.
Let’s look at an example. If you make a $100,000 monthly compounding deposit at the current 4.4% interest rate, your APY will be 4.489%. Calculation used: 100,000 × (1 + 0.044 ÷ 12)^(12). By the end of the year, your balance will be $104,489.
On the other hand, if compound interest is compounded daily, your final balance will be $104,497, with an APY of 4.497% by the end of the year. Calculation used: 100,000 × (1 + 0.044 ÷ 365)^(365).
Shared Security with Eigenlayer using IBC
Eigenlayer allows Ethereum validators to restake their Ethereum. This allows consumer chains of Eigenlayer to borrow the security from the Ethereum network.Polymer Labs suggests if EigenLayer integrates IBC, cross chain validation can be used to add EigenLayer validators into the active validator set of the consumer chain. Otherwise, a consumer chain can still inherit some protection at the IBC connection level for connected chains.
As an example of the IBC ecosystem, let’s look at Cosmos. Cosmos is a burgeoning ecosystem of interconnected applications and services working towards a decentralized future. Also known as the “Internet of Blockchains,” all blockchains built with Cosmos SDK can communicate seamlessly, thanks to IBC.You can see the internet of blockchains in action at Map of Zones.
Cosmos released the Cosmos SDK, a framework for building IBC-compatible blockchains, along with the Cosmos Hub, where all IBC-compatible blockchains are connected using the IBC standard. Cosmos is analogous to interconnected constellations, hence the name “Cosmos.”
All applications and protocols that succeed with IBC and draw more users to Cosmos benefit the entire ecosystem and make DeFi on Cosmos a more engaging and rewarding experience for users.
EigenLayer, with the recent launch of its Stage 1 Mainnet, presents a promising solution to address Ethereum’s fragmented security and capital inefficiencies through the introduction of restaking. This innovative protocol enables ETH stakers to participate in restaking and offers the potential for substantial increases in the level of security within the Ethereum ecosystem.
EigenLayer brings several distinct benefits to Ethereum. By fostering resource sharing and reducing capital costs, it provides a more cost-effective and high-bandwidth alternative to the Ethereum mainnet. This, in turn, enhances interoperability among protocols, accelerates innovation, and attracts additional capital to the Ethereum ecosystem. Additionally, EigenLayer offers users the opportunity to maximize their yields by staking on both the Beacon chain and other protocols simultaneously.
However, it is crucial to acknowledge and mitigate the risks associated with EigenLayer. Operator collusion, slashing penalties, single points of failure, and the potential for centralization must be effectively addressed to ensure the robustness and long-term security of the Ethereum network.
With its Stage 1 Mainnet now live, EigenLayer marks the initial stage of implementation, laying the foundation for a more secure and efficient Ethereum ecosystem. Moving forward, the protocol has the potential to address Ethereum’s current limitations and evolve into a core infrastructure that significantly elevates the platform’s capabilities and fosters its continued success.