In this research report, crypto data analytics firm, Xangle, explores the creation and potential implication of EigenLayer on the Ethereum network.
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2. Ethereum’s Key Limitations: Security and Cost
2.1. The Burden of Capital Cost
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
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
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.
3.1. 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.
- Fragmented Security: EigenLayer provides a new mechanism for pooled security. The figure below shows that $13B is injected into the Ethereum ecosystem in both the left and right scenarios. However, 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.
As of March 20, the total amount of ETH staked on the Beacon Chain was 17.6M, which equates to approximately $31M. With the implementation of EigenLayer, AVS will have access to this significant sum, resulting in a substantial increase in the level of security.
All protocols today end up making some trade-off between democratic governance and the rate of innovation. The emergence of EigenLayer challenges the existence of any trade-off between democratic governance and agile innovation.
EigenLayer allows agile innovation to be built on top of the Ethereum trust network. The structure allows projects to bypass the bootstrapping process for security and fosters change and innovation at the dApps and middleware layers while leaving the core of Ethereum alone to continue upgrading in a cautious and stable manner.
The below figure shows that with the addition of EigenLayer, Ethereum can enjoy the best of both worlds: democratic governance with agility in innovation.
3.2. The Differences Between LSD, Superfluid Staking and Restaking
The cryptocurrency staking landscape is now well-stratified, and participants have a number of ways to maximize capital efficiency and availability.
Some of the more popular options now include:
- Liquid Staking Derivatives: Liquid staking services such as Lido and Rocket Pool allow users to deposit their ETH to a staking pool and receive a liquid staking derivative token that represents a claim on their ETH and its staking yield. The LSD protocol delegates the ETH in the staking pool to validators, and users' LSD tokens represent their staking position and their claim to staking revenue. LSD tokens can also be traded in the DeFi ecosystem via exchanges like Uniswap, Curve, and Aave.
- Superfluid Staking: Developed by Osmosis, Cosmos' flagship DEX, which enables LP tokens to be utilized for Ethereum PoS staking.
- Restaking: Allows users to participate in both staking and AVS validation simultaneously, helping to maximize yields.
Restaking differs from LSD and Superfluid staking in two main ways. First, restaking allows for AVS validation and staking participation. The second main difference is the stacking order. In EigenLayer, there can be several modalities of restaking:
- Native restaking: Validators can restake their staked ETH natively by pointing their withdrawal credentials to the EigenLayer contracts. This is equivalent to L1 → EigenLayer yield stacking.
- LSD restaking: Validators can restake by staking their LSDs by transferring their LSDs into the EigenLayer smart contracts. This is equivalent to DeFi → EigenLayer yield stacking.
- ETH LP restaking. Validators stake the LP token of a pair which includes ETH. This is equivalent to DeFi → EigenLayer yield stacking.
- LSD LP restaking: Validators stake the LP token of a pair which includes a liquid staking ETH token, such as Curve’s stETH-ETH LP token, thus taking the L1 → DeFi → EL yield stacking route.
3.3. Engaging Passive Restakers via Delegation in EigenLayer
Many EigenLayer restakers holding ETH or LSDs may be interested in participating in EigenLayer, but may not want to act as EigenLayer operators themselves.
EigenLayer provides an avenue for these restakers to delegate their ETH or LSDs to other entities that are running EigenLayer operator nodes. These operators receive fees from both the Ethereum beacon chain and the modules they are participating in via EigenLayer. They keep a fraction of those fees and send the remainder to the delegators.
While restakers have the benefit of participating in EigenLayer without running operator nodes, there is a risk of their ETH getting slashed if the nodes are not carefully managed. Each operator node has different conditions, including delegation fees and fee distribution methods, and the operators will provide these details directly to the stakers.
3.4. EigenLayer vs Merged Mining: The Option of Slashing
The restaking concept of EigenLayer is similar to the notion of merged mining, which was used for Namecoin in 2011.
Merged mining is a cryptographic mining operation where proof of work and hash rate is submitted to multiple blockchain networks simultaneously, intending to maximize profits and amortize the cost of mining.
While merged mining has been used for Bitcoin/Namecoin, Bitcoin/Elastos, Bitcoin/RSK, and Litecoin/Dogecoin, the primary reason for its failure was due to security vulnerabilities. Miners were not penalized for failing to mine sub-blockchains, creating security vulnerabilities for the sub-blockchain network.
3.5. The Primary Concern is Security Risks
Due to the LSD protocol's Total Value Locked (TVL) and revenue potential, many validators are expected to utilize EigenLayer's service upon its launch.
Nevertheless, as the amount of ETH deposited into EigenLayer's contracts rises, there is a greater possibility of the following issues arising:
3.5.1. Operator Collusion
Operators may collude to steal funds from a set of AVSs. Consider an AVS which is secured by $8B of restaked ETH and which contains a total locked value of $2B. With a quorum of 50% required to capture the $2B of locked value, the application appears to be secure since a successful attack would result in at least $4B of the attacker's stake being slashed.
However, this may not be the case if the same set of stakers is also restaking in other AVSs. In the simplest case, the same set of restakers participates in 10 other AVSs, each of which has $2B locked. Thus the total profit from corrupting this group of restakers is $20B, thus making the system cryptoeconomically insecure.
To avoid such a scenario, the EigenLayer team has stated that they have taken the following measures: 1) constructing a mechanism to anticipate the likelihood of collusion among operators and 2) allowing AVS to add parameters related to hacking prevention. However, the particular countermeasures will be closely monitored after the service is launched.
3.5.2. Unintended Slashing
One risk is the case in which an AVS is created with an unintentional slashing vulnerability, such as a programming bug, which causes a loss of funds to honest users. The EigenLayer team proposes two measures to prevent such situations: Establish a multisig veto committee comprised of prominent members of the Ethereum and EigenLayer community, which has the ability to veto slashing decisions via a multisig.
3.5.3. Malicious Attacks
As EigenLayer's TVL increases, the risk of hacking attempts also rises significantly. The potential danger is that, unlike typical applications or bridges, hacking an EigenLayer smart contract can result in the loss of the capital that supports Ethereum's security. The larger the EigenLayer TVL and the greater the number of protocols utilizing restaking, the more significant the consequences of a security breach.
4. Flagship Service EigenDA to Launch in 2023
The EigenLayer team recently announced the upcoming launch of its flagship service, EigenDA, which is set to release this year in tandem with the EigenLayer service.
EigenDA will serve as the mainnet counterpart to the Data Availability (DA) layer in the modular blockchain structure, with a focus on securely and accurately storing transaction data. The DA layer's core function is to record transaction data completely and accurately while ensuring accessibility, verifiability, and usability without data availability issues.
EigenLayer aims to address Ethereum's fragmented security and capital inefficiencies by introducing restaking.
Unlike typical AVS or DApps, EigenLayer utilizes ETH staked directly on the beacon chain. However, the security risks of EigenLayer are a concern, as operator collusion, accidental slashing, and hacking can weaken the security of Ethereum.
Therefore, if the security issues are well-addressed, EigenLayer could become a core infrastructure that elevates Ethereum to the next level.