What Is EigenLayer?
EigenLayer is a buzzword. Why has it happened? The key point that stands behind the project’s evolving popularity is that this middleware provides other protocols to leverage Ethereum's highly secure trust network and start their projects with reduced cost. This happens thanks to eliminating the validator set with the reward system part, and by doing this, save startup budget for other initiatives.
EigenLayer caught the market’s attention with their Series A $50 million raise, led by Blockchain Capital. They managed to attract prominent investors such as Polychain Capital, Electric Capital, Coinbase Ventures and Ethereal Ventures.
Source: Cryptorank
EigenLayer is creating a restaking marketplace where protocols have a chance to buy pooled security from validators and validators can sell pooled security to protocols.
Source: EigenLayer Docs
By using EigenLayer, investors get more profits from increased capital efficiency, as they have an option to restake their ETH and receive more staking rewards.
Ethereum Restaking Concept
Let’s dive into restacking to find out what it is about. So, restacking makes it possible for investors to stake the same ETH on both Ethereum and on other protocols at the same time. By doing this, stakes secure all of the networks they’re using simultaneously and leverage existing trust networks.
Although there is a nuance here, when investors restake their ETH, they are exposed to increased slashing risk. But everything is getting even more interesting, as this weakness brings stakers compensation with higher staking rewards for undertaking more risk.
Restaking Process
There are various restaking ways that EigenLayer’s offering:
- Native Restaking: Investors restake their staked ETH;
- LSD Restaking: Investors restake assets that are already staked via liquid staking providers: e.g. Lido, Rocket Pool, etc.;
- LSD LP Restaking: Investors restake the LP token of a pair which includes a liquid staking ETH token;
- ETH LP Restaking: Investors restake the LP token of a pair which includes ETH.
Restaked Points Explained
Restaked points reflect investor’s contribution to the shared security of the EigenLayer ecosystem. They are also a measure of an investor’s staking participation equal to the time-integrated amount staked.
In the following formula, i represents the index of a staker, and j represents the token’s index. The staker’s participation measure for a token j is counted by the formula:
where Sij (t) shows the amount of token j held by a staker i at time t, measured in nominal units of ETH. For the purposes of the nominal participation initiative, EigenLayer treats all tokens, such as Native Restaked ETH and Liquid Staked ETH (LSTs) in the same way and calculates the total participation initiative in units of ETH ⋅ hours.
E.g. a user who stakes 1 stETH for 10 days should get 240 restaking points over this time period (1 ETH).
To get the total participation initiative for a staker i, EigenLayer sums the initiative for each token that a staker hold:
Finally, the restaked ratio is the ratio of a given staker i's participation initiative to the aggregated participation initiatives of all stakers:
Restaking: Opportunities
1. Economic security. Creating economic security for a new blockchain or protocol is always a challenge. EigenLayer provides the ability for developers to maintain economic security at a fraction of the cost.
2. Flexibility. Protocols can focus on selecting applications while still being in full control of their work under consensus and slashing* mechanisms.
3. Increased capital efficiency. Restaking allows stakers to receive rewards from validations that support multiple services without raising additional capital, increasing the efficiency of their capital and rewards for validation services.
Problems EigenLayer Solve
EigenLayer’s is not only profitable but its innovative architecture handles various problems that the DeFi space is suffering from these days.
1. Eliminating Bottlenecks to Developers
Protocols that are built on top of the Ethereum network are required to have their own validators set, which should be quite large to achieve decentralization. This turns into a bottleneck to developers with two main issues:
- investing large sums to reward the validators to secure the network;
- the time taken from developers to manage the validator could be used in a better way. For example, for further protocol development.
This explains why some protocols have to offer an unrealistically high annual percentage rate (APR) to attract stakers to secure their network. This APR is issued in the form of token emissions, which draws down on the network’s treasury.
2. Lack of Independence
That’s not easy for protocols to build on Ethereum, as it has a fundamental set of rules limiting those protocols in innovations they can achieve. This lack of independence has been a key factor which redirects developers to build on other chains such as Cosmos which provides them a higher level of adaptativity and tailoring.
3. Lack of Trust in Other Protocols
A protocol is often dependent on various other protocols for certain functions, with an example being oracles. However, given that these protocols might be built on chains other than Ethereum, it translates to a lower level of security. Hence, this poses a security risk to users because the protocol’s security is only as good as the security of the weakest component, as depicted by the figure below.
Any Other ReStaking Platforms?
Apart from EigenLayer, there is another opportunity to flow into the restaking narrative — Ether.Fi. The platform is launching their own LRT eTH. Investors could stake their ETH on the Ether.fi and it will be automatically restaked within EigenLayer.
The key benefits of Ether.Fi are:
- stakers control their tokens by themselves, instead of trusting node operators;
- it’s a native restaked ETH so they have no cap on EigenLayer;
- eETH is integrated with leading DeFi protocols like Balancer, Curve, Gravita, and Maverick;
- eETH is available to mint now.
The project has raised about $5.3M from such prominent investors as Chapter One and North Island Ventures.
Source: Cryptorank
The significant part of LRT is that it brings something new to DeFi and strengthens ETH staking by providing an opportunity to earn passive income.
Final Thoughts
EigenLayer is one of the brightest protocols that have been built recently. Its architecture is flexible enough to benefit several parties, including developers building protocols who now have access to innovation possibilities and investors who can use their assets to earn more rewards.
Besides, the blockchain landscape is becoming significantly robust providing the improved security and innovation that can be brought to the market. This is another opportunity to attract more users to come and take part in the DeFi narrative.
*Slashing is a punishment for dishonest work during network validation.
📖 Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.