I believe everyone has seen a project called EigenLayer recently. What is this project? I believe everyone knows more or less about it. In this article, BiB Exchange will give you a comprehensive interpretation of this upstart project that Ethereum loves and hates - EigenLayer.
EigenLayer is a token economy security leasing market platform, with main services including restake of LSD assets, node operation pledge and AVS services. EigenLayer is an Ethereum-based Restake protocol that provides Ethereum-level security for the entire future Ethereum-based crypto economy. It allows users to re-stake native ETH, LSDETH and LP Token through EigenLayer smart contracts and receive verification rewards, allowing third-party projects to enjoy the security of the ETH mainnet while receiving more rewards, thus achieving a win-win situation.
1. Principle
1.1 Let’s start with virtual machines
Ethereum was conceived in 2013 and launched in 2015, revolutionizing the blockchain landscape by introducing the Ethereum Virtual Machine (EVM). Ethereum pioneered the concept of programmability, enabling distributed applications (DApps) to be built on it without permission. This innovation means that DApp developers do not need to be trusted, because security and liveness are guaranteed by the underlying blockchain, and trust is provided by the blockchain.
This kind of decoupled innovation greatly promotes the development of the anonymous economy because innovators do not need reputation or trust, DApps can be used by anyone they trust, and the underlying blockchain can verify the DApp’s code. The value stream provides trust to the DApp through the blockchain and collects fees in exchange. With development and entering the Layer2 era, its scale has expanded significantly. Rolllup outsources execution to a single node or a small group of nodes, while EVM contracts can absorb the trust of Ethereum through Ethereum-proof computation.
However, traditional verification services obviously lack trust mechanisms. Any module that cannot be deployed or proven on top of the Ethereum Virtual Machine (EVM) cannot absorb the collective trust of Ethereum. These modules involve processing inputs from outside Ethereum, so their processing cannot be verified in the protocol within Ethereum.
Examples of these modules include sidechains based on new consensus protocols, data availability layers, new virtual machines, management networks, oracles, cross-chain bridges, threshold cryptography schemes, and trusted execution environments. These modules require active verification services with their own distributed verification semantics for verification. Typically, these active verification services (AVS) are either secured by their own native tokens or are permissioned in nature.
1.2 AVS
EigenLayer directly connects to the security and liquidity of Ethereum, and AVS plays a vital role here. AVS (Actively Validated Services) generally refers to a service used to verify an individual's identity or specific information. AVS can be applied to multiple fields, such as finance, telecommunications, online services, etc., to ensure that the information provided is accurate, valid, and legal.
Therefore, the essence of Eigenlayer is to entrust the security verification of various middleware, data availability layer, side chain, oracle, sequencer and other projects that have low-cost Ethereum-level security requirements to Ethereum node operators. This process is called Restake. EigenDA is a decentralized data availability (DA) service built on Ethereum using EigenLayer Restake, and will be the first active verification service (AVS) layer.
1.3 Business Logic
The business logic of EigenLayer involves multiple key concepts, including middleware, LSD, AVS, and DA layers. These concepts are intertwined to form the complex and specific business logic of EigenLayer. Through its business logic, especially node operation, AVS service and other functions, EigenLayer effectively exports the security of ETH to the entire Ethereum ecosystem. Through the provision and staking of LSD (Liquid Staking Derivatives) assets, users provide additional security support for the Ethereum network.
According to the diagram, we can simply sort out the business logic:
i. LSD asset provider: Users can obtain additional benefits by restake stETH, rETH, cbETH and other tokens on EigenLayer and provide AVS services to node operators.
ii. Node operator: obtain LSD assets through EigenLayer, provide node services to project parties that need AVS services, and obtain node rewards and handling fees from the project parties.
iii. AVS demanders (project parties): Project parties purchase AVS services through EigenLayer without having to build their own AVS, thus reducing costs.
iv. EigenDA demander (Rollup or application chain): Rollup or application chain can obtain data availability services through EigenDA.
v. The role of EigenLayer: The main role of EigenLayer is to reduce the cost for project parties to independently build a trust network, expand the use scenarios of ETHLSD, improve the capital efficiency and returns of LSD assets, and increase the demand for ETH.
1.4 Relationship of the Participants
At the same time, we can see that the participants needed in this area are as follows: We can see that according to the official white paper, the role of EigenLayer in the block is as shown in the figure:
So the relationships among the main participants are as follows:
LSD asset providers: hope to obtain additional income and are willing to provide LSD assets as collateral to node operators.
Node operator: obtain LSD assets from EigenLayer, provide AVS services for projects, and obtain node rewards and handling fees.
AVS demanders: Project parties need AVS services and can purchase them through EigenLayer without having to build their own AVS.
EigenDA demand side: Rollup or application chain requires data availability services.
2. Concerns from L2 DA
The 11th AMA of the Ethereum Foundation Research Team focused on why EIP-4844 was done and how Ethereum will solve the liquidity fragmentation and composability problems on L2. This is also what V God has always wanted to emphasize.
This is the biggest test facing Ethereum. What if there is no layer2? Choose Ethereum as DA, or something else? But it can be felt that Ethereum is also quite helpless about this. It may face competition from Celestia. Once other L2s do not use Ethereum as DA, Ethereum may "slowly die". Therefore, Ethereum must promote the Cancun upgrade as soon as possible to reduce the cost of Layer2.
Vitalik said: “The key to Rollup is unconditional security: even if you are targeted by everyone, you can still take your assets away. If DA relies on an external system (outside Ethereum), this cannot be done.”
Some people questioned the above statement, thinking that V God was based on the logic of the Ethereum mainnet and did not go beyond the framework. At the same time, similar opinions appeared in the market - Layer2 does not have to publish DA data on Ethereum to avoid "data withholding" by the sorter, and can be placed on other similar Celestia third-party DAs.
We can issue DA at four important levels of ETH’s external system through the following figure.
Therefore, a major function of the Cancun upgrade focuses on EIP-4844. After completion, the Ethereum full node will automatically discard some historical data, so that Layer2 historical data over 18 days will no longer be backed up by the ETH node network. At that time, the anti-censorship of user withdrawals will no longer be as close to Trustless as it is today. Previously, users could use Merkle Proof to prove their Layer2 asset status and realize unnecessary withdrawals on Layer1.
2.1 Data availability
First, let’s take a look at the structure of Celestia’s DA.
Quantum Gravity Bridge is an Ethereum Layer 2 solution that greatly reduces the cost of storing DA on the Ethereum main chain through data availability (DA) verification provided by Celestia. The specific process includes L2 Operator publishing transaction data to the Celestia main chain, Celestia validator signing the Merkle Root of DA Attestation, and sending it to the DA Bridge Contract on the Ethereum main chain for verification and storage. The Celestia chain achieves consistent propagation of Data Blob through P2P network and Tendermint, but the full node has high requirements for high-speed download and upload, and the actual throughput is relatively low. Celestia's Quantum Gravity Bridge uses this method to reduce costs while ensuring data availability.
At this time, EigenLayer, as a platform, is essentially committed to the security of Ethereum (ETH) at its core, and has made important innovations in data availability (DA). By introducing a new data structure in Blob space, the limitations of relying on calldata to store data in the past have been iterated, while improving the Data availability capabilities of the Ethereum mainnet. Pure Rollup refers to a solution that simply puts DA on the chain, that is, a constant 16 gas needs to be paid for each byte, which will account for 80%-95% of the Rollup cost. After the introduction of Danksharding, the cost of DA on the chain will be greatly reduced.
Compared to the full node storage structure of calldata, Blob is designed as temporary storage for some nodes, which can greatly increase the upper limit of data that Layer2 can submit to the main network at a time, and can expand its TPS. At the same time, since it is only temporary storage, data storage efficiency will be improved, and data storage costs will also drop sharply. The improvement in DA capabilities is because 1 month of temporary storage is more than enough to cope with the 7-day fraud proof time window of OP-Rollup.
The number of transactions submitted by Layer2 to the main network at a time will increase significantly, and the fees allocated to individual users will also decrease significantly. Before the Cancun upgrade, no matter how high Layer2 boasted about its TPS, it was mostly a test environment. On the contrary, the poor experience of gas fee consumption that users intuitively felt made everyone feel that Layer2 was not worthy of its name.
2.2 Sorter Centralization Problem
The issue of Sequencer decentralization has always been the focus of market attention. As a result, everyone has found that with the strong OP Rollup in the Layer2 track, the decentralized Sequencer has become a "soft decentralization" of a social consensus of an alliance nature.
Metis, the provider of Layer2 decentralized sequencer solutions, has already ranked third in TVL lock-up in L2. The issue of sequencer decentralization is related to the credibility of Layer2 transactions and the security of Layer2 transactions on the main network. If we leave aside the issue of "foundation", the TPS and gas rates after the Cancun upgrade seem to be "castles in the air". There will always be other breakthroughs to solve the decentralization problem of sequencer.
2.3 Layer2 gradually evolves into a modular system, and its legitimacy will be broken
When the Layer2 market reaches a certain scale, the purely narrow legitimacy of Ethereum Layer2 may break its boundaries. After the Cancun upgrade, third-party DA solutions will invade Layer2, including the third-party DA solution of Celestia mentioned above.
The focus of the OP Stack is to realize the shared Sequencer, and the focus of the ZK Stack is to realize the shared Prover system. Its own DA capabilities, third-party DA capabilities such as Celestia, and the limited DA capabilities of the main network will all fall within the scope of ZK's strategic enclosure.
2.4 Provided by EigenLayer
So Eigenlayer stepped forward at this time. Given that many ecological applications are currently deployed on Layer 2, and their smart contracts need to interact with EigenLayer for data or obtain data availability services. Its integrated Layer2 solutions include Celo, which transitioned from L1 to Ethereum L2, Mantle and its supporting products outside the BitDAO ecosystem, Fluent, which provides the zkWASM execution layer; Offshore, which provides the Move execution layer; and Optimism's OP Stack, which is currently used on the EigenDA test network.
EigenDA is a generalized DA solution, belonging to the same category as Celestia and Polygon Avail. However, EigenDA has some differences in its solution ideas from the other two. EigenLayer has made a unique reconstruction in data availability and created a new data availability model. By introducing the AVS service, project parties can obtain the required services without building AVS themselves. This innovation not only reduces the cost of project parties, but also provides a more efficient and scalable data availability solution for the entire Ethereum ecosystem. EigenLayer's innovation in this field has brought new possibilities for the development of the blockchain ecosystem.
3. Competition and Challenges
3.1 Competition between Polygon and Celestia
Competition comes not only from within, but also from outside. Polygon+Celestia has begun to compete with Ethereum. In the past 18 months, the explosion of Rollup technology has largely enabled advanced users in the DeFi field to experience unprecedented user experience, including faster confirmation speeds and cheaper transactions.
Polygon's customizable development kit (CDK) enables rapid development of modular blockchain capabilities. CDK's modular approach allows developers to select specific components to personalize blockchain use cases, and interoperability between blockchains is achieved through interconnection. The four main parts of Polygon CDK include ZK Provers, Data Availability, Virtual Machine (VM), and Sorter. The combination of these parts provides developers with options, allowing them to flexibly build blockchains based on project requirements.
Celestia and Polygon Labs announced a collaboration to integrate Celestia’s data availability layer with Polygon CDK. This collaboration will further improve the efficiency of Ethereum L2 transactions and reduce transaction fees. DeFi users will experience a better user experience. The integration with Celestia is expected to significantly reduce Ethereum L2 transaction fees, allowing users to trade in a better execution environment with fees potentially below $0.01.
3.2 Cosmos’ ambiguity
The fragmentation of liquidity and composability across Rollups (and more generally across L2, including validation) is a problem. Each Rollup (such as Arb or Optimism) is an execution "silo": isolated pre-confirmations, isolated ordering, isolated state, and isolated settlement. The universal synchronous composability of Ethereum contracts, which is the fundamental driver of network effects, has been lost.
Recently, EigenLayer announced that it will provide services for the application chain of the Cosmos ecosystem. In the future, new network projects will be launched, and they will be able to enjoy the flexible architecture of the Cosmos SDK and the security provided by Ethereum. Many of Cosmos' innovations involve leveraging validator sets to perform supplementary work. However, maintaining a quorum of validators with strong economic security is a well-known challenge. EigenLayer solves this problem by providing an economic equity platform - allowing any stakeholder to contribute to any PoS network. By reducing costs and complexity, EigenLayer effectively paves the way for innovation in the L2 mining Cosmos stack.
Cosmos is primarily based on its modular nature, making interoperability, which is Ethereum's shortcoming, an ecosystem-centric one, through Tendermint consensus and IBC protocol to achieve interoperability between independent blockchains, each of which uses Tendermint to reach consensus and execute transactions. Integration simplifies the blockchain development process and provides a cohesive environment, but may limit the flexibility to meet the needs of different applications.
Through the Tendermint integration diagram in the figure above (if it is not easy to understand, it can be understood as the Byzantine Agreement), an interconnected blockchain network is formed, which runs uniformly under the protection of Cosmos, emphasizing the collaboration and interaction between blockchains. Therefore, the application-specific innovations launched by Cosmos are a perfect complement to EigenLayer's complex staking community and capital base. Therefore, we look forward to deeper cooperation with high creativity, expanding the functionality of Ethereum, and creating an environment for Cosmos builders to apply their talents to the world's largest on-chain programmable staking economy.
Ethereum and Cosmos initially pursued different goals, but their technical developments have gradually converged. Both face common technical challenges such as MEV, liquidity fragmentation, and widespread decentralization. Cosmos continues to develop as a nexus for experimentation, while Ethereum is being validated as a composable settlement layer. Until EigenLayer came along. EigenLayer solves this problem by providing an economic staking platform - allowing any stakeholder to contribute to any PoS network. By reducing cost and complexity, EigenLayer effectively paves the way for expressive innovation in the L2 mining Cosmos stack.
MEV (Maximum Extractable Value) has always been a core issue of concern for Ethereum, with a profound impact on future roadmaps and protocol design. In order to deal with the centralized pressure caused by MEV, Ethereum has adopted the proposer-builder separation (PBS) approach. In Ethereum, PBS is currently implemented through the MEV-Boost off-protocol design, which uses a trusted commit-reveal scheme. Ethereum plans to integrate the fixed PBS (ePBS) design into the base layer to eliminate the reliance on trusted third parties and achieve a more decentralized PBS.
Cosmos also faces the problem of MEV, and in order to solve this problem, it is implementing a more advanced ePBS solution. For example, Osmosis is experimenting with arbitrage profit sharing mechanisms, and Skip is testing Block SDK, a decentralized block builder and proposer commitment design. The separation of various components in the blockchain architecture, such as consensus, data availability, and execution, contrasts with traditional integrated blockchains. Modularity allows each component to be developed, optimized, and extended independently, providing a customizable and efficient framework. Processing large amounts of data The modular architecture enhances scalability and can effectively process large amounts of data, especially for applications with high transaction throughput requirements.
Vitalik Buterin’s Ethereum roadmap as of December 2021
EigenLayer introduces a new wave of innovation by connecting Ethereum and Cosmos. The Cosmos community can leverage Ethereum's decentralized security and liquidity, while Ethereum can learn from innovative experiments in Cosmos. This fusion brings new possibilities to both ecosystems. On a technical level, MEV is an important topic for both Ethereum and Cosmos, and both are exploring solutions. Interoperability is also a key concern, especially with the modular nature of Cosmos. As their designs converge, they begin to learn from each other and adopt some of each other's design elements.
EigenLayer lowers the barrier for Ethereum to leverage Cosmos innovation, specifically by providing an economic staking platform that enables L2 to leverage the validator set for complementary work. This paves the way for more innovation and collaboration between the two ecosystems. EigenLayer merges the technology stacks of Ethereum and Cosmos, creating a symbiotic relationship with endless possibilities. This integration will not only advance the development of Ethereum and Cosmos, but also hopefully create a more creative and resilient ecosystem.
3.4 Competitive products based on the LSDFi platform
Rival and Partner Restake
The project is based on EigenLayer and provides a modular liquidity staking solution. Through innovative methods, users can harvest Ethereum and EigenLayer staking rewards without locking assets or dealing with complex infrastructure. Managed by a decentralized autonomous organization (DAO), it focuses on strategies that generate income.
Facilitate the liquid re-staking of LSTs (such as stETH) within EigenLayer through the newly launched re-staked ether token (rstETH). Holding rstETH can seamlessly obtain staking rewards for Ethereum and EigenLayer, estimated to be between 3%-5% and over 10%.
Its token RSTK (maximum supply 100 million) is used for ecosystem utility and governance. It is directly related to EigenLayer success and revenue, reflecting platform growth. Its fees are fixed at 10%, of which 5% goes to stakers and 5% goes to the platform treasury.
The project focuses on promoting the decentralization and community governance of cryptocurrency transactions. Through its unique Stake & Yield mechanism, Restake provides holders with substantial returns and achieves governance through community voting. The project focuses on security and sustainability, providing users with a reliable trading ecosystem.
Prisma Finance
The project focuses on Ethereum liquidity staking derivatives. Users can use a variety of LSD (wstETH, rETH, cbETH, sfrxETH) for full collateral to mint the stablecoin mkUSD. Multiple LSD collaterals: wstETH, rETH, cbETH and sfrxETH can be used for mkUSD minting. Get LSD returns. Deposit in the stability pool can get a higher APR. Maintain mkUSD debt for additional weekly PRISMA rewards. mkUSD is a relatively stable asset that provides users with additional income.
Its PRISMA (total supply of 300 million); ways to earn PRISMA include depositing into the pool, minting mkUSD, maintaining mkUSD debt, and staking Curve/Convex LP. Locking PRISMA can earn protocol fees and increase voting rights, with a maximum lock-up period of 52 weeks.
Lybra.finance
Lybra is a LSDFi platform focused on stabilizing the cryptocurrency market through Liquid Staking Derivatives (LSD).
The project offers a unique stablecoin, eUSD, which is backed by ETH assets and generates stable interest for holders. With LSD income, users receive stable income in eUSD. At the same time, peUSD, the Omnichain version of eUSD, was launched, increasing the choice of liquidity staking tokens. rETH and WBETH are used as collateral for eUSD and peUSD, increasing flexibility.
LBR (total supply 100 million) is an ERC-20 token based on the Arbitrum and Ethereum networks. Token uses include governance, yield enhancement, and ecosystem incentives. esLBR esLBR is escrowed LBR, with the same value and subject to the total supply of LBR, and cannot be traded. However, it grants voting rights and a share of protocol revenue. esLBR holders actively participate in shaping the direction and development of the Lybra protocol. esLBR holders receive 100% of the protocol's revenue, increasing their potential earnings. Compared to the previous two projects, Lybra stands out because it can work across chains, giving it access to a larger market.
IV. Development and Prospects
Just like when discussing the DA chapter in the previous article, at the demand level, the Cancun upgrade and the opening of the OP Stack have led to the rapid development of small and medium-sized Rollups and application chains, increasing the demand for low-cost AVS. The modular trend has increased the demand for cheap DA layers, and the expansion of EigenDA has increased the demand for EigenLayer. At the supply level, the increase in Ethereum staking rates and the number of staking users have provided sufficient LSD assets and holders, and they are willing to improve the capital efficiency and returns of LSD assets.
4.1 Product Progress
First of all, the product progress. To be honest, the product page of EigenLayer itself is a bit disappointing, and it is not so user-friendly and flexible. From the user's point of view, users cannot obtain any substantial staking income in the short term, and the unclear staking rewards may affect the subsequent increase in the number of users.
EigenLayer has established an open market where validators can choose whether to join each module and decide which modules are worth allocating additional collective security. This provides a free market structure that allows new blockchain modules to take advantage of resource differences between validators. Therefore, the current open market product promotion page has not yet been established, and most of the promotion is done from the perspective of project operations. Of course, if you participate in some activities, you will find that through the integration of Restake functions: users can restake tokens such as stETH, rETH, and cbETH to participate in the EigenLayer ecosystem.
4.2 Business Model
Both LSD asset deposit activities attracted users, and the deposit limit was quickly reached. Users showed interest in potential airdrop rewards. EigenLayer has accumulated about 150,000 staking ETH, and the current TVL can be seen on the official website.
Eigenlayer official website staking status as of January 27, 2024 (5:am, UTC)
EigenLayer mainly collects security service fees from AVS service users, 90% of which goes to LSD depositors and 5% to node operators. EigenLayer's commission rate is 5%.
4.3 Future Development
The value of ETH staked on Ethereum is about $42 billion, and the total on-chain funding is between $300 billion and $400 billion. The scale of projects served by EigenLayer is expected to be between $1 billion and $10 billion in the short term. All projects that require token staking, maintain network consensus with a gaming mechanism, and maintain decentralization are potential users. EigenLayer is highly regarded in the market. With Lido's current 25x PS as an anchor, newer narratives may enjoy a higher premium when they debut, with a value of 20-40x. We can simply calculate that EigenLayer's valuation is conservatively a $1-2 billion project in the future.
EigenLayer has completed three rounds of financing, with a total of more than 64 million US dollars. The latest round of financing, A, was led by Blockchain Capital, with participation from Coinbase Ventures, Polychain Capital, IOSG Ventures, etc., with a valuation of up to 500 million US dollars. It is difficult to accurately estimate the market size, but in an optimistic scenario, it may reach the level of tens of billions of US dollars within 3 years. If the market is expected to grow at a compound annual growth rate of 37%, revenue will exceed 25 billion US dollars by 2030.
V. Risks and Challenges
EigenLayer also faces challenges such as technical complexity and uncertainty in market adoption. Although EigenLayer currently occupies an unchallenged position in the AVS market, potential competition and the additional risks brought by being a middleware layer cannot be ignored.
The problem of collective re-staking security: The current AVS faces the challenge of collective re-staking security. EigenLayer establishes a new mechanism by allowing validators to obtain security using re-staking tokens instead of their own tokens, and validators earn additional income by providing security and verification services.
Open Market Mechanism Problem: EigenLayer introduces an open market mechanism that allows validators to choose whether to join each module and decide which modules are worthy of allocating additional collective security. This selective dynamic governance provides a free market structure for launching new additional features.
Issues with launching new AVSs: Innovators must build a new trust network to ensure security when launching a new AVS, which can be a difficult task.
Value dispersion problem: As each AVS develops its own trust pool, users must pay fees for these pools, which leads to decentralized loss of value.
The burden of capital costs: Validators who secure new AVS must bear the capital costs, which include opportunity costs and price risks. AVS must provide a high enough staking return to cover this cost, which is a challenge for many AVS.
The problem of lowering the trust model of DApps: The current AVS ecosystem has led to a lower trust model for DApps, because applications that rely on specific modules may become targets of attack. However, the security drawbacks brought by the Restaking mechanism may affect the entry of AVS to a certain extent.
Risks of LSD collateral: Project parties using LSD collateral as security collateral need to consider the credit and security risks of the LSD platform itself, which adds a layer of risk.
Although EigenLayer demonstrates the advantages of an innovative re-staking protocol, the above risks need to be considered. At the same time, EigenLayer's centralized governance model may lead to governance deficiencies or negative effects such as complexity of governance and slow decision-making process.
Summarize
The concept of ETH security derived from EigenLayer emphasizes the interconnectivity of the blockchain ecosystem. This interoperability helps build a more powerful and secure blockchain network, laying a solid foundation for future development. It provides security and trust layers and supports multiple modules such as consensus protocols, data availability layers, etc. It has completed three rounds of financing with a valuation of US$500 million. As an innovative protocol, it has great opportunities for future development.
I believe you have learned about the early ways to participate in this project from major news, social platforms, and various KOL recommendations, so I will not go into detail in this article. BiB Exchange believes that EigenLayer is not just an independent platform, but a part of the entire Ethereum network. It is also a unique project that can compete with Celestia and Polygon, and can also chat and laugh with Cosmos. Of course, there are many criticisms and doubts. This article elaborates on the relevant principles in detail, and also hopes that readers will make more active judgments and pay more attention to the re-staking ecosystem.
