After Ethereum 2.0, the consensus mechanism is directly changed from POW to POS, that is, the proof of work is changed to proof of equity, that is, the Ethereum ecosystem no longer needs physical mining machines to provide security, but directly guarantees security through ETH asset pledge. In order to maintain stable security, high capital costs must be paid. For example, if the Ethereum beacon chain wants to maintain the current pledge volume, it must provide 3.9% APY to pledge users. What EigenLayer has to do is to re-stake funds, so that users can not only pledge ETH PoS, but also repeatedly pledge funds to middleware, oracles, application chains, etc., thereby improving capital efficiency and ensuring the security of the Ethereum network and various protocols.
1. Project Overview
Eigenlayer is a re-staking protocol built on Ethereum. Ethereum nodes can use EigenLayer to re-stake the pledged ETH to obtain additional income. Externally, it allows users to stake ETH, LSDETH and LP Token on other public chains, oracles, middleware, etc. as nodes and receive verification rewards. Third-party projects can also borrow the security of the ETH mainnet, and the security of the ETH consensus layer is released.
Although Rollup is an important direction for Ethereum's performance expansion, and this expansion method is also based on people's trust in L2, if transactions are not executed using EVM, they will eventually have to return to Ethereum for settlement.
In other words, Ethereum only provides trust at the block generation level, and any module that is not deployed or certified on EVM cannot take advantage of the security of Ethereum's trusted underlying layer. The only way is to build your own independent AVS active verification node system (full name Actively Validated Services, which means having its own distributed verification node) to be responsible for the security of your own system.
For example, middlewares such as side chains, data availability layers (DA), new virtual machines, oracles and trusted execution environments based on the new consensus protocol cannot use the trust mechanism of Ethereum to create a wider range of decentralized service, so you can use the AVS active verification node system to build your own trust network.
However, AVS has encountered several problems. First, developers need to introduce a new trust network to obtain security; second, users need to pay AVS fees outside of Ethereum; third, for most AVSs operating today, the capital cost of staking far exceeds any operating costs. For example, a data availability layer with $10 billion staked, assuming that the staker's expected annual percentage return (APR) is 5%, AVS needs to repay at least $500 million to the staker every year to offset the capital cost of the stake.
Finally, dApps in AVS are all low-trust models. In other words, even if Ethereum provides strong security, it is meaningless because dApps will rely on both Ethereum and middleware, and middleware is actually a link with a lower attack cost.
Therefore, EigenLayer introduces two new concepts, which help extend the security of Ethereum to any system through "re-staking" and "free market governance" and eliminate the inefficiency of the existing rigid governance structure.
Re-staking: EigenLayer provides a new security mechanism that allows modules to be protected by users re-staking ETH. According to the white paper, EigenLayer also plans to re-stake ETH extracted from the beacon chain after the Shapella upgrade. "Ethereum validators can set their beacon chain withdrawal credentials to the EigenLayer smart contract and choose to join new modules built on EigenLayer."
Free Market: EigenLayer provides an open market mechanism that allows validators to freely choose which modules to participate in based on their risk preferences, but the premise for validators to make profits is to ensure security. This governance model has two advantages. The first is that it integrates fast and efficient elements into the robust underlying blockchain. The second is that the selectable validator model allows new modules to compete for other resources among validators, thereby better balancing security and performance.
By combining the above practices, AVS on EigenLayer can rent the security services of Ethereum validators to solve the various problems in the AVS system emphasized above. First, AVS can enhance economic security through Ethereum validators; second, the cost of destruction is increased in EigenLayer's security model (US$13 billion); third, ETH stakers can obtain income from AVS.
#Competitive Advantage
Next, if we look at the features and advantages, we can divide them into those for ETH holders and those for application protocols. First, for ETH holders, EigenLayer can bring more benefits to users through re-staking. In addition to obtaining staking income on the Ethereum mainnet, they can also obtain additional income on the secondary staking protocol.
For application protocols, Eigenlayer brings more governance security to the protocol. In blockchains that adopt the PoS protocol, staking is the core mechanism. The more assets are staked, the less likely the protocol is to be attacked in governance, because the cost of attack becomes higher. Finally, it brings economic benefits to the protocol. EigenLayer provides blockchain node verification services for the protocol through re-staking. By directly using the staking verification platform provided by EigenLayer, the protocol no longer needs to establish its own verification platform and pool, and can focus more on developing the core functions of the protocol and improving the user experience.
＃Various application scenarios
EigenLayer supports many types of protocols by providing AVS services, including: data availability layer, decentralized sequencer, light node bridge connecting Ethereum, faster bridge between Rollups, oracles, event-driven activation functions, MEV management, low-latency side chains, helping Ethereum achieve single slot finality, etc.
Utilize the heterogeneity of stakers to significantly expand the block space
In addition, Ethereum nodes are heterogeneous in computing power, risk-return preferences, and features, so the "heterogeneity of stakers" can be used to significantly expand the block space. Simply put, in order to decentralize, blockchains will set block limits based on the performance of the weakest node, and nodes with stronger performance can provide excess resources to other protocols through EigenLayer. Therefore, nodes with higher risk preferences can choose to provide verification for protocols with greater risks, poorer return liquidity, but higher returns.
In other words, by combining verifiable credentials, SBT and other technologies, different protocols can select more suitable nodes to provide verification based on node characteristics.
Advancing the decentralization of Ethereum stakers
EigenLayer provides AVS with a market that monetizes decentralization. AVS can specify that only Ethereum personal nodes (home validators) can participate in tasks, which can help AVS maintain decentralization. At the same time, personal nodes can obtain additional income, incentivizing more users to run Ethereum personal nodes and improve the decentralization of the main network.
Support for multi-token node groups
EigenLayer allows the protocol's AVS to specify its own node group (quorums) to run together with the node group that re-stakes ETH. For example, protocol A can choose to use two node groups, one node group needs to re-stake ETH, and the other node group needs to stake the protocol token $A. When both node groups agree that a certain matter is valid, protocol A finally agrees that the matter is effective. Such a mechanism can help the protocol token $A gain practicality and accumulate value for the protocol.
＃EigenLayer supports multiple staking modes
It provides a variety of staking methods similar to Lido's Liquid Staking and Superfluid Staking, among which Superfluid Staking allows LP pairs to be pledged.
Direct staking: Stake the ETH staked on Ethereum directly on EigenLayer, which is equivalent to L1→EigenLayer revenue staking.
LSD re-staking: Assets that have been staked on Lido or Rocket Pool are staked on EigenLayer again, which is equivalent to DeFi →EigenLayer income staking.
LSD LP staking: For example, Curve's stETH-ETH LP Token is staked on EigenLayer again, which is equivalent to L1 → DeFi → Ethereum Execution Layer (EL) income staking.
ETH LP Staking: Stake the LP Tokens staked in the DeFi protocol again on EigenLayer, which is equivalent to DeFi→Ethereum Execution Layer (EL) income staking.
2. Business model (target user groups, main sources of income)
The business models that can be adopted by the protocol using EigenLayer include:
Pure wallet mode: In this mode, the protocol deploys AVS as a commercial service on top of EigenLayer. Users who use AVS need to pay fees, part of which goes into the protocol wallet to pay for their services, and the rest goes to EigenLayer and ETH re-stakers in EigenLayer. This enables a purely company-based business model and allows AVS to build a SaaS economy on the chain.
Tokenized fee model: In this model, the protocol deploys AVS on top of EigenLayer to run as a protocol (not as a commercial service). Users who use AVS need to pay fees, part of which is used for the node group of AVS token holders (the native token of AVS) specified by the protocol, and the rest of the fees are used for EigenLayer and ETH re-stakers in the EigenLayer protocol.
Payment model using AVS's native token: In this model, AVS operates as a protocol, and users need to pay fees in a specific token issued by AVS. The value of this token depends on the expectation of continued profitable operation of AVS in the future. Part of the fee goes to the node group of token holders specified by the protocol, and the rest of the fee is used for EigenLayer and ETH re-stakers in the EigenLayer protocol.
Dual staking model: In this model, the protocol specifies two node groups for protocol tokens and ETH to run together. The first node group consists of ETH re-stakers and the second node group consists of AVS stakers. In the dual node group model, security is the better of the two node groups, activity is the worst of the two node groups, and anyone with ETH or AVS can provide security for AVS through EigenLayer by re-staking ETH or staking AVS in their respective node groups.
#EigenLayer internal risk management mechanism
First, EigenLayer has established a committee governance composed of well-known figures in the Ethereum and EigenLayer communities. This committee will be responsible for upgrading the EigenLayer contract, reviewing and vetoing slashing events, and allowing new AVS to enter the slashing review process.
AVS can use this committee to assure re-stakers in EigenLayer that they will not be maliciously or mistakenly slashed. At the same time, AVS developers can conduct real-world testing of the AVS-related codebase, and once it matures and gains the trust of re-stakers, AVS can stop using the committee as a backup. In addition, AVS may also require the committee to conduct security audits and other investigations when it is created on EigenLayer, including checking the system requirements for validators to serve AVS.
The design of the slashing mechanism mentioned above is EigenLayer’s design to increase the cost of destruction (when the cost of destruction is greater than the possible benefit of destruction, the system can obtain strong security) and make the encrypted network more secure.
There are a few points to note in the penalty mechanism:
Unlike other crypto projects, EigenLayer does not use homogenous warrants. Because each user can choose different ways of delegation and staking, the risk of fines is also different. Homogenous tokens may cause conflicts between position owners and node operators, so they choose not to use them.
EigenLayer's re-staking concept is similar to the merged mining concept of Bitcoin, Namecoin, etc., but there are also differences. When validators are validating on multiple chains at the same time, in the event of an attack, EigenLayer can protect economic security by punishing malicious validators on the main chain. For PoW public chains, there is no significant cryptoeconomic security even if all miners on the main chain choose to merge-mine the chain. The main reason is that there is no option to take slashing - the inability to slash will cause the malicious miner's mining hardware to fail or be removed, but the miner's hardware will still have value.
Finally, EigenLayer aims to maximize security while minimizing centralized management risks:
When all ETH re-mortgaged using EigenLayer is used to protect an AVS, the AVS can achieve maximum security. However, two problems arise: "whether the expected income of AVS to operators can be higher than the operating costs" and "whether operators have enough computing resources to participate in the verification of AVS". In response to this, EigenLayer proposes two possible module design patterns to solve this problem.
First, Hyperscale AVS: In Hyperscale AVS, the total computing workload is distributed to all N participating operators, so that storage costs and node throughput requirements are reduced, and the system itself can achieve high throughput by aggregating the performance of multiple nodes.
Second, Lightweight AVS: Some tasks are very low cost and require low computing infrastructure, and tasks can be performed redundantly by operators, such as verifying zk-proofs.
(III) Operation Status
According to the latest announcement of EigenLayer 4/7, the first phase of the testnet has been launched. The testnet is built on the Ethereum Goerli network and currently only supports liquidity re-staking and native re-staking.
EigenLayer will be divided into three stages:
Phase 1: Stakers – Stakers will join EigenLayer for re-staking.
Phase 2: Operators – Open node operators join and accept delegations from re-stakers.
Phase 3: Services – The first verified services on EigenLayer will be enabled.
Currently, the first phase testnet has opened two re-staking methods for staking users, namely LSD re-staking (users who stake through LSD protocols such as Lido and Rocket Pool choose this method) and Native re-staking (users who do not stake ETH through the LSD protocol choose this method).
Finally, as of 4/30, the total number of EigenLayer addresses is 120,799 (above). The official website also mentioned that the TVL of the liquid staking token Rocket Pool ETH (rETH) in the Rocket Pool protocol is 50,939.46. Since Q1 2023, rETH has 2224 node operators running an average of 6 validators each. Therefore, it is necessary to re-mortgage rETH, users can deposit tokens into the EigenLayer contract.
Lido Staked Ether TVL is 135,791.13. As of Q1 2023, stETH has 30 node operators, each running an average of 5885 validators. Therefore, to re-mortgage stETH, users can deposit tokens into the EigenLayer contract.
However, the EigenLayer team currently emphasizes that the current testnet is in its early stages and is a non-incentive mechanism, so participants will not receive any rewards, but many people still do not want to miss the opportunity to get an airdrop.
(IV) Team and investment institutions
EigenLabs, the team behind EigenLayer, completed a $14.5 million seed round of financing led by Polychain Capital and Ethereal Ventures last year. At the end of March this year, EigenLayer completed a $50 million Series A financing led by Blockchain Capital, with participation from Coinbase Ventures, Polychain Capital, Hack VC, Electric Capital, IOSG Ventures and others.
Founder Sreeram Kannan, who has served as an associate professor of artificial intelligence and blockchain applications at the University of Washington for more than eight years, said that EigenLabs' mission is to build protocols and infrastructure that promote open innovation. Sreeram Kannan's research focus at the university is on the theory of distributed computing related to blockchain systems. He is also the head of the University of Washington Blockchain Laboratory (UW-Blockchain-Lab) and has published more than 20 blockchain-related papers.
Other team members include Soubhik Deb, a doctoral student at the University of Washington and a researcher at the University of Washington Blockchain Lab, Robert Raynor, a doctoral student in the Department of Electrical and Computer Engineering at the University of Washington, Bowen Xue, a master of electrical engineering at the University of Washington and an assistant laboratory technician, Jeffrey Commons, a smart contract architect at the University of Washington, Gautham Anant, a computer professional developer at the University of Washington, and Vyas Krishnan, a full-stack software developer at the University of Illinois.
#EigenLayer Development Roadmap
In April 2022, EigenLayer started internal testnet testing, participated in the Ethereum DevConnect Developer Conference Roadshow and ZK Summit Roadshow in May of the following year, and registered a Twitter account in July. In February 2023, the project white paper was released, and in April this year, the first phase of the testnet was released.
(V) Possible problems and risks
#Internal Risk
There are two types of risks in EigenLayer. First, many operators may collude to attack a group of AVS at the same time. Second, AVS may have unexpected slashing vulnerabilities, such as honest nodes may be slashed.
First, for the first type of risk, since in reality only a portion of operators will choose to join a given AVS, some of them may collude to steal funds from one group of AVS, leading to complex attacks. There are several solutions to this. First, limit the benefits of destroying any particular AVS. For example, the oracle can limit the total value of transactions in the cycle; second, EigenLayer can actively increase the cost of destroying AVS, that is, EigenLayer can create an open source dashboard, and the AVS built on EigenLayer can use it to monitor whether any group of operators participating in its verification tasks are also re-staking in other AVS. Then AVS can formulate specifications in its contract to only incentivize EigenLayer operators who participate in a small number of AVS.
External risks or potential future risks
Centralization risk: If EigenLayer develops into a major re-staking platform in the future, it may cause the same concerns as everyone currently has about Lido, because the ETH staked on Lido already accounts for 32% of the ETH in the Ethereum beacon chain, which has caused everyone to worry about excessive centralization.
Other security risks of vulnerabilities: Secondary pledge increases the risk of exposure of pledged assets. In addition to the risk of primary pledge, it is also affected by the security of the asset re-pledge protocol. These protocols include data availability layer, middleware, side chains, oracles, various bridges, etc. If these protocols have security vulnerabilities, it will lead to losses for secondary pledgers.
Risk of excessive dependence: If the protocol adopts EigenLayer's staking platform, the independence and security of the protocol itself will be affected by EigenLayer, and the protocol will be highly dependent on EigenLayer.
Risk of weakening the value of native tokens: The staking validators provided by EigenLayer may reduce the value of the protocol's own tokens, because part of the value of the token comes from the role it can play in the staking network. When ETH staking is introduced, this role of the native token may be weakened.