When you stake a proof-of-stake crypto like ETH, you earn a yield for securing the blockchain. But what if you could use your staked ETH to secure other chains besides Ethereum and earn an even higher yield? This is the idea behind restaking, a new crypto primitive that's been pioneered by Eigen Layer. Over 10 billion dollars of ETH has so far been restaked and this has everyone wondering about the potential of the Eigen token.
That's why today we're going to tell you what Eigen Layer is, explain how it works, and see whether its Eigen token could become one of the largest cryptocurrencies in Ethereum's ecosystem.
Table of Contents
Eigenlayer Explained
With that said, Eigen Layer was founded by University of Washington professor Sriram Kannan in mid-2021. Sriram revealed in a 2022 interview that he got into crypto in January 2018.
This was basically because he was fascinated by peer-to-peer technologies and Sriram did his PhD on p2p wireless networks by the way. After getting into crypto, Sriram noticed that it was easy to build decentralized applications on Ethereum, but it was quite hard to build decentralized infrastructure there. And obviously, Sriram created Eigen Layer to make building decentralized infra on Ethereum as easy as building dApps.
And of course, this attracted the attention of some very big investors. Eigen Layer raised over 64 million dollars in 2022 and 2023 before launching its initial main net in mid-2023. CryptoVC, a16z, invested another 100 million dollars in Eigen Layer earlier this year.
The final mainnet went live in April. The Eigen token only launched earlier this month, but we'll come back to that a bit later. Now Eigen Layer was built by an American software company called Eigen Labs and its ongoing development is coordinated by the Eigen Foundation, which is a non-profit which is based in the Cayman Islands.
It's also important to note that Eigen Layer appears to have close connections to the Ethereum Foundation. Back in May, Ethereum Foundation researcher Justin Drake disclosed that he had been allocated Eigen tokens which would be worth quote millions of dollars. And this was in exchange for advising Eigen Layer.
Dankrit Feist, another Ethereum Foundation researcher, subsequently disclosed the same advisory role. Sriram was asked about this potential conflict of interest in an interview and he revealed that Eigen Layer had been working with the Ethereum Foundation for actually quite a long time. In fact, Sriram specified that they had been working with the Ethereum Foundation researchers since quote day zero.
What's interesting here though is that Justin and Dankrit had asked permission from the Ethereum Foundation before formally becoming advisors to Eigen Layer. According to Sriram, the Ethereum Foundation gave them the green light so long as they didn't claim that the foundation was involved in any way. This is interesting because the Ethereum Foundation has quite a history of being directly and indirectly involved in the development of Ethereum's infrastructure, such as its node clients for example.
Now the Ethereum Foundation's apparent involvement with Eigen Layer makes perfect sense when you realize that this novel protocol has the potential to fundamentally reshape the incentives around Ethereum and ETH staking.
This is literally why Ethereum Foundation researchers have been so involved. In a November 2023 presentation, Justin warned that Eigen Layer's restaking mechanism could be a threat to Ethereum's decentralization and even a threat to Ethereum itself. He explained that this is because restaking is analogous to maximal extractable value, whose incentives took years to address.
Oh and FYI MEV is essentially where validators rearrange transactions in a way that benefits them the most. As scary as this is, it simultaneously underscores the importance of Eigen Layer as a crypto project and highlights just how much potential Eigen could have. But again we'll come back to that later.
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How Does Eigenlayer Work
Now this ties into how Eigen Layer works. It consists of four components. Restaking, operators, delegation, and actively validated services or AVSs. As mentioned in the introduction, restaking involves using ETH that's already been staked to secure additional chains or rather services to earn more yield. Notably, Eigen Layer allows staked ETH to be used in its protocol.
So if you don't have the minimum 32 ETH required to self-stake, you can still restake using liquid staked ETH from DeFi protocols like Lido Finance which don't have a minimum ETH stake to stake. According to DeFi Llama, around a quarter of all the restaked ETH in the Eigen Layer is liquid staked ETH. As for the operators, they're tasked with running the AVSs.
In practical terms, this means finding restakers who are willing to commit their stake to secure the AVS software being run by the operator. The restaker and the operator must agree to cooperate before an AVS can be secured by restaked ETH and this agreement process is referred to as delegation and Eigen Layer's documentation specifies that a restaker or rather a delegator can also be an operator.
According to the recently updated Eigen Layer Explorer, there are over 1700 operators and over 155,000 restakers supporting 19 AVSs, only one of which is currently offering additional yield and this leaves the AVSs themselves which are effectively infrastructure services for Ethereum.
Per the Eigen Layer website, AVSs include quote data availability, decentralized sequences, bridges, oracles, event-driven activation, MEV management, low latency settlement, single slot finality etc etc. The largest AVS is Eigen DA, Eigen Layer's data availability layer. Eigen DA launched as part of Eigen Layer's final mainnet launch and its initial purpose was to provide the data infrastructure required for Eigen Layer itself to function.
Eigen DA is also used for other things like supporting Ethereum Layer 2s for example. Without getting too technical, Layer 2s need data from Ethereum to process transactions. Fetching this data is expensive due to Ethereum's high gas fees, although less so after the Denkun upgrade.
Fetching Ethereum data from data availability protocols like Eigen DA instead is cheaper and faster. And I'll note that yes, at a technical level, Ethereum Layer 2s that use data availability layers instead of Ethereum are technically validians, so no need for the wisecrack comments. Now this would explain why Eigen DA is the only AVS offering an additional yield of one percent on the restaked ETH.
Logically this means that any ETH being restaked with operators that support the Eigen DA AVS will earn an additional one percent on ETH's staking yield. And given that this is currently around 3.3 percent, it will bring in around 4.3 percent. The caveat here though is that the yield for restaking with AVSs can be increased with token incentives.
For example, Eigen Layer could airdrop Eigen tokens to restakers, which of course increases their annual yields for the restaking. The Eigen Layer app suggests that these Eigen token rewards are active, but it's unclear exactly what they are. Anyways, by this point you're probably asking why Ethereum experts are so concerned about Eigen Layer.
The short answer is slashing risk at the blockchain level. You see, the AVS software being run by operators comes with requirements that must be met to ensure that the AVS itself works properly. And if this sounds familiar, that's because it's the same incentive found on most proof-of-stake blockchains.
Namely, validators need to be up and running 24/7, have no technical issues, and be honest to properly secure the blockchain. If they go offline and experience a technical issue or act maliciously, their stake is slashed. Similarly, AVSs can incentivize operators to run the AVS software properly by including slashing.
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The catch is that the stake doesn't come from the operator unless the operator is also restaker, but the stake comes from the restaker, which is why delegation involves consent from both parties. When you remember that the stake being delegated is also being used to secure Ethereum itself, you start to understand why this could be a serious problem. For instance, there could be billions of dollars of restaked ETH that get slashed on one of Eigen Layer's AVSs, which slashes staked ETH on Ethereum itself.
Now this could theoretically make the Ethereum blockchain vulnerable to attack. In practice, this doesn't seem to be a risk yet, as it doesn't look like any of Eigen Layer's AVSs have implemented slashing. Sriram mentioned in that August interview that slashing on Eigen Layer won't come until Q4 of this year.
And Eigen Layer's last update about its slashing mechanism was posted in September, and you can check out this by clicking Here.
EIGEN Tokenomics And Price
Now this relates to Eigen Layer's tokenomics. Now Eigen is an ERC-20 token on Ethereum, and you'll recall that it only launched earlier this month.
Aside from better market conditions, Eigen's late launch was presumably because launching the token after the Eigen Layer is complete reduces regulatory scrutiny. Anyhow, the documentation describes Eigen as a quote universal intersubjective work token, which can be simply understood as meaning that it's used for staking and governance.
The first blog post about the Eigen token from the foundation specifies that Eigen can be staked to secure certain AVSs, like Eigen DA, and also to govern the AVSs themselves.
This governance is more significant than you might think. To recap, slashing restaked ETH on Eigen Layer could result in slashing staked ETH on Ethereum, which could threaten its security. I suppose that this happens, but the slashing on Eigen Layer happened because of some critical error.
It stands to reason that you'd want some sort of a way of stopping this slash from happening. And one way to do this would be to fork Ethereum itself so that the staked ETH back into the restaked ETH doesn't get slashed. But this would require an unprecedented amount of coordination.
And if this sounds familiar, well that's because Ethereum experienced something similar with the DAO hack back in the day.
Now the other way to stop the slash on Eigen Layer would be, well, to stop the slash on Eigen Layer itself. The Eigen token's purpose is to make this possible. In other words, the Eigen token's purpose is to ensure that any critical errors on Eigen Layer don't affect Ethereum, which is again very significant.
What's crazy is that this would still involve a fork, but it would be a fork of the Eigen Layer protocol voted on by Eigen holders instead of a fork of Ethereum itself agreed to by all its stakeholders. If someone tries to fork Eigen Layer and the community votes against the fork, all their Eigen tokens are burned. And I'll note that none of what I've mentioned is actually live yet.
Like Eigen Layer slashing, Eigen staking and governance aren't live at the time of writing and will likely come after the slashing. And this should make you understand why the Ethereum Foundation and its researchers have been so involved. In any case, details around Eigen's distribution were first revealed in April and you probably heard that Eigen Layer changed the distribution in May to appease the community after it got lots of backlash.
In the end, Eigen Layer's initial supply of 1.68 billion was allocated as follows. 45% to the community, with 15% going to airdrops of early restakers, 15% for future initiatives, and 15% for ecosystem development. Then we have 29.5% going to investors and 25.5% to early contributors.
Eigen has an initial inflation rate of 4% per year, which can be adjusted via community governance. Regarding vesting, it seems that the supply allocated to early restakers was immediately unlocked. The tokens allocated to the contributors, investors, and the ecosystem fund are locked for one year and will then be unlocked monthly until October 2027.
The remainder is subject to community governance. The fact that the entirety of Eigen's initial supply was airdropped to restakers would explain why its price action has been quite poor out of the gates. Suboptimal market conditions haven't helped either.
At a current market cap of just 700 million, it just barely cracks into the top 100 by market cap. On the one hand, this is a bit surprising because Eigen Layer's TVL is more than 10 times larger than Eigen's market cap. And for context, many believe that the market cap to TVL ratio tells you whether a DeFi protocol is undervalued.
In Eigen's case, this ratio would suggest that Eigen is more than 10 times undervalued. On the other hand, though, Eigen's small size isn't that surprising because Eigen Layer's value isn't derived from its TVL. It's derived from the adoption of its AVSs that its restaked ETH is securing.
As mentioned earlier, the Eigen DA seems to be the only AVS with lots of adoption and that's because it's used by Eigen Layer. In other words, Eigen Layer's value is currently derived mostly from Eigen DA, whose usage is in turn derived from Eigen Layer, where most users are only there to get whatever incentives it's offering. On that note, it's just easy to forget that Eigen Layer is just another layer in the staking tech stack.
And some of you may have heard about liquid restaking, wherein you can make your restaked ETH freely tradable to use in DeFi protocols. It's like liquid staking, but riskier. Chances are that lots of Eigen Layer's TVL are coming from people restaking ETH to get incentives offered by liquid restaking protocols.
Whatever the case, it's clear that the token currently doesn't have any strong demand drivers besides speculation, which isn't high given that Eigen is extremely complex compared to most cryptos. Try explaining restaking to someone who's not native to crypto and then convince them to ape into Eigen. Actually, don't bother because you won't succeed.
Anyhow, it looks like Eigen Layer's long-term potential ultimately depends on the AVSs that launch on Eigen Layer, as well as the liquid restaking protocols that leverage Eigen Layer. Speaking of which, Eigen Layer actually acquired a liquid restaking protocol in June called Rio, of course foreshadowing a native restaking solution. And this pertains to Eigen Layer's upcoming milestones.
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Eigenlayer Roadmap
To refresh your memory, we've covered a few of them already. The introduction of slashing, staking, governance, and apparently native liquid restaking. They are also planning a series of incentive programs, one of which is currently ongoing.
Although Eigen Layer doesn't have a roadmap, it looks like it's going to keep developing additional AVSs besides Eigen DA. And this is something we've gathered from watching interviews with and presentations by Sriram. And the Eigen Layer website even seems to have a sort of a list of AVSs that could be coming up.
- The first is data availability, which is of course already live.
- The second is decentralized sequences for Layer 2s, which are badly needed.
- The third and fourth relate to optimized bridging, which is also badly needed among Ethereum's Layer 2s.
MEV management and single-slot finality are two others that stand out. And that reminds me, the Eigen DA website notes that it plans to continue scaling its throughput to accommodate any and every use case that requires data availability, and apparently not just on Ethereum. And that's because Eigen DA has data about every blockchain in crypto, which is actually quite impressive.
That being said, Sriram specified in that aforementioned interview that they were only working on Ethereum and had even rejected requests to work on other crypto projects. He also revealed that the yield on restaking to support the Eigen DA is coming from the 10 ETH that Eigen Layer is giving out as rewards each month and not from actual fees. And this reminds me of what Sriram said in that 2022 interview, which was that only a handful of AVSs would be likely to generate most of the yield offered on restaked ETH.
It's safe to assume that Eigen Layer believes that Eigen DA will be one of these few AVSs that generates most of the restaking yield. If that's the case though, then it could increase Ethereum's overall centralization, as Eigen Layer could find itself directly or indirectly supporting most of Ethereum's infrastructure via Eigen DA, if it gets adopted that is. This centralization could be even more acute if Eigen Layer develops other widely adopted AVSs.
Eigenlayer Challenges
And this brings me to the challenges that we foresee for Eigen Layer. The first challenge is adoption. In case you forgot, it doesn't derive its value from the ETH being restaked through its protocol.
It derives its value from the AVSs that leverage this restaked ETH for security, and that's where the adoption is lacking. While it's true that Eigen Layer is a brand new protocol, it's also true that its key selling point is its AVSs, which are only valuable insofar as they are secured by large amounts of restaked ETH. And again, the only reason that ETH is being restaked in Eigen Layer right now is for farming purposes, be it on Eigen Layer or the liquid restaking protocols built on top of it.
Newsflash, but this isn't sustainable. In the absence of organic yield from AVSs, restakers will only be incentivized by artificial yield coming from token rewards. And these are only valuable so long as the crypto market is rallying and investors are aping into the tokens being given out as rewards.
And this ties into its second challenge, and that's competition. Eigen Layer isn't the only restaking protocol out there, but more importantly, it's practically competing with other DeFi protocols for the ETH required to secure its AVSs. If there are higher ETH yields elsewhere, be it on a competitor or a different protocol like Aave, Eigen Layer's TVL will tumble.
The consequence of this is that Eigen Layer's AVSs will be less secure, which will make them less attractive to use as an infrastructure solution. And this will result in even lower yields, of course, causing even more ETH to migrate to other restaking and DeFi protocols. The result would be a slow death spiral that could threaten Ethereum if one of these AVSs becomes integral to its operations.
And this relates to Eigen Layer's third challenge, and that's the problematic incentives it could create within Ethereum's ecosystem. Take a second to consider that the risk Eigen Layer poses to Ethereum doesn't necessarily come from Eigen Layer itself, it comes from everything that's built on top of its protocol. The elephant in the room here is the growing number of liquid restaking protocols, which present an exponentially larger threat to Ethereum than Eigen Layer.
Imagine that hundreds of millions of dollars of liquid restaked ETH is liquidated in a DeFi borrowing protocol where it's being used as collateral. One of the many side effects of this could be hundreds of millions of dollars of restaked ETH being removed from the AVSs, which could leave it vulnerable to attack. If that AVS did get attacked and it provides some critical function to Ethereum's ecosystem, the dominoes, they could keep on falling.
But as Sriram stressed in that August interview, the restaking genie is out of the bottle and it can't be put back in. Now that this primitive has been introduced, it's going to keep growing on Ethereum, whether we like it or not. Again, this is exactly why Ethereum Foundation researchers have been so involved.
It seems that nobody is bothering to ask, what if restaking works as intended? What if Eigen Layer secures the next generation of infrastructure? One could argue that the possibility of success is even more terrifying than the possibility of failure, and that's just because it would have profound implications for not just crypto, but the world in general. It would mark a paradigm shift in the way that all kinds of infrastructure are developed and governed.
Not only that, but it would result in millions of crypto investors regretting that they didn't take the time to understand how Eigen Layer worked, and that they ignored the Eigen token when it launched. Make no mistake, this could be the next big thing, or it could be yet another unsustainable crypto protocol. Let us know which one you think Eigen Layer is in the comment section down below.
Disclaimer: Nothing in this post is financial advice. It's purely educational content intended to inform you about Eigen Layer. And of course, this post was not sponsored in any way.