About EigenLayer
1. Disclaimer
EigenLayer, which recently launched its mainnet, is undoubtedly one of the most notable projects in the current crypto bull market. In the modular blockchain ecosystem that addresses Ethereum’s scalability issues, EigenLayer is expanding the domain of ‘security,’ opening a new chapter that has not been seen before. By introducing the new concept of ‘restaking,’ EigenLayer has garnered significant attention, with numerous users writing about its airdrop and restaking yields even before the mainnet launch. Currently, around $18 billion worth of Ethereum is being restaked on EigenLayer.
Amid this excitement, EigenLayer has undeniably become a hot topic in the industry, receiving cumulative capital investments worth $165 million from renowned crypto VCs such as a16z, Polychain, and Blockchain Capital. Additionally, well-known players like major mainnets, L2s, bridges, and oracles have announced plans to launch as AVSs (Active Validating Sets) on EigenLayer, raising expectations for the opening of a vast ecosystem.
What kind of project is EigenLayer, currently regarded as the hottest topic in the crypto ecosystem, aiming to create?
2. Introduction for EigenLayer
EigenLayer is a project designed to expand one of Ethereum’s key features: security. Let’s first examine how Ethereum’s existing security functions work, then explore the problems EigenLayer aims to address in this area and how it plans to solve them.
2.1 What Does Ethereum’s Security Mean?
First, if you search the internet for what Ethereum’s security entails, you might find the following answers:
- Blockchain Technology: Ethereum stores all transaction records on a transparent and immutable public ledger. This ledger is distributed across all nodes in the network, eliminating a single point of centralized attack.
- Consensus Algorithm: Ethereum initially used Proof of Work (PoW) but has transitioned to Proof of Stake (PoS), which is more environmentally friendly and secure. In PoS, participants stake their Ether as collateral to validate transactions and protect the network.
- Smart Contracts: Ethereum’s smart contracts are code that executes automatically when conditions are met. These contracts run on the Ethereum Virtual Machine (EVM) and require thorough testing and verification to prevent security vulnerabilities due to code errors.
- Cryptography: All transactions are protected through encryption using public and private keys, keeping users’ assets and data secure.
- Community and Developer Participation: Ethereum has a robust developer community that continually updates and improves security measures to respond to new threats.
Based on the above content, let’s briefly reconsider what Ethereum is. Ethereum is a network that recognizes changes in the state values of transactions between accounts, executes smart contracts, and stores these executed transaction records in a transparent and immutable “distributed ledger” using blockchain technology. Therefore, Ethereum’s security means protecting the network from malicious attacks, such as tampering with transaction records on the distributed ledger or hacking. If transaction records on the distributed ledger could be maliciously altered to siphon off profits, no one would store value or conduct transactions on Ethereum.
So, what process do transaction records go through to be verified and ultimately stored in the distributed ledger?
As we all know, Ethereum transitioned its consensus algorithm to Proof of Stake (PoS) in September 2022 to reach a common agreement on the transaction records recorded in blocks among network participants. This means that each network participant approves and records data changes without a central administrator through the PoS method.
So, what is the core of the PoS method?
As mentioned above, network participants stake ETH, the coin issued on Ethereum, as collateral to verify transactions and protect the network. In PoW, using more computing power to quickly solve cryptographic puzzles allowed for more mining rewards from the network. In contrast, in PoS, the more ETH staked, the more opportunities there are to verify transactions and receive rewards. Under the PoS system, validators are responsible for verifying the validity and accuracy of transaction records on the blockchain. If the transaction records are valid, the validator proceeds to block creation and propagates the newly created block to other nodes. However, if a validator fails to meet certain network requirements, they face slashing, a penalty where a certain proportion of the staked ETH is forfeited. The main scenarios for slashing are as follows:
- Double Signing: When a validator signs two or more different blocks in the same slot or round. This is prohibited as it can cause confusion in the network and potentially record incorrect information on the blockchain.
A slot refers to a block generated every 12 seconds within the Beacon Chain, and 32 slots make up an epoch (approximately one every 6.4 minutes). - Surround Voting: When a validator votes in a way that contradicts already decided information or votes in a timeline-inappropriate manner. This can negatively impact the activities of other validators participating in the consensus and the stability of the network.
- Not Responding in Time: When a validator fails to propose a block or participate in voting within the designated time, affecting the network’s efficiency and consensus. However, in this case, small fines or penalties are typically applied rather than slashing.
Ethereum’s security is ensured by its consensus algorithm (PoS), the number of validators participating in its decentralized network, and the value of ETH staked for validator activities. No single entity can easily attempt to alter the transaction record process. According to CoinMetrics, to gain control over Ethereum’s blockchain and disrupt its integrity through double-spending, arbitrary transaction recording and modification, or fee manipulation, one would need to control more than 34% of the total staked ETH. However, protocol rules prevent deploying all this stake at once, requiring about eight months to achieve such dominance (after the Denku upgrade, only 1,800 validators can join the chain daily, necessitating 265 days to reach the 34% threshold) and an expense of over $34 billion, along with managing over 1,000 nodes (machines). No attacker would find it worthwhile to spend $34 billion, as the value of their ETH would drop to zero due to loss of trust. Furthermore, if an attack begins, validators and network participants would detect it and increase their stakes to prevent the attack, continuously raising the attacker’s costs and likely forcing them to abandon the attack.
However, the security of smart contract code for dApps and Middleware on Ethereum requires additional scrutiny. The DAO hack in 2016 exploited a vulnerability in a smart contract (a reentrancy bug allowing infinite withdrawals), resulting in the theft of $60 million worth of ETH from the Treasury. This was a flaw in a specific dApp’s smart contract code, not the Ethereum network itself. Thus, even if the security of Ethereum’s distributed ledger is robust, the smart contract code of each Middleware or dApp deployed on Ethereum requires separate audits to check for bugs or errors.
2.2 What Are the Limitations of Existing Ethereum Security?; Fragmentation of Security
Ethereum’s robust security and network trust are built upon a network of block producers composed of validators and the consensus algorithm uniformly applied to block creation.
However, this trust is limited to networks that adhere to Ethereum’s consensus algorithm and computational layer (EVM). Specifically, Ethereum’s security cannot be extended to modular blockchains that do not use 1) Ethereum’s consensus algorithm or 2) its computational layer (EVM). This includes sidechains using different consensus algorithms (e.g., Tendermint), data availability layers, new virtual machines (e.g., SVM), Oracle networks, and bridges. These require off-chain data processing or have modified consensus algorithms or computational layers due to issues like Ethereum’s speed. Consequently, they cannot follow the protocol used by Ethereum’s block-producing validators, forcing them to build their own validator networks, which fragments security.
Modular blockchains with their own decentralized validation protocols, which require active validation services, are referred to as AVS (Actively Validated Services) in EigenLayer. For example, Chainlink has built its own validator network, as shown in the image below. To enhance security, each AVS might issue its own tokens to defend against 34% or 51% attacks or operate as a centralized, permissioned blockchain, sacrificing decentralization.
As a result, dApps that rely on AVSs such as bridges, oracles, and sidechains must consider not only Ethereum’s security but also the security of each AVS. This increases the likelihood of security issues if an AVS does not provide the same level of security as Ethereum. This is evident from the frequent bridge hacking incidents in the past.
According to the EigenLayer whitepaper, in the absence of EigenLayer, modular blockchains (AVSs) face four main issues due to the need to establish their own validator networks for security:
- Need to Build Own Validator Networks: AVSs incur additional time and costs to establish new validator networks.
- Fragmentation of Value: Users must pay additional fees not only for the Ethereum validator network but also for each AVS validator network. This can ultimately diminish the value of the Ethereum network.
- Increased Capital Costs: Validators need to stake new tokens to manage nodes for new AVSs, adding capital costs. Additionally, operating expenses for node management contribute to increased network costs.
- Increased Security Risks for dApps: Attacking the security of AVSs requires much lower costs compared to attacking Ethereum’s security. However, dApps must rely on the security of both Ethereum and AVSs. Consequently, malicious attackers can find it economically incentivizing to attack modular blockchains if the potential gain from compromising a specific dApp outweighs the attack costs (e.g., manipulating oracle price data to steal assets in a DEX using flash loans).
In the scenario depicted in the diagram, Ethereum and each AVS have deposited $1B to secure their respective networks. Here, a malicious attacker could compromise the security of a single AVS, which dApps rely on, with $1B in assets deposited. If successful, this breach would compromise the security of the dApps and potentially allow for asset theft. Essentially, the attacker would only need to breach security worth around $1B, significantly less than the $10B secured in Ethereum, to execute such an attack.
Pooled Security
The core functionality of EigenLayer’s smart contract revolves around one principle: pooled security through restaking. This enables network participants to stake ETH not only for Ethereum’s security but also to share security across other protocols. Essentially, EigenLayer’s smart contracts are designed to allow Ethereum validators to accept additional slashing conditions on the ETH staked by participants, thereby enabling validation for other apps and services. This expands Ethereum’s security in parallel, allowing modular blockchains on EigenLayer and above to stake assets at the same level as Ethereum validators. EigenLayer effectively creates a shared pooled security model by “copying and pasting” Ethereum’s security, gathering multiple validators for EigenLayer to validate other apps and services based on the staked Ethereum pool. This approach shields developers of dApps from fragmented security of modular blockchains against malicious attacks.
In the diagram below, dApps can receive security with capital collateral at the same level as Ethereum ($13B) from both EigenLayer and modular blockchains on EigenLayer. This reduces vulnerabilities to attacks from malicious actors.
EigenLayer allows network participants to restake Ethereum to provide security of equivalent asset value to AVSs (e.g., Oracles, Data Availability) and earn fees (e.g., $AVS). AVSs use restakers’ assets as collateral to perform off-chain computations, while on-chain slashing and on-chain rewards are operated via smart contracts. This enables EigenLayer to form pooled security.
Thus, based on pooled security that EigenLayer aims to establish, collective trust is enabled through Ethereum staking and EigenLayer restaking, potentially extending across various consensus protocols, virtual machines, AVSs, and dApps.
From the user’s perspective restaking with EigenLayer brings the potential for additional rewards ($AVS), in addition to the staking interest traditionally earned by staking Ethereum.
Multiple Staking
Another key feature provided by EigenLayer is Multiple Staking. Previously, staking Ethereum alone allowed users to expect staking interest rates. Now, with the addition of AVS fees, users can anticipate even higher interest rates. Moreover, EigenLayer supports restaking not only ETH tokens but also tokens received from Liquid Staking Protocols like LST (e.g., stETH), further amplifying staking interest rates. Additionally, according to the EigenLayer whitepaper, there are plans to enable restaking of DeFi LP tokens paired with ETH or LST ETH (e.g., stETH), such as stETH-USDC LP tokens, enhancing the staking opportunities available.
Thus, whereas in the past ETH or stETH were locked for DeFi LP purposes, now it becomes possible to reverse this process by locking DeFi LP tokens (ETH or stETH pairs) back into EigenLayer. This enables Superfluid Staking, enriching liquidity and expanding security measures.
2.3.1 Why EigenLayer? (Participant Perspectives)
From the perspective of Project Builders: Before EigenLayer was proposed, project builders had to allocate significant resources such as capital, time, and effort into securing liquidity provider (LP) tokens to ensure security. This often diverted their focus away from enhancing the quality of their services and maintaining stable launches. Moreover, due to the fragmented security issues associated with LP, there was intense competition to secure LP across various fields, which sometimes resulted in projects or ideas deemed less important struggling to materialize.
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With the introduction of EigenLayer, project builders can now redirect the resources previously used to secure LP towards developing better services. They can expect quicker service launches, enabling them to receive feedback faster post-launch and focus more on building and refining their services.
From the perspective of Stakers: Stakers now have the opportunity to achieve two main benefits through EigenLayer:
- Pursuit of Higher Staking APR: By staking a single asset and potentially earning additional rewards from multiple AVSs, stakers can pursue additional income beyond PoS staking rewards.
- Convenient Portfolio Management: Currently, through Operators, restakers can manage AVS portfolios. Additionally, in the future, it is expected that a single restaker will be able to stake with multiple Operators, allowing for even more flexible portfolio management.
From the perspective of VCs: By investing in EigenLayer during the Private Round, VCs can anticipate returns exceeding 10x in the future. Given the ambitious scale of expanding Ethereum’s security, alongside the participation of leading smart money and major players, EigenLayer is expected to achieve a valuation of over $1 billion in the last round alone, assuming a16z holds a stake or tokens equivalent to 10%. Previous rounds, about a year ago, indicated a valuation ranging from approximately $100 million to $500 million, suggesting potential unrealized gains of at least 2x to 10x through these investments.
2.4 Fundraising
EigenLabs was founded in 2021 in Seattle with the goal of creating a blockchain infrastructure capable of providing security commensurate with trusted networks. In September 2022, with the Ethereum consensus mechanism transitioning from Proof of Work (PoW) to Proof of Stake (PoS) through The Merge upgrade, users began staking Ethereum to participate in enhancing blockchain security and receive Ethereum rewards. EigenLayer devised the idea to restake Ethereum already staked by users to contribute security to other protocols as well.
Inspired by this idea, in August 2022, under the joint leadership of Polychain Capital and Ethereal Ventures, investment firms such as Figment, dao5, Robot Ventures, and P2P invested $14.5 million in a seed round. Despite the crypto bear market amidst the Terra Luna crisis in May and the FTX collapse in November, EigenLayer managed to attract significant investment. If EigenLabs sold only 10% of their stake or tokens in the seed round, they would have been valued at approximately $145 million amidst the bear market turmoil.
Within less than a year, in March 2023, EigenLabs secured an additional $50 million in a Series A round led by Blockchain Capital, a top global VC. The round included prominent VCs such as Electric Capital, Polychain Capital, HackVC, and Coinbase Ventures. Assuming they sold about 10% of their stake or tokens during this round, EigenLabs would have been valued at approximately $500 million (about 675.6 billion KRW). Given that March 2023 was still a period of the crypto bear market, the scale of this $50 million investment was significant enough to create a buzz in the industry.
Ali, a partner at a16z, explained their reason for investing in EigenLayer by highlighting that while developers on Ethereum had to use EVM-compatible code and were constrained by block size and gas limits, EigenLayer allows developers to still create customized decentralized services on top of Ethereum’s security. This, he mentioned, would bring about 100 times faster technological innovation in consensus mechanisms, virtual machines, decentralized oracles/bridges, and more.
3. EigenLayer Ecosystem
The EigenLayer ecosystem comprises Restakers, EigenLayer, Operators, and AVS participants.
The value chain is structured in the following sequence: 1) Restakers -> 2) EigenLayer -> 3) Operators -> 4) AVS. Restakers re-stake ETH or LST on EigenLayer, allowing the capital staked on Ethereum to extend its security to other protocols. EigenLayer then provides this ETH or LST as collateral to Operators through a process called delegation. These Operators select AVS, use the collateral to perform validation, and receive rewards ($AVS) in return. These rewards are distributed from Operators to Restakers, enabling Restakers to earn additional income beyond Ethereum staking APR.
3.1 Restaker
Restakers participate in the ecosystem by depositing their assets into EigenLayer. Using these deposited assets, they select an Operator for delegation, initiating the EigenLayer restaking process. Currently, there are two methods of participation depending on the type of asset deposited.
3.1.1 ETH Holder (Native Restaking)
When participating with ETH, the process is a bit more complex. To participate with ETH, an EigenPod, a type of vault, must be created on-chain by sending a transaction.
An EigenPod is a type of vault created via a smart contract, generating an address upon creation. Its primary purpose is to receive rewards from validators operating with ETH staked on the Beacon chain.
To become an EigenLayer ETH restaker, you need to enter the address generated by the EigenPod as the “Withdrawal Address” when depositing ETH to the Beacon chain. After depositing ETH to the Beacon chain, you must also set up a validator, which can be operated directly or through a service. Once the validator is active, the deposited ETH will appear in EigenLayer, and you can restake the deposited ETH to become an EigenLayer restaker.
The image below shows the process of depositing 32 ETH using an EigenPod and completing the restaking process.
Becoming a restaker using native ETH is relatively challenging compared to using LSTs, as it requires a significant amount of capital (32 ETH) for each deposit.
3.1.2 LST Holder (Liquid Restaking)
When using LSTs, the process of deposit and restaking is much simpler and can be done through EigenLayer’s user interface. The following image shows the deposit screen using Lido’s LST, stETH.
Currently, the value of deposited LSTs is about half of the TVL compared to native ETH, and LSTs account for approximately 34.6% of the total restaked ETH.
And recently, for users utilizing LRTs such as ether.fi and Renzo, the process is different from LSTs, as explained below.
3.1.3 LRT Holder
For LRT holders using services like ether.fi or Renzo, participation in EigenLayer happens automatically through the service without direct action.
LRT Providers handle the deposit and restaking processes using the EigenPod for ETH on behalf of the users. Thus, when users deposit their assets (e.g., ETH) with an LRT Provider, their assets are automatically restaked in EigenLayer, allowing them to pursue additional earnings. Furthermore, LRTs enable additional DeFi operations. Detailed information about LRT Providers is provided below.
3.2 LRT Provider
LRT Providers offer services on top of EigenLayer and exist between the 1) Restaker and 2) EigenLayer stages, as explained earlier.
LRT Providers simplify the complex steps required for users to deposit and restake assets in EigenLayer. They were created to address the inconvenience and liquidity constraints faced by restakers when their ETH or LSTs are restaked. Acting similarly to LSPs, LRT Providers issue Liquid Restaking Tokens at a 1:1 ratio as receipts for restaking, ensuring that restakers’ liquidity is not locked. This allows restakers to maximize their returns through DeFi operations with the LRT.
Key LRT players include ether.fi, Renzo, KelfDAO, and PufferDAO. These entities handle the delegation to Operators on behalf of Restakers, effectively deciding which AVS will receive ETH or LST as collateral to enhance security. They also manage risks associated with Operators and AVS, selectively expanding AVS security in a manner that determines the returns for Restakers. Effective LRT providers will excel in risk management, preventing issues, and offering satisfactory returns to Restakers.
3.3 Operator
Operators in EigenLayer are entities that receive delegation to provide AVS (Autonomous Verification Services) using assets as collateral.
In practice, Operators exist as registries within EigenLayer’s smart contracts. Once registered in the registry, Operators set up AVS to operate as validators using assets delegated to them as collateral. Currently, Operators can initiate AVS validation through an opt-in process and can stop AVS validation through opt-out mechanisms in the future. In this validator role, Operators earn rewards denominated in $AVS, which enables Restakers to earn additional income through delegation.
3.4 AVS
Actively Validated Services (AVS) are core components of EigenLayer that provide distributed verification services using assets restaked through EigenLayer as collateral. Examples include sidechains, data availability layers, new virtual machines, keeper networks, oracle networks, bridges, threshold cryptography schemes, and trusted execution environments. Since the inception of EigenLayer, numerous blockchain development teams, not only from existing L1/L2 protocols but also from various blockchain projects, have proposed diverse AVS implementations.
AVS can impose several restrictions related to their Operators when providing their services. AVS can set a minimum delegation requirement, allowing only Operators with sufficient delegation to operate their AVS. Additionally, AVS can choose Operators through whitelisting. Currently, on the Mainnet, all except EigenDA and Brevis coChain among the remaining six AVS have adopted a whitelisting policy to selectively choose Operators, making it permissioned.
3.5 Ecosystem
As mentioned earlier, EigenLayer’s ecosystem involves participants such as Restakers, Operators, AVS, and recently highlighted LRT providers as explicitly stated in EigenLayer’s whitepaper. Additionally, the ecosystem is often represented through diagrams like the one below, focusing mainly on activities within Ethereum. However, there are other participants not explicitly mentioned in the whitepaper, including Base layers, LST providers as introduced earlier with LST, and newly introduced participants like LRT Fi (e.g., ION Protocol).
4. Conclusion
Many in the crypto scene are paying close attention to EigenLayer’s mainnet launch and the hype surrounding it. However, the initial movements seen after EigenLayer’s launch have been somewhat quieter than anticipated. Factors contributing to this perception include the fact that even EigenDA, an actively validated service (AVS), lacks known real-world use cases, and EigenLayer launched without essential features like Slashing and Payment functionalities.
While EigenLayer addresses critical issues in Ethereum security and proposes solutions to establish a new Restaking ecosystem, these efforts remain largely theoretical. Whether they will function as planned requires further time and validation.
For those considering investing in EigenLayer tokens and Restakers expecting airdrops and restaking profits, it’s crucial to consider these factors and conduct thorough due diligence (DYOR) to make informed decisions based on personal analysis.
