A Comprehensive Interpretation of EigenLayer: A New Favorite Project Both Loved and Hated by Ethereum

Everyone has probably heard about a project called EigenLayer recently. What is this project? Many of you might have some understanding. In this article, BiB Exchange will provide a comprehensive interpretation of EigenLayer, a new favorite project that is both loved and hated by Ethereum.

EigenLayer is a token-economic security lending market platform, mainly offering services like the re-stake of LSD assets, node operation staking, and AVS services. EigenLayer is a re-stake protocol based on Ethereum, providing Ethereum-level security for the entire future crypto economy built on Ethereum. It allows users to re-stake native ETH, LSDETH, and LP Tokens through EigenLayer smart contracts and receive validation rewards. This enables third-party projects to enjoy the security of the ETH mainnet while gaining additional rewards, thereby achieving a win-win situation.

1.Principle

1.1 Starting from the Virtual Machine

Ethereum, conceived in 2013 and launched in 2015, introduced the Ethereum Virtual Machine (EVM), revolutionizing the blockchain landscape. Ethereum pioneered the concept of programmability, enabling decentralized applications (DApps) to be built on it without permission. This innovation allowed DApp developers to operate without needing to be trusted, as security and activity were guaranteed by the underlying blockchain, with trust provided by the blockchain itself.

This decoupling innovation significantly propelled the development of the anonymous economy, as innovators, without the need for reputation or trust, could have their DApps used by anyone trustworthy, while the underlying blockchain verified the DApp’s code. The value flow provides trust to the DApp through the blockchain, charging fees in exchange. With development progressing into the Layer2 era, its scale has significantly expanded. Rollups outsource execution to a single node or a small group of nodes, and EVM contracts can absorb Ethereum’s trust through Ethereum proof of computation.

However, traditional verification services clearly lack a trust mechanism. 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 handling inputs from outside Ethereum, hence their processing cannot be verified within Ethereum’s internal protocols.

Examples of these modules include side chains 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, which have their own distributed verification semantics for verification. Typically, these active verification services (AVS) are either protected by their own native tokens or are of a permissioned nature.

1.2 AVS

EigenLayer directly connects the security and liquidity of Ethereum, with AVS playing a crucial role in this process. AVS (Actively Validated Services) typically refers to services used for validating individual identities or specific information. AVS can be applied in multiple domains, such as finance, telecommunications, online services, etc., to ensure the provided information is accurate, valid, and legitimate.

Therefore, the essence of EigenLayer is to delegate the security validation of projects that require Ethereum-level security at low cost, including various middlewares, data availability layers, sidechains, oracles, sequencers, etc., to Ethereum node operators. This process is known as Restake. EigenDA is a decentralized data availability (DA) service built on Ethereum using the EigenLayer Restake, and it will be the first Actively Validated Services (AVS) layer.

1.3 Business Logic

The business logic of EigenLayer involves multiple key concepts, including middleware, LSD, AVS, and the DA layer. These concepts are intertwined, forming the complex and specific business logic of EigenLayer. Through its business logic, especially the functions of node operation and AVS services, EigenLayer effectively extends Ethereum’s security to the entire Ethereum ecosystem. By providing and staking Liquid Staking Derivatives (LSD) assets, users offer additional security support for the Ethereum network.

Based on the diagram, we can simplify the business logic as follows:

i. LSD Asset Providers: Users restake tokens like stETH, rETH, cbETH on EigenLayer, providing AVS service for node operators, thereby earning additional income.

ii. Node Operators: Obtain LSD assets through EigenLayer, providing node services for projects requiring AVS services, and receive node rewards and fees from these projects.

iii. AVS Demand Side (Project Side): Projects buy AVS services through EigenLayer, avoiding the need to build their own AVS, thus reducing costs.

iv. EigenDA Demand Side (Rollups or Application Chains): Rollups or application chains can obtain data availability services through EigenDA.

v. Role of EigenLayer: The main role of EigenLayer is to reduce the cost for projects to build independent trust networks, expand the use cases for ETHLSD, improve the capital efficiency and returns of LSD assets, and simultaneously increase the demand for ETH.

1.4 Relationships Among Participants

At the same time, we can see the necessary participants as follows, according to the official whitepaper regarding EigenLayer’s role in the block as shown in the figure:

Therefore, the main relationships among participants are as follows:

1. LSD asset provider: Hope to obtain additional income and are willing to provide LSD assets as pledge to node operators.
2. Node operator: Obtain LSD assets from EigenLayer, provide AVS services for the project, and obtain node rewards and handling fees.
3. AVS demander: The project party needs AVS services and purchases them through EigenLayer. There is no need to build AVS by itself.
4. EigenDA demand side: Rollup or application chain requires data availability service.

2.Concerns about DA from Layer 2

The Ethereum Foundation’s research team’s 11th AMA focused on why EIP-4844 is necessary and how Ethereum will address liquidity fragmentation and composability issues on Layer 2. This is a concern also emphasized by Vitalik Buterin.

The greatest challenge Ethereum faces is the potential absence of Layer 2 solutions. Should Ethereum be chosen for DA, or should another platform be used? Ethereum faces possible competition from Celestia, and if other Layer 2 solutions do not use Ethereum for DA, Ethereum might “slowly fade away.” Therefore, Ethereum needs to quickly advance the Cancun upgrade to reduce Layer 2 costs. Vitalik remarked that the key to Rollup is unconditional security: even if targeted by everyone, assets can still be withdrawn. This is not achievable if DA relies on an external system (outside of Ethereum). This perspective has been challenged by some, who argue that Layer 2 does not necessarily need to publish DA data on Ethereum to avoid “data withholding” by sequencers, suggesting alternatives like Celestia for third-party DA services.

We can issue DA at four important levels of ETH’s external system through the diagram below.

Therefore, a major feature of the Cancun upgrade focuses on EIP-4844. After completion, all Ethereum nodes will automatically lose part of the historical data, so that the historical data of Layer 2 for more than 18 days will no longer be backed up by the entire ETH node. At that time, the resistance of user withdrawals will be Censorship will no longer be as close to Trustless as it is today. Previously, users could prove their Layer 2 asset status through Merkle Proof and achieve unnecessary withdrawals on Layer 1.

2.1 Data availability

First, let’s examine the structure of Celestia’s DA. The Quantum Gravity Bridge is an Ethereum Layer 2 solution that significantly reduces the cost of storing DA on the Ethereum main chain through data availability (DA) verification provided by Celestia. The process includes the L2 Operator publishing transaction data to the Celestia main chain, Celestia validators signing the Merkle Root of the DA Attestation, and sending it to the DA Bridge Contract on the Ethereum main chain for verification and storage. Celestia’s chain achieves consistency propagation of Data Blobs through a P2P network and Tendermint, but full nodes require high-speed download and upload, resulting in relatively low actual throughput. Celestia’s Quantum Gravity Bridge ensures data availability while reducing costs through this method.

At this time, EigenLayer steps forward as a platform fundamentally committed to exporting Ethereum (ETH) security and has made significant innovations in data availability (DA). By introducing a new data structure for Blob space, it iterates past the limitations of relying on calldata for data storage, simultaneously enhancing the Ethereum mainnet’s data availability capability. Pure Rollup refers to the solution of placing DA directly on-chain, requiring a constant payment of 16 gas per byte, which could account for 80%-95% of Rollup costs. With the introduction of Danksharding, the cost of on-chain DA will be significantly reduced. Compared to the full node storage structure of calldata, Blobs are designed for temporary storage by partial nodes, greatly increasing the data limit for Layer2 submissions to the mainnet, expanding its TPS, and improving data storage efficiency and reducing storage costs as it is only temporary. The enhancement of DA capability is due to one month of temporary storage, more than sufficient to address OP-Rollup’s 7-day fraud proof time window.

The transaction volume submitted by Layer2 to the mainnet in a single submission will significantly increase, and the cost allocated to individual users will noticeably decrease. Before the Cancun upgrade, regardless of how high Layer2 touted its TPS, it was mostly in a testing environment, and users’ direct experience of gas fee attrition made many feel that Layer2 did not live up to its name.

2.2 Centralization Issues in Sequencers

The decentralization of Sequencers, critical for the market’s focus, has resulted in the soft decentralization, or “social consensus,” of Sequencer operations in strong Layer2 solutions like OP Rollup. Metis, offering a decentralized Sequencer solution for Layer2, ranks third in TVL among L2s. Decentralizing Sequencers addresses the credibility of Layer2 transactions and their security on the mainnet.

2.3 Layer2’s Evolution Towards Modularity

As the Layer2 market grows, the orthodox definition of Ethereum’s Layer2 may blur, allowing third-party DA solutions, including Celestia’s DA, to penetrate Layer2 post-Cancun upgrade. This includes shared Sequencer strategies by OP Stack and shared Prover systems by ZK Stack, aiming to utilize both their own and third-party DA capabilities like Celestia, as well as the mainnet’s limited DA capabilities.

2.4 EigenLayer’s DA Offering

EigenLayer emerges, offering a generalized DA solution similar to Celestia and Polygon Avail but with a different approach. It restructures data availability by introducing a new model and AVS services, allowing projects to access necessary services without building their own AVS, reducing costs and offering a more efficient and scalable solution for the Ethereum ecosystem.

3. Competition and Challenges

3.1 Polygon+Celestia’s Competition

Competition comes not only from within but also from outside, with Polygon+Celestia beginning to counterbalance Ethereum. In the past 18 months, the explosion of Rollup technology has significantly enhanced the user experience in the DeFi sector, including faster confirmation times and cheaper transactions. Polygon’s Custom Development Kit (CDK) enables rapid development of modular blockchains. The modular approach of the CDK allows developers to choose specific components for personalized blockchain use cases, facilitating interoperability among different blockchains. The main parts of Polygon CDK include ZK Provers, data availability, virtual machines (VM), and sequencers, offering developers flexibility to construct blockchain solutions according to project needs.

Celestia and Polygon Labs announced their collaboration to integrate Celestia’s data availability layer with Polygon CDK. This partnership aims to improve the efficiency of Ethereum L2 transactions and reduce transaction fees, enhancing the user experience for DeFi users. The integration with Celestia is expected to significantly reduce Ethereum L2 transaction costs, allowing users to trade in a better execution environment with fees potentially lower than $0.01.

3.2 Ambiguity with Cosmos

The fragmentation of liquidity and composability across Rollups (more broadly across L2s, including verifications) is a problem.Each Rollup, such as Arbitrum or Optimism, operates in silos: isolated pre-confirmations, isolated sequencing, isolated states, and isolated settlements. This has eroded the universal synchronous composability of Ethereum contracts, a fundamental driver of network effects.

Recently, EigenLayer announced it would serve application chains within the Cosmos ecosystem, allowing future network projects to enjoy both the flexible architecture of Cosmos SDK and the security provided by Ethereum. Many of Cosmos’ innovations involve utilizing validator sets for supplementary work, but maintaining a strong economic security validator quorum is a well-known challenge. EigenLayer addresses this by providing an economic stake platform, allowing any stakeholder to contribute to any PoS network. By reducing costs and complexity, EigenLayer effectively paves the way for innovating within the Cosmos stack.

Cosmos primarily focuses on interoperability, addressing Ethereum’s limitations by centering on an ecosystem approach through the use of the Tendermint consensus and Inter-Blockchain Communication (IBC) protocol to achieve interoperability among independent blockchains. Each blockchain reaches consensus and executes transactions using Tendermint. This integration simplifies the blockchain development process and offers a cohesive environment but may limit flexibility to meet diverse application needs.

Through the integration illustrated by Tendermint (which can be understood as a Byzantine protocol), a network of interconnected blockchains operates under the protection of Cosmos, emphasizing collaboration and interaction between blockchains. Hence, Cosmos’s application-specific innovations perfectly complement EigenLayer’s complex staking community and capital foundation. This sets the stage for highly creative and deeper collaborations to extend Ethereum’s functionalities and create an environment for Cosmos builders to apply their talents within the world’s largest on-chain programmable staking economy.

Initially, Ethereum and Cosmos pursued different objectives, but their technological developments are converging. Both face common technical challenges such as MEV, liquidity fragmentation, and broad decentralization. Cosmos continues to evolve as an experimental link, while Ethereum is validated as a composable settlement layer, especially with the advent of EigenLayer. EigenLayer addresses these challenges by providing an economic stake platform that allows any stakeholder to contribute to any PoS network, effectively paving the way for expressive innovation within the Cosmos stack by reducing costs and complexity.

MEV (Maximum Extractable Value) has been a core issue for Ethereum, significantly influencing its roadmap and protocol design. To mitigate the centralization pressures from MEV, Ethereum has adopted the proposer-builder separation (PBS) approach, which is currently externalized through the MEV-Boost protocol using a trust-minimized commit-reveal scheme. Ethereum plans to integrate a fixed PBS (ePBS) design into the base layer to eliminate reliance on trusted third parties, achieving a more decentralized PBS.

Similarly, Cosmos faces the MEV challenge and is implementing more advanced ePBS solutions. For example, Osmosis is experimenting with an arbitrage profit-sharing mechanism, and Skip is testing the Block SDK, a decentralized block builder and proposer commitment design. The modular architecture in blockchain design, separating components like consensus, data availability, and execution, contrasts with traditional integrated blockchains. Modularity allows independent development, optimization, and scaling of components, offering a customizable and efficient framework particularly suited for applications with high transaction throughput demands.

Vitalik Buterin’s Ethereum roadmap as of December 2021

By connecting Ethereum and Cosmos, EigenLayer introduces a wave of innovation. The Cosmos community can leverage Ethereum’s decentralized security and liquidity, while Ethereum can draw inspiration from the experimental innovations in Cosmos. This fusion brings new possibilities to both ecosystems. MEV is a significant issue for both Ethereum and Cosmos, and interoperability remains a key focus, especially given Cosmos’s modular nature. As their designs converge, they begin to learn from each other, adopting some of the other’s design elements.

EigenLayer lowers the barrier for Ethereum to leverage innovations in Cosmos, especially by providing an economic stake platform that allows L2s to utilize a validator pool for supplementary work. This paves the way for more innovation and collaboration between the two ecosystems. The integration of Ethereum and Cosmos’s tech stacks brings an unlimited potential for a symbiotic relationship. This integration not only drives the development of Ethereum and Cosmos but also promises to create more creative and resilient ecosystems.

3.4 Competition Based on LSDFi Platform

Competitors and partners such as Restake are based on EigenLayer and provide modular liquidity staking solutions. Managed by decentralized autonomous organizations (DAOs), they focus on yield-generating strategies, allowing users to earn Ethereum and EigenLayer staking rewards without locking assets or dealing with complex infrastructure.

The introduction of rstETH tokens facilitates liquidity restaking within EigenLayer for LSTs such as stETH, offering seamless access to staking rewards from both Ethereum and EigenLayer, estimated between 3%-5% and over 10%.

Their token RSTK, with a total supply of 100 million, is used for utility and governance within the ecosystem, directly correlating with EigenLayer’s success and revenue, reflecting platform growth. A fixed fee of 10% is charged, with 5% going to stakers and 5% to the platform’s treasury. Restake focuses on decentralizing cryptocurrency transactions and community governance, offering significant yields through its Stake & Yield mechanism and governance through community voting, emphasizing security and sustainability for a reliable trading ecosystem.

Prisma Finance

This project focuses on Ethereum liquidity staking derivatives (LSD). Users can use various LSDs (wstETH, rETH, cbETH, sfrxETH) as full collateral to mint the stablecoin mkUSD. The LSD collaterals: wstETH, rETH, cbETH, and sfrxETH can be used for minting mkUSD and earning LSD returns. Depositing in the stability pool offers a higher APR. Maintaining mkUSD debt rewards additional weekly PRISMA rewards. mkUSD is a relatively stable asset that provides users with additional income.

PRISMA (with a total supply of 300 million); ways to earn PRISMA include depositing in pools, minting mkUSD, maintaining mkUSD debt, and staking Curve/Convex LP tokens. Locking PRISMA earns protocol fees and increases voting power, with a maximum lock-up period of 52 weeks.

Lybra.finance

Lybra is an LSDFi platform focused on stabilizing the cryptocurrency market through liquidity staking derivatives (LSD). The project offers a unique stablecoin, eUSD, backed by ETH assets, generating stable interest for holders. Using LSD income, users receive a stable income from eUSD. Additionally, peUSD, the Omnichain version of eUSD, has been introduced, increasing the choice of liquidity staking tokens. rETH and WBETH serve as collateral for eUSD and peUSD, adding flexibility.

LBR (with a total supply of 100 million) is an ERC-20 token based on the Arbitrum and Ethereum networks. The token’s uses include governance, yield enhancement, and ecosystem incentives. esLBR is an escrowed LBR with the same value, limited by the total supply of LBR and non-tradable. However, it grants voting rights and a share of protocol profits. esLBR holders actively participate in shaping the direction and development of the Lybra protocol. esLBR holders receive 100% of the protocol’s income, increasing their potential earnings. Compared to the first two projects, Lybra stands out for its cross-chain capabilities, allowing it to access a larger market.

4.Development and Prospects

As previously discussed in the DA section, the demand for Cancun upgrade and the opening of the OP Stack have propelled the rapid development of small and medium-sized Rollups and application chains, increasing the demand for low-cost AVS. The trend towards modularization has boosted the demand for an affordable DA layer, and the expansion of EigenDA has increased the demand for EigenLayer. On the supply side, the increase in Ethereum’s staking rate and the number of staking users have provided an abundance of LSD assets and holders. These holders are willing to improve the capital efficiency and returns of their LSD assets.

4.1 Product Progress

Starting with product progress, EigenLayer’s product page, to be honest, leaves something to be desired and is not as user-friendly and flexible as one might hope. From a user perspective, users cannot obtain any substantial staking income in the short term, and the unclear staking rewards might affect the subsequent increase in user numbers.

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 to. This provides a free market structure, allowing new blockchain modules to utilize the resource differences between validators. Currently, the product’s promotional page for the open market has not been developed; promotion is mostly through project operations. By participating in certain activities, you can discover that by integrating the Restake function, users can restake tokens like stETH, rETH, and cbETH to participate in the EigenLayer ecosystem.

4.2 Business Model

Two LSD asset deposit events attracted users, quickly reaching the deposit limit, and showing interest in potential airdrop rewards. EigenLayer has accumulated about 150,000 staking ETH, and the total TVL can be seen on the official website.

EigenLayer official website staking status as of January 27, 2024 (5:am, UTC)

EigenLayer mainly collects a commission from the security service fees of AVS service users, with 90% going to LSD depositors, 5% to node operators, and EigenLayer taking a 5% commission.

4.3 Future Development

The value of ETH staked on Ethereum is approximately $42 billion, with the entire chain’s capital scale at $300-400 billion. The project size served by EigenLayer is expected to be in the $10-100 billion range in the short term. All projects that require token staking, maintain network consensus through game mechanisms, and uphold decentralization are potential users. The market’s evaluation of EigenLayer is quite high, using Lido’s current 25x PS as an anchor, newer narratives may enjoy a higher premium, valued at 20-40x. We can conservatively estimate EigenLayer’s valuation to also be a project worth $10-20 billion in the future.

EigenLayer has completed three rounds of financing, totaling over $64 million. The latest Series A financing, led by Blockchain Capital, with participation from Coinbase Ventures, Polychain Capital, IOSG Ventures, etc., was valued at $500 million. The market size estimate is difficult to pinpoint, but optimistically it could reach tens of billions of dollars within 3 years. If the market is expected to grow at a compound annual growth rate of 37%, revenue could exceed $25 billion by 2030.

5.Risks and Challenges

EigenLayer faces challenges such as technical complexity and market adoption uncertainty. Despite its current unchallenged position in the AVS market, the potential competition and the additional risks brought by its middleware layer cannot be overlooked.

Re-staking Collective Security Issue:

The current AVS faces challenges with re-staking collective security. EigenLayer has established a new mechanism by allowing validators to obtain security through re-staked tokens instead of their own, where validators earn additional income by providing security and verification services.

Open Market Mechanism Issue:

EigenLayer has introduced an open market mechanism, allowing validators to choose whether to join each module and decide which modules are worth allocating additional collective security. This selective dynamic governance provides a free market structure for launching new auxiliary functions.

Launching New AVS Issue:

Innovators must build a new trust network to ensure security when launching new AVS, which can be a challenging task.

Value Dispersion Issue:

As each AVS develops its own trust pool, users must pay for these pools, leading to a dispersion of value.

Capital Cost Burden Issue:

Validators protecting new AVS must bear capital costs, including opportunity costs and price risks. AVS must offer high enough staking returns to cover these costs, which is a challenge for many AVS.

DApps Trust Model Diminishment Issue:

The current AVS ecosystem has led to a diminished trust model for DApps, as applications reliant on specific modules may become targets of attack. However, the security disadvantages brought by the Restaking mechanism may impact the settlement of AVS to some extent.

LSD Collateral Risk:

Project parties using LSD (Liquid Staking Derivatives) as security collateral need to consider the credit and security risks of the LSD platform itself, adding an additional layer of risk.

Despite the advantages of EigenLayer’s innovative re-staking protocol, the above risks need to be considered. Additionally, EigenLayer’s centralized governance model may lead to complexity in governance and slow decision-making processes, potentially negatively impacting governance.

Summary

EigenLayer’s concept of deriving ETH security emphasizes the interconnectedness of the blockchain ecosystem. This interoperability helps build a stronger and more secure blockchain network, laying a solid foundation for future development. It provides a secure and trustworthy layer, supports various modules like consensus protocols, data availability layers, etc., and has completed three rounds of funding, reaching a valuation of $500 million. As an innovative protocol, it has significant future development opportunities.

Early participation in this project has been widely discussed across news outlets, social platforms, and by key opinion leaders, which will not be detailed here. BiB Exchange believes that EigenLayer is not just an independent platform but a part of the entire Ethereum network, capable of competing with Celestia and Polygon and engaging with Cosmos. Despite the criticisms and skepticism, this article has elaborated on the relevant principles, hoping to encourage readers to make their judgments and pay more attention to the re-staking ecosystem.

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