A Quick Look at the Restaking Leader: EigenLayer's Business Logic and Valuation Analysis

Introduction

Following the completion of the Ethereum Shanghai upgrade, many LSD projects have experienced rapid growth. The number of LSD asset users and their net worth have surged significantly. On the other hand, with the upcoming Cancun upgrade at the end of the year and the opening of the OP stack, this year is also hailed as the Year of Rollup. Various services revolving around the Rollup module, such as the DA layer, shared sorters, RaaS services, etc., are flourishing. The EigenLayer, which introduced the Restaking concept based on LSD assets aiming to serve numerous Rollups and middlewares, has also been gaining continuous attention this year. Not only did it secure a massive $50 million in funding at a valuation of $500 million in March, but recent rumors suggest that its OTC token price has even reached an astonishing $2 billion, rivaling the valuation levels of public blockchain projects.

In this article, the author will delineate the business logic of EigenLayer and attempt to calculate the project’s valuation, trying to address the following questions:

1. What is the Restaking service? Who are its customers, and what problem does it try to solve?

2. What are the obstacles to promoting the Restaking model?

3. Is EigenLayer’s valuation of $500 million, or even $2 billion, considered expensive?

The content of the following article represents the author’s views as of the publication date, focusing more on a business evaluation perspective with less emphasis on technical details. This article may contain factual errors, biased opinions, and is meant for discussion purposes only. Feedback and corrections from fellow investors and researchers are welcomed.

EigenLayer’s Business Logic

Before delving into EigenLayer’s operations, let’s familiarize ourselves with a few frequently appearing terms:

Middleware: Refers to the services that bridge blockchain’s foundational services and Dapps. In the Web3 domain, typical middleware includes oracles, cross-chain bridges, indexers, DID, and the DA layer.

LSD: Stands for Liquid Staking Derivatives, like Lido’s stETH.

AVS: Short for Actively Validated Services. They are distributed node systems that offer security and decentralized assurances for projects. The most exemplary of these is the PoS system of public chains.

DA: An abbreviation for Data Availability. It mainly means that other projects (such as Rollups) can back up their transaction data on the DA layer, ensuring access and recovery of all historical transaction records when needed.

Scope of Operations

EigenLayer offers a rental market for cryptoeconomic security.

Cryptoeconomic security refers to various Web3 projects ensuring smooth operations while maintaining permissionless and decentralized attributes. This requires the network’s main service providers (validators) to participate in the project by staking tokens. If validators fail to fulfill their commitments, their staked tokens will be confiscated.

EigenLayer, as a platform, collects assets from LSD asset holders on one hand. On the other, it uses the collected LSD assets as collateral to offer convenient and low-cost AVS services to middleware, sidechains, and Rollups in need. EigenLayer itself acts as a demand matching service between LSD providers and AVS seekers, with specialized collateral service providers ensuring the safety of the stakes.

Additionally, EigenLayer’s parent company has developed a DA layer named “EigenDA,” offering data availability services for Rollups or application chains needing DA layer services. There will be business synergy between EigenDA and EigenLayer.

The pain points EigenLayer aims to address are:

1.For various project teams: Reducing the high costs of independently building their own trust network. Instead, they can directly purchase staking assets and node operators on the EigenLayer platform, eliminating the need for self-construction.

Source: EigenLayer Whitepaper

2.For Ethereum: Expanding the use cases of Ethereum LSD, making ETH the network security collateral for more projects, and increasing the demand for ETH.

3.For LSD users: Further enhancing the capital efficiency and returns of LSD assets.

Business Users

EigenLayer’s service caters to three distinct user groups, each with specific requirements:

1.LSD Asset Providers: These users primarily seek to earn returns on their Ethereum LSD assets beyond the basic PoS rewards. They are willing to pledge their LSD assets to node operators, acknowledging the potential risk of forfeiture.

2.Node Operators: Through EigenLayer, they access LSD assets to offer node services to projects needing AVS services. They extract profits from the rewards and transaction fees offered by these projects.

3.AVS Requesters: These are projects requiring AVS for security but aiming to reduce costs (e.g., projects using LSD assets as pledges for a particular Rollup or cross-chain bridge). They can purchase such services via EigenLayer without having to set up their own AVS.

The primary users of EigenDA are various Rollups or application chains.

EigenLayer Business Details

Users can re-pledge tokens staked on the Ethereum network, including stETH, rETH, and cbETH tokens, to the EigenLayer market. The staking service providers match the users’ tokens with relevant security network seekers, offering them AVS services. The foundational assets for AVS are the tokens users staked on EigenLayer. Project parties must distribute a specific “security fee” to these users.

Product Progress

Currently, EigenLayer has only launched the restake function for LSD and has not developed the node operation pledges and AVS services based on LSD assets. During the two public events of depositing LSD assets, deposits rapidly reached the limit (most depositors aimed for potential airdrop rewards from EigenLayer). Users can also directly deposit 32 whole units of ETH for Restake. With the deposit cap in place, EigenLayer has currently accumulated around 150,000 staking ETH.

Image Source: https://app.eigenlayer.xyz/

According to the roadmap shared by EigenLayer’s official team, the primary objective for the current Q3 quarter is the development of the Operator test network (node operator test net). Development for the AVS service test network will officially begin in the fourth quarter.

https://docs.EigenLayer.xyz/overview/readme/protocol-features/roadmap

EigenDA’s first defined user is the Mantle project, a rollup initiative forked from the OP virtual machine. Mantle is currently using the test version of EigenDA for its DA.

Token Economic Model

While EigenLayer is a token-based project, it has yet to finalize and disclose its token details and economic model.

EigenLayer Team and Financial Backing

Core Team

Founder&CEO：Sreeram Kannan

An Associate Professor at the Department of Computer Engineering at the University of Washington, Sreeram Kannan is also the founder and the principal stakeholder of Layr Labs, the parent company behind EigenLayer. He has published over 20 blockchain-related papers. Kannan completed his undergraduate studies in telecommunications at the Indian Institute of Science and holds a Master’s in Mathematics and a PhD in Information Theory and Wireless Communications from the University of Illinois at Urbana-Champaign. After serving as a postdoctoral researcher at the University of California, Berkeley, he is now a faculty member at the University of Washington and heads the University of Washington Blockchain Lab (UW-Blockchain-Lab).

Founder & Chief Strategy Officer: Calvin Liu

Graduating with a major in Philosophy and Economics from Cornell University, Liu has spent many years in data analysis, corporate consulting, and strategic roles. He worked as the head of strategy at Compound for nearly four years before joining EigenLayer in 2022.

COO：Chris Dury

With an MBA from New York University’s Stern School of Business, Dury boasts a rich experience in cloud service product project management. Before joining EigenLayer, he was the Senior Vice President of Product at Domino Data Lab, a machine learning platform, and held roles as General Manager and Director at Amazon AWS. He spearheaded multiple cloud service projects aimed at game developers. He became a part of EigenLayer at the start of 2022.

Source：https://www.linkedin.com/company/eigenl/

EigenLayer’s team is expanding rapidly with a current staff count of over 30, with most employees based in Seattle, USA.

Layr Labs, the company behind EigenLayer, was also founded by Sreeram Kannan in 2021. Apart from EigenLayer, it oversees other projects like EigenDA and Babylon, which also offer encrypted economic security services, mainly serving the Cosmos ecosystem.

Financing Details

To date, EigenLayer has publicly raised funds twice: a seed round in 2022 amounting to $14.5 million (valuation unknown) and a Series A round completed in March 2023 securing $50 million (valued at $500 million).

Notable investing institutions include:

Source: rootdata.com

In the same year, 2023, its parent company, Layr Labs, also secured approximately $64.48 million in equity financing. Detailed information can be found in their SEC filing: https://www.sec.gov/Archives/edgar/data/1936115/000156761923004289/xslFormDX01/primary_doc.xml.

Market Size, Driving Narratives, and Challenges of Restaking’s Business

Market Size Forecast

EigenLayer has introduced the innovative concept of “restaking,” offering “cryptoeconomic security as a Service”. Its clientele encompasses middleware (oracles, bridges, DA layers) and side chains, application chains, and Rollups. The main pain point EigenLayer aims to address is reducing the decentralized network security costs for these projects, especially in comparison to them building their trust networks.

In theory, any project requiring token staking for admission and employing game mechanisms to maintain network consensus and decentralization is a potential user of EigenLayer. The current market size is challenging to pinpoint accurately, but optimistically, it may grow into a hundred billion-dollar market within three years.

Considering Ethereum’s ETH staking amount stands at 42 billion USD, with a total project value of about 200 billion USD (as of August 30, 2023), the overall funds on the Ethereum chain range between 300 to 400 billion USD. Given that EigenLayer’s primary clients will be relatively smaller and newer projects, compared to Ethereum’s dominating position with approximately 40 billion USD in PoS staking, the staking business scale for EigenLayer’s serviced projects should fall between 10 to 100 billion USD in the short term.

Narratives Driving Business and Expected Growth

Demand Side:

The arrival of the Cancun upgrade and the opening of OP Stack have catalyzed the rapid development of smaller Rollups and application chains, increasing the overall demand for low-cost AVS.

The modularization trend of public chains, Rollups, and application chains boosts the demand for cheaper DA layers beyond Ethereum. The expansion of EigenDA intensifies the demand for EigenLayer, showing synergy between the services.

Supply Side:

The rising Ethereum staking rate and the increase in the number of stakers supply a considerable amount of LSD assets and a large holder base. These stakeholders are keen to enhance the financial efficiency and returns of their LSD assets. EigenLayer also hopes to incorporate LSD capital beyond ETH in the future.

Issues and Challenges

For those demanding AVS, how much cost can be genuinely saved by purchasing collateral assets combined with professional validation node services from EigenLayer? It’s uncertain. Using Ethereum’s LSD assets as collateral doesn’t directly inherit Ethereum’s tens of billions worth of security. In reality, a project’s economic security is determined by the overall size of the rented Ethereum LSD assets combined with the operational quality of the validating nodes. While this might be quicker and more convenient than building an AVS from scratch, the saved costs might not be significantly high.

Using assets other than their own for AVS collateral diminishes the use cases for a project’s token. Although EigenLayer supports a mixed staking mode of project tokens and EigenLayer, this can still pose significant adoption barriers.

Projects that utilize EigenLayer for building AVS might become overly dependent on EigenLayer, risking a passive stance in long-term development and fearing potential control issues. As projects mature, they may opt to use their tokens for network security staking.

Projects that use LSD assets for security collateral must consider the credit and security risks inherent to the LSD platform itself, adding an extra layer of risk.

Competitors

Restaking is a relatively new concept pioneered by EigenLayer, with few current adopters. For EigenLayer, the primary alternatives that potential clients weigh are whether to build their security network or to outsource it to EigenLayer. As of now, EigenLayer needs more client use cases to demonstrate the superiority and convenience of its solutions.

Valuation Projection

For EigenLayer, a novel business venture, there lacks a clear benchmark project and corresponding market value. Hence, our valuation is based on predicted annual protocol income and PS (Price-to-Sales ratio).

Before commencing a detailed estimate, we need to make several assumptions:

EigenLayer’s primary business model is to collect security service fees from AVS service users. 90% of this fee goes to the LSD depositors, 5% to the node operators, and EigenLayer takes a commission of 5% (consistent with Lido’s standards).

AVS service users pay an annual security service fee amounting to 10% of the LSD capital they lease.

The reason for choosing 10% is that mainstream PoS (Proof of Stake) projects offer annual rewards ranging from 3-8% to PoS stakers. Given that many projects utilizing EigenLayer are relatively new, initial incentive ratios are likely higher, so an average security service fee rate of 10% is selected.

Data on the PoS reward rates for major L1 platforms can be found at: https://www.stakingrewards.com/

Based on these assumptions and considering the LSD assets loaned out by EigenLayer, along with the corresponding PS, we derived the following project valuation range. The color-coded sections in the valuation indicate the ranges deemed more probable, with greener hues suggesting a more optimistic outlook.

The reason for highlighting the “LSD annual loan volume of 20-50 billion” and “PS of 20-40 times” as more probable valuation ranges is:

Currently, the market value of PoS staking tokens from the top ten public chains stands around $73 billion. Including Aptos and Sui pushes this to nearly $82 billion. However, the stakes from these two projects primarily derive from unreleased team and institutional tokens. Excluding these outliers, we assume that EigenLayer’s share of the total PoS staking market will fall between 2.5%-6.5%, corresponding to a market cap of $20-50 billion. Whether this share estimation is reasonable is open to interpretation.

The PS value of 20-40 times is anchored to Lido’s current 25 times PS (data as of August 30), and newer narratives might enjoy a higher premium when first introduced.

From this projection, $2-10 billion could be a reasonable valuation range for EigenLayer. For primary investors entering at a valuation of $5 billion, considering token unlocking restrictions, they might not leave much of a safety margin for themselves. Rumors of investors wanting to purchase EigenLayer tokens OTC at a valuation of $20 billion should be approached with caution.

It’s essential to clarify that the above valuation pertains to the entire EigenLayer project. The actual token market value depends on the token’s capability to capture value in its operations, such as:

What portion of the protocol’s income belongs to token holders?

Besides buybacks/dividends, are there substantial use cases for the token in operations, increasing its demand?

Will EigenDA share the same token with EigenLayer, providing more scenarios and demand for the token?

If the first two points are not sufficiently addressed, it might further diminish the intrinsic value of EigenLayer tokens. However, a positive surprise in the third point could add value to the token.

Furthermore, EigenLayer’s market cap at its debut will also depend on the prevailing bullish or bearish market conditions.

Let’s await the market’s verdict.

Disclaimer:

1. This article is reproduced from [Mintventures], and the copyright belongs to the original author [Alex Xu]. If there are objections to the reproduction, please contact the Gate Learn team, and the team will process it promptly according to relevant procedures.
2. Disclaimer: The views and opinions expressed in this article represent only the personal views of the author and do not constitute any investment advice.
3. Other language versions of the article are translated by the Gate Learn team. Without mentioning Gate.io, it is not permitted to copy, disseminate, or plagiarize the translated articles.