Detailed Explanation of EigenLayer - A Breakthrough and Leading project of Re-staking

1. Project overview

Eigenlayer is a re-staking protocol based on the ETH staking market (do not be misled by its name, it is not designed to solve the issue of staking rewards, but rather to address the consensus trust problem of Dapps!). It was developed by EigenLabs in 2021, with the team mainly based in the United States. The project currently does not have a token issuance, but it may be launched in the future. Ethereum nodes can use EigenLayer to re-stake their staked ETH and earn additional rewards. Moreover, users can also stake ETH, LSDETH, and LP tokens on other public chains, oracles, middleware, etc., as nodes and receive validation rewards. Third-party projects can also leverage the security of the Ethereum mainnet, thus unlocking the security of the ETH consensus layer. Currently, it is in the first phase of the mainnet stage and has attracted many validators and protocol participants.

2. Background description

In the era of Layer2 on Ethereum, Rollup is currently an important method for scaling Ethereum performance. Rollups outsource execution to individual nodes or small groups of nodes, but can absorb Ethereum trust through Ethereum Virtual Machine (EVM) contracts by proving computation. They can use economic guarantees through fraud proofs (in which case they are called “optimistic rollups”) or cryptographic guarantees through succinct valid proofs (in which case they are usually called ZK-Rollups). This has greatly accelerated the pace of permissionless innovation in Rollup technology, leading to a flourishing of various proof techniques. This scaling method is built on top of the trust people have in L2 (currently mostly using optimistic proofs), but ultimately settles back to Ethereum without executing transactions on the EVM. In other words, Ethereum only provides trust at the block generation level, and any modules that are not deployed or proven on the EVM cannot leverage the underlying security of Ethereum. The only way is to build your own independent AVS (Actively Validated Services) node system, which has its own distributed validation nodes, to be responsible for the security of your own system. For example, sidechains, data availability layers (DA), new virtual machines, oracles, and trusted execution environments based on new consensus protocols, are all middlewares that cannot leverage Ethereum’s trust mechanism to create more decentralized services. Therefore, an AVS actively validated node system can be used to build their own trust network.

3. There are four fundamental shortcomings in the current organization of the AVS ecosystem:

1. Boot issues with new AVS. Innovators looking to develop new AVS must initiate a new network of trust for security.

2. Value leakage. As each AVS develops its own trust pool, users must pay fees for these pools on top of Ethereum transaction fees. This diversion of fee flow resulted in a leakage of value into Ethereum.

3. Burden of capital cost. Validators who stake to secure the new AVS must bear a capital cost, which is equivalent to the opportunity cost and price risk involved in staking in the new system. Therefore, AVS must provide a high enough staking return to cover this cost. For most AVS operating today, the capital cost of staking far exceeds any operating costs. For example, consider a data availability layer with $10 billion staked and assume that validators expect an annual percentage return (APR) of 5%. To cover capital costs, this AVS would need to pay validators at least $5 billion per year. This is significantly greater than the operational costs associated with data storage or network costs.

4.Lower trust model of DApps. The current AVS ecosystem results in a highly undesirable security dynamic: generally speaking, any of a DApp’s middleware dependencies can be targeted. Therefore, the corruption cost of a DApp must generally be considered as the minimum cost that minimizes the corruption of at least one dependency. In a world where applications rely on critical modules such as oracles with small amounts of collateral, the strong economic security guarantees provided by Ethereum may no longer apply.

4. Two new concepts of EigenLayer

Therefore, EigenLayer introduces two new concepts to help extend the security of Ethereum to any system through “re-stake” and “free market governance” and eliminate the inefficiency of the existing rigid governance structure.

1. Re-staking: EigenLayer provides a new security mechanism that allows modules to be protected by users re-staking ETH. According to the whitepaper, 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.”

2.Free market: EigenLayer offers an open market mechanism that allows validators to freely choose which modules to participate in based on their risk preferences, with the condition that they ensure security to earn profits. This governance model has two advantages: firstly, it integrates robust underlying blockchain with fast and efficient elements, and secondly, the optional validator mode allows new modules to compete for other resources among validators, thus 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 highlighted above. First, AVS can enhance economic security through Ethereum’s validators. Secondly, the security model in EigenLayer increases the cost of destruction ($13 billion); third, ETH stakers can obtain the benefits in AVS.

5. EigenLayer solves various problems in the AVS ecosystem

1. Guiding principles of the new AVS: The new AVS can derive security from a vast pool of validators on the Ethereum network.

2. Cost of capital: Because ETH stakers can reuse their capital across multiple services, their cost of capital is amortized. In particular, the marginal cost of capital for local ETH stakers who choose to join EigenLayer is minimal (theoretically zero if there is no risk of honest nodes being written down).

3. Trust aggregation: With a larger pool of capital from re-staking, the trust model becomes more robust. Consider the scenario in EigenLayer where all L1 stakes are re-staked into three AVS modules. The cost of corrupt DApps is now the total amount staked on L1 itself. However, due to the added value opportunities from the three AVS modules, the total amount staked on L1 in the presence of EigenLayer is now equal to the sum of amounts staked on L1 and each AVS module separately in the absence of EigenLayer. Therefore, in the example mentioned above, the total amount staked on L1 in the presence of EigenLayer is $13 billion. Thus, EigenLayer significantly increases the cost of corruption, raising it from the minimum stake amount to the sum of all stake amounts.

4. Value accumulation: EigenLayer provides ETH stakers with several additional revenue streams in which they can participate, further solidifying the ecosystem’s network effects due to the existence of the highly secure AVS ecosystem.

6. EigenLayer supports multiple staking modes

EigenLayer provides a variety of staking methods similar to Lido’s Liquid Staking and Superfluid Staking. Superfluid Staking can allow LP’s staking, specifically: direct staking, which will be staked on Ethereum. The ETH on is directly staked to EigenLayer; LSD staking, the assets that have been staked in Lido or Rocket Pool are staked to EigenLayer again; ETH LP staking, the LP Token staked in the DeFi protocol is staked to EigenLayer again; LSD LP staking, For example, Curve’s stETH-ETH and other LPTokens are staked to EigenLayer again.

7. Delegators

For those who are interested in EigenLayer but do not want to be an operator, they can delegate their rights to other operators. These operators will then stake the tokens in Ethereum and distribute a portion of the profits to the delegators. EigenLayer offers two modes: Solo staking mode, which strakers provide verification services and can join AVS directly, or delegate operations to other operators while continuing to verify Ethereum themselves; Trust Mode: Choose trusted operators to handle operations. If the chosen operator fails to execute according to the agreement, the delegator’s interests will be penalized. In addition, delegators need to consider the fee ratio with the operator. This could create a new market, where each EigenLayer operator establishes a delegation contract on Ethereum, specifying how fees will be distributed to the delegators.

Slashing mechanism design

The security of an encrypted network depends on the cost of attacking it, also known as the “cost-of-corruption.” If the cost of corruption is higher than the attacker’s profit from corruption, then the network is secure. The security of the ETH network’s consensus layer is guaranteed by the potential forfeiture risk of staked funds, which is what we commonly refer to as a violent means to maintain security. L2 feeds transaction data back to the main network for auditing, inheriting its security. The Eigen layer becomes a validating node by staking “ETH-like value assets” and utilizes the violent means of slashing to borrow the security of the main network.

Restaking

Originally, validators staked on the Ethereum network to earn rewards, but malicious behavior would result in a slash of their staked assets. Similarly, after Restaking, one can earn staking rewards on the EigenLayer network, but malicious behavior would result in a slash of the original ETH stake. Simply put, if validators on the Ethereum network engage in malicious behavior, they may lose half of their staked 32 ETH tokens, while EigenLayer allows for a confiscation of the remaining 50% through a slash protocol. The implementation method for Restake is as follows: when an Ethereum validation node participates in validation through EigenLayer, its fund redemption address is set to EigenLayer’s smart contract, granting it the power to slash. If the node violates the application layer’s rules, EigenLayer can confiscate the redeemed ETH through a penalty contract. This penalty mechanism allows the application layer to confirm the rights and obligations of Ethereum trust layer nodes through smart contracts, enabling other applications or middleware to utilize the Ethereum trust layer. Therefore, EigenLayer’s re-staking mechanism enhances security by significantly increasing the cost of malicious attacks.

8. EigenLayer supports new application scenarios

The new set of AVS powered by EigenLayer is extensive and includes new blockchains, middleware and modular blockchain layers such as the data availability layer. Listed here are some possibilities, many of which are also exciting directions for ongoing and future research:

1. Hyperscale data availability layer (hyperscale AVS): We can use EigenLayer re-staking and some cutting-edge ideas in DA developed by the Ethereum community (including Danksharding) to build a hyper-scale data availability (DA) layer that provides high DA efficiency and low cost.

2. Decentralized sequencer (lightweight/very large-scale AVS): Many rollups require decentralized sequencers to manage their own MEV and censorship resistance. These sequencers can be built on EigenLayer with a fleet of ETH staker nodes - there can be a decentralized fleet of sequencer nodes performing many rollup services. A decentralized sequencer does not have to be implemented, just an ordering layer without state growth issues. Therefore, it is possible to make it lightweight and even scale horizontally (by selecting a random subset of consensus nodes to order different transaction combinations).

3. Lightweight Node Bridge (Lightweight AVS): It is easy to build a lightweight node bridge to Ethereum using EigenLayer. For example, the Rainbow Bridge between NEAR and Ethereum is based on an optimistic mode but experiences high latency due to the high gas cost of verification. Validators can off-chain verify the correctness of the bridge inputs, and if a strong group of cryptographic economic nodes signs off on the bridge inputs, they are considered accepted. If there is a dispute, the bridge inputs can be verified, and validators in EigenLayer can be reduced to a slower (non-optimistic) mode.

4. Fast mode bridge for rollup (lightweight AVS): For ZK rollups, as proof verification fees remain high on Ethereum, the rollup sequencer rarely writes to Ethereum, impacting composability and delaying confirmation guarantees. Operators with large amounts of ETH re-staking on EigenLayer can participate in off-chain ZK proof verification and prove that the on-chain proof is correct. If the claims of the fast mode bridge prove to be false, a slower slash path can be triggered. For optimistic rollups, EigenLayer can enable a larger mortgage pool to participate in the certification of the state root with reduced risk.

5. Oracle (Lightweight AVS): Some people have proposed incorporating price feedback into Ethereum, or using the Uniswap token node group to provide price feedback. If all it requires is majority trust in ETH and it is an opt-in layer, then such an oracle can be built with Eigenlayer.

6. Opt-in event-driven activation (Lightweight AVS): Event-driven activations (such as clearing and collateral transfers) are currently not available in Ethereum. Although they can be built on separate layers (such as guardian networks), guardian nodes that do not manage block space cannot effectively guarantee the inclusion of event-driven operations. In EigenLayer, Ethereum validators are precisely the block proposers and also choose to re-stake in EigenLayer for event-driven activation of AVS, which can provide strong guarantees for operations involving events. However, there is a risk of reduction.

7. Opt-in MEV management: In EigenLayer, multiple opt-in MEV management methods become feasible, including proposal generator separation, MEV smoothing and threshold encryption for transaction inclusion. As a simple example, MEV smoothing can be built on top of EigenLayer by a group of restakers who decide to share MEV equally among their members. Any re-staker that deviates from the prescribed MEV smoothing behavior can be slashed. Since only block proposers need to perform specific actions when triggered, it naturally scales horizontally.

8. Settlement chain with ultra-low latency: Ethereum has high latency (up to 12 minutes) to achieve economic finality, so fast settlements with high economic finality may be useful. EigenLayer allows the creation of re-staking sidechains, where ETH re-stakers can participate in new consensus protocols with very low latency and very high throughput. The settlement layer does not require state growth, as settlement ZK proofs are nearly stateless (recent state roots can be kept as contract states). In addition, the settlement layer can be highly parallelized as many ZK proofs can be verified in parallel.

9. Single-slot finality (lightweight AVS): Single-slot finality can be imagined, where nodes sign the finality of blocks through the joining mechanism on EigenLayer. The core idea is that nodes that have restaked can now prove that they will not build on a chain that does not contain witness blocks, thus creating a potential path to closure. Design this scheme so that it is truly opt-in and does not break the consensus protocol.

9. Ecosystem

Many services are suitable for using the Eigen protocol:

1. Data Availability Service

2. Oracle

3. Cross-chain bridge

4.Rollup sequencer (such as decentralized Optimism and Arbitrum)

5.RPC node, such as Infura

6.MEV management

There are currently hundreds of applications on the official website, and there are also many star applications, such as ALT, Blockless, Celo, EigenDA, etc. we talked about yesterday. ˙AltLayerAltLayer is building rollup-as-a-service tools to scale execution at extremely low cost. AltLayer provides flash rollup by using the EigenLayer validator to quickly validate state transitions without permission. Blockless is an infrastructure platform for launching and integrating full-stack decentralized applications, enabling them to transcend smart contract limitations. With a globally distributed, trustless node infrastructure secured and supported by EigenLayer’s refactorers and operators, applications can achieve high-performance trustless computing, automatic horizontal scaling, and advanced load distribution. Take a deep dive into the Blockless collaboration on the EigenLayer forum. Celo is migrating from an EVM-compatible Layer 1 blockchain to Ethereum Layer 2 to enable trustless liquidity sharing, decentralized ordering, and promote greater consistency with Ethereum. Celo will utilize a data-available layer powered by EigenLayer and EigenDA, which inherits Danksharding’s architecture to increase throughput, lower costs and reduce latency. Drosera is a zero-knowledge automation protocol that provides emergency response infrastructure for Ethereum. EigenLayer bootstraps Drosera with a native trust network that will become more decentralized over time. Drosera aims to leverage the decentralized nature of Ethereum consensus to create a powerful and responsive collective of first responders. The protocol defines emergency response logic and high-level validation checks to be performed by the operator. EigenLayer cut and reward mechanisms ensure honesty and accountability. This approach to security extends monitoring and bug bounty programs into dynamic models. Espresso is creating a shared sequencer solution that supports rollup decentralization, improved interoperability, and a powerful, highly scalable data availability layer. It leverages restaking through EigenLayer to optimize node usage and capital efficiency while ensuring trustworthy neutrality, security and fast pre-confirmation in transaction verification. Re-staking enables consistency between Layer-1 validators and the Layer-2 ecosystem. In a centralized sequencer, almost all rollup values ​​(e.g. cost, MEV) may be captured by the sequencer. If a rollup generated by a layer 1 validator captures few or no values, the security of the rollup may be compromised, as layer 1 may be tempted to behave maliciously. By decentralizing the sequencer and having layer 1 validators participate in its operation, these security concerns are greatly mitigated. EigenDA is a data availability service that provides high throughput and economic security through Ethereum operators and re-stakeholders. Based on the principle of danksharding, EigenDA aims to expand the programmable range of rollup while increasing the throughput upper limit. Horizontal scaling will enable EigenDA to eventually scale up to 1TB/s with minimal cost and technical overhead. Flexible token economics, reserved bandwidth, modifiable signature schemes and elliptic curves, and other features enable EigenDA to support a variety of projects and use cases. Hyperlane is developing a permissionless interoperability layer that supports inter-chain composability, including local rollup bridges, communication between rollups, and multi-chain application architecture. It brings modular security through EigenLayer re-staking, enabling permissionless, chain-agnostic application deployment to any environment.

10. Team and investment institutions

EigenLabs, the team behind EigenLayer, completed a $14.5 million seed round last year led by Polychain Capital and Ethereal Ventures. At the end of March 2023, EigenLayer completed another $50 million in 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 been an associate professor of artificial intelligence and blockchain applications at the University of Washington for more than eight years, said EigenLabs’ mission is to build protocols and infrastructure that promote open innovation. Sreeram Kannan’s research at the university focuses on the distributed computing theory of 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 Ph.D. candidate at the University of Washington and a researcher at the University of Washington Blockchain Laboratory, Robert Raynor, a Ph.D. candidate 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 researcher, and Smart Contracts at the University of Washington. Architect Jeffrey Commons, computer professional developer Gautham Anant at the University of Washington, and Vyas Krishnan, a full-stack software developer at the University of Illinois.

11. Data analysis

Currently, the official website shows that a total of 710,000 ETH are staked. These modules include EigenDA, The Graph, Chain link, tBTC, API3, Gravity Bridge, Threshold ECDSA, iExec, etc. These modules cover various types such as data availability layer, oracle network, bridge, threshold encryption scheme, trusted execution environment, etc., demonstrating the wide applicability and compatibility of EigenLayer.

In conclusion, this project has identified some issues and attempted optimizations in the competitive L2 space. The addition of security verification at the middleware layer is noteworthy since the original validation for all apps was ultimately done at layer1. While this requirement is necessary, it also brings about challenges and potentially weakens the value of layer1 to some extent, causing concerns for Vitalik. On the positive side, the concept of restaking is introduced in a novel manner, offering a fresh narrative. As we all know, the cryptocurrency market favors the new rather than the old. However, this does not imply that the project is not good. It has great potential, solid fundamentals, and is genuinely addressing problems. The team behind it is impressive, as are the investment institutions supporting it. Additionally, the project has not yet launched its token, which provides ample opportunities for engagement within its ecosystem and the possibility of receiving airdrops.

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