Exploring the Next ALT: 8 Notable Use Cases for EigenLayer AVS

Remember my words: Restaking will become the fastest-growing category in 2024. Restaking is the 9th largest DeFi category, with a value of $2 billion on EigenLayer alone (and this number is still rising at the time of writing this article). Don’t forget, the “liquidity restaking” category ranks 13th, valued at $1 billion. With the release of the first AVS token (ALT) and the opening of Eigenlayer deposits on February 5th, it’s time to clearly understand what’s happening in this field. In this article, I will briefly introduce EigenLayer restaking and its supported new use cases for Active Validation Services (AVS). Cool!

Eigenlayer will open deposits on February 5th. Here’s what you need to know.

They have modified the points system to encourage decentralization by capping single deposits and LST/LRT allocations at 33%. To optimize Eigenlayer points, it is advisable to avoid protocols ranked in the top three by TVL:

• eETH launched by EtherFi (197k ETH)

• stETH launched by Lido (195k ETH)

• swETH launched by Swell (112k ETH)

However, Swell and EtherFi offer double points through native token airdrops. I adopt a diversified set of LSTs/LRTs to balance point accumulation and risk.

Regarding the competition for LRT, I have hedged bets on several competitors:

• EtherFi: LRT leader with a 51% market share of LRT.

• Kelp DAO: Earn Eigenlayer points and KelpDAO mileage by restaking stETH or ETHx.

• Renzo: Like EtherFi, uses Eigenpods for native ETH restaking. LRT’s market share has grown to 21%.

• Swell: You can deposit ETH to get swETH LST and restake it on Eigenlayer. Or directly deposit to obtain rswETH LRT.

• Eigenpie: A newcomer, but already has $100 million in TVL, supports 6 types of LST, and offered double points in the first two weeks. These points are used for a 10% EGP token airdrop and secured 60% of the EGP tokens in the IDO with a $3 million FDV to incentivize early participation.

I will explain their differences in more depth in the next article.

Restaking

As early as September 2023, I detailed my views on restaking and betting liquidity restaking tokens (LRT). But since then, there has been significant progress. Now, there are multiple LRT protocols on the mainnet, and everything is heating up with the token release of AltLayer.

Many people still need clarification about what restaking is and often overcomplicate it.

In short, restaking allows you to pledge (stake) your ETH for various Active Validation Services (AVS), thereby enhancing the security of the chosen protocol. This includes services such as bridging, oracles, sidechains, and more innovative concepts are on the way.

For example, as long as there is sufficient economic security (in this case, ETH) to support withdrawals, Optimism and Arbitrum can bypass the 7-day fraud-proof window to enable instant withdrawals.

These “secured bridges” provide ample redistribution guarantees in the event of validator misconduct. However, if you restake on a “secured bridge AVS,” you might lose some ETH if the validator errs. (To my knowledge, if there’s a smart contract vulnerability, secured bridges cannot protect your funds either).

You can directly restake ETH or restake ETH through liquidity staking tokens such as stETH, rETH, cbETH, etc. Eigenlayer has added support for LSTs, sfrxETH, mETH, and LsETH.

The benefits of restaking include:

• Multi-protocol rewards: Earn rewards from multiple protocols using the same ETH, such as fees for ensuring bridge security.

• Increased security: New protocols leverage Ethereum’s security.

• Developer freedom: Eliminates the need to establish a new security layer, saving developers’ time and resources.

The risks are as follows:

• Slashing risk: Increased risk of losing ETH due to malicious behavior.

• Centralization risk: If too many stakers move to EigenLayer, Ethereum could face systemic risks.

• Smart contract risk: This risk is present in any corner of DeFi.

I believe the risks are limited at present, as Eigenlayer is still in the Stage 2 testnet phase and has not enabled permissionless AVS deployment. However, I agree with ChainLinkGod’s view that these risks will mostly be overlooked, and at least until 2025, we will enjoy ourselves.

In the current Stage 2 testnet phase, restakers like you can delegate operators. These operators validate AVS. So, you won’t be directly restaking on AVS!

EigenDA (Data Availability) is the first AVS in Stage 2. Rollups can integrate it to increase throughput. The Stage 2 mainnet will launch in the first half of 2024, and Stage 3 will introduce more AVS later in 2024 (the real fun will start then).

Interestingly, among many operators, Deutsche Telekom stands out. It seems that Telekom will use Eigenlayer for staking services.

Regardless, are you ready to manually select AVS and operators yourself? On the mainnet with high gas fees? Then receive rewards from AVS? And then sell those rewards for more ETH? Unless you’re a millionaire, the gas fees will be quite high.

I believe you can guess what I’m about to say: Liquidity Restaking Tokens (LRT). But more about LRT I will discuss in my next article. For now, let’s look at the use cases for Active Validation Services (AVS), which will airdrop us shiny new tokens.

The first AVS is EigenDA, but I won’t go into detail, as I doubt it will have its own token (it’s a data availability layer, helping rollups save on data storage costs).

AVS Use Cases

Don’t be misled by the name AVS. AVS is a fully mature protocol that enhances its functionality by staking ETH again. I mentioned “secured bridging” earlier, but the scope and impact of AVS will soon become even more apparent.

A well-known use case in the community recently is AltLayer, an Eigenlayer AVS case, which is a re-staking Rollup that has already launched its token.

I have introduced AltLayer in my previous articles, so I will not delve into its functionalities here. However, it is important to know that AltLayer introduces three types of AVS to achieve rapid finality of rollups, decentralized ordering, and decentralized verification.

The ALT token economics are intriguing because ALT needs to be staked alongside re-staked ETH to ensure the security of these three AVS. This point seems to be overlooked by many.

If you have farmed in the Pool2 farms during the DeFi summer of 2020, you would understand the potential for a Ponzi scheme.

Currently, only 3% of the total supply has been airdropped to the community, but there are plans for more in the future. An initial circulating supply of 11% and an FDV (Fully Diluted Valuation) of 4.3 billion USD (at the time of writing) may prove the success of a protocol that was unattended even a few weeks ago, right?

Not necessarily, but it makes me more optimistic about the entire re-staking ecosystem.

Moreover, I suspect that AltLayer is reserving liquidity mining rewards for re-stakers. As more AVS become available, various services will compete to attract high-value ETH deposits.

After all, an AVS without ETH deposits is worthless.

It’s time to look for the next ALT on EigenLayer. Here are 8 EigenLayer AVS use cases worth paying attention to.

1) Ethos: Bringing ETH Security to Cosmos

Ethos brings Ethereum’s economic security and liquidity to Cosmos.

The so-called Cosmos Consumer Chains typically issue their own native staking tokens to ensure network security. However, this introduces more complexity and an inflationary token economy. While Cosmos ATOM stakers provided an inter-chain security (ICS) solution, the Ethereum ecosystem (Ethos + re-staking) is now extending into Cosmos’ own territory.

With the launch of Dymension, ATOM forks, and now Ethos, ATOM seems to be under a lot of pressure.

The creation of Ethos was inspired by Mesh Security, which allows the staking tokens of one chain to be used on another, thereby enhancing economic security without the need for additional nodes.

Which security solution prevails will depend on adoption. Ethos is off to a strong start.

Sommelier, an automated yield vault provider with $60 million in TVL (Total Value Locked), is the first partner. To my knowledge, more “Consumer Chains” are on the horizon.

The beauty of this structure is that ETHOS could receive token airdrops (and earnings) from partner chains. At the same time, ETHOS tokens will be airdropped to those re-staking ETH on Eigenlayer when we farm EIGEN tokens.

All you need to do is re-stake ETH and claim the airdrop. It’s very straightforward.

（2）Espresso: Decentralized Sequencer

In brief, Espresso is focused on Layer 2 (L2) decentralized sequencers. As you are aware, L2 solutions have faced criticism due to the centralized nature of their sequencers. Espresso addresses this issue through their HotShot consensus mechanism, which you can learn more about on their website.

AltLayer has integrated Espresso, offering developers deploying the AltLayer stack the option to use AltLayer’s decentralized verification solution and/or the Espresso sequencer.

（3）Omni: Connecting All Rollups

Problem : While L2 solutions reduce transaction costs, they lead to ecosystem fragmentation. This fragmentation makes it challenging for builders to reach a broader audience, complicates the user experience, and disperses liquidity. Bridging has become a necessity, yet bridges often issue various wrapped tokens, which carries risks. If a bridge is compromised, there may not be sufficient underlying assets to support the wrapped tokens, leading to a de-pegging of these tokens.

Solution Omni

Omni is a “secure restaking L1 blockchain” designed to unify all Ethereum rollups. It introduces a “unified global state layer,” secured through restaking via EigenLayer. This layer centralizes cross-domain management for various applications, including:

• Cross-rollup margin accounts and leverage trading: Posting margin in one domain and using it for trading in another.

• Cross-rollup NFT minting.

• Cross-rollup lending: Depositing collateral in one domain and borrowing against it in another.

These use cases may sound familiar because they are similar to what LayerZero offers. LayerZero’s cross-chain messaging supports fully fungible tokens (OFTs) rather than wrapped tokens. For example, Manta’s STONE token is an ETH OFT issued by LayerZero, as is Lido’s wstETH OFT.

However, what happens if there’s a bug in LayerZero’s messaging system? Omni secures its network by restaking ETH, with validators risking their staked ETH for improper behavior.

Imagine a typical degen wanting to use their ETH on Arbitrum to obtain a USDC loan on Optimism. Omni validators monitor transactions on Arbitrum, ensuring the integrity of data transferred to Optimism. Validators verify and report on these transactions, incentivized by rewards and the risk of losing their staked ETH for incorrect reports.

While LayerZero might secure cross-message passing with their token staking, any issues with LayerZero contracts could lead to token dumps, rendering this security… pointless. ETH serves as a hard asset securing the network externally.

Injective partners with Omni, making INJ the first asset on Omni’s open liquidity network. Omni issues xERC20 INJ tokens, bringing INJ into the Ethereum rollup ecosystem.

Moreover, Omni has received $18 million in support from prominent investment firms like Pantera Capital, Two Sigma Ventures, and Jump Crypto. Hence, it’s anticipated to perform well.

(4) Hyperlane: Like Omni, but Better?

You might think Omni connecting Ethereum rollups is cool. Step aside, Omni, because Hyperlane aims to connect all L1 and L2 networks.

With Hyperlane, developers can build cross-chain applications—apps that operate across multiple blockchains using cross-chain messaging, ensuring their security with a modular security stack that includes a cross-chain security module (whatever that means) and re-staked ETH for security.

According to Hyperlane’s documentation, it will support Ethereum L2s, Cosmos ecosystem chains, Solana, Move chains, and more. This is really cool.

Hyperlane’s permissionless interoperability sets it apart, as rollups can connect to Hyperlane without cumbersome governance approval, etc. They really pride themselves on this. However, LayerZero v2 also seems to support permissionless deployment.

Unfortunately, I can’t find any token information for Omni or Hyperlane, so we’ll have to wait a bit longer.

(5) Blockless: Supporting dApps with Computational Power While You Use Them

“To sum it up: when you open an app, you’re naturally supporting it by using the app, and then the app rewards you.” — Twitter

This fascinates me.

In regular dApps, we cannot directly contribute computational power, and the app is limited to specific L1 or L2 functionalities like latency, transaction speed, gas fees, etc.

Thus, Blockless employs a network-neutral application (nnApp), allowing users to support them simply by using them. It uses “nested nodes,” where each user’s device acts as a node, contributing its resources to the network. This means an app’s computational power grows with its user base, a significant shift from the traditional model.

In short, you’re running a node by using the app.

For example, some dApps might choose to keep governance on Ethereum while offloading data availability workloads to Celestia or EigenLayer. But intensive computations for use cases like machine learning, AI interfaces, and gaming would be executed in a faster, more efficient off-chain environment.

This leads to direct scaling of computational support for these applications with user growth, with more users bringing more community-supplied computational power.

I’m reminded of an app on Solana called Grass, which lets you sell idle internet bandwidth to train AI, though this is outside Blockless’s functionality scope.

Blockless’s proof of stake ensures network security, so the token will be more than just a meme.

As for re-staking, Blockless will provide the network for apps developed on EigenLayer to minimize unintended penalties.

I wonder if nnApps will make my phone overheat…

Other AVS

You can see the full list of AVS on the Eigenlayer website. But other noteworthy AVS include:

(6) Lagrange:

Another competitor to LayerZero, Omni, and Hyperlane, its cross-chain infrastructure supports creating universal state proofs across all major blockchains. Recently received $4 million in seed funding from 1kx and other institutions.

(7) Drosera:

An “incident response protocol” for vulnerability attacks.

Upon a hack, the Drosera Trap detects the attack and takes measures to mitigate it. Sounds cool.

(8) Witness Chain:

Uses re-staking to implement Proof of Diligence and ensure rollup security, and Proof of Location to establish physical node decentralization.

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