Sirwin
Sirwin

EigenLayer Is At $10 BILLION in TVL. But What Are The Risks?!

By Michael @ CryptoEQ | CryptoEQ | 4 Mar 2024


You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $20/month you can upgrade to our FULL library of 60+ reports (including this one) and complete industry-leading analysis on the top crypto assets. 

67cbbf4723857b85c151585aa280e6d940346c501cef75bafd7dea02b44b24c9.png

Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:

  • Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
  • Early access to future CORE ratings: Being early is sometimes just as important as being right!
  • Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
  • CORE report Audio playback: Don’t want to read? No problem! Listen on the go.

 

Intro

In the rapidly evolving staking and restaking world, the integration of third-party protocols like EigenLayer into the Ethereum network presents a myriad of opportunities and challenges. As these technologies gain traction, understanding the potential risks and strategies for mitigation becomes crucial for investors, users, and developers alike. This short article delves into the concerns surrounding EigenLayer, particularly the risk of systemic vulnerabilities through widespread slashing events and the specter of increasing centralization. Furthermore, it explores EigenLayer's internal risks, offering a comprehensive view of the protocol's potential impact on Ethereum's ecosystem.

EigenLayer

EigenLayer operates at the intersection of smart contracts and off-chain software, amplifying the commitments undertaken by validators or external node operators. This amplification empowers validators to interact with AVSs, requiring them to run supplementary software.

EigenLayer is still in its early days. Phase 1 launched on the Ethereum mainnet in June 2023 and marked the beginning of this transformative journey. In 2024, EigenLayer plans to register operators for actively validated services (AVS), a significant milestone. Once this stage is reached, restakers will be able to delegate their staked positions to these operators. This development will be closely watched to determine the percentage of staked ETH allocated toward additional security provisions when EigenLayer opens its doors to the wider public.

EigenLayer layers

Restakers have the flexibility to opt-in to multiple AVSs, exposing their stake to various slashing conditions and earning rewards from multiple AVSs. In essence, EigenLayer pools security through restaking rather than fragmenting it. This pooling of security resources empowers multiple parties to collaborate and contribute to the enhanced security of the entire restaking ecosystem.

eigenlayer avs partners Source

How EigenLayer Works

The Ethereum network and EigenLayer present a dynamic and multifaceted ecosystem, offering various roles and mechanisms that contribute significantly to the blockchain's security and functionality. This detailed overview explores the roles, mechanisms, and impact of these systems.

Ethereum's security is bolstered by validators who stake ETH, a capital-based commitment to adhere to the network's rules. Validators play a vital role in storing data, processing transactions, and adding new blocks to the blockchain. Non-compliance with the rules can lead to the loss of staked ETH. For those who can't meet the 32 ETH threshold for becoming a validator, staking pools offer a collective investment opportunity.

EigenLayer (Re)Staking: Expanding Validator Roles

EigenLayer innovates on Ethereum staking by allowing validators to participate in additional networks and systems, necessitating external operators. This expansion provides validators with opportunities to earn extra rewards, thereby deepening their involvement in the Ethereum ecosystem.

eigenlayer diagram 3 Source

Participants and Their Roles

  • Restakers: These individuals commit their ETH to support new networks and services. They have two primary pathways:
    • Native Restaking: Involves independently operating an Ethereum Validator node while contributing tokens.
    • Delegating to Operators (Liquid Restaking): Stakers delegate ETH to Operators, focusing on financial support, while Operators manage the technical aspects. 
  • Operators: Responsible for managing the software built on top of EigenLayer, maintaining network integrity, and facing penalties for misconduct. These operators allocate restaked Ethereum, or ETH LST, to select and back various AVS on EigenLayer, also managing the necessary software. They have the capability to simultaneously validate for multiple AVSs, enhancing yield prospects for those who restake with them. Furthermore, operators play a crucial role in maintaining the integrity of the EigenLayer by adhering to slashing conditions set by the AVS. These conditions are designed to deter and penalize dishonest behavior, thereby ensuring that operators contribute positively to the security of the AVS.
  • Actively Validated Services (AVS): Run by Operators include data availability layers, decentralized sequencers, bridges, oracles, and more.
  • Service Consumers: End-users or applications that utilize EigenLayer's services.

restaking entities Source

AVS, requiring external operators, have specific needs, including certain node software requirements and defined conditions for slashing. Slashing, a mechanism to ensure honesty, penalizes operators for misconduct. This can include actions like double signing for sidechains or signing non-existent messages for bridges. The conditions for slashing are set in the AVS smart contracts.

eigenlayer explainer detailedSource


EigenLayer Risks

The concept of slashing, a penalty mechanism in proof of stake networks, poses a significant risk when considering the distribution of Ethereum (ETH) stakes across EigenLayer's services. The concern is that a widespread slashing event could expose systemic vulnerabilities, potentially undermining the security and stability of the network. However, EigenLayer has proposed several innovative strategies to address these risks.

Central to EigenLayer's strategy is the promotion of validator diversity, which fortifies the network's resilience against slashing and other security threats. Additionally, the deployment of anti-slashing tools and technologies enables the network to prevent validating slashable actions, further securing the ecosystem against potential vulnerabilities.

Pooled Security and Attributable Security Mechanisms

EigenLayer enhances economic defenses by reallocating ETH stakes across multiple Actively Validated Services (AVSs), thereby creating a formidable barrier against attacks. This approach not only increases the cost of attacking any single AVS but also introduces an insurance mechanism through attributable security. This mechanism ensures that penalties from slashing events are redistributed to compensate the affected parties, thereby minimizing losses and maintaining network integrity.

Economizing Security with Bundled Services

By introducing an economy of scale in security features, EigenLayer offers a particularly advantageous model for Layer 2 solutions that require a comprehensive suite of services. Bundling security purchases for services such as oracles, bridges, and sequencers allows for cost-effective enhancements to protective measures against security breaches.

Addressing the Challenge of Centralization

The computational demands of EigenLayer have raised concerns regarding the potential for increased centralization, which could influence Ethereum's validator selection. To counteract this, EigenLayer has implemented strategies aimed at promoting accessibility and decentralization.

EigenLayer's development of AVSs that require minimal computational power ensures that a broad range of participants can contribute to the network. The delegation feature allows individuals without high-powered setups to participate and receive rewards, thereby maintaining a decentralized and resilient network.

EigenLayer's Internal Risks

The incentive structure within the cryptocurrency ecosystem can lead to conflicts of interest, particularly when node operators may misuse restaked ETH for personal gain. EigenLayer addresses these potential conflicts through a combination of technical trust mechanisms, economic incentives, decentralization of control, and transparency and community oversight. These strategies aim to ensure operator compliance with network rules and align their interests with the network's well-being.

Conclusion

EigenLayer's strategic approach to mitigating risks associated with slashing and centralization, coupled with its measures to address internal conflicts of interest, demonstrates a comprehensive effort to safeguard the Ethereum ecosystem. By balancing economic incentives, technological defenses, and community oversight, EigenLayer aims to enhance the security, stability, and decentralization of the network. As the cryptocurrency landscape continues to evolve, understanding and addressing these challenges becomes paramount for the sustained growth and development of Ethereum and the broader blockchain ecosystem.

How do you rate this article?

39


Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.