Imagine hearing TardFi boomers complain about a 200% gain over a two-year period in their precious index funds—they can only dream of such things! Nonetheless, this is the case with Ethereum at this point, and maxis are starting to feel the pain.
Uncertainty surrounding the approval of an ETH ETF in May isn’t helping, and it seems Ethereum needs another major catalyst to kick things off in spectacular fashion.
It’s certainly fair to say that things have been pretty boring in the Ethereum ecosystem until now. They have been so bad, in fact, that we have been seeing single-digit gas fees on the network lately. Even the hotly touted L2s that were supposed to breathe new life into the chain have somehow underperformed. But things could be about to change…
EigenLayer looks to light the fire under the Ethereum ecosystem's ass, bringing some solid advancements in re-staking and with it the potential for some serious ponzinomics and pumpability. We saw the re-staking narrative run hard early in the cycle, and history may be about to repeat.
Hope is far from lost!
What is EigenLayer all about?
Unless you have been living with your head buried in the sand for the last decade, you would know that Ethereum has proven itself to be one of the most secure and decentralized ecosystems in crypto. Its massive network of nodes does a fine job of securing the chain and making it the de facto home for the leading projects in DeFi.
EigenLayer looks to make use of this vast network of validators by providing a security-as-a-service product with the help of re-staking.
This will allow many new projects to borrow security from the Ethereum base layer and be built on top of EigenLayer itself. Add to this the fact that projects on other chains will be able to borrow this security and you have all the ingredients to make Ethereum great again.
Re-staking 101
To run an Ethereum validator node, you first need to invest 32 ETH, which is currently valued at around $100k USD—a large amount for a fresh start-up project!
Once up and running, you will then earn rewards for helping secure the underlying Ethereum network and will have your stake slashed (reduced) for any misbehavior.
Re-staking sidesteps the high costs of running a node and allows projects to borrow security from the existing network. This is known as rehypothecation. You can think of rehypothecation as a way for projects to pay the existing Ethereum validators to lend them their security. This brings us to liquid staking tokens (LSTs).
LSTs are provided by platforms like Lido and Rocketpool. Simply head over to one of these platforms, stake your ETH and in return be given an LST token that can be used across a vast array of DeFi applications.
With EigenLayer, LST holders can ‘re-stake’ their LSTs. Think of this as pledging your ETH to not only the Ethereum consensus but also to services using EigenLayer for security.
This rehypothecation process flows as follows:
Step 1: The user purchases ETH and takes it to a staking provider like Lido.
Step 2: The user is then given an LST token that is basically a receipt for their staked ETH.
Step 3: The user can then take this LST token and re-stake it in one of the many LRT service providers.
Step 4: The LRT service provider uses the LST to provide security to another protocol.
Step 5: The user earns yield every step of the wa, making for some serious farming opportunities!
Now, it’s important to note that once a user provides an LST to an LRT service, they will have no say in which protocol the LSTs are used to secure. The LRT DAO makes this decision, and this choice will impact the yield that you earn.
A good way of thinking about this is like giving your hard-earned fiat to a portfolio manager who decides what they will invest it in, and this choice will dictate the kind of returns you will earn. Obviously, each LRT service will come with its own risks and rewards, and it is fair to imagine that the riskier protocols will pay out the highest returns.
Now you can see how this can get wild over time, I can already smell the ridiculous yields on the horizon!
Now that we understand what EigenLayer will bring to the table, let’s take a look at some of the services and applications being built on top of this impressive tech.
What is being built on EigenLayer?
A number of interesting applications and service providers are being built out on this EigenLayer tech. The first category of these projects is what are known as Actively Validated Services (AVS), which allow users to re-stake ETH to secure other protocols.
Let’s take a look at some of the major AVS players and what they actually do.
EigenDA
EigenDA is pretty much the flagship protocol being launched on the EigenLayer tech stack that aims to prove the capability of liquid re-staking and all its benefits. EigenDA is a high-throughput, decentralized data availability service that goes toe to toe with the likes of Celestia. It will be the first AVS to launch on EigenLayer, almost as a test for the network before all launches go fully permissionless.
Once launched EigenDA will allow users to delegate their stakes to a number of node operators that will be performing validation tasks for EigenDA. Rollups will be able to use EigenDA to post data and access lower transaction costs, higher throughput, and increased security.
Below, we can see the basic data flow achieved by EigenDA:
Ethos
One of the main problems that EigenLayer is trying to solve is cross-chain security that will allow projects on other chains to rent their security from Ethereum. Ethos looks to achieve exactly that for the Cosmos ecosystem.
Before Cosmos introduced the Mesh security model, any new chains launched on the network had to have their own validators in order to secure themselves. Ethos essentially allows Cosmos apps to bootstrap their security directly from the Ethereum network which is quite frankly a big deal!
There are so many applications sitting on Cosmos right now. So the potential for something like Ethos to open the door to a flood of new capital into the Ethereum network is pretty impressive, to say the least.
Exocore
Exocore is the first layer-one omnichain re-staking protocol. So what does this mean?
Basically, if you aren’t fortunate enough to have a load of ETH to stake away but still want to get in on the re-staking action, Exocore allows other tokens to be used for all the same re-staking purposes.
By using these other tokens to secure across chains, they open up entire new pools of capital that can be used to provide security-as-a-service. With novel concepts like Union re-staking that allows off-chain services to form unions to further bolster the security of their own tokens, this is surely a project to keep an eye on!
These are just three of many actively validated services that will be launching under the EigenLayer banner. Some of the other big players to watch out for include:
For a full overview of these AVS protocols be sure to check out this awesome podcast that Grant and 563 put together that takes a deeper dive into all of the above.
Get studying, anon!
Alongside the list of high-potential AVS protocols, there is also a wide range of applications that benefit from the adoption of restaking.
Here are a few to watch out for.
EtherFi
EtherFi is the current leader in TVL in the EigenLayer application space and opened up for deposits at the beginning of last year. EtherFi allows for native re-staking and, therefore, utilizes EigenPods that change the withdrawal credentials of Ethereum validator nodes into EigenLayer smart contracts that then become active for re-staking purposes.
To add to the EtherFi bull case is the fact that they are built out and registered in a way that will allow for large institutions to get involved in the re-staking fun and games. Having already seen the impact that large institutions can have and the fact they have a substantial first-mover advantage, it looks likely that EtherFi TVL will continue on its up-and-to-the-right trajectory.
Pendle
Pendle has been an absolute powerhouse this year, and its yield trading platform, which splits assets into principal and yield tokens, clearly has great market fit and massive potential.
With the rise of liquid re-staking tokens, Pendle has captured huge amounts of value by providing yield trading strategies that allow for leveraging up-and-coming airdrops like EigenLayer itself. These markets have rapidly grown and are now the largest on the Pendle platform.
A Pendle user can use their principal token (PT) to lock in the yield earned on staked ETH and airdrop tokens like EigenLayer and any tokens issued by the LRTs themselves. The yield tokens (YT) give the ability to effectively leverage farm points on EigenLayer protocols like EtherFi, where a user bets on the value of the airdrop being more than the ETH spent to purchase the YT.
With the huge amounts of hype surrounding EigenLayer, Pendle looks sure to continue capturing a shitload of value in these marketplaces, and this makes it well worth adding to your watchlist if you don’t own it already!
Mantle
Mantle is a modular layer2 EVM-compatible blockchain that uses optimistic roll-up tech to get the job done. Thanks to using EIP-4844 and its introduction of Blobs, transaction costs on Mantle have been massively reduced.
By using EigenLayer’s EigenDA for its data availability needs and its own Tectonic V2 technology that helps other OP stack chains with integration, this one looks like a sure winner.
Mantle's token, MNT, will be a native token on the network, not an ERC-20 token, and will be used as a gas token. Nodes that provide data availability to Mantle’s network will have to stake the MNT token, locking it up long-term, which is most certainly a huge bull factor that will keep the price propped up as time goes on.
With a deep treasury containing around 48% of the supply at their disposal, ready to be deployed as incentives, Mantle is no stranger to doing what is needed to drive the project in the desired direction.
Their mETH token will rise with the ETH tide, while at the same time, MNT will be under some serious demand, being utilized as gas and staked by validators making a dual combo of up-only potential.
This is one of the most talked about protocols using the EigenLayer network, so should definitely be looked at closer by anyone with any interest in making the most of this hot new narrative.
As with anything in crypto, there is no reward without risk, and all this EigenLayer madness certainly comes with a few concerns that should be pointed out before diving in head first with your entire net worth.
What are the risks?
The first thing that comes to mind when looking at what is coming down the EigenLayer pipeline is that of pure time perspective. It is anyone's guess as to where we are in the current cycle but one thing is for sure, we have certainly passed the first stages.
It could be argued that the best time to launch a product is in fact during the bear market itself, especially if you have a strong enough product-market fit to maintain the attention of the masses, something that EigenLayer clearly has.
Will this later launch be detrimental to EigenLayer’s full potential? Will it take longer than this cycle to fully play out? All are good questions that can’t be answered just yet.
The next issue is that there are simply so many infrastructure products coming to market on top of EigenLayer. Do we really need more infrastructure when we lack killer apps? We still seem to be waiting for this biblical flood of normie capital to enter the market and one can only hope that EigenLayer will launch in perfect time to capture it.
Another glaring factor is that of extreme EigenLayer airdrop farming that has taken place over the past months. As we have seen time and time again it would come as no surprise to see these airdrop farmooors dump their tokens on the free market as soon as they get their hands on them. Yes, they will probably buy back higher but nonetheless, the negative impact on price cannot be disputed.
Vitalik Buterin himself has expressed concern regarding overloading Ethereum’s consensus. Putting the fate of a large percentage of Ethereum's stake in the hands of external service providers is undoubtedly a risky business, and it’ll add an extra layer of risk to an otherwise very safe network.
Finally, there is the classic case of pure degeneracy that has led to the collapse of almost every bull market to date. It can be almost guaranteed that once EigenDA goes live and AVS building goes fully permissionless every man and his dog will flood in and begin building some serious ponzi schemes.
The problems here are that any malicious actors or dodgy LSTs could cause slashing problems on the network, hacks are likely to occur due to shitty code bases, and out-of-this-world yields will surely collapse in on themselves.
EigenLayer could well hold the potential energy to be the reason to send us all back into the dark depths of the next bear market.
Extreme worst-case scenario, of course!
Final thoughts
All this being said, EigenLayer looks to genuinely solve the problems of cross-chain capability and security fragmentation that have held certain areas of crypto back for a long time. This is undoubtedly a very bullish narrative that will most likely perform exceptionally well, and many (including myself) are hoping that it will bring Ethereum back into the spotlight.
The fact that EigenLayer already holds an enormous 16% of all crypto TVL is a solid signal of where this thing is headed. One protocol with this amount of TVL is enough to scare the shit out of the most seasoned DeFi degens. In a good way…
By providing a top-tier data availability service to many rollups will cut down on the costs of securing, posting, and retrieving data from the Ethereum mainnet by the use of EigenDA it could really change the future of not only Ethereum but crypto as a whole.
Not to mention that it greatly lowers the efforts for developers to launch new applications by bootstrapping security from one of the safest networks in existence, which can only lead to bigger and better products coming to market.
I for one am very bullish on all of these concepts and really hope to see EigenLayer turn Ethereum into the global settlement layer it was always destined to become.
