Economics

EigenLayer introduces an innovative economic model designed to extend and enhance the security framework of the Ethereum blockchain through restaking mechanisms without introducing a native token for its operations. This economic model leverages Ethereum's existing cryptoeconomic security, facilitating a marketplace that connects validators, operators, and AVS consumers in what can be described as a bootstrapped, “pooled” security.

As established previously, the economic model of EigenLayer is built around the concept of restaking, where AVS’s share pooled security provided by Ethereum validators, where liquid staking ETH can be restaked to provide security to other ecosystem applications and protocols.

Validator-Operator-Consumer Marketplace

This marketplace facilitates the interaction between the three main stakeholders:

Security Demand by Consumers: AVS that require secure validation services enter the marketplace to tap into the pool of staked ETH provided by validators. They offer rewards (in ETH or other forms) for securing their services, creating a demand for restaking.
Security Supply by Validators and Operators: Validators, possibly through operators, supply security to these AVS by restaking their ETH. They assess the reward opportunities and risk profiles of different AVS to decide where to allocate their staked ETH.
Operational Management by Operators: Operators mediate between validators and consumers by managing the operational complexities of restaking in different AVS. They optimize the allocation of staked ETH to maximize rewards and minimize risks based on their expertise and the specific needs of the AVS they serve.

EIGEN Token and April Airdrop

Launched in April 2024, the EIGEN token serves as EigenLayer's native cryptocurrency. It functions as a universal staking token, crucial for on-chain verification and rewarding "intersubjective work" conducted by validator node operators. According to the Eigen Foundation, the security and stability of EigenDA are reinforced by staked deposits that include both ETH and EIGEN, though the specifics of the risk-reward structure for staking EIGEN are yet to be detailed.

Airdrop Season 2

The Eigen Foundation announced in Q3 2024 the opening of the Season 2 Stakedrop claims, a key milestone in the lead-up to the official launch of the EIGEN token. This distribution reflects the Foundation's recognition of the critical contributions made by stakers, ecosystem partners, and community members in shaping EigenLayer. The stakedrop provides an opportunity for participants across the ecosystem to claim their rewards, reinforcing EigenLayer's commitment to decentralization and the security of its platform.

The EIGEN token will be distributed across three main categories: stakers and operators, ecosystem partners, and community members. Each group reflects key contributors to the EigenLayer ecosystem during Season 2.

Stakers & Operators: This group includes participants who actively staked ETH or EIGEN during Season 2, ensuring the security and integrity of the network. If you staked through an LRT protocol, your respective LRT will manage the distribution process. Operators, on the other hand, will be able to claim their rewards via a dedicated smart contract, allowing them to provide a new wallet address securely. Eligible participants can claim their EIGEN tokens at claims.eigenfoundation.org. The claim window is open until March 16th, 2025
Ecosystem Partners: Partners such as Actively Validated Services (AVSs), Layer Rollup Technologies (LRTs), Rollups, and RaaS providers who played key roles in expanding EigenLayer are also eligible for the stakedrop.
Community Members: Early advocates, developers, contributors, and content creators who completed social verification by September 13th, 2024, are eligible for the stakedrop. These community members have helped drive the growth and vision of EigenLayer.

Token Utility and Governance

The EIGEN token is instrumental in securing AVS on the EigenLayer, with potential future applications including its use as staking collateral for other AVSs. A notable governance feature of EIGEN is its mechanism for "intersubjective forking," allowing stakeholders to correct and address slashing errors that might not be transparently identifiable on-chain but are recognized by the community. This capability ensures the protocol remains adaptable and evolves through community-driven consensus, enhancing governance effectiveness.

EIGEN is designed to tackle two primary categories of faults:

Objectively Attributable Faults:

These are indisputable errors that can be proven mathematically or cryptographically, such as the incorrect execution of a rollup, verifiable directly on-chain.

Intersubjectively Attributable Faults:

These errors involve scenarios that cannot be conclusively proven on-chain and require consensus among observers. An example is an erroneous valuation claim between cryptocurrencies, which might be upheld on-chain due to a compromised validator consensus, despite contrary evidence from off-chain sources.

Existing solutions for these faults typically involve slashing stakes of malicious operators or initiating blockchain forks. However, these measures can be impractical or excessively burdensome, particularly when a majority of validators are dishonest or when coordinating a fork requires extensive resources.

Two-token Model

EIGEN and its underlying asset, bEIGEN, are crafted to efficiently manage both objective and intersubjective faults:

EIGEN: A versatile token used in DeFi applications, designed to remain stable and "fork unaware," thus maintaining its integrity even in the event of intersubjective faults leading to forks.
bEIGEN (backing EIGEN): Directly contributes to the security of the AVS ecosystem. Validators stake bEIGEN to secure AVS operations, earning rewards in return. This token is crucial for maintaining the canonical state of EigenLayer.

This dual-token structure allows EigenLayer to resolve complex governance challenges. In cases of disputes, such as issues with data availability or faulty price oracles, bEIGEN can be forked into two versions to represent different outcomes. Only bEIGEN holders are affected by these disputes, while EIGEN holders remain insulated unless they choose to convert their tokens.

EigenLayer’s model allows the community to drive decisions, ensuring that market outcomes reflect broader consensus. While bEIGEN holders bear the risk and potential rewards, EIGEN remains a more flexible asset for broader ecosystem use. This separation creates a more adaptable system for decentralized governance and dispute resolution, while maintaining integrity and security.

However, this model introduces economic challenges, particularly for autonomous validation services (AVS) within the ecosystem. These services may benefit from the interconnected demand but must weigh the costs of revenue sharing with stakers versus independent bootstrapping. EigenLayer offers significant advantages by providing a large security pool, but the long-term sustainability of this trade-off remains in question.

These two tokens collectively ensure a robust security mechanism across EigenLayer's platform, allowing them to secure a wide array of protocols and infrastructures beyond just Ethereum's Layer 1. This flexibility positions EigenLayer as a pivotal force in enhancing blockchain security and operational efficiency.

Airdrop Strategy and Token Distribution

The initial airdrop strategy was particularly strategic, offering reward boosts for restakers demonstrating long-term commitment, thus bolstering network resilience and decentralization. An initial 5% of the EIGEN supply was dropped to stakers, with 15% total set aside for future airdrop rewards. A smaller allocation was reserved for Goerli testnet participants affected during the deployment disruptions of EigenLayer, illustrating a precedent in managing future distributions. Upon launch, EIGEN tokens were distributed with immediate utility—enabling recipients to stake tokens to secure the EigenDA network. Additionally, future distributions will likely adopt a similar weighted system to favor contributors who enhance network stability and growth.

The launch also introduced a non-transferability period to ensure that holders are genuinely invested in the network’s success, aligning with the foundation’s policies against the speculative trading of EIGEN derivatives. This stance is intended to preserve community cohesion and eligibility for future airdrops. Of course, this strategy has been highly controversial, with many original stakeholders feeling stuck and unable to move their tokens “for months” following this initial 5% airdrop.

This is especially true when compared to the 55% token allocation to the EigenLayer team and investors, which sparked comparisons to issues with previous airdrops like Starknet's, where investor tokens became tradable shortly after launch. Furthermore, the airdrop excluded residents from a list of countries, including the US and Canada, as well as VPN users, likely due to regulatory risks. This led to frustrations among users who could use the platform but were excluded from the airdrop.

Additional Token Allocations

Alongside the 15% of the total supply designated for stakedrops, an additional 30% of the initial token supply is allocated for EigenLayer's development and community initiatives, with an equal split between the Eigen Foundation and community-directed efforts. As mentioned above, private investors in EigenLayer are set to receive 29.5% of the EIGEN supply, while the core team will receive 25.5% (for a total of 55%). These portions are locked for one year, with a subsequent gradual release of 4% per month over the following two years. To ensure the sustainability of ongoing contributions, EigenLayer plans to implement inflationary tokenomics, granting the community the authority to manage and distribute these emissions among the various stakeholders within the EigenLayer ecosystem.

Staking

Participants who restake ETH on EigenLayer can benefit from five potential income streams:

Yield from ETH staking - obtained through traditional ETH staking.
Yield from restaking - earned by providing services to AVS via EigenLayer.
Points accruing towards potential EigenLayer airdrops.
Points accruing towards potential airdrops from delegators (through the Liquid Restaking Protocol).
Airdrops from dApps or AVS that derive security from EigenLayer.

As of Q3 2024, approximately $12.5 billion in value is staked through the EigenLayer protocol, or approximately 5 million ETH tokens. The majority of this value comes from restaked LSTs, mostly made up from Lido stakers. With such a massive surge in TVL, EigenLayer has quickly risen to become the second largest contributor to Ethereum’s $53 billion in TVL - trailing only the aforementioned Lido. This places EigenLayer ahead of DeFi OGs like Aave, Maker, and Uniswap.

The restaking process varies by the type of stake. Liquid Staking Derivatives (LSDs) can be restaked through simple interactions with the platform's interface, although currently, the capacity for LSD deposits is at its limit. Native restaking involves more complex procedures, including setting up an EigenPod contract and defining a set of validator withdrawal credentials. This document does not delve into the technical specifics of EigenLayer but rather focuses on the financial and incentive-related aspects of the setup.

Per this Dune dashboard, as of Q2 2024, of 120 million total ETH about 27% of that Ether is staked, with 4.1% of all staked ETH being restaked into protocols like EigenLayer. Thus, there is still a massive runway for growth in restaking protocols.

LRTs

Liquid restaking tokens (LRTs) are an important development in the restaking and decentralized finance ecosystems. They allow restaked assets to remain liquid and tradable across different DeFi protocols. This means that users can still use their assets in various applications while earning staking rewards and contributing to network security.

There are several advantages of using LRTs in DeFi:

Facilitating liquidity: Investors can access immediate liquidity from staked assets, which would otherwise be locked and inaccessible.
Enhancing Capital Efficiency: Users can deploy their assets in various DeFi products, optimizing yield generation.
Diversifying Risk: By participating in different protocols, investors spread and potentially lower their exposure to risk.

Challenges and Risks of Integrating LRTs with DeFi

Restaking introduces a layer of complexity and risk that merits careful consideration. The central debate among Ethereum developers and the broader community, including insights from Ethereum co-founder Vitalik Buterin, revolves around the potential ramifications of restaking on the Ethereum network's consensus mechanism.

A primary concern is the risk exposure for staked ETH. When restaked, it serves to secure not only the Ethereum mainnet but also other blockchain protocols. This dual commitment raises questions about the security and stability of these additional protocols, which might have vulnerabilities or weaker security frameworks. In instances of protocol failure or security breaches in these secondary networks, restakers face the risk of having their ETH deposits slashed as a penalty.

Additionally, there are also challenges and potential risks involved in integrating LRTs with DeFi:

Smart Contract Vulnerabilities: As with any DeFi protocol, the underlying smart contracts face risks of exploits or bugs.
Market Volatility: The value of LRTs could fluctuate significantly due to market dynamics, impacting their stability.
Regulatory Uncertainty: The evolving landscape of crypto regulations may affect the mechanisms and acceptance of LRTs.

This risk is further magnified by the decentralized nature of decision-making in many restaking projects. Often, the responsibility of whitelisting additional validation services (AVS) for restaking falls to decentralized autonomous organizations (DAOs). However, individual restakers may prefer a more hands-on approach to vetting these services to mitigate risks associated with malicious networks and potential new attack vectors.

To mitigate these risks, several key measures can be implemented, focusing on optimizing restaking parameters and enhancing user autonomy in decision-making.

Optimization of Restaking Parameters: One effective method to mitigate risk is the careful calibration of restaking parameters. This includes setting caps on Total Value Locked (TVL), adjusting slashing amounts, fine-tuning fee distribution mechanisms, and establishing minimum TVL requirements. By optimizing these parameters, restaking protocols can strike a balance between encouraging participation and ensuring the network's stability and security.
Diversification Across AVSs: Diversification is a cornerstone of risk management. In the context of restaking, this involves spreading staked assets across various Additional Validation Services (AVSs). This strategy reduces the impact of any single AVS's failure or security breach on the restaker's portfolio. A well-diversified restaking approach can significantly lower the risk of aggregate losses.
User-Centric Risk Profile Selection: An immediate and impactful step that restaking protocols can adopt is to offer users the option to select different risk profiles when depositing for restaking.

This user-centric approach empowers individual investors to align their restaking activities with their personal risk tolerance levels. By providing tailored risk profiles, protocols can cater to a broad spectrum of users, from risk-averse individuals to those willing to embrace higher-risk opportunities.

Enhancing User Autonomy in AVS Selection: Ideally, users should have the autonomy to assess and choose the AVSs they wish to restake to without relegating this decision to a DAO.

This approach not only empowers users but also encourages a more educated and engaged community. Users who are well-informed about the AVSs they choose to support are likely to make more judicious decisions, leading to a healthier and more secure restaking ecosystem.

Collaborative Efforts for Risk Minimization: The successful implementation of these measures requires collaborative efforts among various stakeholders, including AVSs, EigenLayer, and the Ethereum Foundation. Establishing a roadmap and working cohesively towards shared goals are critical for minimizing risks associated with restaking.

The EigenLayer team's ongoing partnership with the Ethereum Foundation exemplifies this collaborative spirit, focusing on aligning efforts to ensure that restaking does not introduce systemic risks to Ethereum, Liquid Staking Tokens, or AVSs.

Valuing EigenLayer

The supply side of EigenLayer is influenced by the growing trend of yield-seeking behavior among users, which in turn amplifies the amount of LSTs staked within the platform. This trend bolsters the security EigenLayer can extend to its AVS.On the demand front, the user base of EigenLayer comprises various projects necessitating validators' consensus backed by staked token security. This includes a wide range of AVSs, as previously detailed. A key question centers around the utility of the EigenLayer token. Theoretically, EigenLayer's valuation should proportionally increase with the number of applications developed on its smart contract layer, and it is anticipated that these AVS will contribute to EigenLayer's revenue through gas fees.

Speculation suggests a possible similarity to Liquid Staking Protocols like Rocket Pool, where tokens (e.g., RPL) are used as collateral. It's conceivable that EigenLayer tokens might be required as a prerequisite stake for protocol usage. Another analogy is Lido's LDO token. EigenLayer operates on a model where it derives a portion of the yield from the AVSs. This approach mirrors the strategy employed by Lido Finance, the frontrunner in liquid staking protocols. Both EigenLayer and Lido Finance accumulate revenue by claiming a share of the yield produced. However, a fundamental distinction exists: Lido Finance earns from the native yield of ETH deposited on its platform, whereas EigenLayer benefits from the yield of additional services built atop its framework.

Evaluating the market cap of Proof of Stake (PoS) tokens as a proxy for economic security, a pattern emerges. An average 10:1 ratio of market cap to TVL in top PoS protocols suggests a benchmark for desired economic security. However, the necessity for such a high security level might be reconsidered if costs are involved, potentially lowering the requirement.

Existing applications in popular AVS categories serve as a reference point in estimating the TVL that EigenLayer might secure. With a combined TVL of approximately ~$53 billion across these categories (bridges, oracles, rollups, etc.), a portion of this might transition to AVSs under EigenLayer's umbrella. Yet, realistically, only a fraction of this shift might occur, given that larger TVL protocols are likely secured with their high-value tokens.

The staking reward of a protocol is indicative of its security expenditure. For emerging AVSs on EigenLayer, higher security demands could translate to more attractive incentives. Staking rewards in new protocols hover around 12%, tapering to about 3% as they mature. Assuming cost efficiencies in EigenLayer, these rewards should not fall below 12%.

EigenLayer vs. Competitors

The comparison between Celestia and EigenLayer in the cryptocurrency landscape presents a nuanced picture of how different platforms approach the concept of security and data availability in blockchain technology. While both platforms focus on providing security and data services, their methodologies and business implications are distinct.

EigenLayer extends cryptographic security to applications on its network through liquid staked ETH, which can be restaked. This process involves additional slashing risks for stakers, implying that AVS (actively validated services) outsource the crypto-economic heavy lifting to restaked ETH derived from EigenLayer.

Despite some similarities, fundamental differences exist between EigenLayer and Celestia, particularly in how they accrue value from crypto-economic activities. A key difference lies in the origin of their security offerings. Celestia develops its validator set, compensating them through native token inflation to secure the network and provide consensus. EigenLayer, conversely, harnesses pooled security from restakers willing to accept higher slashing risks.

Another critical aspect is the responsibility assigned when adverse events occur. In EigenLayer's model, restakers bear increased risks, with their ETH stakes subject to slashing under specific conditions. Celestia's approach is more straightforward: DA nodes face slashing of their stakes if they fail to provide necessary proofs.

Governance

EigenLayer's governance model introduces a novel forking mechanism activated by intersubjective faults—situations acknowledged by the community that require intervention without clear on-chain evidence. This allows the protocol to fork at the token level, thus transferring control over assets within EigenLayer's smart contracts independently of Ethereum's broader social consensus.

Understanding Faults in Cryptocurrency Systems

Faults in cryptocurrency systems demand a response, either punitive or rewarding, to secure a decentralized network from threats. These faults are categorized into:

Objective Faults: Clear, deterministic situations where actions are strictly right or wrong, based on mathematical or cryptographic proofs.
Intersubjective Faults: These have a clear outcome but require verification by multiple, possibly uncoordinated parties.
Subjective Faults: Scenarios where the correct outcome can vary based on evolving opinions over time.

Two Token System & Intersubjective Forking

EigenLayer employs a two-token system to manage the complexities of forking:

EIGEN: Used for DeFi and trading, this token acts as a wrapper over bEIGEN. Token holders can unwrap their EIGEN for participating in intersubjective staking or re-wrap it when opting out. This approach simplifies the responsibilities of exchanges and DeFi protocols in supporting the most current token version.

bEIGEN (Backing Eigen): Exclusively used for intersubjective staking towards AVSs.

Token holders define the rules and expected outcomes for handling intersubjective faults. For instance, they might decide on the acceptable accuracy range for an Oracle using EigenLayer, beyond which a violation triggers a slashing event. Violations of these established rules result in forking, leading to potential slashing for any bad actors who persist on an invalid fork.

To initiate a fork, a significant fraction of EIGEN tokens must be staked as a bond by the proposer. If the community validates the fork, the proposer recovers their bond and earns a reward. Conversely, if the fork is rejected, the proposer’s tokens are burned, serving as a risk mechanism influencing community decisions. This framework ensures that EIGEN provides a unified and predictable security model that spans different blockchain infrastructures and services.

A potential issue with a token that frequently forks is the operational challenge it poses for DeFi protocols and exchanges, which must continually update to the latest token version. The two-token system mitigates this burden, reducing the operational complexity and ensuring smoother functionality across trading and staking activities.

Loading...