EigenLayer and Restaking in the Ethereum Network
In April 2023, Ethereum developers activated the Shapella update, which introduced several changes to consensus and execution layers. One of the most significant changes was the ability to withdraw ETH from the Beacon Chain deposit contract.
The hard fork sparked a surge of interest in cryptocurrency staking. Over the course of three months, the volume of assets locked in the validation mechanism increased by 130%, surpassing 26 million ETH.
The influx of liquidity is largely attributed to the fact that validators now have the ability to unlock their assets. In the eyes of potential investors, the finalization of the Proof-of-Stake (PoS) mechanism has transformed staking into a comprehensible and relatively low-risk model of passive earnings.
Some experts even believe that the network’s offered yield will become the primary driver of Ethereum’s ecosystem development in the near future.
The Shapella hard fork also created the necessary conditions for the emergence of new directions and project implementations that were previously impossible due to existing network limitations. And one of these directions is restaking.
In this article, we will explain what restaking is, highlight the notable aspects of the EigenLayer project, and explore why Vitalik Buterin considers the reuse of ETH a potential threat to consensus in Ethereum.
What is Restaking?
The concept of restaking shares many similarities with merged mining. Merged mining refers to the simultaneous mining of two or more cryptocurrencies without reducing the overall mining efficiency.
Essentially, the model allows for the same proof of work to serve as the security guarantee for multiple networks that have compatible consensus algorithms based on Proof-of-Work (PoW).
In the context of PoS blockchains, the concept involves redeploying capital that is already staked for similar purposes.
In Ethereum, restaking aims to address the needs of actively validated services (AVS) products. These products process data obtained from outside the main network and, therefore, need to independently create mechanisms to secure their systems. Examples of such projects include cross-chain bridges, oracles, and sidechains.
The implementation approach for this model can vary, but in general, derivative tokens are issued within the restaking framework and then locked in specific smart contracts. Holders of the underlying assets may be subject to additional slashing conditions according to the rules of the target AVS.
In other words, users stake a cryptocurrency that is already being staked, generating additional returns.
The value of this model extends beyond profitability. For example, in Supra Oracles, it is believed that restaking enhances capital efficiency by allowing validators to scale their presence in the ecosystem while offering additional services to participants.
In turn, AVS obtains a secure and efficient tool for creating a verification mechanism. According to Nick Ashley, the Head of Marketing at Rocket Pool, restaking can have a significant impact on liquid staking protocols by increasing their decentralization.
This new crypto-economic security primitive has the potential to establish itself firmly in the industry. However, the viability of restaking in the Ethereum network is yet to be proven, and the pioneer in this segment, the EigenLayer project, aims to do just that.
EigenLayer
EigenLayer enables ETH stakers to participate in the verification of Ethereum-based software modules and receive additional rewards. To do so, they must connect to special smart contracts and agree to additional slashing conditions.
At the time of writing, there are two types of restaking available in the protocol:
- Native restaking allows validators to re-stake cryptocurrency by providing the necessary account details to withdraw their staked ETH to the EigenLayer smart contract address.
- Liquid restaking allows for the re-locking of liquid staking tokens (LST), such as stETH from Lido and rETH from Rocket Pool.
According to the technical documentation, there is also potential for modifications that involve the locking of LP tokens representing a share in a pool containing ETH or LST.
In April 2023, the project was launched on the Goerli testnet, and on June 14, the smart contracts were deployed on the Ethereum mainnet. A full-functional protocol launch is expected by the end of the year. Afterward, validators will be able to choose projects they want to secure based on their risk readiness, and their resources will be pooled together.
Stakers earn special points called restaking points for their activity. These points are accumulated based on the amount of cryptocurrency contributed to the protocol within a specific time frame. In the future, modules will take these points into account when selecting validators.
The team plans to open registration for “operators,” who will interact with AVS on behalf of ETH holders who have delegated their assets to them. According to the developers, these mechanisms combined will ensure the necessary level of system decentralization. The first compatible AVS is expected to emerge by the end of 2023.
Prospects of EigenLayer
EigenLayer has been actively discussed since its development announcement, and the protocol launch on Goerli confirmed the ongoing interest from users in the new concept. After the protocol launch on the mainnet, the team restricted the maximum allowable LST volume to 9600 ETH, explaining the decision as a measure to safeguard the project. Once this threshold was reached, the creation of new EigenPods—smart contracts required for native restaking—was also disabled.
In mid-July, the developers raised the limit to 32,000 ETH, and then, literally the next day, to 45,000 ETH. EigenLayer explained that this step was due to the “incredibly high demand” from ecosystem participants.
The expanded pool was filled within minutes, with interest in the project coming from major players as well. For example, according to Arkham Intelligence, market maker Wintermute deposited 750 stETH into the protocol.
However, the majority of deposits still do not exceed 1 ETH.
According to a representative from EigenLayer, the team plans to increase the limit on the maximum token volume for restaking in the future. However, he noted that there are currently no “exact data [on this matter].”
The project is targeting a market valued at nearly $50 billion at the time of preparing this material. Several products oriented towards utilizing the protocol have already been announced, with some of them being internal developments.
One of the recent additions is EigenDA. EigenLayer claims that this solution has the potential to reduce transaction costs in Ethereum-based L2 networks by 80%.
As EigenLayer democratizes the validator system-building process, the protocol has the potential to set a new trend, addressing a relevant issue for many AVS. If the project succeeds in the market, it could also give rise to a new segment of products offering similar services. For example, a similar mechanism is already included in the roadmap for Polygon 2.0, albeit with some distinct implementation.
Rocket Pool also expects to see more protocols operating in this direction entering the market. The main question is how committed the new participants in the ecosystem will be to the core principles of Ethereum network security.
Disadvantages of EigenLayer
Despite all the advantages of restaking, the EigenLayer model has several drawbacks that can pose systemic risks to the underlying network. As EigenLayer is a pioneer in its segment, let’s examine its main disadvantages.
In May 2023, Ethereum founder Vitalik Buterin stated that projects expanding validator capabilities pose a potential threat to the “social consensus” of the blockchain.
He distinguishes between economic and social consensus. The former involves making decisions solely based on the amount of cryptocurrency staked, while the latter considers events happening outside the blockchain.
According to Buterin, some projects, including those focused on restaking, could become influential enough to pressure the community into making decisions favoring a specific group. This would undermine Ethereum’s status as a neutral network.
In response to Buterin’s concerns, a representative from EigenLayer referred to an interview with the protocol’s founder, Sreeram Kannan, for Bankless.
Kannan agreed that Ethereum protocol implementations using a set of validators should not rely on social consensus. He also emphasized the need for responsible security practices and avoiding excessive risks for restakers.
Regarding EigenLayer, the project’s founder mentioned that the team is also working on certain internal protective mechanisms. Among potential risk reduction measures, he mentioned vetoing slashing and preventing excessive financialization of the protocol.
Slashing, in general, is often considered a weakness of the restaking concept. In EigenLayer’s case, the model has complete control over this mechanism, which means that “honest” validators could be unjustly penalized due to vulnerabilities in its smart contracts or connected services.
The open market model used by the protocol can also play a malicious role. In the competition for AVS validators, the slashing conditions could potentially be softened, making it nearly impossible to identify dishonest network participants.
Galaxy Digital specialists also highlight another issue: EigenLayer node operators may gain a dominant position among Ethereum’s set of validators, giving them an advantage in applying practices oriented towards maximal extractable value (MEV).
Nevertheless, many in the community believe that these mentioned drawbacks are not a reason to hinder innovation. Instead, the focus should be on secure development, with a priority on reducing risks for the core blockchain.
In the future, the proliferation of protocols like EigenLayer will change the economic balance of Ethereum and simplify the infrastructure-building process, ultimately benefiting the ecosystem’s development.
However, it is important to remember the downsides of the mechanism, especially in terms of its impact on the consensus mechanism. Development teams need to approach their work methodically and conservatively, paying special attention to proactive management of systemic risks.
At the same time, restaking is actively discussed within the community, and the ongoing discussions are constructive. This is a positive signal, as by the time the concept is widely implemented, developers may address existing issues and reduce network-specific risks, similar to what happened with the aforementioned MEV.
The technology solves problems relevant to many services and enables validators to manage capital more efficiently. Therefore, it can be expected that the segment will follow the standard development cycle seen in the cryptocurrency industry: early experiments, concept validation, emergence of imitators, hype, and ultimately, a flow of investments.