Touted as one of the most novel innovation in the Ethereum ecosystem in 2023, what exactly is EigenLayer? Read on to find out.
Blockchains are cool - but they would be even cooler if they, y’know, worked flawlessly.
The sorcerer’s stone of blockchain tech is combining all that innovation into a technology that’s cheap, easy to use, and useful beyond speculation on memes.
Good news: This deep dive’s focus could bring us a step closer to that.
If you read our ultimate guide to Ethereum Liquid Staking, you have probably already heard about EigenLayer. And if you haven’t, you will learn in this article about the most intriguing innovation in the Ethereum ecosystem in 2023:
- What is EigenLayer?
- What problems does EigenLayer solve?
- What is the goal of EigenLayer?
- What are the benefits of EigenLayer?
- What are the use cases of EigenLayer?
- What are the risks of EigenLayer?
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What Is EigenLayer?
In EigenLayer’s own terms, it is “a general-purpose marketplace for decentralized trust.”
That doesn’t really explain much, does it?
In ELI5 terms, EigenLayer allows staked ETH to be rehypothecated, meaning you can stake ETH to secure Ethereum and stake it elsewhere (without unstaking). Protocols benefit from the security of the Ethereum blockchain because the staked collateral secures Ethereum and the protocol. The user benefits from double staking yield, one from Ethereum and one from the additional protocol secured.
This is a novel mechanism in crypto-economic security. Previously, it was not possible to secure more than one layer of trust with a single collateral. This restaking primitive overcomes the challenge of fractured trust across the Ethereum blockchain.
As with any innovation, new opportunities come with new risks. While you receive additional rewards in exchange for securing additional protocols, you also take on new slashing risks. EigenLayer is opt-in, meaning you choose whether you participate in securing additional protocols. These can introduce their own slashing conditions. The section about the risks of EigenLayer explains slashing risks (and other risk vectors) in detail.
What Problem Does EigenLayer Solve?
EigenLayer addresses several problems.
@Folifoxx explains how Ethereum was the first blockchain to introduce modular blockchain technology. However, this led to a decoupling of trust and innovation because the base layer (Ethereum) provides the trust but the protocols provide the innovation. Applications consume trust, while stakers and validators provide trust.
@Cookies uses a different analogy: Ethereum is a shopping mall and applications are the shops. The consensus mechanism is the lifts in the mall. Because there are not enough lifts to reach all shops (= the throughput is not high enough), shops have to build their own. This creates new problems.
For instance, in the shopping mall analogy, there is a trust bottleneck because of the limited capacity of the lifts (= the consensus mechanism). Attacking the Ethereum network itself is rather costly because of the high total value locked (TVL) of stakers. But attacking an individual protocol is comparably easy, as the numerous hacks over the last years show. As Folifoxx puts it: the cost of corruption is much lower, the farther we are from the base layer.
The cost of capital is another hidden cost — if protocols need to incentivize a higher TVL via staking to be secured, the easiest way to pay for it is via token emissions.
In other words, decentralized applications (DApps) pay Ethereum a premium for the trust and security guarantees it provides. But that entails fragmentation of trust — particularly for DApps and bridges that do not use the Ethereum Virtual Machine (EVM) and are not compatible with the base layer.
The consequence is that middleware developers (oracles, bridges, anything that connects blockchain applications) carry the burden of bootstrapping costly new trust models. We’d be much better off if oracles and bridges did not have to worry about their security because it’s guaranteed by the Ethereum base layer. This situation dilutes Ethereum’s value proposition and slows down innovation. Moreover, interests across different blockchain networks are not aligned. Since there is no way for a DApp on Solana to tap into the Ethereum ecosystem, its developers can’t benefit from positive externalities like Ethereum users or developers.
The TLDR of problems:
- Innovation on the Ethereum base layer is unnecessarily slow.
- The reason is fragmented trust.
- Fragmented trust means applications and middleware have to focus on securing their protocols.
- That’s costly and diverts attention and capital.
- Protocols that are not EVM-compatible cannot benefit from EVM incentives.
What Is the Goal of EigenLayer?
Enter EigenLayer.
It is the mechanism to leverage an existing trust network, like the Ethereum blockchain, to achieve goals other than block production it was not primarily programmed to do.
EigenLayer’s goal is to change the status quo and better align the interests of dApps, middleware services, and Ethereum.
It leverages two ideas to do that: pooled security and free-market governance.
The next section explains how EigenLayer does that exactly.
The goal is for any protocol, even non-EVM-compatible protocols, to be able to use Ethereum’s security, thus making the system more efficient and robust.
What Are the Benefits of EigenLayer?
EigenLayer provides services to oracles and bridges, such as data availability on the same network. It has already launched a data availability layer for Ethereum called EigenDA. It enables cheaper and higher bandwidth for data availability than the Ethereum base layer: Ethereum currently processes 80 kilobytes per second, but EigenLayer will allow up to 15 megabytes per second. This EigenDA Data has a dual quorum of ETH and RocketPool stakers and combines slashing with no collusion amongst nodes. EigenLayer’s founder Sreeram Kannan highlighted that the expected throughput of EigenDA for the future will be 1 GB/s.
This results in better programmability on the Ethereum base layer and, as a consequence, a higher rate of development. When protocols interact with each other more quickly and easily, the rate of innovation rises. Since the marginal cost of staking is zero (it doesn’t cost anything to stake the same capital twice), the value proposition of Ethereum grows: protocols on Ethereum can be secured with the same capital stock that secures Ethereum. This should result in Ethereum attracting new capital to secure its base layer.
Consequently, protocols can abstain from tokenization as a security mechanism, which should improve tokenomics and reduce the problem of mercenary capital. Since protocols are secured by the base layer, the cost of corruption rises significantly:
Middleware services and DApps can be built on top of EigenLayer. Users enjoy higher yield on their staked ETH. Since EigenLayer is opt-in, it enforces its mechanisms by obtaining the rights of the staked ETH’s withdrawal credentials.
EigenLayer thus resembles merge mining, where miners can mine and secure a dominant blockchain but mine and secure another chain at the same time:
It also improves the efficiency and effectiveness of Ethereum’s governance process:
Finally, it improves the efficiency of the Ethereum blockchain itself by better spreading the resource surplus of the strongest nodes. In simple terms, EigenLayer should make smaller networks run more smoothly:
It also beats other modular blockchains like Celestia:
- EigenLayer can more quickly create a sizable validator network.
- Since it is not a stand-alone consensus layer, it will be less expensive and have a greater throughput.
- EigenDA’s use cases are specialized to rollup attestations, allowing for decentralized rollup sequencers.
The TLDR of benefits:
- EigenLayer provides cheaper and higher bandwidth than the Ethereum mainnet.
- Its introduction should increase the interoperability of protocols on Ethereum and thus the rate of innovation.
- More capital should flow into the Ethereum ecosystem to take advantage of the extra yield.
- It increases security for protocols that can leverage the mainnet by using EigenLayer.
- It is less expensive than other modular blockchain solutions like Celestia.
In short, EigenLayer could be a real game-changer for Ethereum.
What Are the Use Cases of EigenLayer?
EigenLayer has multiple use cases. Here’s a list with links to highly technical explanations from EigenLayer’s founder Sreeram Kannan:
- MEV-Boost
- Data Availability layers
- Settlement infrastructure
- Secure multiparty computation
- Oracles
- Bridges and bridging hubs
- Single-slot finality
If you don’t understand most of this, don’t worry. You’re not alone.
A simple way to explain good use cases of EigenLayer is that anything which does not run a big risk of frequent slashing is a good candidate. For instance, bridges or oracles fall in this category. They can be secured with more collateral and gain several orders of magnitude in security. Appchains (applications running on their own blockchains) is another good candidate. They can bootstrap security by relying on Ethereum’s security.
EigenLayer also allows projects to build sidechains directly aligned with Ethereum. These are secured by the base layer and their transactions can be included in the sidechains’ blocks before being settled on the mainnet.
What Are the Risks of EigenLayer?
With great power comes great responsibility. Or in crypto terms: with great yields comes greater risk.
EigenLayer inherits decentralized trust from a subset of validators (e.g. RocketPool), which create a decentralized set of stakers. The services using EigenLayer can dictate their own conditions as to which nodes (and which level of decentralization) they are satisfied with. Since EigenLayer introduces a great deal of efficiency, this comes with several risk vectors:
- Single point of failure: EigenLayer receives the withdrawal credentials from ETH stakers. If it is exploited and has a significant amount of ETH staked, this creates a systemic risk for the mainnet.
- Centralization risk: If many stakers secure one app and get slashed, that could have bad consequences for Ethereum.
- Yield risk: Protocols can leverage Ethereum for security. But stakers on EigenLayer may opt into the highest yields to maximize their returns, leading to a race to the top between protocols offering ever higher yields to attract capital.
- Slashing risk: Protocols could also lower their slashing conditions to attract more capital, thus undermining their own security.
Slashing is different from fraud proofs because it enforces network security in a different way. The latency on EigenLayer is zero if the staked amount is high enough (unlike with fraud proofs). However, the input claim would still be initially assumed correct and then become subject to slashing if violations are discovered.
What Lies Ahead for EigenLayer
EigenLayer could revolutionize the way we use Ethereum. Not only does it allow users to earn a higher yield by opting into staking their ETH on other protocols, but it also increases interoperability, efficiency, and the effectiveness of governance on Ethereum. Small wonder that people are calling it the most important protocol since the launch of Ethereum and “a big deal.”
But even with some of its risks pointed out, there are still open questions for EigenLayer.
How Is EigenLayer Going to Accrue Value?
The protocol itself has not announced an EL token. Its design benefits ETH stakers, who get paid additional yield from taking on additional slashing risks. But where is the value accrual for EigenLayer itself?
What Will the UX/UI Look Like?
EigenLayer could work similar to existing Ethereum Liquid Staking products (it does not need a derivative, native ETH can be restaked). Or it could have an entirely different UX. Most importantly, is EigenLayer going to be user-friendly enough to draw enough adoption and unleash its full potential?
There are tons of resources explaining EigenLayer, which tells you that you better keep an eye on this protocol. Ethereum scaling is just getting started!
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