Special thanks to Soubhik & Jessy from EigenLayer for comments and feedback on this post.

Without a doubt, Restaking is a key narrative for Ethereum in 2024. This term was introduced by EigenLayer, a project that has quickly become a hot topic in the Ethereum world.

A few months ago, I wrote about EigenLayer. Since then, a lot has happened, and the interest has grown exponentially. So, I'm back with another post.

In this post, I aim to cover:

1. A Comprehensive Overview of EigenLayer: What it is & Why You Should Care

2. The Current State: What's new and happening now

3. Risks: What we should be careful about.

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Part 1 - EigenLayer: A Comprehensive Overview

EigenLayer is a restaking protocol that has gained significant attention for its new and innovative approach in the Ethereum space.

Let's start by addressing the problem EigenLayer aims to tackle.

EigenLayer: Simplifying Network Bootstrapping

Proof of Stake (PoS) networks typically require operators to run nodes, supported by a token to incentivize their efforts. Launching such a network involves numerous complexities. Key among these are designing an effective token, ensuring its fair distribution, gaining market acceptance, and regulation to mention a few. These factors collectively limit innovation at the infrastructure level.

This is exactly where EigenLayer comes in - to address the challenges associated with infrastructure-level innovation.

Its core concept is to utilize the established economic trust of Ethereum as a foundation for building infrastructure components for advanced projects. In doing so, EigenLayer redefines the bootstrapping process for PoS networks.

How Does EigenLayer Work?

EigenLayer allows developers to utilize Ethereum's existing economic security infrastructure, which includes the validator set and capital. This process simplifies the creation of new networks and services by leveraging the already established security of Ethereum.

Central to this is the concept of 'restaking.' With restaking, EigenLayer enables the use of Ethereum's staked ETH and validator set for other services and networks.

Why does this matter?

• Streamlined Development of Network and Services: EigenLayer's approach of allowing ETH to be restaked streamlines the process of establishing new networks. It provides these networks with immediate economic security and operational support, removing the need for developers to bootstrap these elements from scratch. This not only accelerates network development but also lowers the entry barriers, paving the way for a wider range of networks and services. (Happy developers 🙂)

• New Staking Opportunities: This model offers new ways for ETH stakers to use their assets, potentially leading to additional rewards.

• Validator Utilization: This model offers validators new opportunities to leverage their existing resources. By participating in multiple networks, they can maximize their utility and broaden their earning potential.

A Detailed Overview: Roles, Mechanisms, and Impact

Here's a closer look of how the system works:

Ethereum Staking

Currently, the Ethereum network is secured by validators who stake their ETH as a capital-based commitment to follow to Ethereum's rules. The validators are responsible for storing data, processing transactions, and adding new blocks to the blockchain by running the validator software. If they don't follow the rules, then they risk losing this ETH. To become a validator, a minimum of 32 ETH is required. However, for those unable to meet this threshold, there is an option to contribute a smaller amount of ETH by participating in a staking pool which is like a group fund that’s managed by someone else.

EigenLayer (Re)Staking

EigenLayer takes this a step further. It expands their roles of validators, letting them participate in new networks and systems which require external operators. By doing so stakers can earn additional rewards which increases their involvement in the Ethereum ecosystem and gives them new avenues to earn rewards.

Before moving forward let's clarify the participants and their roles.

Participants and Roles

1. Stakers: They are the ones who commit their ETH to support new networks & services. They have two options:

   1. Native Restaking: Stakers can operate independently by taking on the responsibilities of both contributing tokens and operating an Ethereum Validator node.

   2. Delegating to Operators (aka Liquid Restaking): Stakers can delegate their ETH to Operators, focusing on the financial support while Operators handle the technical requirements.

2. Operators: These participants manage and run the software build on top of EigenLayer. They play a crucial role in maintaining the network's integrity and are subject to penalties for any misconduct.

3. Services: These are the networks and services that are run by Operators - they are called Actively Validated Services(AVS) - more on this in the next section.

4. Service Consumers: These are the end-users or applications that utilize the services provided by EigenLayer.

I mentioned “networks and services,” but what exactly falls under these categories in the context of EigenLayer?

Understanding Actively Validated Services (AVS)

Actively Validated Services are the services that require external operators to operate their networks. Examples of an AVS include data availability layers, decentralized sequencers, bridges, oracles, & more.

These services are not just passive entities; they have specific operational needs. This includes:

1. Certain node software requirements

2. Defining the conditions under which slashing (in other words penalties for malicious behavior) occurs.

Slashing: Ensuring honesty in EigenLayer

In EigenLayer the partnership between stakers and operators is crucial. When Stakers delegate their ETH, they are putting explicit trust that operators will act honestly.

To keep everyone honest, EigenLayer has a mechanism called “slashing.” If operators do something they shouldn't, they can get penalized. This means they might lose some of the ETH they put in.

The slashing conditions are defined in the AVS smart contracts, and impose penalties for rule violations. For example, operators are at risk of slashing penalties for actions such as double signing for sidechains or signing of non-existent messages for bridges.

This mechanism ensures the integrity and trustworthiness of the system.

Trust Bazaar: EigenLayer's Decentralized Marketplace

In a nutshell, EigenLayer creates a decentralized trust marketplace by taking Ethereum's trust (capital + validator set) and offering components of it to anyone interested. With this mechanism, stakers can opt-in to offer new services that provide them with additional benefits.

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Part 2 - The Current State: EigenLayer

Today Mainnet Launch & Total Value Locked

• EigenLayer is launching its platform in multiple phases, starting with restaking on the mainnet, then introducing operators, and lastly, launching AVSs.

• They launched the restaking functionality on the Ethereum mainnet in June 2023. There is 648,964.0315 ETH staked (over a billion dollars!) as of writing this post and, and you can follow it on the dashboard, showing the breakdown of tokens.

• This phase started with a guarded approach to test the protocol at various stages. Right now, EigenLayer lets you do liquid staking with multiple LSTs and native restaking.

AVS World

• Various teams are actively developing AVSs, with EigenLayer's EigenDA being a notable example. As well as teams from Espresso, Witness Chain, Omni, and Lagrange, you can learn more over here.

• Note that AVSs are generally not consumer apps, instead they are services which are required by consumer facing apps. Such as oracles, shared sequences, bridges. - We’ll not be diving in for the sake of this post, something for the future.

EigenDA

• EigenDA is the Data Availability service which EigenLayer is building, it's the first AVS that has launched on the Goerli testnet.

• This is part of the second phase launch. It involves operators running validation services for EigenDA, demonstrating how services can run on EigenLayer.

• Currently the launch is on the testnet. EigenDA is especially important because it will be the first service on EigenLayer.

A Note on Restaking

• While the term 'restaking' is used to describe staking ETH denominated tokens on EigenLayer, it's a permissionless staking platform at its core. The initial focus has been on ETH-denominated tokens, but could extend to other forms of assets such as different tokens. This choice is driven to support the Ethereum ecosystem, as well as the relatively lower volatility of ETH. While the platform doesn't have to be tied to ETH and ETH-denominated tokens, the initial strategy has been to start with it.

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Part 3 - Risks & Re-evaluating Incentives for Ethereum

Re-evaluating Incentives

A few months ago, Vitalik wrote a piece discussing the potential risks and implications of extending Ethereum's consensus mechanism beyond its original scope. The core message here is that while Ethereum's consensus mechanism is a powerful tool for maintaining a decentralized and secure blockchain, using it for decisions beyond its intended purpose can introduce risks and challenges that could undermine the system's stability and trust.

On similar lines, Justin Drake gave a presentation during Devconect, discussing related concerns and potential solutions. I highly recommend watching this, it's a very insightful overview of the potential risks and mitigations (especially if you have some background  on MEV).

🌟 The key question in restaking is how a staking protocol can change Ethereum validator incentives by enabling rewards beyond the core protocol's visibility, and if this could shift Ethereum's fundamental value proposition.

For example:

• The attractiveness of additional earning opportunities through restaking could drive up the demand for staked ETH, impacting the overall economics of the Ethereum network.

• The potential for higher yields through participating in EigenLayer’s staking could make the option for solo-staking less appealing, in the case where there are high node requirements for the networks and services - meaning that not every validator can opt-in for services that give better returns. On the other hand it could make solo-staking more competitive and capital efficient if different incentive mechanisms are provided.

Acknowledging that cutting-edge tech like this might have some initial challenges - and hence my reservations, it's still really exciting to see something so different. There's a buzz of new ideas and possibilities.

EigenLayer Risks

With that here are some notable risks with a bit more context:

1. Operator Centralization

2. Fairness and Reward Distribution among Operators

3. Risks of Operator Misconduct and System Security

4. Complexity and Trust Issues in Liquid Staking

5. Smart Contract Risks

Operator Centralization

• One of the main concerns with EigenLayer is the risk of operator centralization. This issue arises if there are high off-chain requirements for operators, potentially leading to a concentration of resources and expertise among a limited group of operators. Such a scenario could diminish the attractiveness and feasibility of solo-staking on Ethereum. In other words if the rewards of participating as a ‘delegated restaker’ are higher than becoming a solo-restaker, it might discourage solo-staking.

Fairness and Reward Distribution among Operators

• A critical aspect to consider is the fairness in reward distribution among operators. In EigenLayer, operators can opt into various services, each offering different potential rewards. This setup could significantly alter the current "fair" reward system in Ethereum, where each node earns a similar annual percentage rate for staking ETH. The varied reward structures might incentivize operators to focus on maximizing returns, making it hard to maintain a balanced and fair environment for all network validators. Now the validator has a lot more work to do to understand the projects and the reward structure - one month they can opt-into a certain AVS then another, constantly on the look for something better.

• (Adding to the centralization argument - due to the varied reward distribution it might make sense for a native restaker to choose to delegate to an operator instead of running the software themself, altering the validator distribution on the core protocol.)

Risks of Operator Misconduct and System Security

• The possibility of operator misconduct is a significant risk. Given that an Operator can participate in multiple AVSs, what happens if the rewards > penalties. Then the operator can choose to act dishonestly and willing to lose the stake. If there is a small number of operators participating it could make it possible to come together for an attack (attack > loss). (In certain cases you could imagine that the stake required to participate in an AVS, may be more than the 32 ETH to be an ETH Validator, which can limit the number of operators).

• Additionally, if the mechanism for re-balancing collateral in EigenLayer fails due to slow adjustment, latency, or incorrect parameters, it can expose the system to various security risks. To counteract this risk, EigenLayer proposes an "unbonding period" solution. This approach introduces a mandatory delay between the time a staker requests to withdraw their stake and when they can actually access it. (Here's a post by EigenLayer which explains their approach) The proposed solution seems effective in addressing the loophole of premature withdrawal by malicious operators. It's a complex mechanism that EigenLayer is actively refining to enhance security and effectiveness in addressing this potential risk.

Complexity and Trust Issues in Liquid Restaking

• Complexities emerge when stakers use external operators and need to select AVSs- which AVS does the restaker want to support? EigenLayer's solution involves operators using different addresses for each AVS combination they support (For example, an operator working with 2 AVSs can have 3 addresses: AVS 1, AVS 2, and both - explained here). While this allows stakers to retain control over their stake, it introduces a layer of complexity in understanding which address represents which service(s). Additionally, the problem of 'can I trust the operator' continues to exist, as with any permissionless blockchain.

Smart Contract Risks

• Bugs and issues in the smart contracts of EigenLayer or the AVSs pose a potential risk of getting slashed unintentionally. To mitigate the smart contract risks EigenLayer relies on a governance committee to address issues due to unintended slashing. The committee can reverse the slashing that resulted from bugs or malicious code.

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End.

There's a lot of research yet to be done. This includes the work on the AVS, bringing these systems to life, and designing the protocol in a way that strengthens Ethereum's core values. While EigenLayer's solutions are promising, they must balance effectiveness with manageable complexity to ensure the system remains reliable.

I tried very hard not to use “ethereum alignment” which has become a meme at this point, nonetheless I hope that my message comes through. Trying to avoid new-hype-unclear terminology at all costs 😀

It's really exciting to see all the new things happening in the Ethereum world thanks to EigenLayer. Restaking is one of the main narratives for Ethereum going into 2024, and kudos to the EigenLayer team for keeping me excited.

If you have any questions or comments, feel free to reach out to me. See you on the next one. 👋

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Key Terms

• Restaking: Using staked ETH to support other services.

• AVS (Actively Validated Services): Services that need external operators to function.

• Liquid Staking Tokens (LST): Tokens representing staked cryptocurrencies.

• Operator: A participant in EigenLayer who runs validation services for AVSs.

• Staker: A participant who stakes their ETH, to support the network and earn rewards. They can choose to become solo-stakers or delegate to operators.

• EigenDA: Data Availability service by the EigenLayer team.

• Slashing Conditions: Rules set by EigenLayer's smart contracts that impose penalties (slashing) on operators for dishonest or faulty behavior.