Deep Dive into the Eigenlayer Project: A New Era for ETH Stakers, resolving the issues of security and scalability in the blockchain ecosystem

TL;DR

Eigenlayer is a project aimed at providing growing yields for Ethereum (ETH) stakers, resolving the issues of security and scalability in the blockchain ecosystem by building a balanced system of supply and demand. The suppliers are responsible for operating nodes and bearing the risk of ETH stake confiscation, while the demanders pay for the supplied services. Eigenlayer could potentially alter several aspects of the ETH staking ecosystem, including:

1. Enhancing staking yields to attract more people to stake;

2. Establishing a new node ecosystem and market;

3. Creating new roles in the LSD track, such as delegates managing re-staking behavior and wrap protocols;

4. Promoting the degree of decentralization of ETH nodes;

5. Creating new consensus rules.

However, Eigenlayer also has potential issues, such as mismatch of supply and demand, uncertainty of yield advantage, and problems related to security sharing. From the demanders' perspective, many on-chain projects may not have a strong need to use Eigenlayer, and it is still unknown whether Eigenlayer can offer higher returns than existing DeFi strategies. Additionally, while Eigenlayer promotes sharing Ethereum's security, what it actually provides is not the security of the entire Ethereum network, but that of Ethereum nodes participating in specific security verification services.

I. The Core Logic of Eigenlayer

To understand Eigenlayer, we need to first understand the foundation of it - blockchain technology. In the constantly evolving blockchain ecosystem, the issues of security and scalability become increasingly prominent. Eigenlayer strives to meet these needs with its innovative solution, aiming to build an ecosystem that balances supply and demand.

The logic of the Eigenlayer project can be divided into two main parts: the supply side and the demand side. The supply side bears some node operation costs and the risk of ETH staking being penalized to provide node services for the demand side. In return, the demand side pays certain rewards, which may include project tokens, fees, etc. It's worth noting that some types of services may bring some hidden benefits, such as sorters getting MEV income.

II. How Eigenlayer Changes the Existing ETH Staking Ecosystem

1)Realizing the growth of real income from ETH staking, promoting an increase in the staking rate.

The essential goal of Eigenlayer is to enable stakers to enjoy multiple benefits. After participating in the Eigenlayer protocol, the node side not only obtains ETH staking income but also other incomes such as oracle service fees, sorting fees, staking income from other chains, etc. With only some additional node operating costs and the risk of ETH being penalized, stakers can enjoy these benefits.

The increase in yield brought about by this design will attract more people to stake. In my view, this increase in the staking rate will mainly come from individual nodes.

2)New Node Ecosystem

According to the Eigenlayer white paper, the protocol will have free market governance, and there will be a market for demanders to make requests or place orders. Each AVS demand will have elements such as configuration strategies, quotations (or incentives), etc. Ideally, a marketplace for nodes will form, where individual nodes, after staking 32 ETH, will have more ways to play beyond PoS mining for ETH, while information asymmetry will be significantly reduced.

3)New Roles Will Appear in the LSD Race

If Eigenlayer can achieve widespread adoption, the types of demanders and their corresponding income risks will vary greatly. Individual ETH holders or individual nodes lack the ability and time to manage re-staking behavior. Therefore, there will be competition among the market's delegators, and excellent delegators will seek to maximize income for node users with the least risk, like a machine gun pool.

Moreover, since Eigenlayer cannot provide a standardized token for re-stakers, a protocol specialized in wrapping may emerge between node validators and Eigenlayer. The wrap protocol will package re-stake tokens into index tokens on the re-staker side, while on the Eigenlayer side, it will conduct management similar to that of a delegator. The final income is uniformly aggregated and reflected in the exchange rate of the index token.

4)Promoting Decentralization of ETH Nodes Eigenlayer may promote an increase in individual node validators, thus promoting the decentralization of nodes. Because the risk of penalty for individual nodes participating in Eigenlayer is lower than that of delegating to other operators or simply re-staking as an individual ETH holder. With the same income, the risk of individual node participants is lower.

5)New Consensus Rules Eigenlayer has obtained the penalty authority of the re-stakers, which is actually equivalent to implementing a new consensus mechanism at the Eigenlayer protocol level. Although the new consensus mechanism can only be added to the existing Ethereum base, it also provides a channel and testing ground for consensus mechanism innovation.

III. Possible Problems with Eigenlayer

1)Mismatch between Supply and Demand The protocol creates a market where the supply side and demand side are supposed to meet. However, there is a possibility of a mismatch, leading to inefficiencies in the market.

2)Uncertain Yield Advantage Whether the node side can really get more benefits than the existing DeFi strategy through Eigenlayer remains uncertain. It's difficult to conclude whether the additional benefits provided by the Eigenlayer protocol are more appealing than those of existing DeFi strategies.

3)Partial Security Sharing Eigenlayer's core selling point is to share Ethereum's security, but the security it can provide is not that of the entire Ethereum network, but rather the security of specific Ethereum nodes that participate in certain secure verification services.

Despite these potential issues, Eigenlayer is an exciting project that may play a crucial role in the future development of Ethereum's staking ecosystem. It's a project worth paying attention to.

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