EigenLayer - Why, What, How

In recent months, I have come across the term EigenLayer on multiple occasions. Though I had heard about it from various sources, I never quite comprehended its true potential. But, recently, a friend of mine brought up an interesting use case for EigenLayer - creating a decentralized trust system for their network. This sparked my curiosity, and I decided to dive deeper into the subject matter to truly understand the capabilities of EigenLayer.

Why EigenLayer?

To fully grasp the purpose and benefits of EigenLayer, it is important to first understand the fundamental characteristics of a decentralized application (DAPP).

DAPPS are decentralized, meaning there is no central point of control or ownership. This ensures that the application is open and accessible to all users, rather than being controlled by a single entity or organization. This decentralized nature also ensures that the application is not subject to censorship or other forms of interference.

Ethereum's trust
Ethereum's trust

The picture above explains how trust is established in decentralized applications (DAPPs) that are deployed on the Ethereum network. The Ethereum network utilizes a set of decentralized validators who participate in a Proof of Stake consensus mechanism to execute transactions on the Ethereum Virtual Machine (EVM). This ensures that the DAPPs deployed on Ethereum are decentralized, permissionless, and trustworthy.

However, it's important to note that the trustworthiness of a DAPP also depends on the trustworthiness of any external data or contracts that the DAPP interacts with. For example, if a DAPP relies on data provided by an oracle or a bridge, the trustworthiness of the DAPP can be defined as the minimum trust level of the Ethereum network, the bridge, and the oracle. If any of these entities are not trustworthy, the DAPP can be vulnerable to attacks or censorship.

Dapp trust = min(Eth trust, bridge trust, Oracle trust)

To address this, many bridges and oracles are creating their own trust layers. For example, Axelar (a decentralized bridge) and Chainlink (a decentralized oracle) have their own proof-of-stake consensus mechanisms in place to increase the trustworthiness of their services. This is done to ensure that the DAPP's security is not compromised by any untrusted external data sources. By creating their own trust layers, these entities are making it possible for DAPPs to have a higher level of trust and security.

Dapp's reliance on other services
Dapp's reliance on other services

Creating a robust proof of stake mechanism is a challenging task that requires a significant amount of capital. In order for a proof of stake protocol to be financially viable, network participants, such as validators, must be willing to lock their money into the protocol. To incentivize them to do so, the protocol must generate a sufficient level of profits. For example, if network participants are excited by a yield of 5-10%, the protocol must generate a profit that is equal to or greater than that percentage of the total money locked and annual operating costs.

Profit generated >= (5-10)% of (money locked + annual operating cost)

However, generating such a profit sustainably becomes a monumental task, and is an important aspect of building a successful protocol. In addition to the technical innovation of providing the service, the protocol must also focus on generating enough yield to sustain its trustworthy proof of stake. This requires a significant amount of effort and resources, and can be a daunting task.

In summary, maintaining a system of trust and security is an onerous task that requires not only technical innovation but also a sustainable financial model that can generate enough yield to sustain the protocol's proof of stake mechanism.

What is EigenLayer?

EigenLayer is a platform that aims to solve the challenges of creating a robust and sustainable system of trust and security for blockchain projects. It is a restaking platform that provides crypto-economic security as a service for projects such as rollups, bridges, oracles, and decentralized applications (DAPPs).

EigenLayer helps protocol establish trust and security. It eliminates the need for protocol members to lock up a large amount of money to provide trust. EigenLayer takes care of this so that the protocol can focus on generating revenue based on its annual operating costs. This means that instead of worrying about the cost of providing trust, the protocol can focus on generating income from its operations.

Profit generated >= (5-10)% of annual operating cost

In most cases, the operating cost of a protocol is much lower than the money that has to be locked in to provide security and trust. This means that now the people who want to participate in the network only have to worry about whether the service they are providing is economically profitable based on the operating cost, rather than the huge marginal capital that had to be locked in the past. This greatly reduces the barriers to entry for network participants and makes it more accessible for people to participate and contribute to the network.

EigenLayer aims to provide an easy and efficient solution for the protocol projects to establish trust and security, which is a crucial aspect of the adoption and success of any decentralized application.

EigenLayer + Ethereum enables Agility
EigenLayer + Ethereum enables Agility

How EigenLayer works?

EigenLayer enables validators to put the capital they have locked in Ethereum at additional risk in return for providing a service for another protocol. This is done by allowing validators to opt into middleware services, such as oracles, bridges, or sidechains, that are built on top of EigenLayer.

When a validator opts into a middleware service, they agree to the slashing conditions of that service in addition to the Ethereum network's slashing conditions. This means that the Ethereum that they have locked in the Ethereum network can now also be slashed if the middleware's slashing conditions are met.

For example, if a new protocol wants to start an oracle service, they can build their service over EigenLayer as an EigenLayer middleware. Validators who want to provide data to this oracle service can opt into the service and agree to its on-chain slashing conditions. This enables the new protocol to launch their oracle service without requiring a large amount of capital to be locked-in, while still maintaining the security, trust and decentralization of the protocol.

EigenLayer enables existing validators to participate in multiple protocols, and new protocols to launch their services with a reduced capital cost, without compromising on security, trust and decentralization.

Food for thought

As we move towards the adoption of smart contract wallets, the concept of account abstraction is becoming increasingly important. Account abstraction allows for increased security, ease of use, and improves the user experience of wallets by 10 fold. However, it also creates a problem, as every blockchain has its own implementation of account abstraction. This leads to difficulties in having the same wallet address on all chains, and if the owner of a smart contract wallet needs to be changed, a transaction must be made on all chains to update the ownership. This leads to the fragmentation of wallets and makes it more difficult to maintain cross-chain accounts.

One possible solution to this problem could be to have a separate chain for accounts using EigenLayer. This would allow for a unified system of account management that can be easily maintained and updated across multiple chains. I have been pondering about this idea and will soon publish my first thoughts on it.

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