Ingeun Kim | ingeun92@naver.com | CURG
This article was originally written in Korean, and you can find it here !!
In June 2023, Eigenlayer took its first steps with the innovative idea of restaking. It aims to strengthen the Ethereum ecosystem and attract more services by leveraging the economic security of Ethereum, which is measured by the amount of ETH staked through PoS.
With its Total Value Locked (TVL) approaching $13.6b (as of April 11, 2024, according to DefiLlama), Eigenlayer has solidified the concept of restaking. Let’s explore what Eigenlayer is and how a Node Operator should approach participation in the Eigenlayer ecosystem with strategies and methods.
What is Eigenlayer?
EigenLayer is a protocol built on Ethereum that introduces restaking, a new primitive in cryptoeconomic security. This primitive enables the reuse of ETH on the consensus layer. Users that stake ETH natively or with a liquid staking token (LST) can opt-in to EigenLayer smart contracts to restake their ETH or LST and extend cryptoeconomic security to additional applications on the network to earn additional rewards.
EigenLayer is a protocol built on Ethereum, introducing restaking as a new fundamental element of cryptoeconomic security. This method allows the reuse of ETH at the consensus layer. Users who stake ETH natively or with a liquid staking token (LST) can opt-in to EigenLayer smart contracts to restake their ETH or LST, extending cryptoeconomic security to additional network applications to earn extra rewards.
Eigenlayer’s official website succinctly describes Eigenlayer as introducing “restaking as a new fundamental element of cryptoeconomic security” and “extending cryptoeconomic security to additional network applications.” The significance of these key points will become clear as we delve deeper into the topic.
Evolution of Staking Platforms
When Ethereum transitioned from PoW to PoS through The Merge, many ETH holders staked their ETH to support the stable operation of the Ethereum ecosystem and earn staking rewards. This led to the emergence of various staking services and platforms.
The first demand was for staking pools. The minimum required 32 ETH for staking was a significant burden for small ETH holders. Thus, staking pools were introduced, allowing holders with less than 32 ETH to participate in Ethereum staking.
Next, liquidity became an issue. Staking ETH locked it in smart contracts, leading to a decrease in liquidity. Especially early in the PoS transition, staked ETH could not be withdrawn, resulting in minimal liquidity for staked ETH. To address this, staking pool services like Lido and Rocketpool issued Liquid Staking Tokens (LST), providing liquidity by issuing LST equivalent to the value of staked ETH, which could be used in other DeFi services.
As liquidity for ETH was secured, the use of LSTs increased. However, these tokens were primarily used within the DeFi ecosystem and did not extend to network trust validation. This demand led to the introduction of Eigenlayer, incorporating the concept of restaking.
From Fragmented Security to Reconstructed Security
If I have seen further, it is by standing on the shoulders of giants.
By Isaac Newton
This quote by Isaac Newton acknowledges the achievements of past scientists that enabled his own accomplishments. In a broader sense, it implies, “It is wise to fully utilize existing resources.”
Many current blockchain services leverage the ecosystems and trust of large L1 networks. However, some choose underdeveloped giants or try to become giants themselves, risking collapse before maturity.
Although it was a figurative expression, in reality, middleware services are generally not deployed or validated on the EVM. As a result, they cannot share Ethereum’s economic security. Therefore, middleware services must either build their own trust network or find an appropriate trust network to use. However, building their own network requires substantial costs, and even if built, it might have a relatively low level of security. Additionally, even if they find an appropriate trust network, if it doesn’t have a significant level of security, it will still suffer from relatively low security levels.
For instance, in the above diagram, DApp A is attached to the Ethereum network, while DApp B is attached to an Actively Validated Services (AVS) network (with a TVL of less than $1B). Each network can transfer value via bridges, but their staked assets’ trust validation remains separate. Ethereum and AVS cannot leverage each other’s economic security.
In this scenario, DApp A’s security level is proportional to Ethereum’s staked TVL (~$102B), while DApp B’s security level is below $1B. This results in over a 100-fold difference in security, with DApp B choosing an underdeveloped giant.
There is another issue. As the number of middleware services increases and staked capital becomes fragmented, these services may start to compete with the Ethereum network, potentially lowering the economic security of the Ethereum network. In other words, instead of creating synergy, it becomes a situation where giants are fighting each other and diminishing each other’s resources.
Here, Eigenlayer transforms the fragmented security of the Ethereum network and middleware services into reconstructed security through the concept of restaking, creating synergy. This brings about two key benefits. First, AVS can build their ecosystems by sharing rather than taking away capital from the Ethereum network. Second, this shared economic security can be sufficiently utilized by AVS as well. It is an opportunity for the giants to join forces and see further.
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Roles in Eigenlayer
Interestingly, Eigenlayer organizes the reconstructed security in an open marketplace, allowing various roles to operate freely based on economic principles. What roles exist in this open marketplace?
Actively Validated Services (AVS)
- Services requiring their own distributed validation system.
- Includes DA layers, sidechains, oracle networks, etc., that enhance security by operating nodes.
- AVS demands stable node operation from Node Operators.
- AVS uses both slashing (penalties for Node Operators) and rewards to ensure stable node operation.
- AVS can enjoy Ethereum’s security without building a separate trust network through restaked ETH.
REStaker
- Entities restaking natively staked ETH or LST on the Ethereum Beacon Chain.
- REStakers can select AVS to earn node operation rewards.
- If unsure about AVS selection or seeking additional staking rewards, REStakers can delegate their restaked capital to Node Operators to receive restaking rewards.
Node Operator
- Operates nodes and conducts validation processes using restaked capital delegated from REStakers.
- Node Operators build and maintain enhanced security nodes using restaked capital.
These roles balance benefits and losses, driving Eigenlayer’s open marketplace ecosystem.
Strategies for Node Operators in Eigenlayer
To optimize their strategy, Node Operators must thoroughly understand Eigenlayer, as the saying goes, “Know thyself, know thy enemy, a hundred battles, a hundred victories.” Now prepared, how should a Node Operator approach participation?
First, consider the cost flow for Node Operators.
The value for Node Operators comes from AVS rewarding node usage and REStakers delegating restaked capital. Conversely, costs include human and material maintenance expenses and restaking rewards provided to REStakers. Potential slashing risks from AVS should also be considered.
Given this, surviving as a Node Operator might seem more challenging than expected. To survive, the following conditions must be met:
- Maximize rewards from AVS.
- Minimize node maintenance costs.
- Minimize restaking rewards to REStakers.
- Minimize slashing risks.
- Secure additional income channels.
Strategically, the focus should be on “maximizing rewards from AVS”, “minimizing slashing risks”, and “securing additional income channels”.
Maximizing Rewards from AVS and Minimizing Slashing Risks
Node Operators must thoroughly research and selectively choose AVS, appealing effectively to AVS for their node operations.
Proper AVS selection can attract REStakers to delegate their capital, boosting the Node Operator’s influence and appeal to AVS. Performance metrics, decentralization statistics, and geographic diversity can enhance appeal.
Regarding slashing risks, understanding AVS conditions and maintaining node operations within those parameters minimizes potential costs.
Securing Additional Income Channels
Interestingly, the Eigenlayer whitepaper states that direct restaking on Eigenlayer does not issue LSTs (e.g., Lido’s stETH, Rocketpool’s rETH). This means there is a significant lack of liquidity provided to REStakers. Here, the liquidity needs of REStakers and the need for additional income channels for Node Operators align perfectly.
If a Node Operator issues Liquid Restaking Tokens (LRT), REStakers gain liquidity for their restaked capital and can also receive additional rewards from the Node Operator providing the LRT. This would make REStakers choose Node Operators who issue reliable and rewarding LRTs. In the open marketplace of Eigenlayer, issuing LRTs allows Node Operators to secure a favorable position.
Node Operators can secure additional income through the issued LRTs. They can charge fees during the LRT utilization process or link the LRT to the value of AVS, enabling real value exchange.
Lastly, Eigenlayer allows restaking not only with native ETH but also with LSTs and LP tokens. Although using channels other than native ETH poses risks due to external dependency on capital value, if managed well, Node Operators can use other LSTs or LP tokens as additional inflow channels to grow their assets and influence.
Conclusion
This article explored Eigenlayer’s concepts and roles, examining how Node Operators can strategize for optimal positioning in its ecosystem. In an open marketplace, maximizing benefits and minimizing losses through solid restaking capital and appropriate AVS choices is crucial.
However, caution is needed.
Diversifying assets for REStakers could lead to significant risks if foundational capital collapses. A balance must be maintained to ensure stability and minimize potential losses.
Additionally, while having more stringent AVS choices can increase the stability of the restaked capital for REStakers, making it beneficial for them, Node Operators might need more flexibility in AVS choices to cover the rewards to REStakers and the costs of maintaining nodes. Node Operators will need to strike a careful balance in this regard.
Finally, issuing Liquid Restaking Tokens (LRT) is a potentially lucrative additional income method, but it carries significant risks if not managed properly. LRTs can be seen as a type of derivative product to provide liquidity. If the restaked capital of the Node Operator collapses for various reasons, it could lead to a bank run or other irreversible events. There’s no guarantee that such events won’t happen, so it is crucial to have appropriate contingency plans and insurance, such as the Reserve Fund recently proposed by Ethena.
