14 min read

EigenLayer: Explained

Getting Up to Speed with EigenLayer

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Published on

19 Mar, 2024

Introduction

EigenLayer’s TVL and popularity has increased at a truly impressive rate.

Compared to other protocols, EigenLayer has shot up in success at a much faster rate and is now in third place after giants Lido and AAVE.

Ethereum Innovation

EigenLayer works on the Ethereum ecosystem, and to understand it better, let’s take a short recap of the dynamic innovations that have shaped Ethereum.

  1. Ethereum Moves to Proof of Stake (PoS): In September 2022, Ethereum made a significant shift from Proof of Work (PoW) to Proof of Stake (PoS) with "The Ethereum Merge." This move was largely driven by environmental concerns, as Bitcoin's PoW mechanism faced criticism for its high energy consumption. Ethereum's transition to PoS not only addressed these environmental issues but also introduced a deflationary aspect to ETH, leading to a decrease in its total supply over time.

  2. Staking on Ethereum: With the adoption of PoS, Ethereum allowed users to earn rewards through staking. By locking up the ETH they owned, users could make a small profit based on the reward rate, while also helping to secure the network. However, a major barrier emerged: the requirement of a minimum stake of 32 ETH, equivalent to approximately $100,000 today, making it challenging for the average individual to participate as a network validator.

  3. Emergence of Staking Pools: To overcome the high entry threshold, staking pools were introduced, allowing individuals to pool their ETH and stake collectively. These pools are managed by operators who handle the network validation and distribute rewards among participants.

  4. Introduction of Liquid Staking Tokens (LSTs): The next evolution was Liquid Staked Tokens, which provided a 1:1 representation of staked ETH. In exchange for staking 10 ETH, a user would receive 10 stETH or other similar flavour of LST. This brought liquidity to staked assets while also earning rewards. These coins could be used in various DeFi protocols, allowing stakers to compound their rewards and enhance their earnings.

  5. Re-staking Concept: The latest advancement comes from EigenLayer through the process of restaking: the concept of pledging already staked assets again, providing stakers with an opportunity to earn additional rewards.

Enter EigenLayer

To answer the question posed earlier, what makes EigenLayer so special - that lies in its simplicity. EigenLayer in its most basic terms, is a middleware, which sits on Ethereum and provides a platform for restaking. In staking, users secure a network by locking their ETH and earn rewards in the process. Similarly in Re-staking, users just pledge their already staked ETH to secure projects other than just the Ethereum ecosystem, and as a result earn extra rewards as well.

These projects are called Actively Validated Services (AVSs). And as you may have guessed, developers benefit from this as well since they can use the security mechanism of ETH instead of building their own ecosystem and their own token. The proliferation of multiple blockchain tokens has overwhelmed the market, and it is an arduous task to build a security infrastructure from scratch, so it's no surprise that developers trust this novel approach.

This is the barebones explanation, however there are more features and nuances. Such as being able to re-stake native Ethereum, but also LSTs.

LST and Native Restaking

EigenLayer enhances re-staking capabilities through both LSTs and native re-staking. By re-staking LSTs on EigenLayer, users engage these tokens in staking protocols via smart contracts, optimising their rewards beyond mere possession. This process, however, renders the LSTs illiquid while they accrue additional yield.

Alternatively, as mentioned earlier, native re-staking remains an option, permitting users to leverage their staked ETH. This method is exclusive to Ethereum validator nodes, requiring the redirection of their validator's withdrawal credentials to an EigenPod smart contract, explained below.

EigenPod

EigenPods form the cornerstone of the EigenLayer ecosystem. They are essentially smart contracts which enable stakers to restake their Beacon chain Ethereum, therefore being crucial to the entire re-staking process. There are complex smart contract mechanisms under the hood where EigenPods operate - which we have briefly mentioned below, for sake of completeness.

Stakers or their chosen staking providers, use EigenPodManager to create an EigenPod.

In the regular ETH Staking scenario, the validator’s withdrawal key is mapped to the user staking. In EigenLayer, the withdrawal key is mapped to the EigenPod smart contract. The rewards are received here, and also possibly slashed - in case an AVS being secured misbehaves. Therefore EigenPod plays a critical role in ensuring the security and accuracy of transactions and withdrawals on the network.

EigenPods are an innovative smart contract that bridges the gap between stakers, validators, and Automated Validator Services (AVS) operators, ensuring the seamless operation of the EigenLayer protocol.

Actively Validated Services (AVS)

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You have the newest innovative idea for Web3 and you want to create a new ecosystem around this idea. But this also involves the arduous task of bootstrapping your security, creating a token and getting people onboard this entirely new ecosystem.

Meanwhile, Ethereum has a looming presence with its huge pool of stakers providing security and a high value ETH token. If only there was a way to use this pre-existing security infrastructure for a new idea - this is what EigenLayer brings to the table.

All Proof of Stake (PoS) blockchains rely on a multitude of validators, who are critical for their operation. As a result, virtually every PoS blockchain project functions as an Actively Validated Service (AVS). With this new innovation from EigenLayer, developers now have access to an improved methodology for building an AVS.

By building an AVS on EigenLayer, projects can benefit from Ethereum’s huge base of validators and staked capital. They therefore gain an advantage from the flexible infrastructure that enables them to customise how they will use the trust borrowed from the Ethereum network.

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While the pool of stakers and their respective operators are securing Ethereum, the adoption of EigenLayer enables stakers to opt into also securing additional services, i.e. the AVSs. Through this mechanism, stakers can enhance their revenue, while operators receive additional rewards. Moreover, this approach provides developers with the opportunity to build an ecosystem with a level of security that surpasses what they could achieve independently through their own bootstrapping efforts. We shall delve into individual benefits in the next section.

AVS’s functionality is thus powered with re-staked ETH. EigenLayer harnesses Ethereum’s decentralisation and crypto-economic security and extends it to the AVSs. Additionally, since it is an Ethereum-centric system, the AVS state gets reported back to Ethereum periodically.

In the individual AVS ecosystem, the benefits of Ethereum’s security trickle down to three entities - the AVS project, the AVS users (like DApp makers) and the retail users which use the products (like DApps).

To illustrate how AVSs work in the practical setting, let's use an example - which happens to be the first AVS on EigenLayer.

EigenDA AVS

Part of the EigenLabs ecosystem, EigenDA showcases the power of building an AVS on EigenLayer. EigenDA is a Data Availability (DA) Layer.

As a part of the EigenLabs ecosystem, EigenDA exemplifies the innovative potential of actively validated services (AVS) on EigenLayer by serving as a Data Availability (DA) Layer.

A DA layer functions as a specialised layer designed to store and disseminate data in a decentralised manner. It focuses on ensuring the reliability and accessibility of transaction-related data and smart contract details without directly handling transaction processing or smart contract execution. This helps in enhancing scalability, as it offloads the substantial task of data storage.

Celestia stands out as a notable example of a blockchain operating as a Data Availability Layer. It enhances scalability and security by bifurcating the data and execution layers, thereby facilitating the development of the next wave of modular rollups.

EigenDA achieves the same, while operating as a EigenLayer AVS. It offers an advanced data availability solution specifically designed for rollups. This initiative aims to advance Ethereum's scalability goals by establishing new standards in throughput and cost efficiency. Moreover, EigenDA champions the cause of decentralisation by effectively distributing workloads across a broad network of node operators.

EigenDA's mission extends beyond mere technical capabilities, aiming to underscore the crucial role Ethereum stakers and validators can play in bolstering vital infrastructure outside of the consensus mechanism. It demonstrates the viability of AVSs and their participants to flourish through innovative business and token models, all while relying on the inherent trust of the Ethereum network.

Why Use EigenLayer?

It is quite established now that EigenLayer offers more security, easy implementation and more capital utilisation by accumulating greater rewards. The three major groups involved in the ecosystem each have a specialised incentive to EigenLayer -

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For Developers

  • Access to Ethereum's Established Validator Pool: Developers can utilise the vast and seasoned pool of Ethereum validators for their projects without needing these validators to abandon their Ethereum duties.

  • No Need to Bootstrap Validators: Eliminates the daunting task of starting from scratch to build a validator pool, significantly reducing time and effort required.

  • Avoids Token Volatility Risks: Projects can sidestep the risks and volatility associated with launching and promoting a new token to attract validators.

  • Pooled Security: Offers the advantage of pooled security, where collective resources are utilised to enhance system security, benefiting from the combined strength of Ethereum's ecosystem.

  • Immediate Community Support: By leveraging EigenLayer, projects gain instant access to an existing, engaged community of operators and stakers, facilitating easier and more effective outreach.

  • Cost-Effective: Reduces the financial burdens associated with incentivizing participation in a new network, as it taps into an already incentivized and active validator network on Ethereum.

  • Dual-Staking: Using two tokens, to secure the same PoS network. This prevents the “death-spiral” effect and also simplifies the bootstrapping process, if one wants to create a separate token. More on this later.

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For Operators

  • Access to a wider array of networks: Operators can secure multiple networks beyond just Ethereum, expanding their influence and operational scope.

  • Opportunity for higher rewards: By selecting services offering the best rewards, operators can significantly increase their earnings without additional risk.

  • No need to reallocate staked ETH: Operators earn more without having to move their currently staked ETH to riskier networks, thanks to re-staking.

  • Diverse roles beyond validation: Operators are not limited to validation tasks, enabling them to explore various roles and opportunities within the EigenLayer ecosystem.

  • Visibility through EigenLayer's dashboard: A centralised dashboard allows operators to easily discover and opt into new services requiring their expertise.

For Stakers

Stakers in EigenLayer's ecosystem enjoy several distinct advantages, offering them a more dynamic and potentially rewarding way to utilise their digital assets. Here's a concise look at the benefits for stakers:

  • Enhanced earning opportunities: Stakers have the ability to earn more than traditional staking pools by choosing from various services with different reward structures. By utilising the already staked ETH, capital utilisation is maximised.

  • Diversified investment options: Through EigenLayer, stakers can diversify their staked assets across multiple services and projects, aligning with their interests and risk tolerance.

  • Strategic delegation: Stakers can select operators based on performance, trustworthiness, and the rewards offered, allowing for a more tailored investment approach.

While these benefits highlight the opportunities within EigenLayer for stakers, it's important to recognize the need for diligent operator selection. Since stakers depend on the operators' ability to perform effectively without incurring slashing penalties, choosing a reliable operator is crucial for safeguarding their stake and optimising returns. Choosing a trusted operator based on their security expertise is essential, for example Luganode’s significant efforts at security certification.

Restaking Points

Continuing on the topic of benefits for stakers - EigenLayer also has a loyalty points system by which users can accumulate points based on the amount they have staked and the duration for which they have staked. The actual calculation involves a formula and calculates a value in ETH⋅hours.

EigenLayer is still gaining its initial momentum, so there still remains questions about how users will be able to utilise these points. There is much speculation online, but one use-case we have seen is that during the AltLayer Airdrop, the eligibility for EigenLayer users was defined based on Restaked Points, with a minimum of 720 points required to qualify.

Dual-Staking

Earlier we mentioned how developers can benefit from EigenLayer by using the pre-existing security pool of Ethereum to secure their project. This removes the need to bootstrap your own token. However, some projects might want to create their own token as well.

But the reality is, most freshly minted tokens face a certain “death-spiral” crisis. In the early days of a token, its value might fluctuate and go down. Leading to weakened security, and a drop in TVL. This further lowers the token prices and eventually the token collapses in a “death-spiral.”

EigenLayer has a solution for this as well. Simply put, it allows stakers to use two types of tokens to support the network: a native token and a more stable, widely-recognized token like ETH. This dual-token approach helps address challenges faced by new PoS networks, such as volatility and accessibility of the native token, while mitigating the risk of a "death spiral" in token value.

By providing a foundation of economic security through ETH, dual staking simplifies the bootstrapping process for new networks and ensures a more robust security model, offering a reliable and innovative solution for maintaining network integrity.

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EigenLayer X Luganodes

Luganodes is one of the early adopters of this technology, and we recognize the scale of disruption EigenLayer is capable of. Eager to maximise our involvement, we are supporting the ecosystem in multiple ways.

In our recent rendezvous with Renzo Protocol, we took the role of being one of their three node operators. By running Ethereum nodes, we significantly contributed to the EigenLayer TVL and established our footing in an indirect fashion. Renzo Protocol operates as a Liquid Restaking Token (LRT) and Strategy Manager for EigenLayer, and you can learn more about our partnership in our Renzo announcement blog.

Luganodes is a listed operator for EigenLayer AVSs and will be actively supporting these technologies. Currently, Luganodes has a presence on Lagrange and WitnessChain, with support for additional AVSs being consistently expanded.

Having established itself as an ETH staking service and a node operator for LRTs, in addition to being an operator for multiple AVSs, Luganodes has comprehensive expertise in the EigenLayer ecosystem.

Conclusion

In our comprehensive exploration, we've delved into the vast array of concepts and terminologies surrounding EigenLayer, striving to ensure that this cutting-edge technology is accessible and understandable to all. EigenLayer emerges as a seemingly universal solution, boasting an array of features and solutions so extensive that we could not encapsulate them all.

Despite ongoing debates regarding its long-term viability and its place within the greater Ethereum ecosystem, our confidence in the EigenLayer concept remains unwavering. We are particularly excited about the potential of restaking, which we believe will emerge as one of the most significant narratives in the cryptocurrency space in the years to come.

It's inspiring to witness continuous waves of innovation within the Ethereum community, signalling a bright future as the platform grows more established and mature. As part of this ecosystem, Luganodes is committed to supporting all emerging projects and innovations that drive us towards the ultimate vision of a decentralised future.

About Luganodes

Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 40+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.

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