Elwood Research Newsletter · 17 Mar 2023

EigenLayer Explained (ETH Restaking)

By Ian Greer 4 min read

Key Takeaways

EigenLayer enables ETH restaking, which lets stakers earn compounded yield while putting their capital to work in securing other networks aside from Ethereum.
Restakers achieve capital efficiency for their underlying ETH, and protocols that choose to build on EigenLayer get access to pooled security without needing to bootstrap.
The resulting open marketplace of validated services (middleware) and validators ushers in new approaches for data availability, oracles, MEV management, bridges, and more. EigenLayer has actively proposed and started experimenting with its approach for each.

Notes

Ethereum stakers lock in ETH to help secure the network. However, since the locked ETH is solely used to secure the chain, it is inefficient and unable to perform other functions like serving as collateral or securing other networks. Liquid staking derivatives like Lido's stETH have solved this problem for DeFi by issuing wrapped assets that represent the underlying ETH. Networks like Layer-2s, oracle networks, and others are still unable to re-use staked capital to secure their networks. That is until EigenLayer came along, just recently releasing its first public version of their whitepaper.

EigenLayer is a restaking primitive that enables Ethereum stakers to use their staked ETH to secure additional networks, thus effectively securing multiple services with the same initial capital. It does this through a series of smart contracts that allow ETH stakers to provide their computer resources and capital to "middleware" services.

In return for providing capital and computation, rewards from Ethereum fees and compensation from the middleware service are directed to the restaker. However, restaking comes with additional risks. By restaking, the capital is exposed to additional slashing risk. For example, if the staker behaves adversarially in either the Ethereum network or the delegated middleware service, their underlying ETH is subject to slashing, as EigenLayer controls the withdrawal function of the user's stake.

All together, the pooled security in EigenLayer creates a market for decentralized trust. Other services, such as an oracle network that need to secure their service, can rent security from EigenLayer stakers resulting in two core benefits:

Capital Efficiency — Stakers are able to extend their capital towards more functions at the same time, earning them more rewards.
Security Marketplace — Previously, each new network or service had to attract new capital willing to take on greater asset risk (riskier than ETH) and willing to forgo other opportunities, such as staking on Ethereum.

Examples of EigenLayer Middleware

In outlining the project, the team introduced a few protocols currently underway.

EigenDA

EigenDA is EigenLayer’s data availability (DA) solution. DA is the guarantee that all transaction data is made available to other network participants regardless of validity. The ability for all participants to view and verify data ensures that the network can be trusted. Ethereum has a native DA layer, but modular blockchains have emerged to focus solely on DA in order to scale DA capacity, such as Celestia, Polygon Avail, and EigenDA.

In EigenDA’s approach, EigenLayer restakers would function as DA nodes and be responsible for downloading a portion of the data to ensure veracity. With 100 nodes, EigenDA achieves 10 MB/s DA throughput, which is ~7x more than Celestia (modular DA layer) and danksharding (Ethereum’s upcoming upgrade to scale DA). EigenDA security only scales with the introduction of new nodes, without sacrificing scalability or decentralization, which is something that Ethereum faces. Mantle, a Layer-2, plans to use EigenDA for DA.

MEV-Boost via EigenLayer

EigenLayer’s pooled security can help manage the process of block building. A new block in a blockchain includes transactions that are ordered and processed. Maximum extractable value (MEV) is a byproduct of block building and refers to the maximum value that can be retrieved from ordering transactions in a certain way. While this arbitrage is not all bad, “bad” MEV occurs when this front-running negatively affects the end user, usually a trader.

MEV-Boost is a mechanism designed by Flashbots to manage “bad” MEV. For a block proposer to partake in MEV-Boost, validators auction off the right to construct an entire block to a block proposer. Block proposers have limited say in the composition of a block. This is important because when block proposers sign for a full-block, they are tied to rigid slashing conditions. Through restaking, partial-block MEV is enabled, where block proposers only assemble blocks they are interested in. A broader range of slashing conditions ensue, protecting honest block proposers and decreasing the chance they get slashed for a mistake.

Other projects include an oracle secured by staked ETH and secure messaging through a partnership with Hyperlane.

Since restaking through EigenLayer amplifies yield, with the option to delegate validating services to an operator, some LSD stakers might find this a no brainer for putting their capital to work. But with the resulting diminished liquidity, LSD stakers might not be as eager to restake on EigenLayer. These stakers are also likely delegating services to operators because they might not have the required hardware like solo stakers will.

Solo stakers who run validator nodes will have proper hardware and a higher inclination to serve as middleware providers. Currently, there are more than 535,000 validators on Ethereum who have a minimum of 32 ETH staked. EigenLayer will likely secure the most restakers from this category.

At first, protocols will need to be accepted by the EigenLayer committee to ensure crucial security audits are done or that system requirements are complete for a service to use EigenLayer. For EigenLayer to succeed, both sides of the marketplace must be sufficient. Onboarding restakers will be an essential part of the marketplace but will likely be achieved through the additional yield opportunities. The real challenge will be to convince protocols to then build on EigenLayer.

Risks and concerns

Rehypothecating collateral is a common practice in the traditional finance world. It entails collateral being used by the holder, with added benefits for the borrower. Extrapolating this idea to the EigenLayer implementation creates a more complicated machine than just rehypothecated ETH.

There are several centralization concerns for EigenLayer. Governance is entrusted to a centralized party delegated by EigenLayer, where collusion is not completely out of the picture. Because EigenLayer is centralized, there is a single point of failure that can commence if its smart contracts are compromised. This becomes an increasing concern as more ETH gets restaked and if EigenLayer gains control of the majority of circulating ETH.

Restakers face a compounded risk of losing their underlying ETH outside of malicious behavior, such as any middleware smart contract failure on the protocol’s part putting the underlying ETH at risk.

Alternatives to launching on EigenLayer include building a fully validated service or picking to build an app-specific chain on Cosmos, which has the option for Interchain Security. Similarly, there is pooled security through a shared validator set.