EigenLayer: A Marketplace for Trust

EigenLayer: A Marketplace for Trust

EigenLayer: A Marketplace for Trust

By

By

By

Aditya Saraf

Aditya Saraf

Aditya Saraf

Jan 31, 2024

Jan 31, 2024

Jan 31, 2024

One of the core value propositions of smart contract networks is trust minimization. Unlike our current system, a transaction that occurs on a smart contract network, between two counterparties, does not require the facilitation of a trusted institution or middleman such as a bank or a lawyer. Instead, there are thousands of validators competing to validate transactions. Collusion and malicious activity are disincentivized financially creating a trustless environment for counterparties to interact.


One of the most interesting projects that is launching this year is EigenLayer. EigenLayer enables off-chain infrastructure layers and even dapps to source security or “trustlessness” from the existing and abundant Ethereum validator set. Complex blockchain applications typically employ multiple layers of off-chain infrastructure that are extremely difficult to decentralize and secure. Further, as blockchain functions become modular, they can be modified to source security in a manner that best suits each layer’s needs. Off-chain infrastructure and modular blockchain layers become the primary use cases served by Eigenlayer. These include oracles providing off-chain data feeds, cross-chain message passing services, Layer 2 sequencers and provers, fast finality layers, and data availability layers. Through Eigenlayer’s middleware, all blockchain infrastructure layers can decentralize and rent Ethereum’s security.


In order to provide this security, EigenLayer allows ETH holders to “restake” their liquid staked ETH (LsETH) with validators who must run additional offchain software to help secure the network that is renting Ethereum’s security. LsETH is the receipt token programmatically generated when users stake ETH through liquid staking protocols such as Lido, Rocket Pool, Swell, Etherfi and others. The network seeking this security must pay the restakers for the risk they are taking by putting up their ETH/LsETH to secure the network, similar to how ETH stakers get compensated for staking their ETH to secure the Ethereum network.


An interesting aspect of the EigenLayer protocol is that applications (also called Actively Validated Services or AVS in short) sourcing security from EigenLayer can decide on validator demographics of their choice. For instance, if an app requires a higher degree of decentralization rather than purely financial guarantees of security, they can define the validator characteristics that they are looking for and only reward those validators for committing staked Ethereum to their AVS. On the other hand, AVS’ can also rent purely economic security by not discriminating between validators and rewarding restakers in proportion to Ethereum restaked. This flexibility allows developers to customize their AVS across the dimensions of decentralization and cryptoeconomics. As a result, EigenLayer’s ecosystem has been growing rapidly. Some of the AVSs that are building on EigenLayer include:


EigenDA - EigenDA is a secure, high throughput, and decentralized data availability service built on top of EigenLayer. Developed by EigenLabs, EigenDA will be the first AVS to launch on EigenLayer. Restakers will be able to delegate their assets to node operators performing validation tasks for EigenDA in exchange for service payments, and rollups will be able to post data to EigenDA to access lower transaction costs, higher transaction throughput, and secure composability across the EigenLayer ecosystem.


Altlayer - Altlayer is building Rollups-as-a-Service tools to scale execution layers. Altlayer comprises of three AVSs that are vertically integrated. The first is a decentralized verification layer that verifies the correctness of a rollup’s state via zk-proofs. The second is a fast finality layer which optimistically reduces transaction confirmation times to seconds. Lastly, there is the decentralized sequencing layer that makes the task of ordering and proposing rollup batches permissionless. Anybody can spin up a rollup using Altlayer’s infrastructure stack, the backbone of which is Eigenlayer itself.


Lagrange Protocol – Lagrange is building Infrastructure for zk-based cross-chain state and storage proofs. Lagrange protocol can prove dynamic analyses involving both current and historical contract states that span across multiple chains concurrently. Proving historical contract state has been a challenge and Lagrange has made a breakthrough with its novel architecture. The protocol opens up use cases that involve many-to-one cross-chain relationships rather than the standard one-to-one existing relationships that only allow for singular message or asset passing between chains. Lagrange’s nodes that store data of multiple L2s and the Ethereum L1 are secured by Eigenlayer restakers.


Mantle Network – Mantle is building an Ethereum L2 that enables fast and cost-effective transactions through innovative rollup architecture and modular data availability. Through EigenDA, Mantle decouples the data availability layer from the consensus layer, achieving high throughput and low gas costs.


Espresso Systems – Espresso is creating a shared sequencer that enables rollup decentralization and improved interoperability. Restaking in the case of Espresso enables node usage optimization and capital efficiency while ensuring neutrality, security, and transaction validation fairness. Espresso’s HotShot consensus nodes can be existing Ethereum validators that restake Ethereum on Eigenlayer.


EigenLayer's growing ecosystem

Source: EigenLayer


In order to incentivize holders of LsETH to put their assets to work, EigenLayer has allocated a portion of their tokens as a future airdrop to restakers, based on how much and how early they deposit into EigenLayer. Underscoring how excited LsETH holders are about the airdrop and the idea of restaking, the amount of LsETH that has been deposited into EigenLayer has been increasing steadily since deposits were permitted.


Fueling the restaking frenzy, multiple liquid restaking protocols have recently launched that allow Ethereum holders to directly stake and restake Ethereum through them. These protocols entice holders by triple dipping and earning yield in the form of 1) Ethereum staking yield, 2) Eigenlayer points and 3) restaking protocol points that will eventually be converted into the protocol token. This wave of activity is reminiscent of the yield farming frenzy we witnessed in mid-2020, during the early phases of the last crypto bull market.


EigenLayer's TVL has been rising steadily

Source: Defilama


To mitigate the potential risk of assets getting compromised through a hack or smart contract vulnerability, the EigenLayer team has capped the amount of assets that can be deployed at each stage, and gradually raise these caps over time. They have also worked with only a small group of liquid staking protocols to begin with. As of 31st January 2024, there is a total of $2.1 billion worth of LsETH deposited in Eigenlayer smart contracts. This figure is set to rise further as more ETH liquid staking protocols are enabled in the coming months. Eigenlayer’s token launch date has not been announced but will likely happen after the initial AVSs gain some traction to ensure that restakers are well incentivized after the points program ends. We believe Eigenlayer’s token launch could happen as early as mid-year 2024.


Eigenlayer increases revenue for Ethereum validators making the protocol value accretive for the Ethereum network. We estimate that Eigenlayer can increase the yield for ETH holders by multiple folds versus simply staking Ethereum over the next 5 years. The yield primarily comes from restaker incentives that flow downstream from AVSs on Eigenlayer, and airdrops that are rewarded to restakers.


Although Eigenlayer expands the use cases covered by trust-minimized protocols, it does come with its own set of risks. For one, the protocol introduces two additional layers of smart contract risk – one from Eigenlayer’s core contracts and another from the AVS contracts that interact with Eigenlayer. Another factor pointed out by Ethereum founder Vitalik Buterin, is that Eigenlayer could potentially overload Ethereum’s consensus and introduce systemic risks that hinder validators’ ability to function properly in case of an adverse event. The protocol has been audited multiple times and the Eigenlayer team, led by Sreeram Kannan - an associate professor at University of Washington, has been extremely cautious in opening the protocol to validators. The launch has happened in phases in a very controlled manner to ensure protocol growth happens gradually. Despite the risks, Eigenlayer is a refreshing new primitive for the crypto space that would allow for entire tech stacks of applications to become decentralized. The market is eagerly awaiting the launch of both AVSs on Eigenlayer and its native token.


If you want to learn more about investment opportunities with Spartan Capital, please contact ir@spartangroup.io.

One of the core value propositions of smart contract networks is trust minimization. Unlike our current system, a transaction that occurs on a smart contract network, between two counterparties, does not require the facilitation of a trusted institution or middleman such as a bank or a lawyer. Instead, there are thousands of validators competing to validate transactions. Collusion and malicious activity are disincentivized financially creating a trustless environment for counterparties to interact.


One of the most interesting projects that is launching this year is EigenLayer. EigenLayer enables off-chain infrastructure layers and even dapps to source security or “trustlessness” from the existing and abundant Ethereum validator set. Complex blockchain applications typically employ multiple layers of off-chain infrastructure that are extremely difficult to decentralize and secure. Further, as blockchain functions become modular, they can be modified to source security in a manner that best suits each layer’s needs. Off-chain infrastructure and modular blockchain layers become the primary use cases served by Eigenlayer. These include oracles providing off-chain data feeds, cross-chain message passing services, Layer 2 sequencers and provers, fast finality layers, and data availability layers. Through Eigenlayer’s middleware, all blockchain infrastructure layers can decentralize and rent Ethereum’s security.


In order to provide this security, EigenLayer allows ETH holders to “restake” their liquid staked ETH (LsETH) with validators who must run additional offchain software to help secure the network that is renting Ethereum’s security. LsETH is the receipt token programmatically generated when users stake ETH through liquid staking protocols such as Lido, Rocket Pool, Swell, Etherfi and others. The network seeking this security must pay the restakers for the risk they are taking by putting up their ETH/LsETH to secure the network, similar to how ETH stakers get compensated for staking their ETH to secure the Ethereum network.


An interesting aspect of the EigenLayer protocol is that applications (also called Actively Validated Services or AVS in short) sourcing security from EigenLayer can decide on validator demographics of their choice. For instance, if an app requires a higher degree of decentralization rather than purely financial guarantees of security, they can define the validator characteristics that they are looking for and only reward those validators for committing staked Ethereum to their AVS. On the other hand, AVS’ can also rent purely economic security by not discriminating between validators and rewarding restakers in proportion to Ethereum restaked. This flexibility allows developers to customize their AVS across the dimensions of decentralization and cryptoeconomics. As a result, EigenLayer’s ecosystem has been growing rapidly. Some of the AVSs that are building on EigenLayer include:


EigenDA - EigenDA is a secure, high throughput, and decentralized data availability service built on top of EigenLayer. Developed by EigenLabs, EigenDA will be the first AVS to launch on EigenLayer. Restakers will be able to delegate their assets to node operators performing validation tasks for EigenDA in exchange for service payments, and rollups will be able to post data to EigenDA to access lower transaction costs, higher transaction throughput, and secure composability across the EigenLayer ecosystem.


Altlayer - Altlayer is building Rollups-as-a-Service tools to scale execution layers. Altlayer comprises of three AVSs that are vertically integrated. The first is a decentralized verification layer that verifies the correctness of a rollup’s state via zk-proofs. The second is a fast finality layer which optimistically reduces transaction confirmation times to seconds. Lastly, there is the decentralized sequencing layer that makes the task of ordering and proposing rollup batches permissionless. Anybody can spin up a rollup using Altlayer’s infrastructure stack, the backbone of which is Eigenlayer itself.


Lagrange Protocol – Lagrange is building Infrastructure for zk-based cross-chain state and storage proofs. Lagrange protocol can prove dynamic analyses involving both current and historical contract states that span across multiple chains concurrently. Proving historical contract state has been a challenge and Lagrange has made a breakthrough with its novel architecture. The protocol opens up use cases that involve many-to-one cross-chain relationships rather than the standard one-to-one existing relationships that only allow for singular message or asset passing between chains. Lagrange’s nodes that store data of multiple L2s and the Ethereum L1 are secured by Eigenlayer restakers.


Mantle Network – Mantle is building an Ethereum L2 that enables fast and cost-effective transactions through innovative rollup architecture and modular data availability. Through EigenDA, Mantle decouples the data availability layer from the consensus layer, achieving high throughput and low gas costs.


Espresso Systems – Espresso is creating a shared sequencer that enables rollup decentralization and improved interoperability. Restaking in the case of Espresso enables node usage optimization and capital efficiency while ensuring neutrality, security, and transaction validation fairness. Espresso’s HotShot consensus nodes can be existing Ethereum validators that restake Ethereum on Eigenlayer.


EigenLayer's growing ecosystem

Source: EigenLayer


In order to incentivize holders of LsETH to put their assets to work, EigenLayer has allocated a portion of their tokens as a future airdrop to restakers, based on how much and how early they deposit into EigenLayer. Underscoring how excited LsETH holders are about the airdrop and the idea of restaking, the amount of LsETH that has been deposited into EigenLayer has been increasing steadily since deposits were permitted.


Fueling the restaking frenzy, multiple liquid restaking protocols have recently launched that allow Ethereum holders to directly stake and restake Ethereum through them. These protocols entice holders by triple dipping and earning yield in the form of 1) Ethereum staking yield, 2) Eigenlayer points and 3) restaking protocol points that will eventually be converted into the protocol token. This wave of activity is reminiscent of the yield farming frenzy we witnessed in mid-2020, during the early phases of the last crypto bull market.


EigenLayer's TVL has been rising steadily

Source: Defilama


To mitigate the potential risk of assets getting compromised through a hack or smart contract vulnerability, the EigenLayer team has capped the amount of assets that can be deployed at each stage, and gradually raise these caps over time. They have also worked with only a small group of liquid staking protocols to begin with. As of 31st January 2024, there is a total of $2.1 billion worth of LsETH deposited in Eigenlayer smart contracts. This figure is set to rise further as more ETH liquid staking protocols are enabled in the coming months. Eigenlayer’s token launch date has not been announced but will likely happen after the initial AVSs gain some traction to ensure that restakers are well incentivized after the points program ends. We believe Eigenlayer’s token launch could happen as early as mid-year 2024.


Eigenlayer increases revenue for Ethereum validators making the protocol value accretive for the Ethereum network. We estimate that Eigenlayer can increase the yield for ETH holders by multiple folds versus simply staking Ethereum over the next 5 years. The yield primarily comes from restaker incentives that flow downstream from AVSs on Eigenlayer, and airdrops that are rewarded to restakers.


Although Eigenlayer expands the use cases covered by trust-minimized protocols, it does come with its own set of risks. For one, the protocol introduces two additional layers of smart contract risk – one from Eigenlayer’s core contracts and another from the AVS contracts that interact with Eigenlayer. Another factor pointed out by Ethereum founder Vitalik Buterin, is that Eigenlayer could potentially overload Ethereum’s consensus and introduce systemic risks that hinder validators’ ability to function properly in case of an adverse event. The protocol has been audited multiple times and the Eigenlayer team, led by Sreeram Kannan - an associate professor at University of Washington, has been extremely cautious in opening the protocol to validators. The launch has happened in phases in a very controlled manner to ensure protocol growth happens gradually. Despite the risks, Eigenlayer is a refreshing new primitive for the crypto space that would allow for entire tech stacks of applications to become decentralized. The market is eagerly awaiting the launch of both AVSs on Eigenlayer and its native token.


If you want to learn more about investment opportunities with Spartan Capital, please contact ir@spartangroup.io.

One of the core value propositions of smart contract networks is trust minimization. Unlike our current system, a transaction that occurs on a smart contract network, between two counterparties, does not require the facilitation of a trusted institution or middleman such as a bank or a lawyer. Instead, there are thousands of validators competing to validate transactions. Collusion and malicious activity are disincentivized financially creating a trustless environment for counterparties to interact.


One of the most interesting projects that is launching this year is EigenLayer. EigenLayer enables off-chain infrastructure layers and even dapps to source security or “trustlessness” from the existing and abundant Ethereum validator set. Complex blockchain applications typically employ multiple layers of off-chain infrastructure that are extremely difficult to decentralize and secure. Further, as blockchain functions become modular, they can be modified to source security in a manner that best suits each layer’s needs. Off-chain infrastructure and modular blockchain layers become the primary use cases served by Eigenlayer. These include oracles providing off-chain data feeds, cross-chain message passing services, Layer 2 sequencers and provers, fast finality layers, and data availability layers. Through Eigenlayer’s middleware, all blockchain infrastructure layers can decentralize and rent Ethereum’s security.


In order to provide this security, EigenLayer allows ETH holders to “restake” their liquid staked ETH (LsETH) with validators who must run additional offchain software to help secure the network that is renting Ethereum’s security. LsETH is the receipt token programmatically generated when users stake ETH through liquid staking protocols such as Lido, Rocket Pool, Swell, Etherfi and others. The network seeking this security must pay the restakers for the risk they are taking by putting up their ETH/LsETH to secure the network, similar to how ETH stakers get compensated for staking their ETH to secure the Ethereum network.


An interesting aspect of the EigenLayer protocol is that applications (also called Actively Validated Services or AVS in short) sourcing security from EigenLayer can decide on validator demographics of their choice. For instance, if an app requires a higher degree of decentralization rather than purely financial guarantees of security, they can define the validator characteristics that they are looking for and only reward those validators for committing staked Ethereum to their AVS. On the other hand, AVS’ can also rent purely economic security by not discriminating between validators and rewarding restakers in proportion to Ethereum restaked. This flexibility allows developers to customize their AVS across the dimensions of decentralization and cryptoeconomics. As a result, EigenLayer’s ecosystem has been growing rapidly. Some of the AVSs that are building on EigenLayer include:


EigenDA - EigenDA is a secure, high throughput, and decentralized data availability service built on top of EigenLayer. Developed by EigenLabs, EigenDA will be the first AVS to launch on EigenLayer. Restakers will be able to delegate their assets to node operators performing validation tasks for EigenDA in exchange for service payments, and rollups will be able to post data to EigenDA to access lower transaction costs, higher transaction throughput, and secure composability across the EigenLayer ecosystem.


Altlayer - Altlayer is building Rollups-as-a-Service tools to scale execution layers. Altlayer comprises of three AVSs that are vertically integrated. The first is a decentralized verification layer that verifies the correctness of a rollup’s state via zk-proofs. The second is a fast finality layer which optimistically reduces transaction confirmation times to seconds. Lastly, there is the decentralized sequencing layer that makes the task of ordering and proposing rollup batches permissionless. Anybody can spin up a rollup using Altlayer’s infrastructure stack, the backbone of which is Eigenlayer itself.


Lagrange Protocol – Lagrange is building Infrastructure for zk-based cross-chain state and storage proofs. Lagrange protocol can prove dynamic analyses involving both current and historical contract states that span across multiple chains concurrently. Proving historical contract state has been a challenge and Lagrange has made a breakthrough with its novel architecture. The protocol opens up use cases that involve many-to-one cross-chain relationships rather than the standard one-to-one existing relationships that only allow for singular message or asset passing between chains. Lagrange’s nodes that store data of multiple L2s and the Ethereum L1 are secured by Eigenlayer restakers.


Mantle Network – Mantle is building an Ethereum L2 that enables fast and cost-effective transactions through innovative rollup architecture and modular data availability. Through EigenDA, Mantle decouples the data availability layer from the consensus layer, achieving high throughput and low gas costs.


Espresso Systems – Espresso is creating a shared sequencer that enables rollup decentralization and improved interoperability. Restaking in the case of Espresso enables node usage optimization and capital efficiency while ensuring neutrality, security, and transaction validation fairness. Espresso’s HotShot consensus nodes can be existing Ethereum validators that restake Ethereum on Eigenlayer.


EigenLayer's growing ecosystem

Source: EigenLayer


In order to incentivize holders of LsETH to put their assets to work, EigenLayer has allocated a portion of their tokens as a future airdrop to restakers, based on how much and how early they deposit into EigenLayer. Underscoring how excited LsETH holders are about the airdrop and the idea of restaking, the amount of LsETH that has been deposited into EigenLayer has been increasing steadily since deposits were permitted.


Fueling the restaking frenzy, multiple liquid restaking protocols have recently launched that allow Ethereum holders to directly stake and restake Ethereum through them. These protocols entice holders by triple dipping and earning yield in the form of 1) Ethereum staking yield, 2) Eigenlayer points and 3) restaking protocol points that will eventually be converted into the protocol token. This wave of activity is reminiscent of the yield farming frenzy we witnessed in mid-2020, during the early phases of the last crypto bull market.


EigenLayer's TVL has been rising steadily

Source: Defilama


To mitigate the potential risk of assets getting compromised through a hack or smart contract vulnerability, the EigenLayer team has capped the amount of assets that can be deployed at each stage, and gradually raise these caps over time. They have also worked with only a small group of liquid staking protocols to begin with. As of 31st January 2024, there is a total of $2.1 billion worth of LsETH deposited in Eigenlayer smart contracts. This figure is set to rise further as more ETH liquid staking protocols are enabled in the coming months. Eigenlayer’s token launch date has not been announced but will likely happen after the initial AVSs gain some traction to ensure that restakers are well incentivized after the points program ends. We believe Eigenlayer’s token launch could happen as early as mid-year 2024.


Eigenlayer increases revenue for Ethereum validators making the protocol value accretive for the Ethereum network. We estimate that Eigenlayer can increase the yield for ETH holders by multiple folds versus simply staking Ethereum over the next 5 years. The yield primarily comes from restaker incentives that flow downstream from AVSs on Eigenlayer, and airdrops that are rewarded to restakers.


Although Eigenlayer expands the use cases covered by trust-minimized protocols, it does come with its own set of risks. For one, the protocol introduces two additional layers of smart contract risk – one from Eigenlayer’s core contracts and another from the AVS contracts that interact with Eigenlayer. Another factor pointed out by Ethereum founder Vitalik Buterin, is that Eigenlayer could potentially overload Ethereum’s consensus and introduce systemic risks that hinder validators’ ability to function properly in case of an adverse event. The protocol has been audited multiple times and the Eigenlayer team, led by Sreeram Kannan - an associate professor at University of Washington, has been extremely cautious in opening the protocol to validators. The launch has happened in phases in a very controlled manner to ensure protocol growth happens gradually. Despite the risks, Eigenlayer is a refreshing new primitive for the crypto space that would allow for entire tech stacks of applications to become decentralized. The market is eagerly awaiting the launch of both AVSs on Eigenlayer and its native token.


If you want to learn more about investment opportunities with Spartan Capital, please contact ir@spartangroup.io.