Evaluating EigenLayer’s feasibility

Mar 22, 2023

Ethereum is the new oil

Ethereum helps application developers create new things without having to start from scratch. It provides a decentralized trust system that makes it easier for them to focus on innovation.

Before Ethereum, developers had to spend a lot of time building their own trust networks, which was a big obstacle to getting started. But now, that trust is built right into the platform itself, making it easier for them to get going.

However, there are still some trust issues that Ethereum hasn't solved yet. The way that trust is built into the system only applies to certain parts of it, and if developers want to change those parts, they have to start all over again.

So, while Ethereum has created a great platform for innovation, there's still some work to be done to make sure that all applications can benefit from a high level of trust and security.

That is when middleware steps in

Have you ever heard of “middleware”? It's a type of software that helps different blockchain networks communicate with each other.

One popular example of middleware is something called an oracle. This software helps transfer data in and out of the Ethereum network.

However, since middleware sits between different blockchain networks, it needs to be very secure and trustworthy itself. This is a difficult and expensive process. That's why there's only one major player in the game right now - Chainlink.

In other words, middleware is like a translator that helps blockchains talk to each other, but it needs to be super reliable and trustworthy to work properly.

Ethereum is still in its early stages, both in terms of computer science knowledge and in our understanding of what Ethereum is. Think of Ethereum as Gold discovered by James Marshall at Sutter's Mill and sparked the California Gold Rush of 1849. Its future path is clear; the Middleware Gold Rush is inevitable.

There are lots of different middlewares that work with Ethereum. Some of the applications that use these middlewares include things like Oracles in DeFi derivatives and Bridges for cross-chain asset transfer.

These middlewares work independently of Ethereum and have their own networks of people who help make sure they work correctly. We trust them because they use something called "Economic Security," which means that good behavior is rewarded and bad behavior is punished.

So even though Ethereum itself has some trust issues, these middlewares help provide more security and reliability to applications that use them.

Introducing Eigen Layer

This protocol designed by Sreeram Kannan aims to ensure that middlewares are just as secure as Ethereum itself. It manages to do this through something called "Restaking".

Restaking means that the people who help make sure Ethereum works correctly (called "validators") can also earn money by helping to secure the middlewares.

But just like with Ethereum, if someone does something bad, they can have their money taken away.

So if someone wants to help secure a middleware through restaking, they have to choose a special contract that belongs to EigenLayer. If they do something bad, EigenLayer can take away their money.

This is all to make sure that the middlewares that work with Ethereum are just as trustworthy and secure as the platform itself.

EigenLayer offers two other ways to expand its service beyond just restaking ETH. They can also support staking other tokens like WETH/USDC LP Token and stETH/USDC LP Token.

The middlewares that use EigenLayer can also keep their own tokens as a requirement for staking while using EigenLayer to make its system more secure. This way, the value of their own tokens remains important and they don't have to worry about the value of a single token dropping too low.

Upside of the protocol

Restaking is a process that can improve the way we secure cryptocurrency networks and make it easier for developers to create new products. It allows token holders to earn rewards for contributing to network security, and then use those rewards to earn additional yield elsewhere. This means they can get more value from their investment without having to lock their capital into one place.

By opting into EigenLayer, users can earn passive rewards on their extended capital, and invest it in multiple protocols, each with their own rewards system. This means they can earn more money without having to take on more risk.

EigenLayer also has the potential to improve the Ethereum fee model by allowing new protocols to participate in it. This helps keep value locked within Ethereum and drives more revenue back to the network.

Downside to consider

1. Talking about ETH demand

EigenLayer has a problem because it needs people to use ETH as economic security in new protocols, but most protocols prefer to launch their own tokens instead of using ETH. This may make it hard for EigenLayer to get demand for its product. Launching a token to generate a runway for development and community support is a far more appealing alternative, as history has proved, and every new protocol is motivated to do so. Others may recall that the community once advocated for protocols to use WETH instead of creating new tokens.

2. “Pooled Shared Security” & “Free-Market governance“

EigenLayer and standard contracts both achieve pooled shared security in a similar way. Nexus Mutual is an example of pooled security on Ethereum, though it is an insurance protocol.

The whitepaper says that EigenLayer aggregates ETH security across all modules, but it actually aggregates ETH liquidity across them, which improves capital efficiency but reduces security.

EigenLayer is a protocol that attempts to secure protocols, but it has a liquidity pool that allows 100x leverage of risk with no risk parameters. This creates a risk of losing economic security for every module, and the risk increases as more modules are added.

For example, if there is a shared pool of 100 ETH in EigenLayer with 10 modules and one module experiences a slashing event that burns 50% of the stake, only 50% of the ETH remains to secure the other 9 modules. The governance model in the whitepaper is not enough to manage these issues, even with full control of all the ETH.

Upon reviewing the whitepaper, it appears that EigenLayer's open market mechanism relies on a set of economic incentives to encourage validators to behave in the best interest of the network. Validators are incentivized to participate in the system by earning fees for validating and staking ETH. However, the system does not provide any guarantees against the risks associated with validators' actions or module vulnerabilities.

3. “Innovation beyond the smart contract-based DApps” honest review

The whitepaper covers several capabilities that EigenLayer can handle with its new breakthroughs. But, EigenLayer is merely a smart contract; no extraordinary skills from beyond have been granted to this contract. Nothing in the whitepaper on new enabling technology cannot or has not already been achieved in a "regular" contract. Any of these described skills are simply technical fluff put to the whitepaper to increase its apparent importance: Decentralized Sequencers, Light-Node Bridges, Fast-Mode Bridges for Rollups, Oracles, Opt-in Event-Driven, Activation, Opt-In MEV Management, Ultra-Low Latency Settlement Chains.

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