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Is EigenLayer the Key to Ethereum’s Long-Term Dominance?

Lincoln Murr

Summary: One of Ethereum’s most impressive achievements is creating a secure, decentralized, and attack-resilient network of trust secured by Ether. Though this is only used for securing the Ethereum blockchain right now, there is no reason why it can’t be used for other protocols, mechanisms, and primitives. EigenLayer hopes to realize this vision by creating a ...

One of Ethereum’s most impressive achievements is creating a secure, decentralized, and attack-resilient network of trust secured by Ether. Though this is only used for securing the Ethereum blockchain right now, there is no reason why it can’t be used for other protocols, mechanisms, and primitives. EigenLayer hopes to realize this vision by creating a restaking platform for Ethereum, which could ultimately allow ETH stakers to secure hundreds of billions of dollars in value, if not trillions, and provide long-term diversified utility for ETH.

 

EigenLayer was founded by Dr. Sreeram Kannan, lead at the University of Washington’s Blockchain Lab. Its goal is to allow liquid-staked ETH to be “re-staked” on other protocols, effectively giving the new protocol the robust security guarantees of the Ethereum network while also providing ETH stakers with more yield forms. Their whitepaper, released in February 2023, details potential applications, including single-slot finality, data availability, and decentralized oracles. For this to work, users deposit their staked ETH into the protocol, choose the applications they would like to secure based on their rewards and terms, and earn yield from the application. If a user acts maliciously and breaks the rules of the new protocol, they get penalized, and their ETH gets slashed.

 

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Since Ethereum is arguably the most secure and decentralized network, it makes sense to extend its use case beyond a blockchain and commercialize its trust. Instead of a protocol needing to bootstrap its own set of validators, come up with feasible crypto economics, and hope that its protocol is not vulnerable to hacks, exploits, or consensus mechanism attacks, they can utilize Ethereum’s pre-existing network and derive all of the same security guarantees. As long as Ethereum is safe, their app is secure, and given that there is over $49 billion in staked ETH over 800,000 nodes, this seems like a relatively safe assumption.

 

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In the future, EigenLayer plans to extract even more value by allowing re-staking on more yield-generating ETH-based assets, such as ETH/ETH LP tokens. This will not only create a strong liquidity pool for ETH trading but also provide maximum yield to re-stakers and create an incredible incentive system for holding ETH. Not only will Ethereum be the fee-generating asset that’s burned every time a transaction on the mainnet is made, but it could also be the security and trust layer for dozens of other blockchains, decentralized oracles, sidechains, and protocols. Since each staker can individually choose which protocol to support, they will have complete control over their risk and reward level, meaning that the chance of catastrophic re-staking disasters can be mitigated on a per-user basis. 

The true innovation of EigenLayer is creating a marketplace for decentralized trust, wherein all sorts of applications, not just those related to blockchains or decentralized finance, can find value in having a set of users acting on a specific set of rules, with incentives for following them correctly and penalties for malicious behavior. The application of this technology is nearly limitless, and Ethereum is the perfect asset to pair re-staking with since it is battle-tested, decentralized, and has a robust liquid staking infrastructure. Even if mainnet Ethereum loses popularity or does not have enough transactions for ETH to be burned and deflationary, the rewards from re-staking could be more than enough to keep the network afloat. It’s effectively giving ETH an entirely second use case that leverages its strong network effects like no other proof-of-stake chain has. That being said, EigenLayer’s popularity will likely inspire similar protocols on other PoS chains, like Avalanche, BSC, and Solana.

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Though EigenLayer has yet to launch a single Actively Validated Service, they already have over 160,000 ETH locked on their platform and waiting to be re-staked. With billions of dollars ready to go, it is only a matter of time before the first protocols go live on EigenLayer, and a new phase of ETH value accrual begins.

By Lincoln Murr

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