EigenLayer Protocol: Reshaping Ethereum and Potential Network Health Concerns

2023-06-20, 09:16

[TL; DR]

The EigenLayer protocol enables Ethereum validators to restake their ETH to secure other networks.

Both the Ethereum network and EigenLayer protocol will slash the validators’ staked ETH if they act maliciously.

Restaking results in validators getting more rewards than before as they can get incentives from two protocols.

Currently, the investors can deposit liquid staking tokens (LSTs) which include cbETH tokens, stETH and rETH.

Introduction

The truth is that the blockchain and crypto sectors have many possibilities which people may not imagine at a certain point in time. We can say that in connection with the EigenLayer Protocol which now enables people to restake their staked tokens.

In this article, we shall discuss how the EigenLayer protocol enables stakers to restake their tokens and get rewards from two sources.

Understanding the EigenLayer Protocol

The EigenLayer, the Ethereum restaking protocol, has caused much excitement among crypto investors as it enables individuals to have two income streams from their staked Ether (ETH). This is likely to create a new dimension of how some decentralized applications like oracles and rollups function.

The EigenLayer protocol, built on the Ethereum blockchain, is a decentralized marketplace for validators and node operators that enables them to restake their ETH on other networks. As a result, the networks that use the EigenLayer protocol are able to leverage Ethereum’s trust network.

EigenLayer - Thetie

Significantly, the EigenLayer Protocol solves one of the problems which the Ethereum blockchain currently has. The fact is that the ution layer and the consensus protocol which make up the Ethereum blockchain trust network are coupled, meaning that it is impossible to separate them.

Nevertheless, the EigenLayer Protocol’s restaking capability helps to overcome that constraint since it enables the Ethereum network validators to secure other middleware like oracles and cross chain bridges. With this, the existing networks can also use other ution layers and consensus protocols.

What is restaking?

Restaking is a new concept on the blockchain. However, it simply means that ETH which is staked on one network can be staked again on another protocol. In other words, the ETH which the Ethereum blockchain validators have staked can be used to secure other networks such as non-EVM blockchains or sidechains.

Already, EigenLayer plans to facilitate the restaking of ETH which is withdrawn from the Beacon Chain after the Shapella upgrade. This creates new utility for ETH and ETH staking which should increase its demand in the medium to long run.

According to Ultrasound Money tracker, there are 17.9 million ETH, valued at around $33.6 billion, staked on the Beacon Chain. With the aid of EigenLayer protocol such a quantity of ETH can be restaked and create additional value to the entire eco.

EigenLayer restaking of ETH increases the security of various middleware such as bridges and oracles. This is because ETH’s large market capitalization provides enhanced security and stability of the middleware as well. Furthermore, the capability to restake withdrawn ETH is likely to encourage additional participation in the Ethereum network and other networks that depend on the Ethereum blockchain.

More significantly, the ability to restake ETH creates room for better rewards for stakers and validators.

Important info: Top eth-20-staking Crypto Coins & Tokens by Market Cap

The current state of the EigenLayer protocol

The EigenLayer protocol has undergone testing using the Goerli testing network. Nonetheless, it will be tested under three phases which involve various participants in the eco. The EigenLayer protocol mainnet is expected to be launched in the third quarter (Q3) of 2023.

The project is progressing well since it has a large financial backing. In March, it raised over $50 million in a Series A funding round where fin-tech giants Coinbase Ventures, Polychain Capital, Blockchain Capital, Finality Capital Partner and Electric Capital participated.

Risks of restaking ETH

As we know, Ethereum blockchain validators used to stake their ETH to participate in the network validation process. Their main role has been to verify the transactions on the blockchain and earn rewards in the form of ETH in return.

Nevertheless, there are some disincentives for acting maliciously. If a validator acts maliciously, he/she loses some of his/her staked ETH through a process called slashing. Restaking the ETH means that the stakers should abide by the conditions of the other protocols. If they misbehave, they also lose their ETH through slashing in a similar way the Ethereum blockchain does.

This means that the validators risk losing their staked ETH through slashing from two protocols. For instance, if the staked ETH of a validator is slashed by a protocol other than the Ethereum network there will be a double slashing. The reason is that the Ethereum network also slashes the ETH even if the validator has not flouted its terms.

According to the current Ethereum network smart rules, a validator who acts contrary to the expected standard loses half of the 32 staked ETH. If the validator had violated the standing rules of another protocol EigenLayer would slash the remaining half. This means it would slash 8 ETH from the remaining 16. That becomes a huge blow to the validator.

However, it is also important to note that the validator who has restaked his/her ETH would receive double rewards. He/she gets a reward from the Ethereum network and the other network connected to the EigenLayer protocol.

However, analysts have also pointed out that restaking the ETH may create risk for the Ethereum network and its social consensus.

Vitalik Buterin’s Views on Restaking ETH

Although Vitalik Buterin, Ethereum blockchain co-founder, believes that there is nothing wrong about restaking ETH, he clearly pointed out that the applications that rely on the restaked ETH for security should not “recruit its social consensus.” In other words, such protocols should not aim to rely on a fork to recoup any losses. Also, if the protocol misbehaves the Ethereum social consensus will not bail it.

According to Buterin, there are two types of risks that arise from Ethereum restaking for the purpose of securing other protocols other than the Ethereum network. First, there is a low-risk re-use “where, even if everything completely breaks, the losses are contained to the validators and users who opted in to participating in and using your protocol.”

Then, there are also higher-risk applications that end up overloading the Ethereum network’s social consensus. This could significantly affect several applications or protocols both on and off-chain.

Will there be an EigenLayer Crypto?

EigenLayer has not announced an intention to introduce a native cryptocurrency. Time will tell if it will launch an EigenLayer token. What we know at the moment is that investors can deposit liquid staking tokens (LSTs) in EigenLayer protocol.

Currently, it supports Coinbase’s cbETH tokens, Lido’s stETH and Rocket Pool’s rETH. However, it has plans to introduce more LSTs.

Conclusion

The recent launch of the EigenLayer protocol on the Ethereum blockchain marks a new development for the entire eco. EigenLayer restaking will increase the validators ‘rewards while creating more utility for ETH. So far, EigenLayer protocol has not yet suggested a release of its token. However, users can deposit various liquid staking tokens (LSTs).

FAQs on EigenLayer Protocol

How does the EigenLayer work?

The EigenLayer is a marketplace for validators and node operators which enable them to restake their ETH. The restaked ETH can secure other blockchains that exist on the Ethereum blockchain.

What are the risks of EigenLayer protocol?

The validators who act maliciously will lose most of their ETH. This is because both the Ethereum network and EigenLayer may slash their staked ETH.

Does Eigenlayer have a token?

Currently, EigenLayer does not have a token and it has not yet announced its intention to have one. However, investors can deposit liquid staking tokens (LSTs) which include cbETH tokens, stETH and rETH.

Who is the founder of EigenLayer protocol?

Sreeram Kannan is the founder of the EIgenLayer. The EigenLayer is a protocol that enables Ethereum validators and node operators to restake their ETH.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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