EigenLayer achieves shared security via pooled security and open marketplace.
As modularization advances, EigenLayer helps projects deploy applications quickly, easily, and at a low cost.
Why Has Restaking Emerged?
The emergence of Restaking is the result of the continuous evolution of staking, which was primarily catalyzed by Ethereum’s transition from PoW to PoS in September 2022. Ethereum staking allows users to become network validators by staking ETH, thereby ensuring the secure operation of the Ethereum network. The more validator nodes, the higher the security and decentralization within Ethereum. This will better foster the growth of the Ethereum ecosystem.
However, Ethereum staking comes with drawbacks. The most notable ones include a high entry threshold (32 ETH) and a locking period. To address these issues, liquid staking derivatives (LSDs) have garnered traction. LSDs pool the ETH staked by individual users to meet the 32 ETH requirement for validator nodes, lowering the participation threshold. Additionally, users receive ERC-20 derivative tokens, such as stETH issued by Lido, at a 1:1 ratio for their ETH staked in the pool. These tokens boast strong liquidity and are typicallly tradable and redeemable.
Simply put, Restaking is staking assets that have already been staked, with the aim of receiving staking rewards and potential airdrops from projects. In the real world, security is paramount for projects like oracles, DeFi, and DALayer. However, establishing proprietary validator nodes can be challenging if project funds are limited. In response, EigenLayer pioneered Restaking. As projects adopt the security provided by Restaking, the market anticipates them to offer airdrop rewards as an incentive.
How Does EigenLayer Build a Shared Security System?
EigenLayer’s founder proposed four Restaking modalities:
1. Native Restaking: Ethereum mainnet validators can restake their staked ETH by pointing their withdrawal credentials to the EigenLayer contracts.
2. LST Restaking: Validators can restake their LSTs, ETH already restaked via protocols like Lido and Rocket Pool, by transferring their LSDs into the EigenLayer smart contracts. Note: LST means liquid staking token, such as Lido’s stETH and Coinbase’s CbETH.
3. ETH LP Restaking: Validators stake the LP token of a pair which includes ETH.
4. LST LP Restaking: Validators stake the LP token of a pair which includes a liquid staking ETH token, such as Curve’s stETH-ETH LP token.
So, how does EigenLayer achieve shared security through restaking? According to its whitepaper, this relies on two mechanisms: Pooled Security and Open Marketplace.
Pooled Security: Ethereum validators can set their beacon chain withdrawal credentials to the EigenLayer smart contracts and select new modules built on EigenLayer. These modules can impose additional slashing conditions on the staked ETH of validators who choose to join them. In return, validators earn rewards from their staked credentials and additional revenue from projects using AVS (Active Verification Service).
Open Marketplace: EigenLayer introduced this mechanism to manage how its pooled security is provided by validators and used by AVS. Validators can choose to join or leave a module built on EigenLayer. Modules need to incentivize validators to allocate restaked ETH to their module, and considering the possibility of additional slashing, validators will help determine which modules are worth assigning this additional pooled security. In other words, the open marketplace provides a competitive market decided by supply and demand, allowing validators to serve protocols based on their risk and return.
In terms of penalty mechanisms, EigenLayer significantly increases the cost of malicious attacks. The entire penalty is executed by smart contracts and can punish malicious investors with up to 50% of their ETH.
Advantages and Potential Risks of Restaking
EigenLayer has, to some extent, improved asset efficiency on Ethereum and extended the security consensus on the Ethereum main chain. This will undoubtedly help the Ethereum ecosystem thrive. Essentially, it provides Software-as-a-Service (SaaS) or Restaking-as-a-Service (RaaS). With the competition among public chains, DApps are emerging one after another. Projects like EigenLayer, by providing Ethereum security consensus, are expected to gain popularity. However, EigenLayer is still nascent and carries risks of failure. Overall, as modularization advances, EigenLayer provides a groundbreaking way to help projects deploy applications quickly, easily, and at a low cost.
The post first appeared on HTX Square.
