EigenLayer, explained
EigenLayer aims to eliminate a critical barrier many new DApps face by providing developers with an established security framework.
Ethereum has come a long way since its launch in 2015. It has held its position as the most influential blockchain, successfully transitioned from proof-of-work (PoW) to proof-of-stake (PoS), and is the foundation for many innovative crypto projects.
One such project is EigenLayer, a decentralized Ethereum staking protocol that provides developers with an established security pool. This EigenLayer explanation details staking and other vital parts of the Ethereum staking protocol.
The EigenLayer protocol is an Ethereum-based project aiming to improve the network’s PoS consensus through a process called Ethereum restaking. The EigenLayer team claims to solve many existing Ethereum security inefficiencies, such as requiring every protocol to manage its own security and scalability processes.
However, before discussing the EigenLayer restaking process, defining the traditional Ethereum staking process is essential.
What is staking?
Staking is one of crypto’s most popular features, providing traders with a reliable passive income stream.
Staking involves locking one’s cryptocurrency in a staking pool, exchange or smart contract. A user earns interest on their staked assets, and in turn, the network utilizes these assets to cultivate network security. The more funds a user stakes, the more passive income they make.
High-value stakeholders often become validators who participate in transaction validation and vote on upcoming or existing proposals to improve the network. The idea is that stakers are more invested in protecting the blockchain network and less likely to become bad actors. Staking incentivizes good behavior as well. Validator rewards on Ethereum are slashed if a validator fails to participate in the network’s best interest.
Decentralized staking is seen as the more accessible form of transaction validation when compared to PoW. PoW has miners racing to be the first block validator to earn a reward. This process has miners spending thousands on computer equipment to increase their hash rates, meaning those who spend the most earn the most. As these users continue to amass tokens, it becomes even more difficult for new miners to get involved.
Staking on Ethereum is similar to holding a savings account in a traditional bank and requires much less effort from the user. Thanks to the advent of staking pools, even users without much money to spare can begin their staking journey.
What is restaking, and how does EigenLayer support it?
Restaking is EigenLayer’s take on traditional staking. It provides new ways for users to generate passive income while increasing network security.
Restaking, in the case of EigenLayer, is the act of taking staked Ethereum and repurposing it to increase security on other protocols — essentially creating a pool of restaked assets from which other decentralized applications (DApps) can pull. Users can opt-in to EigenLayer’s restaking smart contract through their already staked Ether (ETH) or through a liquid staking token (LST).
When a user stakes funds on an Ethereum protocol, most projects offer liquid staking tokens to represent those staked assets — a sort of receipt. These tokens allow one to keep using their funds in other ways, such as restaking them through EigenLayer via a process called LST restaking without unstaking their original assets.
Alternatively, users can allow EigenLayer’s smart contracts to work with their already-staked ETH. Restaking with already-staked ETH is called native restaking. If a user participates in native restaking, the network will add those assets to the protocol’s security pool. How safe is EigenLayer? It’s about as secure as the size of its security pool.
Applications built on EigenLayer are called actively validated services (AVSs) and can be anything from a bridge to a DApp to an oracle. Developing on EigenLayer is cheaper and more efficient than developing on a separate protocol, as EigenLayer has an established trust network in place through restakers. Developing elsewhere requires building a trust network from scratch.
That said, AVSs aren’t randomly harnessing services from EigenLayer. Instead, there’s an intermediary called a node operator, a volunteer opting to help manage the network. Much like an Ethereum validator, an operator can be a single user or an organization.
Operators can build their own AVSs or provide services to other existing AVSs while receiving rewards in return. However, operators are also subject to an AVS’s slashing requirements should they fail to perform their duties.
Moreover, operators can be restakers, or restakers can choose to delegate their restaked assets to an operator. Either way, restakers have complete control over which services their assets go toward. As a result, EigenLayer creates a sort of free-market governance system. Developers build on EigenLayer to harness its established security, while operators and restakers earn rewards for managing and providing said security.
How do restakers manage their restaked assets?
EigenLayer streamlines asset management through its EigenPod solution.
Users must connect their wallet to the EigenLayer application and select the token they want to restake. First-time restakers must approve the process before depositing funds into EigenLayer’s restaking contract.
A restaker manages their restaked assets through an EigenPod, a smart contract created during the restaker’s initial restaking process. An EigenPod is essentially a hub for the restaker to manage restaking processes, withdrawals and more. There can only be one EigenPod per Ethereum wallet address.
Restakers can visualize their network contributions through EigenLayer’s restaked points. Users earn restaked points every time a block is validated from their restaking date onward. EigenLayer calculates a user’s restaked points through a proprietary formula that factors the amount of restaked assets and the time they’ve been locked in. The formula views native restaked ETH and restaked LST equally.
Users can withdraw their staking rewards on EigenLayer through a partial or full withdrawal process. Restakers who want to withdraw their earned rewards but continue providing services go through a partial withdrawal process. Partial withdrawals require on-chain proofs, and their gas fees can be expensive. Restakers can request one partial withdrawal every four to five days, and withdrawn funds must go through an additional escrow period before appearing in the restaker’s wallet.
Full withdrawals are for restakers who no longer want to provide their services. Otherwise, the process is similar to a partial withdrawal, requiring on-chain proofs and an escrow period for withdrawn funds. If a restaker accidentally initiates a full withdrawal, they can redelegate their assets via EigenPod’s “redeposit” button. Restakers can initiate either withdrawal process through their EigenPod’s “Unstake” section.
Pros and cons of EigenLayer
EigenLayer features innovative solutions, though this Ethereum network upgrade also introduces its own problems.
EigenLayer hopes to innovate on Ethereum’s tried-and-true proof-of-stake feature. In some ways, it is doing just that. However, its innovations aren’t perfect and can lead to new problems.
Pros
Additional passive revenue
Since restakers can use their staked assets in additional ways, they have the potential to earn higher rewards than traditional staking methods.
Improving developer success rates
EigenLayer’s security pool eliminates a key barrier many new projects struggle to overcome. Now, developers can focus on providing valuable services without worrying about establishing trust.
By removing one of the most significant barriers that newer projects face, EigenLayer could lead to genuinely innovative layer-2 projects.
Cons
Higher barrier to entry
While EigenLayer benefits new DApps by providing them with established security, restaking to participate in the network may overwhelm some users. Many crypto exchanges offer staking as a built-in service, simplifying node setup and maintenance for users on the network. That accessibility comes at the cost of technical know-how. If less technical users are already comfortable with the staking process, they will unlikely be interested in restaking.
Increased risk
EigenLayer AVSs have slashing rules that are different from traditional staking. Since restakers hold assets in traditional staking and restaking avenues, they’re doubling their slashing risk should they fail to uphold their duties.
Not only this, but restakers are doubling their exposure to security risks. Stakers already trust Ethereum’s smart contract code when they stake assets, and restaking requires trust in EigenLayer’s development prowess. This isn’t to mention the quality of EigenLayer AVSs.
Fortunately, both Ethereum and EigenLayer’s code is entirely open-source. Knowledgeable developers can assess this code before risking their assets.