An important part of the growth of Web3 is the development of innovative solutions that drive down the cost of building dApps without compromising security. EigenLayer is a marketplace that offers developers on the Ethereum network access to a marketplace of Ethereum stakers ready to provide validation services at significantly low costs.  

Read on to learn about EigenLayer, how it works, and its benefits and risks. 

What Is EigenLayer?

EigenLayer is an Ethereum-based protocol that uses a restaking mechanism to allow ETH stakers to reallocate their staked ETH and Liquid Staking Tokens (LSTs) to bolster security for other protocols. 

Stakers on EigenLayer earn extra restaking rewards for their efforts, while the protocols enjoy access to an already-built validator set. 

EigenLayer commoditizes decentralized trust by allowing protocols to leverage Ethereum’s highly secure trust network, driving down the cost of kickstarting protocols since they don’t have to spend on reward incentives to create a validator set. 

How Does EigenLayer Work?

EigenLayer enables users to repurpose their staked ETH to extend Ethereum’s security to other dApps built on the network.

Users can opt into EigenLayer and agree to grant additional enforcement rights on their staked ETH. The opt-in feature creates additional slashing conditions to meet the conditions of projects, such as data availability layers and bridges. The slashing conditions enforce honesty among the participants and ensure the security of the dApps utilizing EigenLayer is upheld. 

EigenLayer operates as a marketplace where developers get to incentivize validators to allocate their restaked ETH to secure their protocols. Alternatively, dApp would have to create a native token for the validators’ reward incentives and bootstrap their own trust network from scratch. 

With Eigenlayer, developers can make it attractive for validators to choose their projects through attractive yields. The financial and time resources involved here are significantly lower than those involved in creating an entirely new trust network. 

Types of Staking on EigenLayer

Users can choose between two staking options on EigenLayer: native staking and liquid restaking. Let’s take a look below.

Native Restaking 

Native restaking involves having the Ethereum validator’s withdrawal credentials to the EigenPod, which is the protocol’s smart contract. Users must operate an Ethereum Validator node to participate in native staking. 

Liquid Restaking

Users can also choose to restake by locking their liquid staking tokens, LSTs, into EigenLayer smart contracts. The validator takes their LSTs already staked on protocols, such as Rocket Pool and Lido, and restake them on EigenLayer. 

Benefits & Risks of EigenLayer

EigenLayer presents both benefits and risks. 

Benefits

  • Additional rewards for stakers: Restaking allows stakers to earn rewards from multiple protocols. 
  • Trust aggregation: The large capital pool improves the trust model by reducing the chances of and increasing the protocol’s corruption cost should a 51% attack occur.  
  • Reduced capital costs: On the validators’ side, reusing capital across multiple services amortizes its cost. On the developers’ side, EigenLayer solves the bootstrapping problem by offering a large validator set at a comparatively lower cost (both financially and in terms of time) than building the set from scratch. 
  • Simplified network security: Restaking on EigenLayer presents flexibility to the Ethereum ecosystem, where projects can easily access and utilize the network’s security. Small projects no longer need large capital outlays to develop security systems as they can rely on Ethereum’s. An increase in the number of projects on Ethereum due to the lower entry barrier increases adoption and leads to further decentralization. 

Risks

  • Yield risk: The open marketplace may lead stakers to opt for the protocols offering the highest yields. This may lead to competition between projects to adjust their yields to attract stakers, leading to limited or no demand for projects that offer lower yields. 
  • Centralization: EigenLayer’s promise of increased yields may lead to ETH stakers redirecting their withdrawal credentials to the protocol. This risks the Ethereum network if bad actors identify and exploit EigenLayer’s potential vulnerabilities. 
  • Slashing: A staker agrees to the potential slashing of up to 50% of their staked ETH. Additionally, they have to comply with the protocol’s conditions. If the rules determine they exhibited malicious behavior, they stand to lose the remaining 50%. 

The (S)Takeaway

EigenLayer holds significant promise in benefiting multiple parties, especially developers looking to focus on their dApp’s features and trusting EigenLayer to provide validator sets. This can potentially lower the entry barrier and see more decentralized protocols built on Ethereum. 

However, EigenLayer also comes with a set of risks, including yield risk, centralization, and the potential for stake slashing. How the protocol will address those challenges will significantly impact its future.