Project Primer: EigenLayer

Key Points

EigenLayer’s ‘restaking’ will allow ETH stakers to earn incremental yield on staked ETH.
The project is slated to launch on Ethereum in Q3 2023. Participating in its testnet version (steps below) is expected to give early adopters a leg up come launch time.
EigenLayer has not publicly announced plans for a token launch or airdrop. But both seem probable in the future.

Project Overview

Project Name: EigenLayer
Category: Ethereum Infrastructure/Staking
Founded: 2021
Total Funding: $64M ($200M valuation)
Twitter Follows: @eigenlayer, @sreeramkannan

What is Restaking?

Restaking is just what it sounds like: taking staked ETH and staking it again somewhere else. Today, the bulk of staked ETH is only securing Ethereum and only earning ETH staking rewards. EigenLayer’s restaking will shake that up.

It will provide user opportunities to:

earn incremental yield on liquid staking derivatives (e.g., Lido’s stETH)
earn incremental yield on natively staked ETH

That incremental yield will come from crypto projects that use EigenLayer to bootstrap their security. Rather than “starting from scratch” to build out their security profiles, projects will now have the option to “rent” staked ETH from EigenLayer to secure their networks. In return for this “rented” security, these projects will pay fees which will be passed on to restakers.

What are the Pros and Cons of EigenLayer?

Pro: Higher All-In Staking Yields

By staking ETH today, users earn ~5% in annual percentage yield (APY). With restaking, there will be the opportunity to earn incremental yield. Just how much will depend on which projects actually use EigenLayer to rent security, but all signs point to 2.5% to 5.0%. (Why would anyone restake for just an additional 1.0%?)

That should bring all-in restaking yields into the high single digits and potentially double digits. Not too shabby. Especially if you are in “it for the long haul” and compounding those yields.

What shape and form this incremental yield will take remains to be seen. Will it be paid out in ETH? Will it be paid out in other tokens? Both seem possible today.

Con: Increased Staking Risks for Users

Slashing Risks Today

Staking ETH on Ethereum today comes with slashing risks. The ins and outs of slashing are complicated, but here is a simple way to understand it: if the validator staking ETH on your behalf doesn’t do their job, (some of) the ETH you staked with them could go “bye bye”.

It happens rarely. Since Ethereum staking went live in December 2020, only ~250 Ethereum validators have been slashed. That’s just 0.033% of the ~775K active Ethereum validators.

And even when slashing has happened, the consequences have not been that bad… at all. Consider what happened to Lido. In April 2023, 11 of its validators were slashed. All in the slashing penalty was ~13.7 ETH. That’s ~$25K at current ETH prices. (What is this? A penalty for ants?)

There are a lot of things that can keep the Milk Man up at night. Slashing (on Ethereum layer-1) is not one of them.

Slashing Risks With Restaking

Restaking ETH will come with additionalslashing risks. In other words, EigenLayer restakers could still have their initial staked ETH slashed. But the projects that they are restaking this staked ETH with could also slash them. Confused yet?

What these additionalslashing risks will be depends on which protocols are using EigenLayer and what conditions they impose. But suffice to say that restaking ETH is going to be riskier than just staking ETH. When EigenLayer does launch, you’ll want to take a look at what slashing conditions come with restaking to certain projects.

For additional research and analysis on the risks associated with restaking, refer to the EigenLayer whitepaper and Vitalik Buterin’s “Don’t overload Ethereum’s consensus”.

The Outlook for EigenLayer

The market for ETH staking is large and growing: ~$45B worth of ETH are currently staked on Ethereum.

Now $45B may sound like a lot - but that only represents a small fraction of all ETH in circulation.

Staking is not for all ETH holders. And (you guessed it) restaking will not be for all current ETH stakers. But given how much ETH is staked today, even if a small percentage of ETH stakers opt to re-stake through Eigenlayer, the numbers could be eye popping. Take a look at the chart below. It shows how many billions worth of ETH could be restaked through the EigenLayer protocol under different levels of adoption.

Even if just 2.5% of all staked ETH are restaked through EigenLayer, that would put the protocol’s total value locked (TVL) somewhere in the ballpark of ~$1B. Consider that the conservative case.

If the launch of EigenLayer looks anything like the launch of Lido, we wouldn’t be surprised if the protocol racks up a couple billion dollars of TVL a few months after it launches

Why does all of this matter?

TVL is the lifeblood of (pretty much) any DeFi protocol out there. The more TVL that a project has, the more revenue it can generate. And the more TVL a project has, the higher the likelihood that its token will actually be worth something.

But will EigenLayer even have a token? While they have not publicly announced plans for a token, all signs point to “yes”.

Why, you may ask?

Firstly, issuing a token would enable EigenLayer to incentivize validators and stakers to utitilize adopt the protocol. What better way to get people to use the project than to pay them to do so?
Secondly, because EigenLayer is aiming to decentralize. A token launch could be instrumental in making the project “community owned”.
Thirdly, because the project’s VC investors didn’t invest $64M into the project out of the kindness of their hearts. They will be demanding a return on their investment which will likely come in the form of a token allocation.

How To Try EigenLayer Today?

EigenLayer has yet to deploy on Ethereum mainnet, but users can get an early look at the protocol today by staking on its Ethereum Goerli testnet implementation. The steps (for users that already have a Metamask wallet) to do so are as follows:

(i) Source testnet ETH via a faucet such as Alchemy’s Goerli testnet faucet.

(ii) Navigate to the rocketpool testnet website to stake this testnet ETH.

(iii) Navigate to the EigenLayer testnet implementation and find a pool.

(iv) Stake the ETH in an EigenLayer pool.

(v) Keep track of the “restaking points” you earn over time:

These points are used to determine your position in the restaking queue when the project goes live. The more points you have, the higher the likelihood you will be able to restake to new projects as they are added to EigenLayer.

Restaking points are also used to determine your staking rewards. The more restaking points you have, the more staking rewards you will earn. LFG.

This article is for informational purposes only and should not be relied upon as a basis for investment decisions, nor is it offered or intended to be used as legal, tax, investment, financial or other advice. You should conduct your own research and consult independent counsel on the matters discussed within this report. Past performance of any asset is not indicative of future results.