Guide to EigenLayer

Intro to EigenLayer

EigenLayer, the first restaking protocol on Ethereum released its Operator and AVS Mainnet on April 9, 2024, and Coinbase Staking is proud to participate as an Operator. We’re excited to support permissionless innovation and we cannot wait to see the growth of the EigenLayer ecosystem! 

If you’re a blockchain developer building a new protocol that will interact with Ethereum, it’s likely you’ll need a trustless way to validate any data originating offchain. Today, that means you face the difficult task of bootstrapping your own decentralized network of computers to validate information and provide consensus, including determining how to incentivize users to join the network and run your node software on their machines. 

EigenLayer is trying to change that. 

The Ethereum network already sports a massive — in scale and capital — decentralized network of validators. It uses a proof-of-stake (PoS) consensus mechanism, meaning node operators stake capital in the form of ETH to participate, earning rewards for securing the network and facing a loss of financial capital (i.e. slashing) if they misbehave. There’s currently +31M ETH staked to secure the Ethereum network. 

EigenLayer proposes to leverage the robust security of the Ethereum network to secure a broader range of decentralized applications (dapps), foster permissionless innovation, and make it easier for developers to build onchain.

It accomplishes this by introducing the concept of restaking — the use of currently  staked ETH to secure additional dapps and infrastructure, earning participating restakers additional rewards atop their current ETH rewards.

EigenLayer launched in June 2023, enabling users at that time to restake native ETH and liquid staking tokens (LSTs). By April 2024, participating restakers had deposited 3.6M ETH into the protocol, worth +$12B at the time. Following this launch, EigenLayer released its Operator and AVS Mainnet on April 9, 2024, and we are proud to participate as an Operator.

EigenLayer explained

In general, restaking involves using already-staked assets to earn more rewards while also being subject to additional slashing penalties.

Crypto cold start problems

There are protocols that can't fully deploy atop Ethereum because they rely on external inputs that can't be validated by the network. This could include cross-chain bridges, sequencers, sidechains based on new consensus protocols, data availability layers, new virtual machines, keeper and oracle networks, and trusted execution environments.

For a project to independently secure its network, it would need to bootstrap its own PoS network where it would be required to incentivize operators to run validators and a token incentivize participation in the network (i.e., stake). This is a complex problem to solve. 

Aiding projects like those facing the prospect of bootstrapping their own PoS networks is where EigenLayer comes in.

What if there was a way to build a protocol that can leverage another protocol’s validator set that is already providing billions of dollars in economic security? 

In the case of Ethereum, its validators have staked ≈$114B worth of ETH (as of April 10, 2024) to secure the network.

What we have then is a marketplace of actors that all need/want something: 

1. Stakers want to participate in networks for token rewards and many often do not want to run and maintain their own infrastructure

2. Operators want to maximize their existing operational resourcing to participate in networks but need stakers in order to receive payment for their services (usually in the form of a commission)

3. Protocol builders do not want to deal with the complexities involved with building a protocol at the infrastructure level but need economic security and operational support

EigenLayer connects (re)stakers, operators, and protocol builders via a series of smart contracts to become the coordination layer of this marketplace and ensure everyone’s needs are met. It does so by leveraging Ethereum’s economic security infrastructure (validator set and staked ETH) as the foundation of this layer so it simplifies bootstrapping for PoS protocols. EigenLayer calls this restaking. 

Forcing each new project to bootstrap its own PoS network fragments the security of Ethereum’s network, EigenLayer argues, as each new project siphons value in the form of staked tokens away from Ethereum’s beacon chain. It also leaves each new project more susceptible to attack because each is secured by a smaller amount of stake than they would be if secured by EigenLayer’s pooled security approach.

EigenLayer seeks to do the opposite: It wants to pool security, creating a cost-effective way to secure multiple networks while maintaining a high level of trust in each one.

Source: EigenLayer Whitepaper

Putting it all together

The components that make up this system are:

1. Ethereum

2. EigenLayer

   1. Restakers

   2. Operators

   3. Actively Validated Services (AVSs)

   4. AVS Users

Source: EigenLayer Docs: Intro to EigenLayer

Ethereum

Ethereum Protocol and Staking

Ethereum is secured by validators who stake their ETH to participate in the protocol and follow its rules. If a validator violates those rules, they are subject to slashing penalties on their principal staked ETH. 

To run a validator today, it requires 32 ETH. An individual can stake 32 ETH and run a validator themselves at home (home-stakers) or they can outsource operations to a trusted third-party operator, like Coinbase Staking.

If you do not meet the 32 ETH requirement, you can immediately leverage our Partial ETH Staking product or participate in liquid staking protocols like cbETH.

EigenLayer

Ethereum Validator Set and Economic Security

At the time of writing (April 10, 2024), there is +31M staked ETH (+$114B), and +981K active validators on Ethereum (source: Beaconcha.in). 

EigenLayer leverages Ethereum’s already existing and robust validator set. By collecting already-staked ETH and maintaining a two-sided network where developers of dapps can leverage the shared security of Ethereum, EigenLayer is enabling an approach it calls “pooled security.” This idea of “pooled security” is a cost-effective and more secure way to build blockchain infrastructure that extends the functionality of the Ethereum network. Essentially it uses +31M staked ETH to secure other protocols.

Restakers 

Restaking enables current stakers to restake their staked ETH to extend security to other services in the EigenLayer ecosystem. These services are called Actively Validated Services (AVSs). Before we get into that, EigenLayer enables two types of restaking: 

• Native restaking: This is the process used by existing Ethereum validators and requires the creation of a smart contract (called an EigenPod) which manages restaking and withdrawal operations in the EigenLayer protocol. In order to restake native ETH, a validator is required to point their Ethereum validator’s withdrawal credential to their EigenPod, which they continue to manage. 

• Liquid restaking: This is a process where liquid staking token (LST) holders restake by depositing their tokens into the EigenLayer smart contracts. As of April 10, 2024, LST deposits are paused.

Operators

Operators provide infrastructure services to AVSs built on top of EigenLayer. Remember, although AVSs may be leveraging Ethereum’s economic security to enable their own decentralized trust networks, those networks still require active nodes. Operators within EigenLayer are individuals or organizations that run nodes and provide other services to the AVSs in return for pre-determined rewards. For each additional supported AVS, Operators is subject to that AVS’s slashing conditions, much like in traditional ETH staking. 

Important Note: Slashing and payments (i.e. AVS rewards) are not live as of this writing but will be live later in the year. 

So we have ETH validation operations and now EigenLayer AVS operations. If a restaker does not want to run their own EigenLayer operation, then they have the option to delegate their restaked ETH to an Operator like Coinbase. The restaker will receive fees according to the AVSs the Operator chooses to support. 

To learn how to delegate to Coinbase Staking’s Operator, please read our Delegation Guide.

Actively Validated Services

AVSs are the projects and services built atop Eigenlayer run by Operators. AVSs can be anything that helps solve an existing problem, including bridges, data availability layers (e.g. EigenDA), oracles, co-processors, and more. There are many AVS classes being built today and we look forward to many emergent classes in the future that have yet to be conceived. Check out EigenLayer’s AVS page to see what is currently being built.

The makeup of an AVS

Each AVS has its own operational requirements and its own slashing conditions. 

As such, an AVS is made up of a container for offchain execution that operators must download and an onchain contract that dictates the terms of slashing and rewards for operating the AVSs. 

AVS Business Models & Payments Mechanisms

As of April 10, AVS rewards are not live, but there are multiple ways AVS business models can be constructed. This is an ever evolving design space so what is noted here is non-exhaustive

ETH Restaking: These are AVSs only leveraging ETH restaking for security

• Fees in a “known” token: In this model, users using these AVSs will pay fees in “known” or “neutral” tokens such as ETH or USDC and can issue payments in a native AVS issued token or neutral token  

• Fees in a native AVS issued token: In this model, AVSs can issue their own native token and also can have payments occur in that token. Users will pay fees in the AVS native token

Dual Staking: This is a new primitive resulting from EigenLayer. These AVSs can issue their own native token. However, their protocol consists of two quorums: (1) ETH restakers and (2) AVS token stakers. In this model, participants can provide security via ETH restaking or staking the AVS token to the AVS protocol

Payments done in multiple tokens: Fees can be done in any of above the but payments can be done in multiple tokens (similar to dYdX)

AVS Users

And finally, we have users of AVSs. Whatever the AVS classification might be (bridge, oracle, decentralized sequencer network, etc), it will need users to actually participate in the AVS. 

Source: EigenLayer Whitepaper

Understanding the risks and rewards

While restaking opens up many exciting opportunities, this innovative approach comes with some risks that are important for users and the Ethereum community to understand. For individual restakers, the risks range from the anticipated (e.g. potential slashing) to the unanticipated (e.g. bugs in nascent contracts triggering unintentional slashing events).

But before we get into that, it is important to make clear that in EigenLayer restakers always retain full custody and control of their original tokens. The restaker has the freedom to withdraw their ETH at any time from the protocol, subject to a seven-day escrow period on top of Ethereum’s exit queue.

Slashing risk 

Just as staking comes with slashing risk, so too does restaking.

The attraction of EigenLayer for many validators and solo-stakers on Ethereum is the promise of earning additional yield on their staked ETH by securing one or more AVSs, each of which sets its terms, including slashing penalties to deter malicious operators .

EigenLayer has launched on Mainnet with one AVS, EigenDA, but there are several others in development. As more AVSs launch, an operator will be able to opt in to secure more than one AVS — accruing additional rewards from each but also increasing their total risk exposure. 

Because many restakers will choose to delegate their stake to an operator rather than run their own AVS nodes, this makes it paramount to select a trusted operator who won’t back every AVS offering rewards without doing the proper due diligence. 

While slashing is an acceptable risk for most honest actors, there’s also the risk of unintentional slashing due to bugs that crop up in immature AVS smart contracts. While this would certainly impact individual restakers, such a scenario could also pose a systemic risk to Ethereum if too much staked ETH was concentrated in the impacted AVS (we discuss Concentration Risk in more depth later).

To mitigate the risks of securing new AVSs in their early stages, EigenLayer has created "slashing veto committees" that will have the ability to veto unintended slashing decisions. Viktor Bunin and Ben Rodriguez from Coinbase Staking, are both members on EigenLayer’s Community Multisig.

Smart contract risk

In addition to the risks of nascent AVS smart contracts, there’s risk any time one interacts with smart contracts on a new platform like EigenLayer.

While native ETH restakers, who set their withdrawal credentials to an EigenLayer smart contract (i.e, an EigenPod), and liquid restakers (who deposit their LSTs into EigenLayer’s smart contracts) maintain control of their restaked ETH, they are still trusting that EigenLayer’s smart contracts are secure and bug-free. 

EigenLayer has carried out security audits of these contracts, but audited contracts are not automatically bulletproof. As with any new protocol, smart contract risk must be taken seriously. 

Risk of operator collusion

One of the risks EigenLayer addresses in its white paper is the risk of collusion among operators to exploit one or more AVSs. The ideal scenario would be for all operators to restake evenly across all AVSs, thus maximizing the cost of corrupting any single AVS. But what’s ideal is rarely realistic. The white paper analyzes a complex attack where a subset of operators could collude to steal funds from a set of AVSs.

“Consider an AVS which is secured by $8M of restaked ETH and which contains a total locked value of $2M. With a quorum of 50% required to capture the $2M of locked value, the application appears to be secure, since a successful attack would result in least $4M of the attacker’s stake being slashed. However, this may not be the case if the same set of stakers are also restaking in other AVSs. In the simplest case, exactly the same set of restakers participates in 10 other AVSs, each of which have $2M locked. Thus the total profit from corrupting this group of restakers is $20M but the total value at stake is only $8M thus making the system cryptoeconomically insecure.”

Source: EigenLayer White Paper

To mitigate this risk, EigenLayer will monitor operator participation (i.e. which AVS each operator is restaking in) and incentivize spreading stake across fewer AVS to increase costs of coordinated attacks.

In addition, Tokensight has developed an AVS risk simulator that attempts to calculate the risk factor of an AVS based on inputs like TVL, business model, reputation of the AVS, and number of security audits.

Concentration risk

There is a risk of having a large portion of the total staked ETH locked in EigenLayer and concentrated with a single AVS. If restakers in this hypothetical AVS are victims of a major unintentional slashing event due to bugs or an attack, there are hypothetical scenarios where such a loss of staked ETH could compromise Ethereum's consensus layer by exceeding its Byzantine Fault Tolerance (BFT) threshold (i.e. the number of validator faults the network can tolerate while maintaining security). Too much stake concentrated in one place and subject to slashing could potentially exceed this threshold if issues occurred.

Similar to concentration risk, there’s also the risk of centralization. Over time, if a small number of extremely large operators dominate activity on EigenLayer, it could centralize control. While individual AVSs may remain decentralized, the overall restaking ecosystem could become less so.

Concentration and centralization risks are additional reasons EigenLayer plans to monitor operator participation and incentivize spreading stake across a broad range of AVSs rather than consolidation. 

Liquidity Risk

One of the ways solo-restakers can participate in EigenLayer is by depositing liquid staking tokens into the protocol’s smart contracts. When they do, those assets become locked up and illiquid for as long as they’re restaked.

One concern is that if too high a percentage of a specific LST becomes illiquid, it could cause that LST’s price to become volatile. Downward pricing pressure on an LST, in turn, would adversely impact the security of the AVSs those restaked LSTs are helping secure. 

This is a risk that might be mitigated by liquid restaking protocols that have permissionlessly built atop EigenLayer and provide restakers with liquid restaking tokens (LRTs) representing their restaked positions. This could help maintain some liquidity even with assets technically locked in staking. However, LRTs come with their own risks, such as looping, which EigenLayer recently addressed in a blog post. 

Regulatory Risk

The regulatory landscape around crypto and yield-bearing activities like staking is still developing. Regulations could change in ways that impact restaking.

EigenLayer itself also faces regulatory risk, such as being deemed an illegal financial activity in some countries. This uncertainty adds risk until regulations provide clearer guidance. 

Conclusion

EigenLayer is tackling an important challenge in its quest to make it easier for developers to build onchain by leveraging Ethereum's robust economic security.

Its innovative concept of restaking not only allows ETH stakers to secure multiple applications beyond Ethereum's base consensus layer, earning additional yield on their staked assets, but also promotes a permissionless environment for innovation.

However, as with any new primitive, there are complex considerations around both opportunities and risks that demand open evaluation. EigenLayer's team has shown commitment to mitigating legitimate concerns through mechanisms like slashing veto committees and monitoring centralization risks.

Coinbase Staking is proud to support EigenLayer as an Operator and trusted delegate for your staked ETH and LSTs. Our reliable infrastructure provides enterprise-grade security and a 99% uptime guarantee, minimizing operational risk so that your assets continue to earn rewards.

Check out our Delegation Guide or contact us today to get started.

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