Why EigenLayer Is So Exciting
There’s a buzz about a new meta on the horizon. In the world of crypto, from time to time, an explorer uncovers a groundbreaking concept that reshapes the entire industry.
We’ve witnessed this phenomenon with MEV:
First, observers noticed the emergence of high-frequency transaction bots engaging in a novel form of automated arbitrage. Second, researchers and developers had a moment of realization about the profound long-term implications of such activity. Third, FlashBots or a similar solution was created to tame the potential fallout. And now, we find ourselves in the fourth stage — a burgeoning billion-dollar industry, Ethereum undergoing protocol-altering EIPs, and widespread understanding of the concept of MEV across the industry.
EigenLayer, a new project generating significant discussion around the potential of “restaking”. While the long-term equilibrium of restaking remains uncertain, Ethereum’s deep thinkers largely agree that the staking game will undergo fundamental transformation.
This article will explain EigenLayer, “restaking”, and why we’re so excited about it.
What Is Restaking?
Restaking, in its essence, is as straightforward as it sounds: you take your staked ETH and stake it once again. It may seem overly simplified, but this concise explanation encapsulates the true power behind restaking.
But what’s the purpose? What do you stake it into? How does it work? Why bother? The answer is a resounding yes. Restaking allows you to stake your already-staked ETH for any desired objective.
To grasp the concept, let’s draw a parallel with the older notion of PoW “Merge Mining”. Picture this: multiple networks can be mined simultaneously using the same computational work. A single mining rig harnesses its hashing power to serve two or more blockchains that share compatible PoW algorithms. Essentially, one rig generates revenue from mining two different sources.
Now, applying this principle to Proof of Stake, we have restaking. It entails securing multiple networks simultaneously using the same capital stake. Initially, you stake your ETH to the Beacon Chain, granting it the authority to “slash” your ETH in case of malicious behavior. Then, you take your staked ETH and enroll it for additional slashing conditions on another network where you intend to stake.
For instance, consider building an oracle network on top of EigenLayer. By participating in this network, you may face the risk of having your ETH slashed for providing inaccurate data to Ethereum. However, on the flip side, you also receive rewards for supplying reliable data. It’s the same ETH, but now it interacts with a different network, encompassing new slashing conditions and additional rewards.
From Monogamy To Polyamory
Restaking has raised concerns among Ethereum protocol developers, just like MEV did. It brings forth crucial questions about the long-term stability of the Ethereum network. Restaking challenges the alignment of ETH stakers, as they transition from solely serving Ethereum to embracing multiple networks.
Before restaking, ETH stakers dedicated their security efforts exclusively to Ethereum. Their ETH was staked for the benefit of Ethereum alone. However, restaking allows for a shift from Ethereum monogamy to network polyamory. ETH stakers now have the option to commit their security to other networks as well.
The critical concern arises: Does an abundance of ETH restakers pose a risk to the health of the Ethereum network? If ETH stakers also secure other networks with their ETH, it’s evident that Ethereum’s security becomes diluted. Let’s explore the risks and benefits associated with restaking, with the help of a simple example.
Consider the process of baking a cake. When baking a cake, you start with a basic recipe that provides the foundation for a delicious dessert. The recipe outlines the necessary ingredients and instructions to create a well-balanced dessert. However, just like in the world of crypto, individuals have the freedom to customize and experiment.
In the realm of crypto, the underlying blockchain technology can be seen as the base recipe for a cake. It provides the fundamental structure and functionality for the digital asset. However, enthusiasts and developers can introduce modifications, similar to adding different flavors, fillings, or decorations to a cake.
These modifications can take the form of new protocols, smart contracts, or dApps built on top of the existing blockchain. Just as various cake flavors cater to different tastes, these modifications cater to specific needs and preferences within the ecosystem.
However, similar to baking experiments, there are risks associated with introducing too many modifications. While some modifications may enhance the cake’s taste, others may introduce compatibility issues, vulnerabilities, or unintended consequences. It’s crucial to strike a balance between innovation and security, ensuring that the modifications are well-tested, compatible with the underlying blockchain, and align with the community’s best interests.
Much like a well-executed cake that delights its consumers, a successful modification in our space should enhance the overall user experience, provide new functionalities, or solve existing challenges. By carefully considering the ingredients, proportions, and execution, developers and enthusiasts can contribute to the growth and evolution while maintaining the necessary security and integrity.
But it’s easy to envision restakers staking their ETH across as many protocols as possible, seeking higher yields and maximizing their returns. In the world of crypto, such behavior is commonplace.
The Baking Competition
Let’s dive into the baking metaphor to address the points raised in the text above.
Imagine the Ethereum ecosystem as a baking competition, where different participants bring their unique recipes to the table. In this competition, there’s a concept called “signature recipes”. These signature recipes are widely recognized as the epitome of excellence and have become integral to the baking community.
Similarly, in Ethereum, we encounter the notion of “enshrined rollups” or “enshrined oracles”. These are like the signature recipes of the blockchain industry. They are deeply integrated into the Ethereum protocol itself, like tried and tested baking techniques that have been incorporated into the core foundation of baking.
However, it’s crucial to understand that pursuing enshrined rollups or oracles is not without its challenges. Just as relying too heavily on signature recipes in a baking competition can limit innovation and stifle creativity, embracing enshrined solutions within Ethereum may impede progress and limit the exploration of new ideas.
The beauty of the baking competition lies in the diversity of recipes and techniques brought by participants. Similarly, the strength of the Ethereum ecosystem lies in the diverse range of solutions, rollups, and oracles available, each offering unique features and benefits.
Restaking, in this context, can be seen as a scenario where certain networks gain significant traction and become the go-to choice for staking ETH. This can be compared to a popular baking technique that becomes a dominant trend in the competition, where most participants adopt it.
However, it’s important to consider the consequences of relying heavily on a single technique or network. Just as a baking competition loses its charm when every participant uses the same approach, Ethereum could face risks if a single restaking network dominates the ecosystem. This concentration of power and reliance on one network may introduce vulnerabilities and limit the decentralization that Ethereum strives to achieve.
To ensure the growth and resilience of the Ethereum ecosystem, it’s vital to encourage a diverse range of staking networks and explore various techniques. By embracing a multitude of approaches, Ethereum can foster innovation, maintain security, and cater to the needs of its diverse user base.
Just as in the baking competition, where open discussions and experimentation lead to new breakthroughs and exciting discoveries, Ethereum’s open community must engage in ongoing research, dialogue, and collaboration to address the challenges and open questions surrounding restaking and enshrined components. By doing so, Ethereum can continue to rise as a vibrant and dynamic blockchain ecosystem, just like a baking competition that continually delights with fresh and innovative creations.
The Internet’s Native Currency
Restaking and the concept of an infinitely modifiable security layer on the internet pose numerous thought-provoking questions. However, they are undeniably bullish for ETH.
The advent of EigenLayer opens up a vast realm of utility for ETH and ETH staking. It enables the birth of entirely new networks on top of ETH, leveraging it as a security layer. Bootstrapping a network is a daunting task, but with EigenLayer, new networks can tap into the existing $35 billion worth of security by transforming ETH staking into generalized security for these networks.
Today, there exists a pendulum that swings between spawning new Layer 1 networks and building on existing networks. We witnessed this phenomenon in Bitcoin back in 2017 when some projects opted to fork Bitcoin, airdropping new network tokens to BTC holders, instead of starting from scratch with a new Layer 1 or conducting an ICO on Ethereum.
EigenLayer shifts the incentive pendulum from the proliferation of multiple Layer 1 networks to a single shared network based on ETH. EigenLayer represents the downstream outcome of the principle that capital begets capital. ETH and ETH validators constitute the largest pool of crypto-economic security globally. In theory, EigenLayer doesn’t discriminate among networks it integrates with, but it is incentivized to choose the most substantial source of economic security available — ETH and staked ETH.
EigenLayer allows entirely new types of networks to emerge, leveraging the security provided by ETH stakers. The value generated by these networks ultimately flows into ETH staking yields, thereby increasing the incentives for staking ETH and the overall value of ETH itself. Each new network becomes a unique bond market with varying levels of productivity and yield, and all these networks are built upon the highest form of money within the system: non-restaked ETH.
If the incentives driving EigenLayer and restaking prove successful, could ETH solidify its position as the internet-native bond? Restaking offers ETH a pathway to emulate the traditional bond world. United States Treasuries serve as a means of final settlement, just one level higher than hard cash or central bank deposits. All other forms of bonds, such as corporate bonds, municipal bonds, and junk bonds, become higher-order expressions of base money.
In essence, the potential ramifications of EigenLayer and restaking for ETH are vast and could position ETH as the bedrock of internet-native financial systems.
Conclusion
EigenLayer has unlocked a whole new realm of possibilities when it comes to constructing and launching crypto-networks. We anticipate witnessing the familiar patterns that have characterized the space time and again: Early stages of experimentation, followed by proofs of concepts, and eventually, fully operational networks. Naturally, we’ll also see imitators emerge, along with a wave of enthusiasm and, inevitably, excessive investment.
It’s crucial to acknowledge that we are still in the nascent stages of exploring the concept of restaking and its long-term impact on the industry’s equilibrium. We have only scratched the surface of what restaking can become. The questions raised in this discussion merely skim the surface, serving as catalysts for further dialogues and inspiration regarding the immense potential of the restaking phenomenon.
Yet, that’s precisely what makes this journey so exciting. Along the way, there will undoubtedly be opportunities waiting to be uncovered and embraced. The adventure is far from over, and we have yet to fully realize the possibilities that lie ahead.
Who We Are
Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.
Website: https://www.moonrockcapital.io
Twitter: https://twitter.com/MoonrockCapital
Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.
