How EigenLayer Works? A Deep Dive Analysis of the Protocol
EigenLayer is a middleware protocol built atop Ethereum, proposing a significant network expansion through a new cryptoeconomic primitive known as restaking. The restaking ecosystem comprises of three key elements: restakers, operators, and actively validated services (AVS).
TL;DR:
- EigenLayer, a middleware protocol built on Ethereum, facilitates network expansion with its restaking cryptoeconomic primitive.
- Restakers pledge their staked ETH or ETH liquid staking tokens (LSTs) to the ecosystem, and in return expect to receive rewards for their commitment.
- Operators are individuals who facilitate the functioning of the software developed on this platform.
- AVS refers to systems requiring unique distributed validation procedures for verification
Understanding EigenLayer Framework
EigenLayer is a middleware protocol built atop Ethereum, proposing a significant network expansion through a new cryptoeconomic primitive known as restaking. In essence, this middleware comprises a set of smart contracts deployed on Ethereum, that enable ETH stakers to opt in and validate new software modules within the Ethereum ecosystem.
These modules can take several forms, including consensus protocols, data availability layers, virtual machines, oracle networks, and bridges, among others. The objective is to secure these modules through the restaking process, not by splitting ETH security among them, but rather by aggregating it across all
For implementing this framework, EigenLayer allows the repurposing of staked ETH or ETH LSTs to validate these modules’ transactions. In exchange, users are rewarded with the fees generated by the modules.
Furthermore, EigenLayer is also positioning itself as the key to unlocking a new era of permissionless innovation, reducing the innovators’ requirements of building their trust network to implement new distributed validation modules. Instead, they can rely on the security and decentralization provided by ETH restakers via EigenLayer.
The Elements of the EigenLayer Framework
The restaking framework is comprised of three key elements: restakers, operators, and actively validated services (AVS).
Starting from the users’ perspective, the first element of the EigenLayer ecosystem is the restakers. Restakers pledge their staked ETH or ETH liquid staking tokens (LSTs) to the ecosystem, and in return expect to receive rewards for their commitment.
For users with ETH staked directly on the beacon chain, the path to participate on the network is via the creation of an EigenPod. An EigenPod is a contract, deployed by each user, that enables native restaking by configuring the beacon chain withdrawal credentials to the EigenPod addresses.
Users with ETH staked on liquid staking platforms journey is slightly different. To restake an ETH LST, users can do it directly via the EigenLayer platform, or through a liquid restaking protocol. Liquid restaking protocols are a new burgeoning sector, that enables users to restake their LSTs and remain liquid by minting a wrapped token that encompasses both yield layers and the underlying asset.
The next stakeholder in the restaking process are the operators. Operators within EigenLayer are individuals who facilitate the functioning of the software developed on this platform. They enroll in EigenLayer, enabling restakers to delegate their stakes to them. Operators then choose to support various services that operate on EigenLayer. It’s important to note that operators can also assume the role of restakers; these two roles are not exclusive to one another. Essentially, operators in EigenLayer perform a similar function to validators on Ethereum, tasked with the critical job of authenticating blockchain transactions.
The ecosystem’s last stakeholder is actively validated services (AVS). AVS refers to systems requiring unique distributed validation procedures for verification. As previously mentioned, this includes a range of services such as fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography systems, AI inference/training mechanisms, and committees for trusted execution environments.
There is no one-size solution for AVSs, so it’s safe to assume that several AVSs will be created and integrated into the ecosystem. The first of these, currently in the testnet stage, is EigenDA. This AVS is a decentralized data availability layer designed to enhance Ethereum’s network scalability and efficiency.
Restakers’ Role and Operators’ Responsibilities
Restakers and operators play crucial roles in the ecosystem. Starting with the first one, they will be the key to extending the largest decentralized trust marketplace, Ethereum. Only by capturing restakers, the ecosystem will be complete.
Restakers can participate in the ecosystem by directly restaking with EigenLayer or with a liquid restaking platform. Looking at the overall market, besides restaking directly with EigenLayer, there are already a few liquid restaking providers developing their products: InceptionLRT, Rio Network, Restake Fi, Renzo Protocol, GenesisLRT, Kelp DAO, YieldNest, Swell Network, Supermeta and Puffer Finance. Among these, GenesisLRT and Renzo Protocol are the only ones offering a direct ETH staking service, handling all restaking processes in their backend.
After restaking, users will opt for different operators to pledge their restake. Operators in turn will use the restaked ETH or ETH LST to validate transactions. Similar to Ethereum validators, EigenLayer safeguards against malicious behavior by imposing slashing conditions on operators’ actions.
Therefore, the roles of restakers and operators are closely intertwined. Operators are tasked with ensuring optimal performance to appeal to restakers, while restakers, on their part, need to conduct thorough research and exercise due diligence to safeguard their assets from being slashed. This dynamic relationship underscores both parties’ importance in maintaining the system’s stability and security.
Actively Validated Services
Actively validated services are the stakeholders that will propel the ecosystem to its full potential. The implementation of AVS will unlock a myriad of possibilities for Ethereum developers.
AVSs are crucial for enhancing the rate and scope of open innovation, as they leverage EigenLayer smart contracts to borrow programmable trust from the Ethereum network. This will enable developers to launch a wide array of blockchain systems such as the aforementioned fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography systems, AI inference/training mechanisms, and committees for trusted execution environments. AVSs are also responsible for setting the fee rates charged by the services that run under their system.
EigenDA, developed by EigenLabs, will be the first AVS to be deployed. This AVS, which is already in the testnet stage, is engineered for horizontal scaling, enabling increased throughput as more operators join the network and addressing one of Ethereum’s major challenges: scalability.
Additionally, EigenDA is characterized as being a data availability service built on top of Ethereum, including its own economic security and decentralization. It is also economically efficient, flexible, and customizable in terms of payment models for roll-ups. With its innovative design and by leveraging Ethereum’s trust network, EigenDA is designed to be censorship-resistant.
Although EigenDA is just the first use case within the ecosystem, it has already revealed some of the positive impacts EigenLayer will have.
Innovation in Ethereum: Pioneering LRTFi
Having come this far, the added value of EigenLayer to the Ethereum network is undeniable. At Davos Protocol, we are closely monitoring its development and are attentive to the protocols creating products for this ecosystem.
Similar to the growth seen in Ethereum’s liquid staking sector, we anticipate an increasing demand for liquid restaking products as EigenLayer solidifies its market presence. Davos Protocol, being a collateralized debt position (CDP) protocol, recognizes a significant expansion opportunity in this niche.
As a strategic move, we plan to onboard these reward-bearing tokens into our protocol and enable our users to collateralize them to mint DUSD, which they will be able to use in any of their DeFi endeavors.
In doing so, we will expand users’ asset composability and unlock new multi-chain opportunities through our bridge. This enables our users to participate and engage in all EVM-compatible chains we support by restaking their native ETH assets.
As this burgeoning sector continues to grow, we invite our readers to begin leveraging their reward-bearing assets through our protocol and be part of our current MissionsHub campaign that is rewarding users for their participation.
