The Bull and Bear Cases for EigenLayer
EigenLayer is an innovative protocol on Ethereum, introducing a unique “restaking” concept that has quickly garnered significant attention with over 220M TVL as of Oct 2023. This protocol enables individuals who have already staked their ETHs or LSTs to engage in restaking, thereby bolstering the security of various decentralized services on Ethereum and earning additional rewards. It enhances the security infrastructure across Ethereum services without necessitating additional capital from stakers, proving especially advantageous for dApps on Ethereum. Rather than establishing a trust network from scratch, these dApps can leverage EigenLayer to tap into an existing pool of stakers, fostering a more secure and cohesive ecosystem.
EigenLayer has successfully captured the market’s attention following its substantial $50M Series led by Blockchain Capital. Other eminent investors include Polychain Capital, Electric Capital, Coinbase Ventures, and Ethereal Ventures.
In this brief analysis, I will delve into the potential long-term prospects for EigenLayer, exploring both the bullish and bearish cases that may unfold. The analysis will culminate with my personal perspective on these cases.
The Bulls
Tackling critical problems: Crypto protocols face significant issue of generating their own trust networks, a process burdened by high security bootstrapping costs. From a macro perspective, cryptoeconomic security on Ethereum is fragmented. EigenLayer tackles these challenges by enabling multiple stakers to concurrently secure a range of services, effectively consolidating these fragmented securities and reducing the cost of bootstrapping security. This practical solution to a pressing business need positions EigenLayer for substantial demand and growth potential.
Innovation in a burgeoning market: The Actively Validated Services (AVS) market is substantial, with a predicted 37% CAGR and over $25 billion revenue by 2030 according to Stratos. EigenLayer’s novel restaking approach gives it a competitive advantage, enhancing its potential to secure a significant market share.
Network effect in a two-sided market: EigenLayer operates as a two-sided market connecting new protocols/projects seeking to bootstrap security (“buyers”) with stakers restaking staked ETHs to gain additional yield (“sellers”). As the number of buyers and sellers grows, a network effect is created, forming a moat against potential competitors.
Ecosystem formation (around itself and around Ethereum): EigenLayer’s versatility allows it to be incorporated into a wide array of services, such as oracles, bridges, and data availability layers. The resulting ecosystem reinforces EigenLayer’s competitive stance. In a broader context, EigenLayer augments Ethereum’s dominance among alt-L1s, as alt-L1s can leverage Ethereum’s security measures. This setup creates synergies within the Ethereum ecosystem: as more protocols adopt EigenLayer, restaking yields increase, thereby potentially boosting the ETH price.
The Bears
Technical complexity and uncertainties: Despite the successful launch of the EigenLayer Stage 1 Mainnet, the platform is in its nascent stages. Future technical challenges, owing to complex use cases, could potentially impact its stability and performance.
Adoption uncertainties: While a two-sided market inherently possesses a network effect, initial bootstrap of this market is less predictable. A scenario where projects outnumber stakers could drive up the cost of rewards from projects to attract stakers, potentially creating a barrier to EigenLayer adoption.
Potential (asymmetric) competition: Currently, EigenLayer enjoys an unchallenged position due to its novelty. However, the lucrative AVS market is likely to attract competitors, potentially eroding EigenLayer’s market share. There’s also a chance for asymmetric competition: saying a new DeFi protocol, even without competing directly in the AVS market, could offer higher restaking yields, thereby rivalling EigenLayer for stakers.
Risks: As a middleware layer, EigenLayer introduces additional risk layers over Ethereum. These encompass generic issues such as smart contract and governance risks, as well as EigenLayer-specific concerns such as validator collusion and potential slashing vulnerabilities.
My Take
Analyzing EigenLayer presents a nuanced view. On one hand, its innovative solutions to crypto protocols’ security challenges, strong position in the growing AVS market, and network effects from a two-sided marketplace create a strong case for growth and adoption. The company is strategically poised to capitalize on these opportunities and potentially gain a significant market share. However, the bearish perspective highlights critical uncertainties and risks. Technical challenges, potential difficulties in market adoption, and the threat of competition (both direct and asymmetric) could hinder progress. Additionally, operating as a middleware layer introduces inherent risks that cannot be ignored.
From my standpoint, I am inclined to attribute a higher weight to the bullish arguments. This is predicated on the assertion that the fragmentation of security presents a tangible challenge within the Ethereum ecosystem, and the process of bootstrapping security for applications atop is fraught with complexity. EigenLayer’s mission is squarely aimed at ameliorating these issues. Given the current surge in LSD, the market for such solutions is on an upward trajectory. Assuming EigenLayer successfully establishes a dual-sided market as anticipated, it is plausible to envisage a future in which the platform sustains its relevance and becomes an integral component of the Ethereum infrastructure, particularly in the absence of comparable competitors in the current landscape.
About The Author
As a crypto and Web3 enthusiast, Haydon is committed to the blockchain space through volatile cycles for 5 years. His expertise encompasses token investment, technical development, and in-depth long-form analysis.
With recent experience in both investing (as an angel investor) and operating (as a product manager for a startup), Haydon has also developed well-rounded skills for both sides of the same coin of VC. Previously, Haydon began his career at AECOM, a Fortune 200 multinational infrastructure consulting firm.
Haydon holds an MBA from the Carlson School of Management at the University of Minnesota and a BEng from the Hong Kong Polytechnic University. He speaks English, Cantonese, and Mandarin Chinese.
Connect with Haydon on his website, LinkedIn, and Twitter.
DISCLAIMER
The analysis in this document is for general information purposes only. While I endeavor to keep the information up to date and correct, I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the document or the information, products, companies, or related graphics contained in this document for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
Originally published at https://www.haydonluo.com on October 30, 2023.
