Navigating Restaking: Your Guide to Eigenlayer's Actively Validated Services
Which one is the next ALT? Covering the use cases of AVS. Some are really cool!
Mark my words: Restaking will dominate as the fastest-growing category in 2024.
Restaking is the
10th 9th largest DeFi category, with $1.78B $2B USD in EigenLayer alone (it went up while I was writing).
And don't forget the "Liquid restaking" category at 13th place with
$641M $1B USD.
And now with the first AVS token (ALT) launched, and Eigenlayer deposits opening on February 5th, it’s time to catch up with everything happening in the space.
This is the first part post on “Navigating Restaking.” I will briefly explain Eingelayer’s restaking and I will cover emerging use cases for Actively Validated Services (AVS) enabled with restaking. Those are really cool!
In the future posts, I will dig deeper into differences among LRT protocols, and discuss restaking beyond Ethereum, so make sure to subscribe!
Eigenlayer opens deposits on February 5th. Here’s what you need to know.
They've revised their point system to encourage decentralization by capping single deposits and LST/LRT allocations at 33%. No single LST/LRT has reached the 33% cap but take this into consideration.
Swell and EtherFi offer double points through native token airdrops. My approach involves diversifying across various LSTs/LRTs for balanced point accrual and risk.
Regarding the LRT competition, I'm hedging bets on several contenders:
EtherFi: The frontrunner LRT with 51% LRT market share. Use my referral for 1k extra EtherFi points per ETH and double points in partner DeFi protocols.
Kelp DAO: Earn Eigenlayer Points and KelpDAO Miles by restaking stETH or ETHx. My referral link offers a 20% point bonus.
Renzo: Like EtherFi, uses Eigenpods for native ETH restaking. Grew LRT market share to 21%. While there's no point bonus, using my referral link would be awesome!
Swell: You can deposit ETH for swETH LST, and restake on Eigenlayer. Or deposit directly for rswETH LRT. Depositing via my referral grants an additional 10 Pearls per ETH.
Eigenpie: New entrant with already $100M in TVL, supports 6 LSTs and offers double points for the first two weeks. These points used for a 10% EGP token airdrop and access to 60% of the EGP token IDO at a 3M FDV, incentivizing early participation. Use my referral to join.
I’ll dig deeper on their differences in my next blog post.
Reminder: This isn't financial advice. Be aware of hacking risks with the mentioned protocols, potentially leading to financial losses.
I detailed my thesis on restaking and bet on Liquid Restaked Tokens (LRT) back in September 2023. But things have progressed a lot since then. We now have multiple LRT protocols on the mainnet, and with AltLayer launching the token, things are heating up.
You can read my previous post in full below but because it’s already paywalled article, I will briefly emphasize the key points.
Many are still confused what restaking is and often overcomplicate it.
In simple terms, it lets you vouch (stake) your ETH for various Actively Validated Services (AVS), improving security for a selected protocol. This includes services like bridges, oracles, and sidechains, with more innovative concepts on the horizon.
For example, Optimism and Arbitrum could enable instantaneous withdrawals bypassing the 7-day fraud proof window, as long as there is enough economic security (in this case ETH) backing the withdrawals.
These "insured bridges" provide a guarantee of sufficient redistribution in case of validator misbehaviour. However, if you restake to the "insured bridge AVS," there is a possibility of losing some ETH if validators go wrong. (AFAIK, Insured bridges, wouldn’t protect you if there is a bug in a smart contract).
You can restake ETH directly or through liquid staking tokens such as stETH, rETH, cbETH etc. Eigenlayer is adding LSTs sfrxETH, mETH, and LsETH this round.
The Benefits of Restaking:
Multi-protocol Rewards: Earn from several protocols using the same ETH. For example, a fee for insuring bridges.
Boosted Security: Leverage Ethereum's security for new protocols.
Developer Freedom: Saves developers time and resources by not having to establish a new security layer.
Slashing Risk: Increased risk of losing staked ETH due to malicious activities.
Centralization Risk: Potential for systemic risk to Ethereum if too many stakers move to EigenLayer.
Smart contract risks: Like everywhere in DeFi.
I believe the risks are currently limited as Eigenlayer is still at Stage 2 Testnet, and permissionless AVS deployment is not enabled. I agree with ChainLinkGod, though, that the risks will mostly be ignored, but we'll have fun at least until 2025.
At current Stage 2 Testnet restakers like you can delegate to Operators. These Operators validate AVS. So, you don’t restake directly to AVSes!
EigenDA (Data Availability) is the first AVS at Stage 2. Rollups can integrate it to increase throughput. Stage 2 mainnet will launch in 1H 2024 and Stage 3 with more AVS (when the real fun starts) later in 2024.
You can actually check how delegation to operators work on Goerli testnet. Get some goerliETH and swap to stETH by following this guide here. Then head to Eigenlayer testnet page and deposit stETH. Then choose an operator that run EigenDA AVS.
Interestingly, among multiple operators, one stands out: Deutsche Telekom. Seems like Telekom is going to use Eigenlayer for its staking service.
Anyway, are you ready to do manually choose AVS and Operators yourself? On mainnet where gas fees are high? And then claim the rewards from AVS? And then sell rewards for more ETH to compound? If you are not a millionaire, gas fees here will be high.
I'm sure you can guess where I'm going with this: Liquid Restaked Tokens. But more on LRTs in the next post. Now, let's focus on the use cases of Actively Validated Services that will airdrop us shiny new tokens.
The first AVS is EigenDA, but I won't go into detail as I doubt there will be a separate token for it lol (It’s a data Availability layer for rollups to save on data storage fees).
Actively Validates Services
Don’t let the name fool you. AVSes are fully fledged protocols that use restaked ETH to superpower their functionality. I mentioned “insured bridges” above, but the scope and implications of AVS are going to become more apparent soon.
I will cover 7 in this blog in very simple language, as we need to get the scope of AVS if we are serious about investing our ETH in the Restaking ecosystem. If you want to get deeper, I share resources to learn more.
Ethos - Bringing ETH Security to Cosmos
Ethos bridges Ethereum's economic security and liquidity to Cosmos.
The so-called Cosmos Consumer chains typically issue their native staking tokens to secure the network. However, it introduces more complexity and inflationary tokenomics. While Cosmos ATOM stakers offer an Interchain Security (ICS) solution, the Ethereum ecosystem, with Ethos + restaking, is now expanding to Cosmos own domain.
Coupled with launch of Dymension, ATOM fork, and now Ethos, ATOM seems to be under a lot of pressure. Not everyone agrees, so please check this thread for insightful comments.
Ethos is inspired by Mesh Security (allowing a chain's staking token to be used on another chain) thus boosting economic security without the need for additional nodes. For more details check the Ethos blog post here.
Which security solution wins, depends on adoption. And Ethos is launching strong.
Sommelier, an automated yield-vault provider with $60M in TVL, is the first partner. AFAIK, more “Consumer Chains” are coming soon.
The beauty of this structure is that ETHOS will likely receive partner chain token airdrops (and revenue). Meanwhile, ETHOS token itself will be airdropped to ETH restakers on Eigenlayer as we farm EIGEN token.
All you need to do is restake ETH, and claim airdrops. Easy-peasy, right?
AltLayer - Restaked Rollup
I covered AltLayer just before their airdrop announcement in my previous post, so I won’t get too deep on what it does in this post.
But you need to know that AltLayer introduces three AVSes to bring 1) fast finality, 2) decentralized sequencing and 3) decentralized verification to rollups.
The ALT tokenomics is interesting as ALT is REQUIRED to be staked together with restaked ETH to secure those three AVS. Many threadors seem to have missed that.
If you farmed in Pool2 farms during 2020 DeFi summer, you’ll understand the ponzi effect it might have.
Currently, only 3% of the total supply is being airdropped to the community, but there are more airdrops planned in the future. The initial circulating supply is 11%. Does $4.3B FDV (at time of writing) justify a protocol that no one even heard about a few weeks ago?
Not sure, but it makes me more bullish on the entire restaking ecosystem.
Additionally, I have a suspicion that AltLayer is reserving liquidity mining rewards for restakers. As more AVS become available, various services will compete to attract valuable ETH deposits.
After all, AVS without any deposited ETH holds no value.
Espresso - Decentralizing Sequencers
I’ll keep this one short.
Espresso focuses on decentralizing sequencers of Layer 2s. As you know, L2s get a lot of blame due to sequencer centralization. There’s a great visualization on how Espresso achieves it using their HotShot consensus, so check it out on their website here.
AltLayer actually integrated Espresso, so devs can choose to use either AltLayer’s Decentralized Verification solution and/or the Espresso Sequencer when deploying on the AltLayer stack.
Learn more in the docs
Follow on X here
Omni - The Blockchain Built to Connect All Rollups
Problem: L2s reduced transaction costs but led to a fragmented ecosystem. This makes it hard for builders to reach a wide audience, complicating the user experience, and fragmenting liquidity.
Bridging also became a must, but the bridges often issue wrapped versions of tokens carry a risk. If the bridge is hacked, there is not enough underlying asset to support the bridged wrapped token. As a result, the wrapped token loses its peg.
Omni is a “restaking secured Layer 1 blockchain” built to unite all of Ethereum's rollups under one roof.
Omni introduces a “unified global state layer”, secured through EigenLayer's restaking. This layer centralizes the cross-domain management of applications under one roof.
Use cases include:
cross-rollup margin accounts and leverage trading: post margin on one domain, and trade using that margin on a separate domain
cross-rollup NFT mints
cross-rollup lending: deposit collateral on one domain, and borrow against that collateral on a separate domain
And many more, but doesn’t this sound familiar? That’s what LayerZero does.
LayerZero’s cross-chain messaging enables Omnichain fungible tokens (OFT) as opposed to wrapped tokens. Manta’s badly named STONE token is an ETH OFT, and LayerZero issued Lido’s wstETH OFT.
But what if there’s a bug in LayerZero messaging system? Well, Omni secures it by restaked ETH, which would get slashed if validators misbehave.
Consider a typical degen, who wants to use his ETH on Arbitrum to secure a loan in USDC on Optimism. Degen’s transaction on Arbitrum is monitored by Omni validators, who ensure the integrity of the data transfer to Optimism. The validators validate and report on these transactions, motivated by rewards and deterred by the risk of losing their staked ETH if they report falsely.
LayerZero will probably use their token staking for cross-messaging security, but if there’s an issue with LayerZero contracts, the token would dump, and that security is … useless. ETH is much harder asset that’s outside the system to secure the network.
Injective partnered with Omni to make $INJ the first asset on Omni’s open Liquidity Network. Omni issues xERC20 INJ token, this way bringing INJ to Ethereum rollup ecosystem.
Oh, and Omni is backed by $18M from prominent investors such as Pantera Capital, Two Sigma Ventures, and Jump Crypto. So, I guess it will do quite well.
Hyperlane - Like Omni, but Better?
You though Omni is cool for connecting Ethereum Rollups? Move aside, Omni, as Hyperlane’s goal is to connect all Layer 1s and Layer 2s.
Using Hyperlane, devs can build Interchain Applications - apps that span multiple blockchains using interchain messaging, which is secured its modular security stack featuring Interchain Security Modules (whatever that means) and restaked ETH.
Judging from the docs, Hyperlane will support Ethereum L2s, Cosmos ecosystem chains, Solana, Move based chains etc. That’s pretty cool.
Hyperlane Permissionless Interoperability makes it different as Rollups can connect to Hyperlane themselves, without bothersome governance approval etc. They are really proud of this one, as you can see from the tweet below. Yet it seems LayerZero v2 also allows permissionless deployment.
Unfortunately, I couldn't find token info for either Omni or Hyperlane, so we'll have to wait a bit longer.
Learn more in docs
Follow on X here.
The Blockless - Power dApps While You Use Them
“TLDR for users: you open an app, you power the app automatically just by using it, the app rewards you.” - Twitter
This got me hooked.
In normal dApps, we cannot directly contribute computational power, and the apps are limited to the specific L1 or L2s capabilities, like latency, tx speed, gas fees etc.
So, Blockless employs a network-neutral applications (nnApp), allowing users to power the apps simply by using them. It uses 'nestled nodes', where each user's device acts as a node, contributing its resources to the network. This means the computational power of an application scales with its user base, a significant shift from traditional models.
In short, you run a node as you use the app. WTF?
For example, some dApps may choose to keep governance on Ethereum, and data availability workloads on Celestia or EigenLayer. But the intensive computational stuff for use cases such as machine learning, AI interfaces, and gaming will be executed in a faster, and more efficient off-chain environment.
This results in the computational support for these applications directly scaling with the growth in the number of their users, with more users resulting in more community-provided computing power.
Grass, an app on Solana that sells your idle internet bandwith to train AI comes to mind, although it’s not part of Blockless.
Blockless Proof of Stake to secure its network so token will not be just a meme.
As for restaking, Blockless will provide its network for apps built on EigenLayer to minimizing unintended slashing.
Wonder if nnApps won’t overheat my phone…
Others - Because Post Gets Too Long
You can check the full list of AVS on Eigenlayer website here. Worth mentioning are:
Lagrange - Another competitor to LayerZero, Omni & Hyperlane with its cross-chain infrastructure that enables the creation of generalized state proofs across all major blockchains. Recently raised $4M seed from 1kx and others.
Drosera - “incident response protocol” to contain exploits. When a hack happens, Drosera’s Trap detects it and takes action to mitigate exploit. Sounds cool.
Witness Chain - uses restaking for Proof of Diligence and ensures rollup security, as well as for Proof of Location to establish physical node decentralization.
That’s it for now. Let me know if I missed something important!
In the next blog post I will cover the bull case for LRTs, their differences, and how I think the LRT wars will play out.