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Everything You Need to Know About the EigenLayer Mainnet Launch
196 Plays6 months ago
In this week's episode, Matt gives a full overview of the EigenLayer protocol, how restaking changes the way new projects are launching, and what this means for staking on Ethereum.
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Transcript
Introduction to the Episode
00:00:12
Speaker
Hello and welcome to the Decrypting Crypto Podcast. It's April 11th, 2024, and I'm flying solo today. It's Matt. I'm on my own. Austin's out. He's putting out some fires somewhere. Don't worry, not in the world of crypto.
What is Eigenlayer and Restaking?
00:00:29
Speaker
I'm gonna do a bit of a deep dive today into a topic that I've been talking about for a little while. I am incredibly excited about this topic and absolutely over invested in it. And that is the Eigenlayer launch. It's just hit mainnet. And what I'm gonna do in this shorter episode is a bit of a deep dive into what restaking is.
00:00:58
Speaker
And just giving you a simple breakdown of how things work at a really high level, because I think this is a particularly complicated or technical project to get your head around initially. And as crypto Twitter often does, there's a lot of over complication in the explanation of it. So I'm going to try and distill that down a little bit.
00:01:23
Speaker
Then I'm going to talk a little bit about what the opportunity is right now for both builders in the space, but also any of you participating in restaking or thinking about doing that and what that could mean. And then of course, we will talk a little bit about the upcoming token from Eigenlayer. So let's jump straight in.
Eigenlayer's Role in the Crypto Ecosystem
00:01:53
Speaker
What is Eigenlayer? This is a question that I have heard from a lot of people I've been chatting about restaking to over the past few months and we are finally at the moment yesterday that was where Eigenlayer announced that it had hit the mainnet along with
00:02:15
Speaker
One of its ABS is the EigenDA, which is Data Availability Protocol. Now, I'm not going to talk too much about EigenDA, so let's separate that. What I am going to talk a lot about is Eigenlayer. So, let's dig into what it means. Eigenlayer has pioneered what's now become known relatively commonly as restaking.
00:02:43
Speaker
And the best way to think about what the Eigenlayer platform protocol does, because it really has
00:02:54
Speaker
led the way in some new innovation that I think is going to be a landmark moment for not just like Ethereum but for crypto as a whole and could really reshape the way that new crypto projects, protocols actually deploy, launch and open up the space for innovation here.
00:03:21
Speaker
The comparison that I want to give to help break down and understand what Eigenlayer actually does is much more similar to software-as-a-service in the regular Web2 space.
Security-as-a-Service in Eigenlayer
00:03:35
Speaker
I spent the best part of a decade in the software-as-a-service space prior to coming into crypto, so know this space very intimately.
00:03:42
Speaker
And if you think back before the likes of cloud and SaaS, you know, if you were a new tech company, new startup, you would build your tech stack end to end. You would spin up your own servers, manage your own hosting. You would then have to like build out all of your
00:04:06
Speaker
info like tech architecture etc etc etc huge cost required a lot more of an engineering set of resources and a lot of this was secondary to the primary mission of what your startup was actually building this is just
00:04:23
Speaker
you know, building the foundations for your company. And even, you know, if we take a lot of the stuff that software has brought for granted from just like even brick and mortar businesses and how they can, you know, very easily just buy off the shelf packages of software that's nice and simple to use. Well, now, right, you know, we have
00:04:45
Speaker
cloud computing, we have SaaS where with one click, you can set up a server on Amazon Web Services. You can build out a pretty simple and cheap modular tech stack via a whole host of software as a service, like subscriptions, right? You want
00:05:05
Speaker
a CRM. Well, you're not going to build that in-house, right? You can go get like HubSpot or any other like CRM. You want to do email marketing. You can have like an email market provider like Beehive if you want then to start actually like building in additional layers into your tech. Your web hosting is run through a web hosting provider. You've got
00:05:26
Speaker
your website built on, you know, like a web flow or otherwise. So all of this, you're just building, you're not actually building all of this on the ground up. You're not worrying about how this is all maintained. It's managed by another third party that specializes in this area. And you are simply paying a subscription fee for it. Okay, so what's that got to do with Eigenliet?
00:05:51
Speaker
Well, let's think about the blockchain space right now.
Leveraging Ethereum's Validator Network
00:05:54
Speaker
And, you know, as of today, if you wanted to build, let's take a layer two blockchain. Let's say you're building a layer two roll-up like Optimism or ZK Sync or Arbitrum or et cetera, et cetera. One of the biggest needs that you would have
00:06:12
Speaker
that is actually kind of just really adjacent to any like real utility that you're providing is you need a validator network to provide security for your chain. And to do that, you'd need to incentivize people to run validator nodes and probably whole other types of nodes to do any other kind of like tasks required to support both the security and running of your network.
00:06:39
Speaker
How do you incentivize people to run nodes and validators to provide security? Well, you're probably gonna have to give them some kind of token. And that's where the majority of these projects, token emissions go to is, and it creates an incredibly inflationary environment. There's a ton of work that goes into just building and maintaining that tech stack. And a lot of capital is invested. Sounds a lot like the pre software as a service days.
00:07:08
Speaker
Now what Eigenlayer does is you can almost think of Eigenlayer as like security as a service, I think. You as a new layer to roll up that you're starting to build, instead of building all this stuff yourself, you can go to Eigenlayer and get all of the baked in like validators set and security that is already set up and running on the Ethereum network with a click of a button. You'll pay a fee.
00:07:34
Speaker
It will be much, much smaller than the incentives that you would have to pay and the heavy lifting to set this all up yourself, just like software as a service. And you will be able to tap into the Ethereum validator set to provide economic security for your blockchain, right? And that is completely simplified. You're not running it. You're just simply, for all intents and purposes, renting it, right? Now, how does that work? Well,
Risks and Rewards of Restaking
00:08:03
Speaker
The way this works is actually pretty simple. On Ethereum, the proof of stake chain is supported by validators. You can run a couple of validators myself. To do that, you have to stake 32 ETH in your validator and you run and support the network and provide security. If you
00:08:26
Speaker
act maliciously as a bad actor, you will have some of that 32 eth slashed, which means it will be penalized and your stake will be taken from you. The way that Eigenlayer does this is it says, okay, if you're running a validator, you can now restake that validator into Eigenlayer. You're basically pointing your validator withdrawal address into Eigenlayer.
00:08:51
Speaker
So then what Eigenlayer can do is say, okay, well, hey, you're using this Ethereum validator to provide security just exclusively to the Ethereum network and you get paid your validator rewards, which, you know, is between three and four and a half percent.
00:09:08
Speaker
Now, this stake from your validator can be extended to support some of the projects that are building utilizing Eigenlayer. These are known as actively validated services, AVSs, which could be like a layer two roll up, as I said. And what they will do is you will be able to use your validator to provide network security for their blockchain, as well as
00:09:37
Speaker
Ethereum. So you're kind of like, you're able to extend the use case of your your 32 ETH. Now, what's the trade off? Okay, because the benefit of this is a validator, someone running a validator is that
00:09:54
Speaker
Not only will you get Ethereum validator rewards, but you'll get rewards from one or more of these AVS's through which you're providing your proof of stake and your validator services to. So you get an even greater yield. Now, when we get to the downside,
00:10:12
Speaker
you know, there's also additional slashing risk. So let's say that you're restaking and supporting, your stake is being used to provide network security to this layer to roll up that's an AVS that's using Eigenlayer.
00:10:33
Speaker
Well, they may have very specific slashing conditions that are slightly different to those that Ethereum uses. So they can actually program net new slashing conditions to prevent bad actors. There could also be
00:10:49
Speaker
kind of different requirements from a tech perspective that are needed from your validator to support certain AVS's and all of these will probably be balanced with even greater rewards but there is additional risk that you may have your your your stake slashed it's actually very rare that your stake is slashed on the ethereum validator network you know this definitely opens up greater opportunities for risk
Economic Security Marketplace
00:11:15
Speaker
So how is all of this managed? So we're kind of like, if I take a step back, right? We've explained what Eigenlayer does. It's effectively a marketplace for economic security, for new AVSs, which is for all intents and purposes, new blockchains that are building outside of like the Ethereum layer one.
00:11:37
Speaker
So how do we manage this? So you've got three groups, the AVSs, which I just explained, the restakers, which are those people running validators. There are other forms here, but I'll explain those in a second because we have liquid restaking protocols. You also have liquid staking tokens that you can restake, but let's just park that for now. Let's just say it's the Ethereum validators that are restaking.
00:12:04
Speaker
And then the middle of these two are operators. And these operators play a critical role in managing risk and upside for the restakers. So here's how this all works. As a restaker, you are ultimately restaking your ETH into eigenlayer. So that's the simple part.
00:12:30
Speaker
And AVS on the other side wants access to that stake, right? They want to be able to tap into the stake through Eigenlayer. They don't go directly to restakers. Instead, you go through an intermediary called operators. And what you will do is you will delegate, as a restaker, you will delegate your stake into one or maybe more operators, depending on like how many different validators you have.
00:12:59
Speaker
And those operators then will pool together the stake from many different restakers. And this could be like, you know, they could have thousands of restakers that are pooling, you know, like thousands plus of ETH into one single operator that then can decide
00:13:20
Speaker
who they are going to support at the AVS level so the AVS's can go to individual operators and say okay hey we would love to you know get some of this stake to support our network we need
00:13:33
Speaker
500 ETH or we need 4000 ETH to be able to secure our network at this stage and this is how much we're going to pay for this and there will be like a marketplace in place and I'm sure a ton of additional incentives off the back of that. The operators will then you know offer that stake to the AVS's probably a whole host of them and then the
00:13:58
Speaker
the rewards, the fees that they charge then are passed on to restakers. And it's worth noting that you are also earning your underlying ETH validator rewards as well. So depending on, and this is where things start to get interesting, right? Because what does this mean for restakers?
00:14:19
Speaker
Well, I think that there's going to be varying levels of risk. And what is risk here? So the risk here for the restakers, if we just, you know, there's obviously smart contract risk. So let's say.
00:14:31
Speaker
There's a bug in Eigenlayer. Well, you know, then there's a big problem, systemic problem. But that's a problem in basically all of crypto that can happen anywhere. So let's just park that. The major risk here is how do I as a restaker determine the likelihood that I could have some of my stakes slashed? And this probably comes down to the slashing conditions
00:14:58
Speaker
that the individual AVS is put in place.
00:15:02
Speaker
What is probably fair to assume is that, if we bucket this as like higher risk, where AVSs are maybe in their infancy, do slightly more, let's say, DJN things, and ultimately there is a higher likelihood to have slashing take place, or for things to go wrong as a whole. I would imagine they will also compensate this with much higher rewards and fees that they pay out.
00:15:32
Speaker
So there'll be a balance. So what we'll start to see with the operators, and there's already a whole host of operators that are up and running, we'll see much, much more of those coming live, that certain operators will determine a certain risk profile. They'll only work with, say, low-risk AVSs and kind of have a slightly lower yield overall compared to others.
00:15:55
Speaker
then you may have operators with a slightly higher risk tolerance. They will go where the highest yield is and will be willing to take on the risk that comes with it. So when you're determining as a restaker where to delegate your stake, your choice is around the types of operators and the risk profile you're willing to take on.
00:16:16
Speaker
So in many sense, how you would with any kind of investment strategy, right? So that's kind of the way this all works. Now, so as a restaker here, and if you're already restaking through Eichenlais, congratulations, you've embarked upon a similar journey to me, which has been quite the experience and we're just in the beginning.
Restaking Options for Participants
00:16:45
Speaker
If you haven't yet, or you're considering it, or you just wanna understand how you can get involved, there's typically three ways. The first way, which I've already discussed is actually natively restaking your Ethereum validator to Eigenlayer. The downside to this is you need 32 ETH per validator that you wanna restake. So that's the minimum bar.
00:17:13
Speaker
absolutely appreciate. Not everyone has 32 ETH and if they do, not everyone wants to, you know, take the risk on trying something that's in its infancy right now.
00:17:25
Speaker
The way that, another way that you can do this is Eigenlayer periodically opens up deposits of liquid staking tokens. So staked ETH through Lido, Rocket Pools, R ETH, you know, a whole host, Frax, ETH, and otherwise. And you can deposit any amount. I think maybe there's like a lower limit of like 0.1 ETH, maybe there isn't.
00:17:50
Speaker
But you can deposit any amount of ETH into Eigenlayer and get like proportional rewards. So you can do that. The third way
00:18:02
Speaker
is using a liquid restaking protocol. Now, this is kind of like the layer above Lido, if you like. So you'll know I've had on the podcast Mike from EtherFi. They recently launched their token, really fantastic, interesting, exciting project. There's many, many more Puffer, Renzo, et cetera, et cetera, et cetera, right?
00:18:30
Speaker
And what you're doing with that is you're depositing ETH into the liquid restaking protocol.
00:18:37
Speaker
And they are then natively staking validators on Eigenlayer. And the same way that Lido does, basically, with StakedEAF. But they are going to then manage the relationship with the operators. And in many cases, many of these liquid restaking protocols also are operators. I know EtherFi is, for example. And why would you do that versus depositing a liquid staking token directly into Eigenlayer? Two reasons. One,
00:19:03
Speaker
They don't often open up deposits on Eigenlayer. There's very brief time windows and they sell out quite a lot. If you do it through a liquid restaking protocol, you can do that anytime. There's no caps.
00:19:15
Speaker
And the second piece is that there are often additional rewards. So through things like EtherFi, they offer a yield on EtherFi tokens for depositing ETH for those that haven't launched yet, like Renzo, Puffer and Kelp and many, many others.
00:19:36
Speaker
you accrue points which effectively then turn into tokens when they are air dropped. So there's additional upside to that. Now, as eigenlayers hit the mainnet now, restakers as of basically yesterday can actually for the first time delegate their stake to an operator who will then go through and determine which AVS's they'll provide services to.
00:20:06
Speaker
I think this is where then we're going to start to see many of these AVS's launch tokens and pass on probably big air drops into the operators which will then most likely pass down to restakers. Restakers are going to get a share for a fee and we're going to kind of see this like whole marketplace
00:20:22
Speaker
open and expand and it's going to be really interesting to see how it plays out. I think we're going to see some slashing events happening over the space of the next year that maybe some of them are big depending on the risk tolerance. What Eigenlayer has done for this initial rollout to mainnet is they have basically not, they have disabled slashing for now just until things get up and running. And for context there is only one AVS that's live right now. So there's many many more that need to launch. The only AVS is actually the one that was built
00:20:51
Speaker
by Eigenlayer, their Eigen team, which is called EigenDA, which is a data availability platform. Similar to, you can think of like a Celestia, if you like, but for outside of the
00:21:07
Speaker
Cosmos ecosystem. So that's still, I mean, to get some of these yields, to get some of the benefits from restaking, there needs to be more AVS's and they'll be coming online. I think there's already 10 or 11 of them that I know of that are going to probably be launching in the next couple of weeks. And then we'll just see this huge explosion of those AVS's launch.
00:21:32
Speaker
So that's super exciting. I think there's a ton of stuff that's going to be really launching and generating a lot of hype over the coming few weeks and probably the biggest piece of hype. And this is really the last piece that I'll round this out on that is, you know, the classic when token discussion. And this is around Eigenlayer and the Eigen token.
Impact of the Eigenlayer Token Airdrop
00:21:59
Speaker
one of the reasons why Eigenlayer, and for context they have amassed, I need to double check, but it's somewhere in the region of 10 or 12 billion dollars worth of TVL just since the start of this year. That is an enormous amount of total value locked. I think it puts in like second or third largest TVL across anything. That's huge. Why? Why are people doing that? Because
00:22:28
Speaker
You know, if the AVS is on online yet, it was actually pre-mainnet. There was no additional rewards coming in. Well, Eigenlayer had a points system that, you know, the more you staked running up to mainnet, the more points you recruit, so that when the Eigenlayer token is launched, you will then be given your allocation of the Eigen airdrop.
00:22:53
Speaker
My perspective on this is that I think the Eigen token is going to probably be the largest combined value of airdrop of all time.
00:23:07
Speaker
I don't think it's crazy to think that Eigen token could debut with a fully diluted valuation in the region of like $30 billion. That alone would make it the 10th largest token by FDV. Time will tell I could be off on this, but my take here is that that could be a conservative estimate.
00:23:34
Speaker
Eigenpoints, really cool. I think I've mentioned this before, whales.market, great way to get a secondary valuation on points. I think currently valuing one Eigenpoint 24 cent.
00:23:49
Speaker
that it could be a potentially lucrative payoff and then you've also got all of the liquid restaking tokens that I think it's only are ethified that have launched their token and that has been a very successful airdrop in terms of where it landed in terms of valuation coming in with a higher market cap than actually even Lido.
00:24:10
Speaker
So there's going to be a lot of momentum around that. We've got lots to come. I mentioned Puffer, Renzo, Kelp, there's loads more. So I think like, you know, if you're not at the place where you want to go all in with a validator here, you want to just, you know, skirt around and play around here. I do think going in via liquid restaking token platform is probably the best place you can go in smaller amounts and just see how this all plays out. Because I think
00:24:37
Speaker
There's a lot of unknowns in, especially when we get into the realities of restaking actually going live and having these actively validated services up and running and what's going to come with all of that. But I think this is a super exciting time. And there's Eigenlayer, which is by far and away the largest restaking protocol and has basically built this category.
Future Innovations and Competition
00:25:07
Speaker
there will be competitors to eigenlayer that we're already seeing a big push in the likes of tapping into the Bitcoin network to bring Bitcoin layer 2s. And they're almost doing a similar thing. I think things like Babylon are doing interesting stuff on the Bitcoin side for restaking. We'll see this on Solana. I think Picasso is one example.
00:25:35
Speaker
so that we'll see this more and more and we'll probably see some Ethereum based competitors to Eigenlayer over time with so much capital and hype being generated around this but regardless of whether you actually put any ETH into this I would really recommend just diving in and seeing what's happening here because I think this is a super interesting model and is probably what it could be or has the potential
00:26:04
Speaker
to be a major catalyst in driving innovation in the wider crypto space because I think this is a huge challenge for most new crypto startups is how they get over the hurdle of managing, you know, validator sets, nodes, and just their own economic security. And it's just a big brain drain for small teams to have to think about.
00:26:30
Speaker
And also, lots can go wrong when you're building that from the ground up versus actually tapping into a proven tested, stress tested validator set in Ethereum. All right, hopefully that's been interesting. Go check out Eigenlayer. Go check out a little liquid resticking tokens. And I will see if my prediction around the valuation of Eigenlayer is true. I'm sure it's going to be launching in the next couple of weeks.
00:26:57
Speaker
Austin will be back with me, so don't worry if you missed Austin, you're fed up here in my place. He'll be back next week, so I'll see you then.
00:27:26
Speaker
The contents of the Decrypting Crypto podcast should not be used and are not intended as investment advice. Please do your own due diligence before making any investment, cryptocurrency or otherwise.