Eigen Layer launched only two months ago on the Ethereum mainnet. Since then, the protocol reported constant inflows of collateral deposits, reaching $20B. Skeptics view the deposit frenzy as similar to meme tokens.
Read: EigenLayer on the Edge of Potential Yield Crisis
Eigen Layer still hinges on tokenless earnings, but those are based on provable reserves. The source of Eigen Layer value is staked ETH, which is then used for securing new projects.
Eigen Layer does not consolidate deposits and distributes them among multiple Actively Validated Services, each with different rules. The competitive AVS already shows a set of leaders with the highest liquidity.
🔥 Top 10 AVS by Total Restakers@eigen_da @eoracle_network @AutomataNetwork @witnesschain @OpenLayerHQ @brevis_zk@alt_layer @XterioGames @lagrangedev @OmniFDN #Restaking pic.twitter.com/OCKSvzOTvI
— Staking Circle (@stakingcircle) June 7, 2024
However, The Eigen Layer ecosystem is drawing in new projects that promise higher rewards, potential airdrops, and additional yield farming opportunities. Eigen Layer and AVS aren’t inherently risky or leveraged, but they’ve become connected to a risky environment.
Not to forget, the whole concept of EigenLayer is restaking (leveraged yield farming), making the financial engineering equally Ponzi-like as memecoins. https://t.co/Iwy2nOEvqd
— Yash Agarwal (@yashhsm) June 9, 2024
Eigen Layer holds the risk of the EIGEN token performance. The Eigen point market is also just beginning to show its value. The opportunities to sell Eigen points are still limited. Only Kelp DAO has tried to tokenize points. Additionally, each AVS may reward its own points, which still need a market to determine their value.
Can Eigen Layer endanger Ethereum’s security?
Eigen Layer’s initial idea was to enhance Ethereum’s security while also offering security to a new array of projects. Essentially, restakers give access to Eigen Layer, which will then have the right to “slash” their staked ETH in the case they do not fulfill their honest validator services.
So far, Eigen Layer has not signaled any liquidations or losses, and the slasher smart contract shows no activity. The biggest risk comes from AVS projects which are themselves dealing with risky DeFi, especially high-leveraged yield farming.
Eigen Layer itself holds a much lower risk of slashing. According to Eigen Layer documents, the big risk comes from protocols that issue Liquid Restaking Tokens. Eigen Layer itself does not create leverage, but the issuers of LRT can do that.
Liquid staking protocols are for users who hold some ETH but not the 32 ETH required to stake directly. Both Ethereum and Eigen Layer will soon reach their limit for adding validators and restrict new participants. This makes LRT protocols the only way to both gain passive income from ETH while keeping a liquid position.
The problem is that end buyers may open positions across multiple protocols. With that dependency, any risk-taking or price crash can cause ripple effects across LRT issuers, as well as AVS projects, Eigen Layer and hypothetically, the main Ethereum network.
Such an event is still seen as a “black swan”. Similar over-leveraged events also caused the fallout of Terra (LUNA), where loans were used to create new assets and use them as security for other loans. In the case of Eigen Layer, there is a hypothetical possibility for a similar contagion event.
LRT protocols fight for dominance
Liquid re-staking protocols include Ether.fi, Kelp DAO, Renzo, Puffer, Swell, Eigenpie and others. Eigen Layer itself has not endorsed any of the protocols and warned users to do their own research before engaging.
Also read: Pendle Finance Regains Control: Swift Action versus the Unauthorized Use of Property
In total, the liquid staking market has expanded to $67B market capitalization, even after a recent correction. The initial feeding frenzy of new launches has passed, and at this stage, separate protocols are fighting for top positions.
Greed may drive users to protocols like Pendle, which also draws in significant investments from TRON’s founder, Justin Sun.
孙哥 Justin Sun 在 7 小时前，使用 0x7a9…095 地址花费 18,000 ETH ($67.86M) 买入了 3 家 LRT 6/27 到期的 PT。
来赚取约 17%~21% APY 的币本位固定收益。◎10,000 ETH 买入 10111.937 PT-weETH (6/27 到期 1:1 换得 weETH)；
◎5,000 ETH 买入 5,082.9 PT-pufETH (6/27 到期 1:1 换得 pufETH)；… https://t.co/W690xpksGL pic.twitter.com/djOjgWPk4X— 余烬 (@EmberCN) June 4, 2024
Pendle also hosts new tokens, where risk-takers can provide liquidity to build decentralized trading pairs. Pendle’s value locked has also gone exponential since May and has now grown to $6.7B. To compare, Solana’s DeFi is now down to $4.75B. Pendle also redirects deposit funds to other protocols like Aave and Compound, potentially creating a contagion chain in other DeFi layers and pools.
Thus, the current selection of LRT issuers has displaced most of the older DeFi styles, promising bigger rewards.
Cryptopolitan reporting by Hristina Vasileva