Description of EigenLayer
EigenLayer aims to remove a significant barrier faced by many new DApps by providing developers with an established security framework.
Ethereum has come a long way since its launch in 2015. It maintains its position as the most influential blockchain, successfully transitioning from proof-of-work (PoW) to proof-of-stake (PoS), and is the basis for many blockchains. An innovative crypto project.
One such project is EigenLayer, a decentralized Ethereum staking protocol that provides developers with an established security pool. This EigenLayer explanation details staking and other important parts of the Ethereum staking protocol.
The EigenLayer protocol is an Ethereum-based project that aims to improve the network's PoS consensus through a process called Ethereum Restaking. The EigenLayer team claims that it solves many of the existing Ethereum security inefficiencies, such as every protocol having to manage its own security and scalability processes.
However, before discussing EigenLayer's re-staking process, it is essential to define the traditional Ethereum staking process.
What is staking?
Staking is one of the most popular features of cryptocurrencies, providing traders with a reliable source of passive income.
Staking involves locking one's cryptocurrency into a staking pool, exchange, or smart contract. Users earn interest on the assets they stake, and as a result, the network utilizes these assets to strengthen the network's security. The more funds users stake, the more passive income they earn.
High-value stakeholders often become validators who participate in validating transactions and vote on future and existing proposals to improve the network. The idea is that stakers will be more invested in securing the blockchain network and less likely to be the bad guys. Staking also encourages good behavior. Validator rewards on Ethereum will be reduced if validators are unable to participate in the best interests of the network.
Decentralized staking is considered a more accessible form of transaction validation when compared to PoW. In PoW, miners compete to be the first block validators to earn a reward. In this process, a miner spends thousands of dollars on computer equipment to increase his rate of hashing. In other words, those who spend the most get the most. As these users continue to accumulate tokens, it becomes more difficult for new miners to join.
Staking Ethereum is similar to having a savings account at a traditional bank, and requires much less effort on the part of the user. Thanks to the advent of staking pools, even users who don't have a lot of money can start their staking journey.
What is restaking and how does EigenLayer support it?
Restaking is EigenLayer's idea of traditional staking. This provides users with a new way to generate passive income while increasing the security of their network.
For EigenLayer, restaking is the act of taking staked Ethereum and reusing it to strengthen the security of other protocols. So basically, it creates a pool of re-staked assets from which other decentralized applications (DApps) can obtain. Users can opt-in to EigenLayer’s re-staking smart contracts through their already staked Ether (ETH) or Liquid Staking Tokens (LST).
When a user stakes funds on the Ethereum protocol, most projects provide a liquid staking token, a receipt of sorts, representing the staked assets. These tokens allow you to continue using your funds in other ways, such as restaking them through EigenLayer, through a process called LST restaking, without unstaking your original assets. .
Alternatively, users can also enable EigenLayer’s smart contracts to work with ETH that is already staked. Re-staking using already staked ETH is called native re-staking. When users participate in native restaking, the network adds their assets to the protocol's security pool. How secure is EigenLayer? It is approximately as secure as the size of your security pool.
Applications built on top of EigenLayer are called Active Verification Services (AVS) and can be anything from bridges to DApps to oracles. Because EigenLayer has an established trust network through stakers, developing with EigenLayer is cheaper and more efficient than developing with another protocol. Developing elsewhere requires building a trust network from scratch.
However, AVS is not randomly using EigenLayer's services. Instead, there are intermediaries called node operators. Node operators are volunteers who choose to help manage the network. Similar to Ethereum validators, operators can be a single user or an organization.
Operators can build their own AVS or provide services to other existing AVS while receiving compensation in return. However, if the operator fails to perform her duties, she will also be subject to her AVS reduction requirements.
Additionally, an Operator can become a Restaker, or a Restaker can choose to delegate the Restaken Assets to the Operator. Either way, re-stakers have full control over which service their assets go to. As a result, EigenLayer creates a kind of free market governance system. Developers build on EigenLayer and take advantage of the security established, and operators and restakers earn rewards for managing and providing that security.
How do restakers manage restaked assets?
EigenLayer streamlines asset management through its EigenPod solution.
Users will need to connect their wallet to the EigenLayer application and select the tokens they want to restake. If you are restaking for the first time, you will need to approve the process before depositing funds into your EigenLayer restaking contract.
Restakers manage their restaked assets through EigenPod, a smart contract created during a Restaker's initial restaking process. EigenPod is basically a hub for restakers to manage the restaking process, withdrawals, etc. There can only be one EigenPod per Ethereum wallet address.
Restakers can visualize their contribution to the network through EigenLayer’s restaking points. Users earn restaking points every time a block is validated after the restaking date. EigenLayer calculates a user's restaking points through a proprietary formula that takes into account the amount of assets that have been restaked and the time they have been locked in. This formula shows native restake ETH and restake LST equally.
Users can withdraw their staking rewards on EigenLayer through a partial or full withdrawal process. Returning participants who wish to withdraw their earned rewards but wish to continue providing services will perform a partial withdrawal process. Partial withdrawals require on-chain proof and can result in high gas fees. Re-stakers can request one partial withdrawal every 4-5 days, and withdrawn funds must go through an additional escrow period before appearing in the re-stacker's wallet.
Full withdrawals are for restakers who no longer wish to provide the service. Otherwise, the process is similar to a partial withdrawal, requiring on-chain proof and an escrow period for withdrawn funds. If a re-stacker accidentally initiates a full withdrawal, they can redelegate their assets using the “Re-deposit” button on EigenPod. Restakers can initiate any withdrawal process through the “Unstake” section of EigenPod.
Advantages and disadvantages of EigenLayer
Although EigenLayer has an innovative solution, this Ethereum network upgrade also comes with its own challenges.
Eigenlayer wants to innovate on Ethereum's proven proof-of-stake functionality. In a sense, that's exactly what we're doing. However, the innovation is not perfect and may introduce new problems.
Strong Points
additional passive income
Re-stakers can use their staked assets in additional ways, potentially earning higher rewards than traditional staking methods.
Improved developer success rate
EigenLayer's security pool eliminates a significant barrier that many new projects are trying to overcome. Developers can now focus on delivering valuable services without worrying about establishing trust.
By removing one of the most important barriers facing new projects, EigenLayer has the potential to lead to truly innovative Layer 2 projects.
Cons
High barrier to entry
EigenLayer benefits by providing established security to new DApps, but restaking to join the network can be overwhelming for some users. Many cryptocurrency exchanges offer staking as a built-in service, simplifying the setup and maintenance of nodes for users on the network. Achieving accessibility requires technical know-how. If less-skilled users are already familiar with the staking process, they are unlikely to be interested in re-staking.
increasing risk
EigenLayer AVS has different slash rules than traditional staking. Because restakers hold assets through traditional staking and restaking methods, the risk of failure to meet obligations is multiplied.
Not only that, but restakers are doubling their exposure to security risks. Stakers already trust Ethereum’s smart contract code when staking assets, and restaking requires trust in EigenLayer’s development capabilities. This goes without saying about the quality of EigenLayer AVS.
Fortunately, both Ethereum and Eigenlayer code are completely open source. Knowledgeable developers can evaluate this code before risking assets.
