EigenLayer, Crypto’s Biggest Project Launch This Year, Is Still Missing Crucial Functionality

Upon a more detailed examination, it becomes clear that EigenLayer has not initiated most of its distinctive attributes, such as the incentive system and the essential “slashing” function, which are key aspects of the project.

In the dynamic and financially substantial crypto sphere, EigenLayer has garnered exceptional attention: With over $15 billion in deposits at present, Eigen Labs, the project’s development team, secured an impressive $100 million investment from venture powerhouse Andreessen Horowitz last year.

In addition, there is a thriving sector of new businesses, referred to as “actively validated services” (AVSs), which are eager to connect with EigenLayer’s security system. Furthermore, there are startups specializing in “liquid restaking,” capitalizing on EigenLayer’s achievements, amassing substantial deposits worth billions of dollars for themselves.

EigenDA, a data-availability protocol built by Eigen Labs, was the first AVS to launch on EigenLayer – released on Tuesday in tandem with the rest of the EigenLayer protocol. As other AVS networks wait in the wings – for now, they’re only allowed to “register” – EigenDA is supposed to be a proof-of-concept for what EigenLayer will eventually enable for other services: A way for networks to base their own security on Ethereum’s.

In its current early development phase, EigenLayer’s security model for EigenDA appears quite traditional. The protocol is governed by a group of operators spread across the globe, but there are no financial repercussions if they behave dishonestly, which goes against EigenLayer’s claimed security features. Additionally, depositors won’t receive rewards for restaking as intended.

Last week in an interview, Sreeram Kannan, the founder and chief architect of EigenLayer, admitted that the upcoming launch would progress sans some essential features. Instead, they will implement a gradual release, the timing for which remains undisclosed.

“EigenLayer announced on Tuesday that they will wait for the marketplace on their platform to grow and become more stable before adding in-platform transactions and imposing penalties (slashing) to the main network this year.”

In the crypto world, where innovation is the norm, it’s not uncommon for startups to employ what some call “training wheels.” This is especially true when these startups are entrusted with managing vast amounts of user deposits. The “move fast and break things” philosophy prevalent in Silicon Valley doesn’t work well here due to the significant financial implications involved.

According to Mike Silagadze, the CEO of Ether.fi, a platform for depositing $3.8 billion of user funds into EigenLayer, many other crypto projects cut corners and ultimately become riskier than their original intent. In comparison, he believes that their approach has been more prudent.

With a significant third place in the decentralized finance market by total value locked (TVL), EigenLayer faces increasing competition. As a result, there’s immense anticipation for this protocol to deliver impressive results.

The current state of EigenLayer

For investors in EigenLayer, referred to as “restakers,” there’s an additional reward: they earn an extra return, in addition to the interest they already gain by staking Ethereum. Conversely, Automated Verifiable Syndicates (AVSs) enjoy the perk of enhanced security through pooling their resources.

Kannan cites an illustration with 100 distinct blockchain protocols, each backed by a billion dollars in commitment.

Kannan proposed a different way of thinking about it: “Instead of each protocol having $1 billion individually staked, imagine that we have a total of $100 billion collectively staked among the 100 protocols. So, to launch an attack on any single protocol now requires $100 billion instead of just $1 billion.”

The concept is sound, but the practical implementation of EigenLayer’s security system and the features intended to generate returns for depositors are still largely theoretical rather than proven in real-life applications.

For instance, consider the core element of EigenLayer’s defense mechanism referred to as “slashing.” Slashing plays a crucial role in EigenLayer: It serves to discipline networks constructed upon the protocol by imposing penalties on untrustworthy operators – through the withdrawal of all or part of their previously deposited stake.

During the recent launch of EigenLayer, slicing was noticeably absent. In a conversation, Kannan didn’t provide a definitive schedule for its availability; he only mentioned that it would be implemented at some point in 2023.

There are still significant uncertainties regarding the operational details of the system – specifically, how and in what quantities will cancelled tokens be destroyed and redistributed? Answering these queries is crucial for the development of AVSs upon EigenLayer.

Despite the fact that the complete slashing feature isn’t active yet, we plan to release this system in its beta version for public use. We will ensure the necessary backup systems and other features are in place.

Kannan intends to implement a “security safeguard” mechanism in EigenLayer’s coding, which is presently undefined. This system functions as a backup plan to secure the protocol against unexpected events that could jeopardize its security infrastructure. The goal is to mitigate contagion risk, or the possibility that a single slashing incident could negatively impact every other security component in the network.

In simpler terms, attributable security functions similarly to insurance in the world of crypto, where new terms are coined just as swiftly as new tokens. Essentially, a new market for actuarial services will likely emerge, offering pricing based on each AVS’s (Advanced Verification System’s) perceived risk level.

Using simpler terms, Kannan said, “On Eigenlayer, a service can request $3 billion out of the $100 billion locked-in fund. Eigenlayer as the protocol ensures that if all other Active Validator Nodes (AVS) run out of funds at once, the requested $3 billion will still be redirected to this AVS.”

When asked to explain the practical pricing method of EigenLayer’s attributable security market, Kannan admitted that his team has not released any information about it publicly.

EigenLayer’s fee system serves as its revenue source, designed to compensate depositors with rewards in the form of interest, which is expected to motivate them to restake.

In an interview with CoinDesk, Kannan expressed that the implementation of the fee system is a top priority for his team, making it straightforward and uncomplicated. However, without this feature, users will miss out on the opportunity to earn interest by restaking with AVSs.

Without this essential element, the $bilions accumulated in EigenLayer are due to its reward system: EigenLayer issues loyalty points that investors anticipate can be exchanged for actual cryptocurrencies later on.

Prior to EigenLayer’s launch this week, crypto traders and users primarily focused on achieving two goals: Firstly, they earned points by depositing assets into platforms like EigenLayer and Ether.Fi, or in certain instances, bought the points directly. Secondly, they traded these points with high leverage of up to 40x through third-party crypto protocols, which were popular among risk-takers.

Looking back, I might have advised us to be more restrained with our enthusiastic statements about cryptocurrency, as things got carried away excessively, according to Ether.Fi’s Silgadze. The crypto world is notoriously volatile, leading people to overreact.

Read more: As Crypto ‘Points’ Farming Grows, So Does Risk of Vague Promises

Looking ahead

In simpler terms, EigenDA, which is currently the sole implementation of AVS (Automated Market Making System) in EigenLayer, falls short of the intended vision for EigenLayer. This is because it doesn’t include features like transaction fees, security tokens, and other attributes that are essential to fully realize the goals set for EigenLayer.

In the short term, the management of EigenDA will be handled by a group of validators. However, these validators won’t face the penalty of slashing, which is the consequence of acting dishonestly in other blockchain networks. Essentially, this setup eliminates the financial motivation for validators to be truthful – a core principle of EigenLayer’s “pooled security” concept.

Kannan anticipates that most of EigenLayer’s key attributes will be released by the end of this year. However, some people find it challenging to trust these timelines.

In certain situations, engineering issues may present challenges that require persistent effort before being solved. On the other hand, there are research dilemmas where existing solutions have yet to be discovered. (Silgadze)

Regarding research issues, Silgadze admitted, “It can be challenging to adhere to deadlines since we’re dealing with unresolved puzzles.”

Some EigenLayer developers, wishing to remain anonymous, have expressed growing concern and frustration due to the unclear technical setup of EigenLayer. This ambiguity has also caused confusion among users, leaving them uncertain about EigenLayer’s current progress on its extensive development plan.

An equivalent expression for the given text could be: Concerns have been raised that EigenLayer’s structure bears similarities to “rehypothecation” – a controversial technique in traditional finance where collateral is used multiple times to generate greater profits, but also heightened risks. However, Kannan strongly disagrees with this assessment, explaining that users retain full ownership and control over their assets when using EigenLayer.

Kannan expressed the need for clearer communication about updates and our planned developments to the wider EigenLayer community. We hadn’t anticipated reaching a size with numerous projects relying on our codebase.

Calvin Liu, Eigen Labs’ chief strategy officer, says he welcomes the scrutiny.

When something is heavily hyped up, it’s important to scrutinize it closely and maintain a healthy dose of skepticism. I apply this approach to various projects regularly. I trust that we will eventually prove worthy of such scrutiny. I welcome the challenges – they help us improve in the long run. (Liu’s message paraphrased)