Is EigenLayer Ready For Institutional Adoption?

In simple terms, EigenLayer and restaking have become popular discussions at conferences this year, and they are crucial stories within the ecosystem for 2024. While EigenLayer is suitable for risk-tolerant individual investors, it doesn’t cater fully to institutional requirements at present. Therefore, EigenLayer must determine whether it should focus on serving the retail market or address the specific needs of institutional players entering the field.

So why is EigenLayer, as currently built, unsuitable for institutions?

Initially, most establishments store their assets with reputable custodians or wallet providers designed for institutions. Yet, the standard process for re-staking with EigenLayer primarily relies on their user interface and necessitates linking to decentralized finance (DeFi) wallets like Metamask, Trust, or Rainbow. Since these institutions typically depend on their custodians or wallet providers to make integrations within the EigenLayer system, it becomes essential for such integrations to accommodate preferred staking providers like Twinstake. Unfortunately, many institutional-focused custodians have yet to establish comprehensive EigenLayer integrations, thus preventing access to the ecosystem.

For an institution, it’s important to identify who they are partnering with next – the ‘Operator’ as referred to in EigenLayer terminology.

Institutional entities tend to select Operators who provide contractually-binding performance assurances, a trend evident in their preference for staking service providers over decentralized permissionless protocols. These entities anticipate safeguards like slashing risk insurance – a mechanism that penalizes validators for misconduct. At this point, no external service providers have stepped up to offer such protection at the institutional level.

One alternative approach for institutions when it comes to Active Validated Services (AVS) selection is determining which party – the Operator or their delegator – will be responsible for choosing the AVS support list. This includes services like zero-knowledge provers, data availability layers, and oracles. The Operator manages software and hardware to provide rewards for their supporters. But, who should be in charge of selecting these AVS providers?

In situations where institutions invest more than an individual operator’s minimum, they might require a unique operator. This scenario necessitates an agreement on who makes the Anti-Virus Software (AVS) choices and who bears the responsibility or potential legal consequences stemming from suboptimal AVS decisions.

Another institutional aspect to consider is incentives. Even though a mechanism for distributing rewards has been introduced recently, most Asset Verification Systems (AVS) on EigenLayer continue to function using a point-based system. This approach may help them steer clear of the complex legal and regulatory issues associated with token launches, but it necessitates institutions to maneuver through an uncharted landscape of accumulating points and interpret tax laws that don’t yet cater to conversions from point systems into blockchain-based token structures.

Over the past few months, TVL (Total Value Locked) has been gradually decreasing, but it’s still around $11 billion, leading some to wonder if this amount is necessary for projects utilizing EigenLayer for security at this or future points in time. In light of this, numerous new projects are still striving to achieve product-market fit and a sufficient level of usage. The issue is that many of these AVSs (Automated Validator Systems) might struggle to find their market fit, resulting in tokens with insufficient liquidity and stability. This could lead to institutions holding illiquid assets as rewards, and the commissions paid to Operators potentially exceeding the potential returns that institutions can earn.

As a crypto investor, I’ve noticed that the main obstacle preventing widespread institutional adoption of EigenLayer currently boils down to a fundamental issue – smart contract risk. This challenge is particularly tough to overcome because no number of audits can completely guarantee protection against hacking or coding errors. The most compelling evidence of safety in this context is simply time, as a proven track record demonstrates that the system has withstood the test of time without major incidents.

Given the growing enthusiasm among institutions for the DeFi narrative, it’s important to remember that many are still acclimating to decentralized exchanges (DEXs) and activities beyond traditional on-chain transactions. Thus, I believe that institutions will hold off participating until these areas become more familiar and until retail investors have had a chance to test the waters, which currently feel somewhat chilly.

Please be aware that the opinions stated within this article belong exclusively to the writer and may not align with those held by CoinDesk, Inc., its proprietors, or affiliated parties.