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If people vote with their dollars, Biden and Trump better watch their asses around EigenLayer. Smashing through the paltry ~$1B they each raised in the 2020 election, EigenLayer is blasting its way through the TVL stack rankings.
But why? Their primitive - restaking, and the entirely new ecosystem it begets.
So strap in, apes, because we’re taking a deep dive into EigenLayer’s new world of restaking: the tech, the incentives, and the outright degeneracy.
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Get DigestingIf people vote with their dollars, Biden and Trump better watch their asses around EigenLayer. Smashing through the paltry ~$1B they each raised in the 2020 election, EigenLayer is blasting its way through the TVL stack rankings.
But why? Their primitive - restaking, and the entirely new ecosystem it begets.
So strap in, apes, because we’re taking a deep dive into EigenLayer’s new world of restaking: the tech, the incentives, and the outright degeneracy.
The main idea behind restaking is that there already exists massive monetary security in the Ethereum ecosystem (from validators). And many of them would be happy to have a side gig to earn some extra beer money (we’ve all been there).
So instead of only validating the Ethereum network and earning 3-4% yield, validators could also “re-stake” (vouch) for other services, securing them and earning some additional yield for their troubles.
There is added risk for these validators, as now their 32 ETH is being used to secure multiple services beyond Ethereum’s consensus. If there is some bug in one of these Actively Validated Services (AVS), the validator’s stake could risk slashing. But if the yields are good, degens will degen.
These guys were actually pretty early aboard the “points” hype train, opening up deposits back in June of 2023. Since then, they’ve routinely raised the caps, and today are pushing 3.5 million ETH (>$11B).
A portion of the hype surely lies in their “Restaking Points,” which is prominently displayed atop their dashboard, slowly ticking up day by day. Early depositors are rewarded with points proportional to their deposited ETH size and duration.
These Restaking Points will (probably) be converted into $EIGEN (or whatever the ticker is) during the full launch of the protocol, which is shaping up to be this year. This airdrop has all of the potential to be one of the largest ever:
Will this be the airdrop to end all airdrops? It remains to be seen. But if their TVL is any indication, people are very keen to be included in this one.
If you feel inclined to participate, caps are raised regularly, just keep tabs on the EigenLayer twitter and have some Liquid Staking Tokens (LSTs) ready to go. If you are a bit impatient (we know our audience well) there are some other avenues to take even if the caps remain closed - hint, hint, in the LRT section below.
Next up on today’s menu:
As mentioned, additional services that want to bootstrap their security by leveraging existing Ethereum validators can opt to become AVSs (Actively Validated Services) on EigenLayer. These could be new chains, cross-chain bridges, oracle networks, whatever - if they don’t want to establish their own set of validators, they can just borrow Ethereum’s.
Rollups can mix and match their favorite features of these AVSs, along with existing modular options, in order to finetune their architecture. This freedom in design space is just now starting to gain major traction, and EigenLayer is positioning itself to be a major contributor to this narrative.
While reading these sections, make a note about the projects that excite you. Dig deeper into them and try them out if you can. We’re still early, my friends, and some of these will be household names before long.
EigenLayer is dogfooding their product by releasing the first AVS - EigenDA, a data availability layer. Much like Celestia, EigenDA will offer a cheaper alternative for modular chains to post and retrieve data. This will be a massive improvement for Ethereum rollups, who spend the majority of their L1 fees on DA. This is set to improve with EIP-4844 (proto-danksharding) having just gone live, but will be far from perfect.
Upon launch, restakers will be able to delegate stake to node operators performing validation tasks for EigenDA. And of course, EigenDA will pay these restaking validators for their trouble.
Some added benefits of rollups opting for EigenDA:
On top of this, EigenDA touts itself as “Ethereum-aligned” in that value contributed flows back to Ethereum stakers and validators (instead of to Celestia node operators). We already see the early stages of this battle taking place, with Arbitrum siding with Celestia for DA while EigenDA focuses on the OP Stack. Expect to see the maxis fight this one out on the Twitter timeline while BD suits fight it out over happy hours.
Mantle, which boasts one of the largest onchain war chests, intends to use EigenDA to decrease transaction costs on its network. The Ethereum rollup has already shot up the rankings of L2s by TVL, in large part due to the massive incentive programs they are able to run with their treasury. They’ve recently announced further partnerships with EigenLayer, aligning themselves with this up-and-coming titan.
Celo is an OG blockchain which has pivoted to become an Ethereum L2. Their mobile-first strategy didn’t entice the Western mindshare much during the last cycle, but with hordes of new users entering the space, they could be one to watch.
Layer N is building a network of financial and institutional applications, and plans on leveraging EigenDA for their zk-Optimistic hybrid rollup design. Yes, they are apparently trying to stamp everyone’s keyword BINGO cards.
Their aspirations are ambitious, with three planned, fully composable rollups:
Caldera, Movement, and (kinda) Versatus are all Rollups as a Service providers that are integrating with EigenDA.
Caldera is already making waves with their one-click deployment of rollups and announcements from Kinto, HYTOPIA, and RARI. Expect a lot more to come out of their camp.
Movement will allow developers to code with the innovative Move language and deploy to a network of Ethereum L2s, potentially changing the game when it comes to parallelization and security. While Sui and Aptos have some pretty cool tech, bringing those capabilities over to the Ethereum ecosystem will mean more people get to benefit from it.
Versatus is somewhat of a wildcard here, and they probably wouldn’t hate that classification. Their vision is to create a peer-to-peer web service platform, where any dev could code in any language they want and have their service hosted with Versatus. They are technically a stateless rollup that uses EigenDA and their goal is to completely overhaul the Web3 developer experience.
It’s been said that the roadmaps of Ethereum and Cosmos are coming to a convergence. From Ethereum’s perspective, EigenLayer could finally become that bridge connecting the dozens of disparate L2s together, defragmenting liquidity and users.
And if you just squint a little, Cosmos’ appchains and Ethereum’s rollups aren’t all that different, are they? They each have their own struggles, to be sure. The bridging experience between Ethereum rollups is an annoyance at best, but Ethereum has (nearly) all the users and TVL. If only there were a way to get the interoperability of Cosmos’ IBC (Inter-Blockchain Communication protocol), but with the user base and security of Ethereum…
Condensing a lot of history into a brief synopsis - the Cosmos’ killer use case was that any team could specify the exact parameters they required for their very own chain. Want to build a chain specifically for a DEX? Or a lending platform? Or a DA layer? Or a game? You can build it on Cosmos and your users can easily bridge value to other chains within the IBC ecosystem.
The only problem? Each of these new chains would need to spin up their own token economy and validator set, which can be very difficult for a startup with limited capital resources (starting to sound familiar?).
The eventual solution to this is the practice of Mesh security - where any IBC-enabled chain can share its validator set with any other IBC-enabled chain.
But, wait a minute, don’t we know of a certain network that already has a shitload of economic security (Ethereum)? Wouldn’t it be great if we could just plug into that instead?
Well if you were able to figure this out a while back, you could’ve frontran Ethos - an EigenLayer AVS that essentially acts as an Ethereum-powered IBC chain on Cosmos. Its purpose is to provide a communication layer between these two ecosystems, affording any Cosmos chain the option to plug into an extremely secure network.
As with other AVSs, EigenLayer restakers can share the validation rewards of securing these IBC chains by validating for Ethos. And with ~250 apps already built into Cosmos, this could turn out to be a lucrative endeavor for these restakers.
The fine folks from Polymer Labs argue that the interoperability capabilities of IBC are unmatched elsewhere in crypto, and they have a point. While user adoption and value accrual have been difficult for the Cosmos ecosystem, one thing that has stayed consistent is just how easy it is to bridge assets from one IBC chain to another.
Technically, Polymer will be an Ethereum L2, using:
“But wait,” you may ask yourself, “how is this different from Ethos?” While Ethos ported the security of Ethereum to Cosmos’ apps, Polymer brings Cosmos’ apps to the users of Ethereum.
With this design, apps that were deployed to Cosmos can be easily ported to Polymer, where they can be enjoyed by Ethereum-native users. The tinkering nature of Cosmos finally getting exposure to the user base and capital markets of Ethereum will be a sight to behold.
The overwhelming issue with incumbent cross-chain solutions is that of trustworthiness. Do you trust that this middleman is going to do what you ask? Or are they just as likely to rug you after you’ve given them wallet access?
For cross-chain messaging solutions, the architecture of their node network is crucial. All of the trust assumptions come down to how this network is designed.
LayerZero opted for a customizable Oracle-Relayer design. Chainlink CCIP will use a network of independent oracles to avoid collusion. But, guess which network may be the most cryptographically secure of them all? Ethereum’s validator set.
Hyperlane will tap into this validator set and use EigenLayer for its independent node network, verifying messages and passing them between chains.
New nodes can be added permissionlessly, allowing developers to plug their favorite chain into the network. This means that Hyperlane could scale quicker than some of its competition which is rolling out a permissioned set of sanctioned nodes.
These new nodes can be implemented in any environment. Whether you’re building with the Cosmos SDK or on an EVM/SVM/MoveVM - messaging nodes can be added and get you connected.
Interchain apps that offer a truly chain-abstracted experience - honestly extremely exciting to see. Maybe one day the Ethereum maxis will be proven right after all.
Pro tip - if you want to try it out now, they have their NEXUS bridge live. Might be smart to be an early user for this one… We sent a couple transactions of tiny amounts of $TIA (like 0.001 each) to give it a shot. Can also access Hyperlane using Merkly NFT mints.
Developers these days face a twofold problem. Even if they are successful in building an application with product-market fit, if they pick the wrong L2, they’re shit outta luck. They have to bet on the right horse back-to-back.
Omni aims to simplify the process, allowing devs to deploy apps that will be accessible from any rollup - no longer will users have to interact with several instances of the same app. By aggregating state from all the rollups in its network, Omni becomes a unified state layer.
Omni is like the old lady on the block watching all the neighbors from her window; making notes on her little notepad; always keeping tabs on everyone else. Just imagine Omni as this strange old lady and it becomes a whole lot simpler.
Here’s the deal - where do all L2s eventually settle once their Sequencers batch transactions? Ethereum validators. And since Omni uses Ethereum’s validators directly via restaking, Omni acts as a natural junction, aggregating rollups from their common denominator.
Omni provides some initial use cases for their product, but honestly, this infrastructure layer could be the tech that finally puts the fragmentation argument to bed.
On top of this, Omni integration is backwards compatible for existing apps - devs will just have to swap out the app front ends:
For argument’s sake, imagine you are an onchain native that has some roots in the Binance Smart Chain ecosystem. Your wallet is chocked full of $BNB and you want to participate in this restaking craze in order to earn some nice yields, but you can’t bear the thought of trading in your precious $BNB for some dirty, dirty $ETH. Don’t worry, my strange friend, Exocore has you covered.
Exocore is an omnichain restaking platform, allowing users/Operators to pool and stake various gas tokens, LSTs, LP positions, stablecoins, and AVS tokens to secure other AVSs. AVSs can configure the types of tokens that can be used to secure their protocol. For example, a BNB-Arbitrum bridge that gets its security from EigenLayer might allow users to put up $BNB, $ARB, $ETH, and their own bridge token as collateral, to align the incentives of all their participants.
AVSs (like the bridge in the above example) have the option to integrate with Exocore in a fully permissionless manner, simply by interacting with the Exocore smart contract and defining restaking parameters. Once integrated, collateral beyond $ETH can be used to secure their services.
The idea behind omnichain restaking harkens back to Cosmos’ vision for pooled security, where the security of the entire ecosystem increases as more entrants join the pool. Exocore runs light clients on all “client chains” (everything besides Ethereum mainnet) by leveraging the existing connections of LayerZero/Polyhedra (which just announced BTC dual staking via EigenLayer, by the way). This means that funds don’t have to originate on Ethereum in order to be restaked. Any steps toward chain abstraction is a win in our book.
Determining a security budget for an application is difficult. You don’t want to box yourself in by allocating minimal resources, but providing massive security is cost-prohibitive to startups - it has to scale with your growth. But how to automate this?
Blockless allows apps to be directly powered by their user base, via their Network Neutral Application (nnApp) architecture. Apps built with this framework leverage the computational hardware power from willing users of the apps, allowing security and decentralization to scale directly with usership. Apps built on EigenLayer, as well as Operators will be able to plug into the Blockless network freely, gaining access to this marketplace.
Their nnApps will have their own sovereignty, much the same as Cosmos’ vision, putting control in the hands of their communities. The goal of Blockless is to allow for builders to have complete control over the design of their application - code in any language, define consensus mechanisms, and leverage existing tech as desired.
AVSs aren’t only here to squash Ethereum’s shortcomings, but also to unlock new capabilities. The future of finance™ is among us, friends. Let’s take a peek.
There aren’t many worse feelings, as a developer, than when PeckShieldAlert tags your protocol. As a user, it isn’t much better - seeing that your funds are all gone and there is nothing you can do about it.
Hacks, exploits, and rugs have been part of crypto since the advent of smart contracts. If there is an incentive in place to hack a contract, there will be people that try.
Drosera offers an offchain solution - where developers can set “Traps” to stop exploits before they become catastrophic.
These could be IF/THEN statements like:
IF/THENs can be as complicated or simple as the developers wish, adding additional checks wherever necessary to finetune their incident response plan.
If these checks were onchain, they would be completely visible to would-be attackers. By keeping these Traps offchain, protocols can keep their intentions hidden. And since they are securing this network via EigenLayer, Traps are secured by a trustless set of economically-secured nodes.
Even if we forgo the “it would be nice if we decentralized” argument for removing the centralized sequencers of major rollup chains like Arbitrum and Optimism, security can also become a concern.
For those unfamiliar, a rollup’s Sequencer batches all of the L2 transactions, orders them, and sends them off to Ethereum mainnet for final settlement. Today, most of the big rollups have a single in-house Sequencer that processes all of the transactions.
The fees collected by these Sequencers are mostly used to pay for mainnet settlement back to Ethereum (as seen below). The worry is that if, in the future, only a small percentage of value is left over for the mainnet (L1) validators, there will be little incentive for these validators to support the L2. This could become the case if the centralized sequencer model is centralized further and absorbs more of the fees. In this case, L1 validators could be bribed to fork the L2 state and be more-rewarded than if they acted honestly. This, as the experts say, would be no bueno for rollup users.
Along with worries of liveness due to Sequencer downtime, this incentive misalignment is driving authority figures to seriously push for decentralization of this Sequencer node.
But, where would we ever find a crypto economically-secure set of validation nodes that could take this job?
You guessed it. Espresso aims to leverage EigenLayer to bootstrap their shared sequencer network. This network could be accessed by rollups wishing to secure their sequencing architecture with the strongest validator network in existence.
As an added bonus, if many rollups end up using this Shared Sequencer network, they would realize some additional benefits such as atomic transactions. Since the Shared Sequencer can sequence transactions from multiple rollups simultaneously, cross-rollup operations become much simpler. Imagine being able to arbitrage $ETH between Arbitrum and Optimism - with the guarantee that your buy on Arbitrum will only succeed if your sell on Optimism also goes through. Very nice.
Shared sequencing can bring all of this to our favorite rollups, and the fact that it’ll be using Ethereum’s own validator layer is just the icing on top:
The key unlock that Lagrange brings is cross-chain state proofs - meaning that chains in their network can understand what is going on with other chains in their network on a deep level. While other messaging protocols rely on message-passing nodes, Lagrange proves state between chains without transferring messages or assets.
I’m self-aware enough to admit that sometimes a picture can explain an idea a lot better than my incessant rambling. Case in point, see the example below to visualize the power that Lagrange unlocks.
In this example, the DEX on Arbitrum has access to the states of all of the other chains in the Lagrange network, meaning it can price its assets by combining all of this information. No longer is cross-chain price discovery facilitated only by oracles, but by simple state proofs.
With this tool, applications can aggregate data between several chains and apply logic to it. E.g. do something on Chain X when the moving average of an asset’s price across several chains hits a certain price. Cross-chain apps without oracle risk? Sign us up.
Yes, that NEAR. They’re back, and in fact, they never left. They’re coming at us with their newest offering to the modular stack - a fast-finality layer for rollups, built on EigenLayer.
While Crypto Twitter might be quick to point and laugh at the pivot, from our perspective, it makes a lot of sense. They already have a distributed set of validators spread around the world as well as an extremely fast consensus mechanism via their sharded design. What more could you want from a finality layer?
And while Shared Sequencer networks are cool too, they are in their early days and will take some time to build up to the level of time-testing that Near already has achieved.
With the additional integration of their own in-house Data Availability layer (Near DA), they could offer a tempting alternative to Shared Sequencer networks. Providing an out-of-the-box soft finality and DA solution for rollups.
No, a rollup being “optimistic” does not mean it is happy-go-lucky. For these rollups to provide fast commitments to users, we assume that the sequencing of transactions is done honestly, unless proven otherwise. “Unless proven otherwise by whom?” you might ask - that’s where Witness Chain comes in.
In a perfect world, optimistic rollups would be fact-checked by so many isolated parties that it would be extremely unlikely any wrongdoing could occur. And indeed, today, Arbitrum’s state assertions are checked by a group of 12 whitelisted nodes. But wouldn’t it be nice if this process of posting fraud proofs was all decentralized and worked in a way that rewarded checkers well for their service?
Witness chain foresees a future with countless more optimistic rollups than we have today. And for this future, it proposes a line of defense that is trustless, decentralized and programmable.
To incentivize participation, bounties are awarded to participating Watchtower nodes that submit Proof of Diligence. Once Witness Chain goes live, integrated chains could use some token emissions to help fund these Watchtowers as part of their security budget.
The easier we can make it to get a chain or application up and running, the better. Devs just want to build cool shit, so let’s make their lives easier and allow their innovative juices to start flowing.
AltLayer is bringing “restaked rollups” to the mix, as a Rollup as a Service (RaaS) provider. WTF are restaked rollups? They’re basically rollups that take advantage of all that EigenLayer has to offer.
AltLayer itself is made up of three services (three AVSs), each of which is secured by EigenLayer:
On top of this, AltLayer will allow custom settings for their rollup builders, with almost every integration you can think of. Take a peek at their ecosystem partners if you don’t believe me.
Sheesh, that’s a lot to dump on you at once. How are you feeling? You hanging in there, friends?
It’s important to remember that these initial AVSs are just the permissioned set of “approved” services that will be available soon after EigenLayer launches (EigenDA will be first, then the rest of these). After this period, AVSs can permissionlessly enter the marketplace, offering incentives for restakers to support them.
The early days of EigenLayer restaking will be chaos, that’s for sure, but at least it’ll be controlled. The real fun begins once any bridge/chain/app can be plugged into the network. Who will validate these random services? High risk, high reward.
As far as a strategy, we’ll continue to recommend curiosity. One of the AVSs above sound cool? Try out their testnets and check out their communities. Some of our early favorites are Hyperlane, AltLayer, Caldera, Ethos, and Blockless, but honestly, any one of these could prove to be a monster.
And if you’re thinking “these are cool and all, but how do I make money from all of these?”, let’s dive into the absolute hellscape that is Liquid Restaking.
As mentioned, AVSs pay for the security they receive from restakers. Operators choose which AVSs to secure, based on the potential rewards they foresee weighted against the potential loss of capital. These Operators are generally professional validating entities you might’ve heard of (like Figment, Kiln, and Everstake) and have a lot of experience running hardware.
Users, such as yourself, can delegate your restaked ether to these Operators. They will take your ether and restake on their hardware with their approved AVSs, collect a small fee, and pass the remaining rewards back to you.
But, as you may already realize, your $ETH is now locked away. It’s earning you some nice yield, for sure, but wouldn’t it be nice if you could still use that $ETH elsewhere in DeFi at the same time? Enter, Liquid Restaking Tokens (LRTs).
As with Liquid Staking Tokens (LSTs), LRTs are receipt tokens that represent your restaking position. But since they are liquid, they can be used elsewhere in DeFi for lending, yield farming, or providing liquidity. This freeing of locked capital is what led to the absolute domination of LSTs in the staking sector, and we expect to see the same trends in restaking.
Despite the similar acronyms, it’s critical to understand the differences between LSTs and LRTs, as they carry different risks.
Staking is a relatively safe process. In fact, according to rated.network, barely more than 1 $ETH has been slashed since the transition to Proof of Stake. Not much at all in the grand scheme of things. I’ve probably spent more on gas fees by this point (no, I’m not gonna check. It’ll just make me depressed).
Restaking, on the other hand, is a whole different ball game. Instead of only securing the Ethereum network, restakers may be signing up to secure Ethereum, a couple bridges, a few rollups, and a security service. If there is an issue with any of these networks, your assets are at risk.
When you enter into a restaking position, which AVSs should you be securing? That’s the question that Operators will have to answer, as will LRT providers. In essence, these providers/Operators act as portfolio managers, judging risk/reward on behalf of their clients (restakers = us).
Potential options for portfolio combinations scales with , so if there are only 3 possible AVSs, there’s just 7 portfolio combinations. At 13 AVSs (roughly what EigenLayer will launch with), that becomes 8,191 combos. And at 50 live AVSs, that’s about one quadrillion portfolio combinations. How do you pick the right combination for your needs?
A potential misalignment materializes, as LRT providers are incentivized to pump up their APRs as much as possible to encourage more users to restake through them. This could, and probably will, lead to some providers to crash and burn by restaking with questionable AVSs (and/or too many at once).
New LRT providers are popping up constantly, but let’s take a look at the current landscape and see if any are showing some early leads.
Before diving face-first into the ecosystem, let’s define a couple different types of LRTs.
Each of these strategies has different pros and cons, outlined in the thread below by 0xJeff.
Out of the roughly dozen LRTs in development, three four ten (please stop) are currently live on mainnet and open for deposit. Just about all of them have an active points program.
Ether.fi’s $eETH was the first to open mainnet deposits in November of 2023 and hasn’t looked back. Since it allows for native restaking, as soon as users deposit $ETH into Ether.fi, it goes straight into EigenLayer. No need to wait for caps to increase. It also has the added bonus of removing LST smart contract risk (which admittedly, is fairly small).
They’ve been quick to integrate with DeFi protocols, amassing a network of connections. Here is a snapshot, with their corresponding $eETH value locked.
Remember, Lido didn’t win the LST wars because they were first to market. They won because they were the quickest to integrate with market-leading DeFi protocols. If an LRT provider wants to gain dominance, they ought to follow suit.
Ether.fi works with a permissioned set of Node Operators, which can be found here. These operators are in charge of recommending AVSs to secure. In the future, they plan on making this set permissionless, with token holders able to vote on the Operator set.
Additionally, Ether.fi already has a CIMA-registered fund, allowing institutions to access staking services. If “the institutions are coming,” they might be eyeing Ether.fi.
From the founders of Stader, deposits for their own LRT, $rsETH, went live in December of 2023. Kelp DAO paints itself as the secure option for restakers, with their custom-built Strategy Manager deploying $ETH/LSTs to AVS strategies.
$rsETH is a basket LRT, with users able to mint it with either $stETH, $sfrxETH, $twETH, or $ETHx (Stader’s LST). It’s worth noting that minting $rsETH with $ETHx affords the depositor extra “Kelp Miles” for Kelp’s points program.
Kelp has recently ramped up their DeFi adoption, leveraging their Stader connections. They’ve integrated with a lot of the usual suspects like Pendle, Balancer, Equilibria, Uniswap, and Curve, with more coming soon.
Taking a slightly different approach, Renzo’s focus is on risk-adjusted return for their LRT holders. There are a lot of AVSs out there… which are worth the risk?
For each potential AVS, Renzo attempts to define a) the risk of slashing and b) the potential reward for securing that AVS. It goes on to run simulations in order to gauge the optimal portfolio in terms of risk-adjusted returns.
Pretty cool idea. Of course, it remains to be seen how this theory will translate into practice, but it is a novel approach to the standard DAO-decided selection process. The main “issue” is that this theory won’t be put to the test until we’re already deep into the AVS-running process. Renzo’s goal until then ought to be differentiating itself from the pack and maintaining relevance.
Vector’s implementation of Superfluid Staking is what initially sets them apart from the pack.
Superfluid Staking means that instead of restaking with $ETH or LSTs, you instead restake liquidity pairs (LPs) of $ETH and LSTs. After all, a 50-50 mix of $ETH and $stETH ought to be redeemable for 100% $ETH anyway (unless something goes wrong). The added benefit of this change is that the LPs can be used in DEXs, collecting trading fees on top of the restaking rewards already mentioned throughout this report. Yield on yield on yield.
Vector’s $vETH LRT (or Liquidity Position Derivative, LPD) can be minted by depositing ETH, LSTs, or LRTs. Read that again. Yes, it’s an LRT backed by other LRTs. What could go wrong.
After the token, $VEC, launched, some background was revealed that made this all make sense:
With OlympusDAO team members likely behind the curtain, it should be no surprise that there are several… aggressive mechanics involved. (Additional background on Olympus’ level of involvement)
For example, Vector’s Advanced Treasury Management system aims to optimize for yield while maintaining stability. Here are a couple strategies listed in the docs:
Additionally, they’re introducing bribing and bonding, harkening back to the high times of the last bullrun. Throw in some good ol’ veTokenomics, and you’ve got yourself a flywheel that a lot of us can recognize.
In the end, the total $vETH yield ends up looking something like the monstrosity below.
Look, we think Vector is taking on a lot of risk here, no doubt about it. That being said, if we have learned anything from previous cycles, it’s that people love yield. Often to their own demise.
The problem that Vector has to overcome is that they could have exposure to everything in DeFi, so how do they manage it?
And while they say that they are “diversifying” by accepting so many $ETH derivatives, is that a fact? If any of the LRTs de-peg, $vETH will be affected. By adding more tokens to your basket, you don’t decrease de-pegging risk, you compound it.
The $VEC token itself accrues value from revenue sharing - where a portion of yields & fees generated by $vETH is routed back to $VEC backing of staked $VEC ($sVEC). Bonding activities and transaction taxes also theoretically help back the token, as these assets are flowed back to the Strategic Reserve (which is governed by token holders). There’s also some vote-escrow details tacked on, which aims to drive value to $VEC by giving it the power to direct emissions/liquidity to the LRT project who pays the most in bribes.
Will $vETH blow up at some point, probably. But until then, it might just turn into one of our favorite ponzis. To us, this is tokenized degeneracy. So of course, we love the spirit of it.
Taking a completely opposite approach to risk management is Inception, with their isolated LRTs. Instead of a basket of tokens backing their LRT, Inception allows users to isolate their risk to a single LST with their support of every EigenLayer-accepted LST. For example:
Now, if Coinbase suddenly stops issuing redemptions and the $cbETH peg explodes, you will be safe holding your $instETH.
On top of the basic isolated approach, Inception’s LRTs are built using the xERC20 standard, introduced by Connext. Similar in concept to LayerZero’s OFTs, xERC20s can be moved between chains, freeing up capital beyond Ethereum mainnet.
This means that L2 LRTfi becomes possible - opening up an entirely new sandbox. No longer will transacting with LRTs mean that you have to pay $20 gas fees at every turn. Could be a true gamechanger.
Perhaps carrying the most street cred amongst LRT providers is Swell. With the announcement of their $rswETH, Swell adds another feather to their cap of $ETH derivatives.
Their $swETH LST launched in response to the rallying cry for Lido competitors in the land of liquid staking. We actually provided some coverage back in June, if you were paying attention. Swell’s LST dominance has pulled a 7x by then, catapulting it to rank 7 by TVL.
Swell is prioritizing risk management with their installation. Their Liquid Restaking Council is made up of several AVS and Operators in the EigenLayer ecosystem, and is tasked with advising the strategy of Swell’s liquid restaking program.
Restakers opting to go through Swell also earn “Pearls” (their version of points), which are set to convert to $SWELL upon token generation - currently slated for late Q1. Liquid stakers holding $swETH have been earning pearls for almost a year at this point, so be aware of dilution.
EigenLayer opened the door to Swell’s LST back in December after a community vote, turbocharging their adoption. With their name recognition amongst a sea of newcomers, we are confident that they will be eating well off the back of their LRT program.
Launched as one of Magpie’s SubDAOs, EigenPie comes out of the gates strong, thanks to their brand recognition and referral program. Their isolated LRTs are prefixed with “m.”
EigenPie emphasizes security for their LRTs, opting to offer isolated LRTs for each underlying LST. Not much is yet known about their AVS-selection process, which is probably more important from a security standpoint than their isolation strategy.
Due to Magpie’s existing integrations with DeFi protocols, folks are quite bullish on the adoption curve for EigenPie and their $EGP token.
Besides EigenLayer restaked points, early depositors to EigenPie’s restaking protocol are eligible for:
Recognizing the contentious issue of Lido domination amongst LSTs, Puffer’s goal is to ensure LRTs aren’t destined for the same fate. With Puffer, any individual can run a validator to become a “Node Operator”, simply by posting a bond of 1-2 $ETH. These Node Operators would have the power to keep 100% of the native Ethereum staking rewards plus some restaking yield (most goes back to $pufETH holders). Here’s how it works:
Puffer wants to make it as simple as possible for users to make the leap into becoming validators. What’s the common worry for newbie Node Operators? Slashing. So, on top of lowering the capital requirement, they also have developed some nifty anti-slashing tech.
Puffer foresees a world where liquid restaking takes up the mantle alongside liquid staking, and they are worried about the possible outcomes. By lowering the barrier for potential restaking operators, perhaps we can avoid similar pitfalls.
It’s easy to get lost in the sauce when new LRT protocols are launching at such an impressive clip (for the love of God, please stop releasing new LRT projects). But here is how we view these: if there is no obvious differentiator between a new protocol and an “established” one, dismiss the new one. It’ll make your life a whole lot easier.
Now onto risk - this is a bit personal and depends on your own tolerance for such things. But here is how we look at it.
We (the royal “we”) have a decent-enough idea about how risky Ethereum staking is. The general consensus (get it?) is… very safe. As mentioned above, despite billions of dollars being staked since the Merge, only about 1 $ETH worth of value has been slashed. In the grand scheme of things, this is noise.
People start to worry when you begin to compound risk. A basket LRT inherits the risk of all of the LSTs in its basket. Is that a lot of risk? Probably not, but it depends which LSTs are included.
For us, the major risks involved will come down to AVS selection. For the sake of argument, let’s just assume that the first batch of AVSs (the ones mentioned in this report), have a slashing risk of 1% each. Not bad. What happens if an LRT decides to secure all of them? That risk balloons to 14%. Probably too high for many large players to handle.
The problem is that no one truly understands how to granularly quantify the slashing & smart contract risk of these AVSs. Because of this, LRT providers are taking different approaches and we won’t find out who is swimming without shorts until the tide inevitably goes out.
These are indeed the early days for LRT projects. Here is how the landscape looks today.
Here is how we understand the options.
If you believe that LRT dominance will follow in the footsteps of LSTs, where there is a winner-takes-most outcome, it makes sense to bet heavily on the frontrunners. Right now, it seems that Etherfi holds that title, being early-to-market and early-to-integrate with key DeFi infrastructure plays. Pay attention. These ecosystems can have a Power Law distribution when the playing field has been established, and LRTs probably won’t be an exception.
If you believe that decentralization will play a large role in the LST space, maybe Puffer is more your jam. Puffer reminds us a lot of RocketPool, which has proven its staying power in the world of ETH maxis and solo stakers. This is a big market, and decentralization-maxis will undoubtedly carve out a healthy chunk. Hell, if Puffer keeps up its current adoption rate, it could be the top seed someday.
If you believe that sound investment-allocating is going to be the name-of-the-game for LRTs, then Renzo could be your favorite horse to back. This makes a lot of sense to us, given our comparison of LRT providers to fund managers. A lot of these protocols will likely blow up due to risky practices, so a project that puts risk-adjusted returns first is one to watch.
Speaking of blowing up (sorry), if you think the worries about restaking risk are overblown, then Vector Reserve is going to be the obvious pick. If it turns out that securing other networks is basically as safe as securing Ethereum, then taking the reins off and letting yields run to infinity is the right mindset to have. Sure, it may all end in tears, but hopefully you’ve taken some healthy profits by then.
In these early days, we’re personally going to pick 3-ish of our favorites and start earning points/token rewards passively. Restaking of AVSs likely won’t go live until late Q2, so expect a lot of business development (BD) and integration games to be played with the LRT providers, jockeying for a top spot. Take the free money when it is offered, friends. But always stay vigilant.
VCs have their finger on the pulse and they are excited about this new era. It would be quicker to list the funds that aren’t involved in restaking projects listed here than to name the ones that are. They all have allocations, and we want some too.
EigenLayer could be Ethereum’s key to solving several of their very-public problems concerning interoperability and fragmentation. EigenDA brings an Ethereum-native solution to cheap data availability and some of the smartest minds are building on this thesis of Ethereum-first modularity.
To say we are excited about restaking would be a gross understatement. The massive potential of staked $ETH has been sitting dormant for too long - now it gets some real use.
All this being said, Vitalik’s worries about overloading Ethereum’s consensus are more than fair. Putting most of Ethereum’s stake at the whims of external protocols is a recipe for disaster. Throw in some risk-taking LRT providers and a pinch of leverage and you have one spicy meatball. Things will break, but the hope is that this movement further cements ether’s value proposition as hard money (or ultrasound money, if you want to be cringe about it). Solana is great, Cosmos is cool, but Ethereum is the ultimate smart contract settlement layer - and EigenLayer will remind everyone of that.
DISCLOSURES: This report was authored by our head of research, 563. He has exposure to the following projects mentioned in this report: Pendle, Vector, Celestia. Additionally, he is actively participating in points programs for: EigenLayer, Ether.fi, Kelp DAO, Renzo, EigenPie, and Puffer. Be aware of these biases while reviewing this report.
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