EigenLayer on the brink of potential yield crisis

Industry experts are raising concerns that EigenLayer, Ethereum’s leading staking protocol in terms of total value secured, may be experiencing a significant yield issue.

Because EigenLayer is experiencing swift expansion in Total Value Locked (TVL), there’s a concern that its Actively Validated Services (AVS) might become insufficient, potentially causing significant yield decreases. This was expressed by Chudnov, an anonymous builder at 3Jane derivatives exchange, in a post on April 22.

“EigenLayer has >$15B in TVL but AVSs will actually need less than *10%* of that for security, which means yields may fall off a cliff.”

On April 16, as announced by EigenLayer, there were no longer any restrictions placed on the use of liquid staking tokens (LSTs) by the platform. EigenLayer had gone live on the mainnet just six days prior, on April 10.

EigenLayer on the brink of potential yield crisis

When a user deposits their LST tokens with EigenLayer through staking, those tokens are assigned to a node operator. In turn, this operator employs the deposited funds to maintain security within the EigenLayer network by establishing an AVS. Simultaneously, the node operator is granted staking rewards. A portion of these rewards is subsequently distributed back to the user.

However, services that actively validate transactions on the Ethereum protocol consume significantly less staked Ether for security, a situation that might pose challenges down the line, as per Chudnov’s assessment.

“The problem is that none of the AVSs will come close to needing $1.5B in security let alone $15B. The whole point of Proof-of-Stake is that the value of the stake is higher than the potential profit earned from a validator behaving dishonestly.”

CryptoMoon has approached EigenLayer for comment.

EigenLayer ranks as the second-largest decentralized finance (DeFi) protocol on Ethereum, trailing only behind Lido. The total value locked (TVL) in EigenLayer has grown by more than 16% during the past month, reaching a current value of approximately $14.15 billion, based on DefiLlama’s data.

The problem may grow larger as altcoin values drop because AVSs won’t feel motivated to keep their surplus on-chain funds. A potential response could involve launching several new tokens to boost security budget demands, which might only provide a short-term solution by postponing the issue rather than addressing it directly.

Instead of weaving EigenLayer into DeFi and enhancing the role of LSTs with this integration, Chudnov proposes a long-term solution.

“If [EigenLayer] ecosystem can more deeply entrench itself in the DeFi ecosystem via [Liquid restaking tokens] and financial primitives on top then this is a much more guardable moat and gives AVS’s more time to figure things out at a fraction of the cost.”

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2024-04-22 12:18