What is EigenLayer? Ethereum’s restaking protocol, explained

EigenLayer, explained

EigenLayer helps remove a major hurdle for novice DApp creators by offering them a reliable security foundation to build upon.

Since its debut in 2015, Ethereum has made significant strides and remains the leading blockchain with a substantial impact. It masterfully switched from the proof-of-work (mining) to proof-of-stake (staking) consensus mechanism, and serves as the base for numerous groundbreaking cryptocurrency initiatives.

One example is EigenLayer, a decentralized Ethereum staking system offering developers a pre-existing secure deposit. The following description outlines the process of staking and other essential aspects in the Ethereum staking mechanism for this project.

The EigenLayer project, which runs on the Ethereum network, aims to enhance consensus mechanisms through a process called Ethereum restaking. The creators of EigenLayer assert that they can address several security weaknesses in Ethereum, including the need for each protocol to handle its own security and scalability independently.

To fully understand the EigenLayer restaking procedure, it’s important to first clarify the standard Ethereum staking process.

What is staking?

“Crypto’s staking function is widely used, allowing traders to earn regular income without actively trading.”

Placing cryptocurrency in a staking contract or pool means keeping it locked for network security. In return, users receive rewards in the form of interest on their invested amount. The size of these rewards increases with the amount staked. Essentially, the network uses the staked funds to strengthen its security.

In Ethereum, significant contributors to the network, known as high-value stakeholders, take on the role of validators who verify transactions and have a say in proposing improvements. This setup encourages these individuals to safeguard the blockchain and avoid malicious behavior due to their substantial investment. The reward system for validators ensures that good conduct is incentivized, as they face penalties if they don’t act in the network’s best interest.

Decentralized staking is considered a more inclusive method of verifying transactions compared to Proof of Work (PoW). In PoW, miners compete to validate blocks and win rewards. To do this, they invest heavily in expensive computer hardware to boost their hash rates, resulting in those with the greatest resources earning the most. As these users accumulate more tokens, it becomes increasingly challenging for new miners to join in.

Paraphrasing: Ethereum staking resembles keeping money in a regular savings account with minimal work required from the account holder. The emergence of staking pools now enables individuals with limited funds to initiate their staking experience.

What is restaking, and how does EigenLayer support it? EigenLayer’s version of staking, called “Restaking,” offers users novel methods to earn passive income and strengthen the network through enhanced security.In simpler terms, with EigenLayer, you can reuse your staked Ethereum (ETH) to enhance security across various protocols. This is achieved by pooling together this “restaked” Ethereum for other decentralized applications (DApps) to utilize. Users have the flexibility to participate in this process either by directly using their staked ETH or through a liquid staking token (LST).When users deposit funds into an Ethereum project, many platforms issue staking tokens as a representation of the invested assets. These tokens serve as proof of ownership and enable users to continue utilizing their resources in various ways, such as reinvesting through EigenLayer via LST restaking without first withdrawing their original holdings.Users have the option to let EigenLayer’s smart contracts manage their previously staked ETH. This process is referred to as “native staking.” By choosing native staking, users enable the network to incorporate their assets into the protocol’s security pool. The safety of EigenLayer depends largely on the size of its security pool.Applications constructed using EigenLayer are referred to as “actively validated services (AVSs)” and can take various forms, ranging from bridges and Decentralized Applications (DApps) to oracles. The process of creating on EigenLayer is cost-effective and time-efficient due to EigenLayer’s existing trust network, established through restakers. In contrast, developing elsewhere necessitates the creation of a new trust network from the ground up.AVSs don’t directly access EigenLayer’s services at random. Rather, there is a mediator known as a node operator who facilitates the network. This operator could be an individual or an organization that has chosen to manage the network. In essence, they function similarly to Ethereum validators.Operators have the flexibility to establish their own Voice Assistants (AVS) or offer services to current AVS platforms, earning incentives. Yet, operators assume responsibility for adhering to an AVS’s penalties if they neglect their duties.In addition, restakers have the ability to act as operators or let operators manage their restaked assets. Regardless, restakers retain ultimate authority over how their assets are utilized. Consequently, EigenLayer establishes a decentralized governance framework. Developers can leverage EigenLayer’s robust security by building on it, while operators and restakers receive remuneration for maintaining this security.

How do restakers manage their restaked assets? EigenLayer streamlines asset management through its EigenPod solution.To get started with restaking on EigenLayer, users need to link their wallet to our app and choose the specific token they intend to stake. For newcomers, an approval step is required before transferring funds to EigenLayer’s restaking agreement.A restaker oversees their staked assets via an EigenPod, which is a custom-made smart contract generated during the restaker’s setup process. Essentially, an EigenPod functions as a centralized platform for the restaker to handle restaking tasks, executions of withdrawals, among other features. Each Ethereum wallet address can have only one associated EigenPod.Users on EigenLayer, known as Restakers, can observe their role in the network by checking their earned restaked points. Every validation of a block, starting from the Restaker’s staking date, results in new restaked points being added to their account. EigenLayer determines the amount of restaked points based on a confidential algorithm that considers both the value of the locked-in assets and the length of the lock-up period. Restaked ETH and LST are treated equally in this calculation process.On EigenLayer, users have the option to withdraw their staking rewards using either a full or partial process. For those who wish to cash out some of their earnings while still contributing to the network, a partial withdrawal is the way to go. This approach involves submitting on-chain evidence and incurring potentially costly gas fees. Restakers are allowed one partial withdrawal every four to five days, and the funds will undergo an extra holding period before being accessible in their wallets.For those opting out, full withdrawals are available as an option. This means relinquishing all staked assets and no longer offering services. The procedure for full withdrawals resembles that of partial withdrawals, which involve on-chain evidence and a holding period for released funds. In case of an unintended full withdrawal, restakers can easily rectify the situation using EigenPod’s “redeposit” feature. Restakers have the flexibility to initiate either process via their EigenPod’s “Unstake” tab.

Pros and cons of EigenLayer

EigenLayer features innovative solutions, though this Ethereum network upgrade also introduces its own problems.

EigenLayer aims to advance Ethereum’s established proof-of-stake mechanism with fresh ideas. In certain aspects, it succeeds in doing so. Yet, its novel approaches may also introduce unforeseen complications.

Pros

Additional passive revenue

Restakers have the opportunity to gain more returns on their staked assets due to the extra uses permitted in this method, contrasting the simpler staking approaches.

Improving developer success rates

With EigenLayer’s security pool in place, new projects no longer face the major hurdle of building trust. This means that developers can concentrate on delivering useful services without having to worry about establishing security.

EigenLayer has the potential to eliminate a major hurdle for new layer-2 projects, paving the way for fresh and groundbreaking innovations.

Cons

Higher barrier to entry

New DApps can securely join the EigenLayer network thanks to its established security measures. However, for users to participate by restaking, they might find it too complicated. On the other hand, many cryptocurrency exchanges offer staking as a convenient service, making node setup and upkeep easier for users. Yet, this ease of use comes with a trade-off: technical expertise is required for those who are already familiar with staking to consider restaking.

Increased risk

In EigenLayer’s Availability Verification System (AVS), the rules for slashing are distinct from conventional staking. This means that validators or “restakers” in traditional staking and restaking platforms, by holding additional assets, increase their risk of penalties twofold if they neglect their responsibilities.

Additionally, stakers are taking on an extra layer of risk by restaking with EigenLayer. They currently rely on Ethereum’s smart contract code when depositing assets for staking. However, restaking involves placing trust in EigenLayer’s development abilities as well. Furthermore, the caliber of EigenLayer’s Automated Validator System (AVS) is another factor to consider.

Luckily, the source code for Ethereum and EigenLayer is openly available. Skilled programmers can examine it prior to investing their assets.