Recently, EigenLayer launched the first phase of the Eigen airdrop activity, attracting significant market attention and being viewed as a leader in the re-staking track of this bull market. Currently, Eigen only has the staking function enabled, with no transfer or trading available. Therefore, whether to participate in Eigen staking is a highly discussed topic in the market.

To help everyone understand, this article will clarify the EigenLayer staking mechanism, the potential rewards from staking, and the associated risks. At the end of the article, the author will also share their thoughts on whether one should stake EIGEN.

Firstly, it is crucial to understand that the EigenLayer staking mechanism is vastly different from the Ethereum mainnet’s PoS staking mechanism. It is more akin to the staking logic of the Cosmos community. From the structure of the staking interface to the marketing of node airdrops, the influence of Cosmos is evident, providing a reference point for strategies from the Cosmos ecosystem.

01 EigenLayer: Ethereum Restaking

Restaking involves reusing ETH already staked on the Ethereum mainnet to support the security of other projects. This allows users to earn returns from their initial staking while also increasing potential rewards by backing additional projects.

Founded in 2021, EigenLayer is a pioneer of the restaking concept. It serves as a middleware platform between the Ethereum mainnet and other applications. By deploying mainnet smart contracts, EigenLayer enables stakers to restake their ETH and ETH staking derivative tokens (LST) on its platform.

Since its launch in June 2023, EigenLayer has seen rapid growth, with the total value staked surpassing $10 billion. This positions it as one of the largest blockchain protocols in the market, with staked value exceeding that of many major decentralized finance (DeFi) platforms like Aave, Rocket Pool, and Uniswap.

Dual Staking

With the introduction of the $Eigen token, the range of assets accepted for staking on EigenLayer has expanded beyond just ETH and ETH LSTs. Now, it also includes $Eigen and staking services for native tokens issued by various future Autonomous Virtual Subnets (AVS).

This is the innovative dual staking concept pioneered by EigenLayer: combining the “restaking” of ETH series tokens with the “staking” of Eigen tokens to collectively ensure the security of EigenLayer.

To understand dual staking, it’s essential first to grasp the concept of Quorum. In EigenLayer’s context, Quorum refers to a set of assets (restaked or staked) used to support the shared security of Autonomous Virtual Subnets (AVS). Node operators can select one or more token Quorums based on the assets staked to their nodes and the design of the AVS.

According to the official description, AVS teams can set the numerical values and asset composition of the Quorum, and these settings are not fixed. They can be adjusted after the AVS goes live to better suit market conditions.

Dual staking’s innovation effectively mitigates network security issues caused by the massive issuance of native tokens in traditional Proof-of-Stake (PoS) networks by introducing more stable assets as security guarantees. By including more stable external tokens like Ethereum, dual staking provides continuous economic support for the network, ensuring the overall security and stability of the PoS network.

Once the network operates smoothly, the staking proportions of the two token types can be adjusted, increasing the native tokens’ proportion to enhance the network’s autonomy and independence. Although dual staking improves the network’s risk resistance and provides project teams with a more diverse set of economic tools, it also introduces new challenges and risks.

Firstly, this mechanism partially undermines the sovereignty of the project token, diminishing the value and utility of the original network token. More empowerment may be needed to counteract the negative impact of reduced sovereignty.

Additionally, the increased flexibility of the staking mechanism introduces some centralization risk. The decisions to modify the Quorum might not be fully transparent or involve broad community participation, potentially leading to centralized decision-making.

In EigenLayer’s context, the native token Eigen has a different unstaking period compared to ETH series tokens within the same dual staking scenario. The EigenLayer mainnet contract sets a 7-day delayed withdrawal period for LST tokens and ETH restaking, while Eigen tokens have a 24-day withdrawal window.

The team explains the differentiated withdrawal times by indicating that Eigen will have more unique features in the future (requiring longer unlock periods). However, it remains unclear what specific features would necessitate Eigen’s unlock period being three times longer than that of ETH series tokens.

Setting such a long unlock period without transparent mechanisms undoubtedly poses significant risks to Eigen stakers.

In conclusion, while dual staking offers economic advancements and provides project teams with high flexibility and scalability, individual investors need to carefully discern and guard against risks. This is especially crucial regarding changes in key protocol parameters and unlock mechanisms, where attention to centralization risks is essential.

02 EigenDA

EigenDA is a data availability storage solution developed by EigenLabs and built on the EigenLayer platform. It has been live on the mainnet since the second quarter of 2024.

EigenLayer’s documentation does not provide specific details on the staking parameters for AVS. However, since EigenDA is the first AVS, we can understand EigenLayer AVS’s staking parameter setup by looking at EigenDA’s parameters.

EigenDA’s active operator nodes on the mainnet and the Holesky testnet are limited to 200. This limitation is due to the cost of bridging EigenDA’s proof of availability to Ethereum L1. It is expected that as technology improves, these costs will decrease, potentially increasing the number of operators.

The documentation specifies minimum staking assets for nodes:

• Operators joining the Ethereum (ETH) group must stake at least 96 ETH.
• Operators joining the EIGEN group must stake at least 1 EIGEN.

Compared to new PoS public chains, EigenDA’s node count is not high and is similar to the Cosmos ecosystem, with a set upper limit on node numbers. In contrast, other well-known PoS public chains do not limit node numbers but set a minimum staking asset requirement. For example, Solana and Avalanche both have over 1,700 nodes, while Ethereum has more than one million validators.

EigenDA limits node groups in both assets and numbers. Under such stringent conditions, it is not surprising that there might be fewer nodes meeting the asset requirements than the AVS’s limit of 200. For instance, currently, EigenDA has only 147 active nodes.

Of course, the number of nodes does not directly correlate with network security; this is provided for reference and comparison.

When the number of operators reaches the upper limit (200), new operators must have a group weight 1.1 times greater than the current lowest-weighted operator to replace that operator.

This brings up a significant challenge and one of the core issues restaking aims to solve:

Ordinary PoS chains can easily verify the native asset status within nodes and autonomously update the set of valid nodes according to the rules. However, EigenLayer is different because the restaked assets are on the Ethereum mainnet, and EL nodes cannot directly access Ethereum mainnet dynamics.

A secure and decentralized method is needed to prove that upper-level nodes meet the requirements. If this cannot be achieved in a decentralized manner, malicious actors could illegally replace legitimate nodes and attack the EL consensus.

The challenge is that using smart contracts to solve this issue is impractical due to the high cost and complexity of sorting or maintaining priority queues on-chain.

To address this problem, EigenLayer introduced a combination of off-chain churn approvers and on-chain smart contract checks. When the network reaches the operator limit, new operators wishing to join can apply for a signature from a “churn approver.” The approver will check if the new operator meets the funding requirements, provide a signature, and the signature and change information will be inputted into the EigenDA smart contract on the mainnet.

While this off-chain signing mechanism provides convenience and flexibility, it also introduces some centralization risks. The off-chain signing process could be affected by the approver’s misconduct or system security vulnerabilities, thus affecting the decentralization and security of the entire network.

Additionally, the documentation does not address the risk of churn approvers going offline. If off-chain validators do not respond to new node requests, EigenDA’s validators cannot be replaced according to the rules, and validators that need to be excluded can still participate in validation, which is a dangerous situation.

Therefore, users need to pay extra attention to any steps involving off-chain mechanisms.

03 Missing Slash & Reward Mechanism and Staking Strategy

The Slash & Reward mechanism is fundamental to all PoS networks, but due to EigenLayer’s rushed launch, the reward and punishment functions are not yet fully implemented.

Everyone is likely familiar with the reward aspect, which includes generating APR and the expectation of airdrops. The punishment part, known as slashing, is more complex. If operators fail to meet their obligations, such as when nodes are down or offline for a period or engage in double-signing, the funds delegated to these nodes by users will incur a percentage deduction. Additionally, the node’s APR emissions might be halted.

It’s important to note that EigenLayer has not released detailed information yet; the description of the reward and punishment mechanism above is inferred from other PoS projects.

In my view, this approach is quite unreasonable because when users participated in restaking, these rules were not in place, and most were unaware of slashing. In the future, if the node they delegated to engages in misconduct or encounters issues, users will lose funds without prior knowledge.

For restaking users considering financial security, it is advisable to spread their stakes across different operators. This strategy mitigates risk, ensuring that if slashing occurs, only a portion of the funds will be affected.

Considering EigenLayer’s ecosystem marketing incentives, choosing the most reputable nodes with point airdrop plans for restaking seems to offer the highest expected returns. However, this incentive mechanism contradicts the fundamental goal of maintaining decentralization.

04 Conclusion

Restaking, an emerging technology, is attracting significant attention both inside and outside the industry. For example, a March 15 report revealed that the co-founder of Lido, the largest Ethereum mainnet staking protocol, and Paradigm are secretly funding a new project named Symbiotic to venture into the restaking field, highlighting the industry trend.

Despite the substantial growth potential of the restaking market, the technical challenges faced by EigenLayer, as discussed in this article, cannot be overlooked. Notably, restaking has not been incorporated into any Ethereum Improvement Proposal (EIP).

Currently, there is no finalized proposal on how the mainnet will handle validators exiting EigenLayer, which introduces uncertainty. The technical imperfections increase the risks of participating in restaking, especially concerning potential asset slashing.

EigenLayer’s design currently focuses more on economic benefits rather than technical solutions. If the technical issues can be resolved, a project with a strong emphasis on economic benefits is likely to yield significant returns.

Overall, EigenLayer shows great market potential and growth prospects in the restaking wave. Although it faces technical and standardization challenges, these are just stepping stones toward growth.

As these issues are resolved, there is reason to believe that EigenLayer will achieve its long-term economic goals while fostering innovation.

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