Bixin Ventures: Why do we invest in EigenLayer?

Original authors: DX, Henry Ang, Mustafa Yilham, Allen Zhao, Jermaine Wong & Jinhao, Bixin Ventures

Blockchain is referred to as a "trust machine," allowing users to build networks without the permission of centralized regulatory bodies (permissionless) ------ Bitcoin is the starting point of everything, as it helps miners reach consensus on value distribution through the PoW consensus mechanism, thereby creating a trust layer where all value transfers occur.

However, one issue with Bitcoin is that it resembles a single application-specific blockchain that only supports transfer functions; other applications like Namecoin need to create their own trust layers to operate, which sets a huge barrier to application innovation. Ethereum's pioneering innovation lies in adding a layer of general-purpose Turing-complete execution (i.e., EVM) on top of Bitcoin's innovation. By separating the application layer from the trust layer, applications can directly deploy their smart contracts on Ethereum and receive security guarantees from the trust layer without having to create their own trust layer from scratch.

After The Merge, Ethereum transitioned from PoW consensus to PoS consensus. Compared to the PoW mechanism, which requires miners to compete in computing power using hardware to reach consensus, the PoS mechanism requires nodes to stake a certain amount of funds to vote for consensus. Honest nodes receive network rewards, and those who violate the rules will be punished. This approach has two benefits:

First, the penalty mechanism can increase the cost of corruption while keeping the profit from corruption unchanged, which helps enhance the economic security of the trust layer.

Second, it implements a more refined governance structure for the protocol over nodes, providing more dimensions of guidance for node behavior while expanding node governance capabilities. For example, Ethereum can dynamically determine the penalty amount for malicious nodes based on the total amount of penalties over a period, increasing the punishment for colluding malicious nodes; or in the inactivity leak mode, when too many nodes go offline such that consensus cannot be reached over four epochs, Ethereum can restore finality by penalizing the funds of offline nodes, ensuring the overall network's activity.

Relying on this mechanism, Ethereum manages the rights and obligations of trust layer nodes more balancedly.

Limitations of Ethereum's Trust Layer

Ethereum's management of the trust layer is based on the penalty mechanism within the consensus protocol layer. When non-Ethereum applications wish to utilize Ethereum's trust layer, they cannot penalize the funds of nodes that violate application rules but comply with Ethereum's consensus rules. In other words, these non-Ethereum applications cannot directly use Ethereum's trust layer as a foundation.

These non-Ethereum applications or middleware, such as oracles or cross-chain bridges, need to create their own trust layers or actively validated service (AVS), which practically raises the innovation threshold and economic burden of the application layer, slowing down the pace of application layer innovation. Different AVSs can also lead to liquidity fragmentation, affecting the economic security of each AVS.

The Answer of EigenLayer

Restaking

In response to the limitations of Ethereum's trust layer, EigenLayer adopts restaking to expand the penalty mechanism of Ethereum's trust layer. By managing the fund retrieval certificates of nodes through smart contracts, EigenLayer creates a new penalty mechanism at the smart contract level.

When an Ethereum validator node participates in verification through EigenLayer, its fund retrieval address will be set to EigenLayer's smart contract. If the node violates the rules of the application layer, EigenLayer can penalize its retrieved ETH through the penalty contract. This penalty mechanism allows the application layer to confirm the rights and obligations of Ethereum's trust layer nodes through smart contracts, making it possible for other applications or middleware to utilize Ethereum's trust layer.

Trust Marketplace

Based on restaking, EigenLayer will establish an open trust marketplace to monetize trust. First, Ethereum trust layer nodes, as suppliers, will determine the transaction content with application layer protocols, as demanders, through a free market mechanism. Second, nodes will decide whether to participate in the verification work of a certain application to earn additional rewards based on their preferred risk-reward ratio and penalty conditions. Application layer protocols can conveniently purchase "trust" through market prices, allowing them to focus on protocol innovation and operations while achieving a balance between security and performance.

Externalities of EigenLayer

Based on the innovative design of restaking and the trust marketplace, EigenLayer's impact on the entire Ethereum ecosystem exhibits both positive and negative characteristics.

Positive Externalities

1) Accelerating Application Layer Innovation

By establishing a trust marketplace, EigenLayer further modularizes the separation of Ethereum's trust layer from the execution layer. Non-Ethereum applications can conveniently obtain trust from the modular trust layer, significantly lowering the financial threshold for building security. This brings enormous benefits to applications and middleware protocols that value economic security, such as oracles, data availability layers, decentralized sequencers, cross-chain bridges, and sidechains, allowing them to focus on protocol innovation and user experience. Similar to Web3 social protocols, when social data is sunk to the data layer, all social protocols can conveniently access the data layer without permission, leading to rapid improvements in application innovation and user experience.

2) Helping Protocol Layer Innovation

Since EigenLayer has a penalty mechanism at the smart contract level that achieves the same effect as the consensus protocol layer, it can create additional rules for nodes to choose to comply with without changing the existing consensus mechanism, achieving a quasi-consensus mechanism effect.

For example, to solve the single-slot finality problem, Ethereum currently uses the Gasper protocol, which can only provide finality for the first block (checkpoint block) in each epoch and cannot provide finality for every slot in the epoch. However, by using EigenLayer, nodes can ensure they continue building along the main chain that includes a certain slot block, allowing each slot to achieve finality, and nodes that violate this commitment will have their funds penalized.

Another example is addressing the partial-block MEV-Boost issue in MEV. Currently, block builders can only submit complete blocks through MEV-Boost, and block proposers can only see the complete block content after signing the block header and ensuring the block is added according to the builder's intentions ------ this is to prevent proposers from stealing blocks for their own profit.

EigenLayer allows builders to submit partial blocks, with the remaining blocks constructed by proposers themselves. If proposers do not include the builder's partial transactions in the final block as agreed, their funds will be penalized by EigenLayer. This way, a broader range of block proposers can participate in block construction and earn partial MEV income, thus curbing the centralization of block builders. Additionally, since more centralized block builders cannot be responsible for constructing the entire block, randomly selected proposers from the consensus mechanism can also participate in block construction, enhancing the censorship resistance of Ethereum transactions.

3) Promoting the Economic Security of Ethereum's Trust Layer

EigenLayer allows Ethereum nodes to choose to earn additional rewards after assessing their risk-reward ratio, which will increase the yield of staked Ethereum, further leading to more ETH being staked, promoting the economic security of Ethereum and the security provided to application protocols, creating a positive feedback loop.

4) Increasing the Decentralization of Ethereum's Trust Layer

On one hand, EigenLayer provides higher staking rewards for individual nodes, incentivizing more people to run their own nodes. On the other hand, application protocols can require that participating verification nodes can only be individual nodes, which can enhance the decentralization of the application as well as the overall decentralization of Ethereum's trust layer.

Negative Externalities

1) Abnormal Penalties Damaging Ethereum's Trust Layer

In addition to normal penalties resulting from rule violations, the entire system may also experience abnormal penalties caused by code bugs or malicious protocols, where even honest nodes may have their staked funds penalized. When abnormal penalties lead to large-scale penalties for honest nodes, the economic security of Ethereum's trust layer will be significantly harmed.

To mitigate this negative externality, EigenLayer has adopted two countermeasures. The first is to reduce risk through strict auditing, and the second is to provide a veto system for penalties, allowing the governance committee to veto penalties through multi-signature, providing a safety net for extreme situations.

2) Trust Leverage Caused by Restaking

In the open trust marketplace, trust layer nodes can provide verification services for different protocols through restaking to earn additional rewards. When trust layer funds provide verification services for applications/middleware layers that accumulate significant value to gain more rewards, it may lead to extreme leverage of trust, making the profit from corruption higher than the cost of corruption, thus reducing the economic security of the trust layer. Therefore, restrictions on node restaking and the balance between trust layer rewards and security need to be more accurately addressed through subsequent practices.

Conclusion

In the future, blockchain will enhance its performance through high modularity and partial outsourcing of responsibilities. What EigenLayer is building is beneficial not only for the entire Ethereum ecosystem but also for ecosystems beyond Ethereum. In addition to the points mentioned above, EigenLayer's positioning is to fundamentally change the current block limit model, becoming a new testing ground that breaks the trade-off between democracy and flexibility in Ethereum by utilizing the surplus resource pool of nodes, thus injecting more possibilities for new business models.

At the same time, EigenLayer is also committed to developing new products, including EigenDA, which is a large-scale data availability layer for Ethereum, aimed at achieving cheaper, more consistent fees, and higher data availability bandwidth. EigenLayer also plans to collaborate with teams like Mantle Network to bring this technology to broader scenarios, and we look forward to seeing how EigenLayer will influence the future development of L2.