Newman Research: Interpreting the Ethereum Super Scaling Network EigenLayer

Author: Newman Capital

Current State of the Network

The Total Value Locked (TVL) in the cryptocurrency space is not limited to the Ethereum network. As shown in Figure 1, while the majority of TVL (59%) is on Ethereum, the remaining 41% is distributed across more than 179 blockchains, with the number of developments increasing daily. In our previous article, we highlighted our latest investment - Orb Labs, proposing the concept of a multi-chain future. However, this fragmented liquidity poses challenges for developing new applications. EigenLayer aims to address this issue by providing a solution to supercharge the Ethereum network.

Figure 1: Cross-chain TVL, DefiLlama

Creating new underlying public chains or any applications that cannot be deployed on the Ethereum Virtual Machine (EVM) requires an Active Validation Service (AVS) maintained by native tokens. Taking Solana as an example— as shown in Figure 2, there are over 500,000 unique active stakers and over $8 billion staked in SOL, making the deployment of a new non-EVM Layer 1 extremely capital-intensive. It requires market participants willing to bear the financial or time losses to validate the network.

Figure 2: Data on Solana Validators, SolanaCompass

While networks like Solana and Aptos have substantial venture capital backing, automatically attracting participants willing to validate their networks, many new Layer 1s and dApps do not have this advantage.
In addition to facing startup and capital cost issues, AVS is highly susceptible to attacks due to the need for entirely new validators. For Proof of Stake (PoS) networks issuing native tokens, they must accumulate significant value to achieve sufficient security.
To some extent, because they are built from scratch, the cost for hackers to attack smaller PoS networks is much lower than attempting to attack the Ethereum network. We can refer to Figure 3 in the Eigenlayer whitepaper for illustration.

Figure 3: Comparison of the cost of attacking a single validator versus attacking a pool with integrated security, Eigenlayer

Introduction to Eigenlayer

EigenLayer is a re-staking protocol for Ethereum, recently announcing a $50 million Series A funding round led by Blockchain Capital. For those unfamiliar, EigenLayer aims to aggregate the dispersed trust and liquidity across different networks. Additionally, by introducing a set of smart contracts on Ethereum, EigenLayer allows existing consensus layer ETH stakers to choose to validate new software modules built on the Ethereum ecosystem.

Figure 4: EigenLayer Re-staking

In simple terms, this means that existing ETH stakers can choose to participate and allow smart contracts to enforce additional slashing conditions on their staked ETH. In return, stakers can earn additional income by providing security and validation services for the selected modules. These modules include sidechains, data availability layers, virtual machines, and more.

This establishes a mutually beneficial relationship between developers and validators. By leveraging the relatively secure validators on Ethereum, new AVS do not have to worry about scaling and raising funds for their own validators. Existing market participants also do not need to spread their funds and resources across other networks but can aggregate their liquidity on Ethereum.

This mutually beneficial relationship also creates a hidden effect, aligning the interests of both parties and creating a positive feedback loop. As more teams utilize ETH validators, ETH stakers receive higher returns—more people are incentivized to stake ETH, further enhancing the security of both Ethereum and EigenLayer.

In the words of the EigenLayer team: "EigenLayer is an open market where AVS can rent the aggregated security provided by Ethereum validators."

Risks

The EigenLayer team outlines two categories of risks:

1. Collusion among operators to attack a set of AVS

The reality is that not all ETH stakers will choose to join EigenLayer; some may even opt for different AVS for staking.

For example, if an AVS locks $8 million of re-staked ETH with a TVL of $2 million, a hacker would need to slash at least $4 million of stake to make the attack economically unfeasible. However, if the same amount of ETH is re-staked across 10 different AVS, each with $2 million locked, successfully attacking this group of re-stakers would yield a total profit of $20 million, with only $8 million at risk.

To mitigate this risk, the EigenLayer team proposed two solutions. The first is to add regulations by limiting the total value flow or total transaction value within a certain period.

The second solution is to create an open-source dashboard to monitor the participation of validation workers. By setting certain conditions, such as limiting the number of AVS that can participate, it prevents validators from overly relying on multiple AVS.

2. Accidental slashing due to smart contract risks

The second risk primarily applies to new AVS that have not been battle-tested. When launching new applications, the relevant AVS may have vulnerabilities (e.g., programming errors) that trigger accidental slashing, leading to financial losses.
Like any application on the blockchain, smart contract risks are very common. Therefore, the EigenLayer team has established two lines of defense: auditing and the ability to veto slashing events. While this may seem contrary to the idea of decentralization, the EigenLayer team believes that as the market matures, these measures can be gradually removed. The veto committee will consist of well-known figures from the Ethereum and EigenLayer committees and will not have the power to maliciously trigger slashing. They can only veto slashing when it occurs accidentally. Once an AVS is deemed mature and battle-tested, it can stop using the veto committee.

Conclusion

In our recently published article on liquidity staking, we reiterated our belief in the development of the entire Liquid Staking ecosystem. EigenLayer further amplifies this belief. It creates more economic value for staked ETH, significantly expanding the market for staked ETH.

Although this technology is still in the testing phase, this innovation is exciting as it tightly aligns the interests of users and Ethereum developers. EigenLayer provides market participants with a new opportunity to stake their ETH long-term, generating the aforementioned positive feedback loop.

Figure 5: Trade-off between democracy and speed, EigenLayer

While the Ethereum network currently enjoys democratic and stable development, on-chain innovation is slow. EigenLayer lowers the requirements for launching new applications and ensures the necessary security from the ground up. We believe this product has the potential to pave new paths for improving the democracy, flexibility, and speed of blockchain without sacrificing stability.

This article is the English version translation. In case of any discrepancies or inconsistencies between the Chinese and English versions, the English version shall prevail.

Disclaimer: This article does not constitute investment advice. Newman Capital is not an investment advisor and does not assume legal responsibility. The article and opinions do not constitute investment opinions. We recommend conducting your own research before making any investment decisions. Newman Capital is an investor in Orb Labs and does not hold any interests related to EigenLayer.