Overview of Restaking Leader: EigenLayer's Business Logic and Valuation Derivation

Author: Alex Xu, Mint Ventures

Introduction

With the completion of the Ethereum Shanghai upgrade, many LSD projects have experienced rapid growth, with a significant increase in the number of users and net value of LSD assets. On the other hand, as the end-of-year Cancun upgrade approaches and the OP stack opens up, today is also a big year for Rollups, and various services surrounding Rollup modules, such as DA layers, shared sequencers, and RaaS services, are thriving. The concept of Restaking, proposed based on LSD assets, aims to provide services for numerous Rollups and middleware, and EigenLayer has seen a continuous rise in attention this year. Not only did it complete a $50 million funding round at a valuation of $500 million in March, but its token's OTC price has recently reportedly reached an astonishing $2 billion, comparable to the valuation levels of public chain projects.

In this article, I will outline the business logic of EigenLayer and attempt to calculate its project valuation, trying to answer the following questions:

• What is Restaking service, who are the customers, and what problems does it aim to solve?
• What are the obstacles to promoting the Restaking model?
• Is EigenLayer's valuation of $500 million, or even $2 billion, expensive?

The content of this article reflects my views as of the time of publication, with more emphasis on commercial evaluation and less on the technical details of the project. This article may contain factual errors and biases and is intended for discussion purposes only. I also welcome corrections from other research peers.

EigenLayer's Business Logic

Before formally outlining EigenLayer's business, let me introduce a few high-frequency terms that will appear in the text:

Middleware: Refers to services between blockchain underlying services and Dapps. In the Web3 field, typical middleware includes oracles, cross-chain bridges, indexers, DID, DA layers, etc.

LSD: Liquid Staking Derivatives, such as Lido's stETH.

AVS: Actively Validated Services, which refers to a distributed node system that provides security and decentralization guarantees for projects, the most typical being the PoS system of public chains.

DA: Abbreviation for Data Availability, which mainly refers to the ability of other projects (such as Rollups) to back up their transaction data on the DA layer, ensuring that all historical transaction records can be accessed and restored from the DA layer when needed.

Business Scope

EigenLayer provides a rental market for cryptoeconomic security.

Cryptoeconomic security refers to the requirement for various Web3 projects to ensure that they operate smoothly while maintaining permissionless and decentralized attributes. This requires the main service providers of the network (validators) to participate in the project through token staking, and if validators fail to fulfill their obligations, their staked tokens will be forfeited.

As a platform, EigenLayer raises assets from holders of LSD assets on one hand, and on the other hand, uses the raised LSD assets as collateral to provide convenient and low-cost AVS services to middleware, sidechains, or Rollups that have AVS needs. It provides demand matching services between LSD providers and AVS demand parties, with specialized staking service providers responsible for the specific security guarantee services of staking.

In addition, the parent company behind EigenLayer has also created a DA layer to provide data availability services for Rollups or application chains that need DA layer services. This product is called "EigenDA," and EigenDA will generate business synergy with EigenLayer.

The pain points EigenLayer aims to solve are:

1. For various project parties: Reduce the high cost of independently building their own trust networks, allowing them to directly pay for staking assets and node operators on the EigenLayer platform without the need to build their own. Source: EigenLayer White Paper

2. For Ethereum: Expand the use cases of Ethereum LSD, allowing ETH to become a network security collateral for more projects, increasing the demand for ETH.

3. For LSD users: Further enhance the capital efficiency and returns of LSD assets.

Business Users

The users served by EigenLayer involve three parties, with corresponding needs as follows:

1. LSD asset providers: These users primarily seek to earn returns on Ethereum LSD assets beyond the basic PoS rewards and are willing to stake their LSD assets as collateral for node operators, facing potential forfeiture risks.

2. Node operators: They obtain LSD assets through EigenLayer to provide node services for projects needing AVS services, extracting profits from the node rewards and fees provided by the project parties.

3. AVS demand parties: These are project parties that need AVS for security but wish to reduce costs (such as a Rollup or cross-chain bridge using LSD assets as collateral for node operators). They can purchase such services through EigenLayer without the need to build AVS themselves.

The demand parties for EigenDA are mainly various Rollups or application chains.

EigenLayer Business Details

Users can re-stake tokens that are staked on the Ethereum network, including stETH, rETH, and cbETH, into the EigenLayer market. Staking service providers are responsible for matching users' tokens with the corresponding security network demand parties, providing AVS services for these project parties, with the underlying assets of AVS being the tokens staked by users in EigenLayer. Project parties need to distribute a certain amount of "security fees" to users.

Product Progress

Currently, EigenLayer has only launched the restake function for LSD and has not yet developed node operation staking and AVS services based on LSD assets. In the two deposit activities that have been opened, deposits quickly reached the limit (depositors are mainly seeking potential airdrop rewards from EigenLayer). Users can also directly deposit 32 integer units of ETH to participate in Restake. Under the limited deposit conditions, EigenLayer has accumulated around 150,000 staking ETH. Image source: https://app.eigenlayer.xyz/

According to the roadmap published by EigenLayer, the main task for Q3 is the development of the Operator testnet (node operator testnet), and the development of the AVS service testnet will officially begin in Q4. https://docs.EigenLayer.xyz/overview/readme/protocol-features/roadmap

The first clear user of EigenDA is the Rollup project Mantle, which is based on the OP virtual machine fork. Mantle is currently using the beta version of EigenDA for its DA.

Token Economic Model

EigenLayer is a project with a token, but its token information and model have not yet been determined and disclosed.

EigenLayer's Team and Financing Background

Core Team

Founder & CEO: Sreeram Kannan

Associate Professor in the Department of Computer Engineering at the University of Washington, and also the founder and controlling person of Layr Labs, the parent company behind EigenLayer. He has published over 20 papers related to blockchain. He completed his undergraduate studies in telecommunications at the Indian Institute of Science and obtained a master's degree in mathematics and a Ph.D. in information theory and wireless communication from the University of Illinois at Urbana-Champaign. He later worked as a postdoctoral researcher at the University of California, Berkeley, and is currently teaching at the University of Washington, where he heads the UW Blockchain Lab. Founder & Chief Strategy Officer: Calvin Liu

Graduated from Cornell University with a degree in Philosophy and Economics. After graduation, he worked for many years in data analysis, corporate consulting, and strategy, serving as the strategic head at Compound for nearly four years before joining EigenLayer in 2022. COO: Chris Dury

MBA from NYU Stern School of Business. He has extensive experience in project management for cloud service products. Before joining EigenLayer, he served as Senior Vice President of Product at Domino Data Lab (a machine learning platform) and held positions as General Manager and Director at Amazon AWS, leading multiple cloud service projects aimed at game developers. He joined EigenLayer in early 2022. Data source: https://www.linkedin.com/company/eigenl/

The EigenLayer team is rapidly growing, currently with over 30 employees, most of whom are based in Seattle, USA.

Layr Labs is the parent company behind EigenLayer, also founded by Sreeram Kannan (established in 2021). In addition to EigenLayer, it also has two other projects, EigenDA and Babylon (which also provides cryptoeconomic security services, but mainly serves the Cosmos ecosystem).

Financing Situation

EigenLayer has undergone two rounds of public financing, including $14.5 million in a seed round in 2022 (valuation unknown) and $50 million in a Series A round completed in March 2023 (valuation of $500 million).

Notable investment institutions include: *Data source: * rootdata.com

In the same period in 2023, its parent company Layr Labs also completed nearly $64.48 million in equity financing. For details, see its filing with the SEC: https://www.sec.gov/Archives/edgar/data/1936115/000156761923004289/xslFormDX01/primary_doc.xml

Market Size, Driving Narratives, and Challenges of Restaking Business

Market Size Forecast

EigenLayer has proposed the novel concept of restaking, providing "cryptoeconomic security as a Service." Its customer base includes middleware (oracles, bridges, DA layers) as well as sidechains, application chains, and Rollups, aiming to solve the pain point of reducing the decentralized network security costs for these projects (compared to building their own trust networks).

In theory, any project that requires token staking as an entry point to maintain network consensus through a game-theoretic mechanism and keep decentralization is a potential user. The specific size of this market is currently difficult to estimate accurately, but optimistically, it could reach a $10 billion level within three years.

As of now, the total amount of ETH staked on Ethereum is $42 billion, with the total market capitalization of projects around $200 billion (all data as of August 30, 2023). The total scale of funds on the Ethereum chain is between $300 billion and $400 billion. Considering that EigenLayer's main customers in the future will still be relatively small and new projects, the scale of staking business for projects served by EigenLayer should be in the range of $1 billion to $10 billion in the short term, compared to the approximately $40 billion PoS staking scale of Ethereum, which is in an absolute leading position.

Driving Business and Expected Growth Narratives

Demand Side:

• The arrival of the Cancun upgrade and the opening of the OP Stack have allowed small and medium-sized Rollups and application chains to develop rapidly, increasing the overall demand for low-cost AVS.
• The modular trend of public chains, Rollups, and application chains increases the demand for cheaper DA layers beyond Ethereum, and the expansion of EigenDA increases the demand for EigenLayer, creating synergy between businesses.

Supply Side:

The increase in Ethereum's staking rate and the rise in the number of staking users provide ample LSD assets and holder scale, with a strong willingness to enhance the capital efficiency and returns of LSD assets. In the future, EigenLayer also hopes to introduce LSD capital beyond ETH.

Issues and Challenges

• For AVS demand parties, how much cost can be reduced by purchasing the combination service of collateral assets + professional validation nodes on the EigenLayer platform? This is difficult to say. Using Ethereum's LSD assets as collateral does not mean directly inheriting Ethereum's security level of tens of billions; in fact, the economic security of the project is determined by the total scale of borrowed Ethereum LSD assets + the operational quality of validation nodes. This may be faster and easier than building AVS from scratch, but the cost savings may not be substantial.
• Using other assets as collateral for AVS may weaken the use cases for their own tokens. Although EigenLayer supports a mixed staking model of the project's own tokens + EigenLayer, it may still create significant obstacles to service adoption.
• Project parties using EigenLayer to build AVS may worry about becoming passive in long-term development due to dependence on EigenLayer, potentially facing "bottleneck" issues in the future. Once the project matures, project parties may switch to using their own tokens as collateral for network security.
• Project parties using LSD collateral as security need to consider the credit and security risks of the LSD platform itself, adding another layer of risk.

Competitors

Restaking is a relatively new concept pioneered by EigenLayer, and there are currently few followers of this model. However, for EigenLayer, its potential customers' comparative options mainly involve building their own security networks or outsourcing security networks to EigenLayer. At present, EigenLayer still needs more customer instances to prove the superiority and convenience of its solution.

Valuation Derivation

As a new type of commercial project, EigenLayer lacks clear benchmark projects and market capitalization. Therefore, we will estimate the project's valuation by predicting its annual protocol revenue and PS.

Before making a formal estimate, we still need to assume a few premises:

1. EigenLayer's business model mainly involves charging a commission on security service fees from AVS service users, with 90% of the service fees going to LSD depositors, 5% to node operators, and EigenLayer taking a 5% commission (this standard is consistent with Lido).
2. AVS service users pay an average of 10% in security service fees for the LSD capital they lease each year.

The reason for choosing 10% is that the annual rewards provided to PoS stakers by mainstream PoS projects are generally in the range of 3-8%. Considering that those using EigenLayer are likely to be newer projects, the initial incentive rate may be higher, so I selected 10% as the average security service fee rate. PoS reward rates of major L1s, data source: https://www.stakingrewards.com/

Based on the above assumptions, I derived the following project valuation range based on the amount of LSD assets lent by EigenLayer and the corresponding PS, where the colored area of the valuation represents the range I believe has a higher probability, with greener colors indicating more optimistic predictions.

The reason I consider the range of "annual lending of LSD assets of $2-5 billion" and "PS of 20-40 times" to be a high-probability valuation range is that:

• Currently, the market capitalization of the top ten public chain PoS staking tokens is around $73 billion. If we include Aptos and Sui, it approaches $82 billion, but most of the staking for these two projects comes from unreleased team and institutional tokens. During the cautious period, I excluded these two outliers. I assume EigenLayer's LSD share can account for about 2.5%-6.5% of the total PoS staking market (note, this is a rough estimate), corresponding to a market amount of $2-5 billion. Whether the 2.5%-6.5% share is reasonable is open to interpretation.
• A PS value of 20-40 times is anchored by Lido's current PS of 25 times (as of August 30, 2023, based on fully diluted market capitalization) and newer narratives may enjoy a higher premium when they first emerge.

Based on the above calculations, a reasonable valuation range for EigenLayer may be $200 million to $1 billion. For primary investors participating in the project at a $500 million valuation, considering various restrictions on token unlocks, they may not have left themselves much safety margin. If there are indeed investors rumored to want to buy EigenLayer tokens OTC at a $2 billion valuation, caution is advised.

Of course, it should be noted that the above valuation is a derivation for the entire EigenLayer project, and the specific market capitalization of the token will depend on its ability to capture value in the business, such as:

1. What percentage of the protocol's revenue will belong to token holders?
2. Besides buybacks and dividends, does the token have relatively rigid application scenarios in the business, increasing demand for it?
3. Will EigenDA share the same token with EigenLayer, providing more scenarios and demand for the token?

If the empowerment of points 1 and 2 is insufficient, it will further weaken the intrinsic value of the EigenLayer token. If point 3 brings unexpected surprises, it will increase the token's value.

Additionally, the market capitalization of EigenLayer at launch will also depend on the market conditions at that time.

Let us wait for the market's answer.