IOSG: EigenLayer Reshapes the Re-staking Model and Returns

Written by: Siddharth Rao, IOSG Ventures

Introduction to EigenLayer

About a year ago, EigenLayer embarked on a journey aimed at enhancing the understanding of network security in a new paradigm, giving rise to the concept of "re-staking." In short, ETH validators can now secure multiple networks, including foundational layers like DA layers, computational networks, and middleware like shared sequencers. Essentially, any network requires some form of consensus without needing initial capital to ensure security. These networks are referred to as Actively Validated Services (AVS) on EigenLayer.

Without EigenLayer, anyone wanting to operate a system (e.g., DA) would need to invest in the necessary hardware and initial staking. This forces projects that require a collection of validators to issue tokens at very high (sometimes unreasonable) valuations to obtain rewards with high inflation. This can lead to large-scale speculative sell-offs, which are detrimental to validator operators.

Admittedly, there is a risk of leveraged liquidation for single operators, but there will always be well-performing validators looking to gain some extra yield.

EigenLayer allows for local re-staking of Ethereum by creating EigenPods or using liquid staking tokens (LSTs) like stETH, rETH, and cbETH to secure AVS networks. Anyone holding LSTs is effectively a contributor to Ethereum's security and decentralization and earns rewards from the Ethereum network. Further staking of LSTs provides security for AVS networks in exchange for AVS rewards. Therefore, LST re-stakers will be eligible for network rewards (minus operator fees).

If staking and re-staking are beneficial, why is it liquid?

If you believe in Ethereum's liquid staking, you will also recognize the value of liquid re-staking. Ethereum's liquid staking actually involves two parties: Lido and retail participants. Retail participants might say, "I don't have enough ETH, hardware, or even the time to operate a validator, but I want my ETH to earn more." Staking companies would respond, "I can help you; I take a portion of the rewards as an operating fee and do so in a completely transparent manner."

This eliminates five expenses for the public: hardware costs, hardware maintenance, time, energy, and mental space.

For EigenLayer, in addition to the aforementioned expenses, there are additional delegation costs. In Ethereum, every node operated by an operator is "interchangeable," meaning the network treats each node the same, regardless of whether it runs on bare-metal infrastructure, in the cloud, or elsewhere.

For EigenLayer, there is a network that secures other networks, and each operator in the network can choose which other networks they wish to validate. This essentially means that no two operators are the same. Therefore, experienced teams or associations wisely select operators with good strategies to address retail participants' concerns.

The "Liquid" Part

There are opportunities throughout the year to earn ETH yields higher than any staking protocol on Ethereum.

If you focus solely on yields, there are approximately 1,748 ways to earn higher yields on your ETH.

The real value lies in the almost "risk-free" yield, referring to the least risky ways to earn ETH. For liquid tokens, the lower the risk, the greater the likelihood that the LST will be listed on other protocols, enhancing composability and increasing demand for LSTs. All of this starts with trust, which is the lowest risk.

For LSTs, risk assessment is not that difficult. You have operator-based risks (operator shutting down the validator, operator quality, hardware quality, etc.) and network-based risks (smart contract risks). The consensus mechanism for all risks is the same, and the minimum hardware requirements for all operators are also the same.

In re-staking, there are more factors to consider, primarily including hardware requirements (whether scaling is needed), security audits of AVS, real-world testing of new consensus mechanisms, the economic model of AVS itself, and the types of supporters (investors, partners, etc.) that AVS attracts. Just the 15 AVS running on EigenLayer alone present 32,767 possible strategies. We cannot expect retail investors to make educated decisions.

Retail participants will not do this; if they simply mimic any operator's strategy and are liquidated, it will lead to a loss of trust, affecting the network's liquidity. If operators launch their own LSTs, it will lead to excessive fragmentation or over-concentration of staking in the early stages. Even if multiple operators use the same strategy but have different Liquid "re-staking" tokens (LRTs), it will also lead to unnecessary fragmentation. A unified strategy with decentralized operators' common LRT is crucial for EigenLayer's success.

This ensures a positive feedback loop of "minimum risk," which can be viewed as:

Best risk management → More liquidity → Most whitelisted → Most utilized → Most liquidity → Most popular → Lowest risk

It is the lowest risk because being liquidated from 1 ETH among 100,000 validators is far less risky than losing 1 ETH from 1 validator. This is why people still choose to stake with Lido. Lido recently experienced a liquidation event where over 20 validators each lost about 1.1 ETH (totaling around 20 ETH). While their infrastructure partners absorbed the loss, this was negligible compared to Lido's 8.83 million staked ETH. This highlights the importance of having trustworthy partners.

How Does Liquid Re-staking Work?

Users send their LSTs/ETH to the liquidity re-staking platform's fund pool contract. Re-stakers will receive an equivalent amount of LRT (Liquidity Re-staking Token). The contract then allocates these tokens to the strategy management contract within the EigenLayer protocol. The strategy management contract delegates these tokens to node operators and ensures that the node operators adhere to the strategy. The governance of LRT can choose specific strategies. Operators validate the underlying AVS and retain a portion of the rewards. The remainder is then transferred to the LRT protocol, which takes a portion and ultimately distributes the rest to re-stakers. This is clearly more extractive than LST (liquid staking tokens), but the workload and maintenance require more resources.

How Attractive Are the Yields?

We do not know how AVS (Actively Validated Services) incentives will be distributed, nor do we understand how each consensus mechanism will operate. However, based on some basic written mathematical calculations, here are several possible scenarios that are relevant for calculating EigenLayer yields.

Considering FDV (Fully Diluted Valuation), referencing the last known FDV data of projects, those project tokens may launch at higher valuations, making yields significantly more attractive. Conservatively, we assume that the FDV values of all partners announced on the EigenLayer ecosystem page are the valuations from their last funding round. As of October 19, EigenLayer's TVL (Total Value Locked) was approximately 172k ETH, with Lido's base yield around 3%. According to our calculations, there are approximately $62 million in emissions (both affected by TGE prices and emissions, which is a conservative figure, i.e., 2.5% of token supply and FDV), roughly equivalent to an average of 9% APY enhanced yield, potentially totaling 12%.

In a more aggressive scenario, the boosted yield APY could reach up to 15%. Of course, these are based on assumptions, and if the discussion goes deeper into the calculation methods, feel free to DM me on Twitter (@Rao_Sidd).

LRT Ecosystem

• Ion Protocol: A lending protocol that allows borrowing assets using LSTs and LRTs;
• Renzo: A platform dedicated to liquid re-staking. Accepts all EL LSTs (EigenLayer Liquid Staking Tokens) and ETH in exchange for their LRT ezETH (Liquid Restaking Token ezETH);
• Rio: A platform dedicated to liquid re-staking. Accepts all EL LSTs and ETH in exchange for the platform's LRT reETH;
• Puffer Finance: A DVT-based LRT protocol;
• Inception LRT: An LRT protocol focused on ensuring the security of L2s;
• Swell: An LST protocol that is also creating its own LRT. Swell's LST is also a candidate for EigenLayer re-staking's JokerAce competition;
• Stader Labs: Stader Labs also has its own LST ETHx and is creating its own LRT;
• Genesis LRT: Provides customized LRTs, allowing each client to create their own LRT based on their desired risk configuration, primarily aimed at large clients and institutions entering the space;
• Astrid Finance: Uses a rebase model, allowing users to earn rstETH, rrETH, or rcbETH based on what is staked in the pool and the user's balance, with the balance automatically adjusting as rewards accumulate;
• KelpDAO: Similar to the models of Renzo and Rio;
• Ether.Fi: Allows users to deposit only ETH into the fund pool in exchange for the platform's LRT eETH.

How Might the Future Space Evolve?

In this space, to become a true winner, one must start by establishing the highest trust. LRTs will also follow the same positive feedback loop as LSTs. Risk management is the most crucial factor in attracting re-stakers, liquidity providers, and partners.

At some point in the future (timeline undetermined), yields may be slightly higher than ETH yields, but this will depend on the design and usage of the underlying AVS's economic model. The use of AVS may become the choice for users to obtain the lowest risk yield on Ethereum, which is a combination of Ethereum's consensus rewards and AVS yield rates.

Mantle recently staked 40,000 ETH to Lido from BitDAO's funds, which means they will receive a significant amount of stETH in the foreseeable future, potentially listing it on Mantle, with some also being re-staked on EigenLayer (when the supply cap of LSTs is increased). For example, if Mantle chooses to use EigenDA as the DA layer, they will greatly favor the lowest risk strategy, as these AVS protect the treasury while supporting Mantle's overall strategy and goals.

Mantle can also encourage the use of their platform's LST: mntETH, and establish a matching LRT (Liquidity Re-staking Token). This will help Mantle effectively utilize its funds while helping to ensure the security of the DA layer they commit to. The fees earned can be returned to their users as Gas.

Due to the competitive environment, a power law will play a role (the competitive landscape of the market tends to favor a "winner takes all" model), with the top 1-2 protocols ultimately controlling 80-90% of the market. I believe that only those protocols fully focused on developing this market will have a chance to succeed, as this market requires highly concentrated investment. It is also possible that some large LST protocols may integrate upstream in the supply chain like Swell, but there are currently no further signs of this.

The availability of LRT protocols on the market from day one is also crucial. The greatest trust in the retail market comes from TVL (Total Value Locked). Projects that can attract good TVL on the first or second day of EigenLayer's launch may become leaders in the foreseeable future.

There will always be those pursuing high yields, especially high-risk investors. With the broader adoption of LRT protocols, there will be more DeFi integrations, and many strategies will unlock exponentially, potentially creating a positive flywheel effect.

We believe that over time, all operators will choose to use more similar strategies and achieve the lowest yields. This will primarily depend on the new and old designs of the underlying AVS and its economic model. To avoid too many large LST whales and liquid staking protocols controlling EigenLayer, there are controls at the protocol level. If re-staking yields become increasingly low-risk, liquid staking protocols will become the power center in the Ethereum ecosystem. This can be mitigated by early adoption of a version of "governance proof" from Jon Charbonneau's concept.