Did EigenLayer's economic model fail?

Original Title: “Eigenlayer's economic model is broken”

Author: Zach Rynes | CLG

Translation: Peisen, BlockBeats

Editor's Note:

After studying the deadlock between Eigenlayer node operators and users, the economic burden of AVS, and the technical challenges faced by oracle systems, @ChainLinkGod points out that the actual operation of Eigenlayer's economic model exposes a series of deep-seated issues, failing to provide a real solution to launch new decentralized infrastructure protocols.

Eigenlayer's economic model has issues

The protocol does not provide a real solution to launch new decentralized infrastructure protocols.

The launch problem is a classic "chicken and egg" issue, as follows:

(1) Node operators will not join and protect the network unless it is profitable for them to do so.

(2) Users will not pay to use the network unless there is already a group of node operators protecting it.

Thus, there is a deadlock where the existence of supply and demand is interdependent.

This deadlock is resolved by issuing new tokens, subsidizing the supply side through token inflation to ensure that joining the nodes is profitable—even before the network itself is profitable.

Then, if the network provides valuable services and the adoption by demand increases, the growth in user fees will eventually replace the subsidies, making the network net profitable.

Protocols launched on Eigenlayer (AVS) still need to be initiated in exactly the same way, but Eigenlayer's characteristics exacerbate the problem:

(1) AVS forfeits the utility of the token, as its natively issued token is no longer the only staking/collateral asset, replaced instead by staked ETH/EIGEN.

(2) Since AVS are not profitable in the early stages, they must pay for staked ETH/EIGEN through inflation of their own token supply—participants lack consistency regarding the AVS token and may sell it to accumulate more ETH/EIGEN.

(3) For any successful AVS, they will need to pass on revenue to ETH/EIGEN stakers, resulting in a net outflow from the protocol as revenue leaves its ecosystem.

This arrangement makes no sense for well-funded or well-positioned projects that do not need to undermine the utility and value of their tokens to attract capital and validators.

Any successful AVS that generates revenue is likely to detach from Eigenlayer to retain more of its own income and accumulate more value for its native token, just as many dApps become their own L2/L3/appChain to capture more fees/MEV.

Protocols will only want to become and remain AVS under the following conditions: (1) their costs are subsidized through EIGEN token inflation, (2) they secure VC funding based on re-staking hype, or (3) they gain benefits through a narrative shift similar to failed L1 transforming into L2.

Aside from the economics, becoming an AVS does not mean users will receive higher quality services or better security guarantees.

Especially for oracles, we can see three major challenges:

(1) DevOps: Are node operators known reliable entities capable of managing high-performance and interference-resistant infrastructure? Can their infrastructure scale to thousands of data sources while maintaining low latency under extreme blockchain network congestion and adversarial P2P network conditions? Can operators identify and resolve issues in a timely manner?

(2) Data Quality: Do operators aggregate data only from high-quality data providers with strict accuracy/availability guarantees? Can the data aggregation methods reflect volume/liquidity-weighted market prices of assets during extreme market volatility? Can network participants identify and resolve data provision issues in a timely manner?

(3) Code Quality: Is the on-chain and off-chain code resistant to manipulation and vulnerabilities? Is there sufficient third-party auditing/review, and how quickly can issues be identified and resolved if vulnerabilities arise?

Eigenlayer does not provide any solutions; therefore, even if an oracle AVS has a large amount of staked ETH/EIGEN, this does not guarantee the reliability, accuracy, or performance of that oracle.

So far, oracles or bridges have not encountered any economic attacks, as the staked collateral is merely an additional security layer (which the protocol could self-provide more effectively).

Eigenlayer's transformation and support for AVS tokens as re-staking assets effectively acknowledges that there are issues with Eigen's core economic model, which has never been reasonable, and they are also trying to find returns on their $12 billion in collateral assets.

In the foreseeable future, Eigenlayer will still be a subsidy revenue pool for ETH stakers.