EigenLayer Trust Controversy Review: Investors' Staking Rewards, Lock-up Tricks, and Token Distribution Issues Brought to Light

Author: Nancy, PANews

Shortly after the "airdrop bribery" incident, the top-tier Restaking project EigenLayer faced a trust crisis due to its staking reward rules and false lock-up controversy.

Investors' Staking Rewards Unrestricted Blamed for Token Price Drop

As a leading project with over a hundred million in financing and the ability to attract billions in funds, EigenLayer's token launch naturally drew significant attention. Shortly after the second season of EIGEN reward claims opened, EigenLayer's native token EIGEN officially landed on major trading platforms on October 1. However, the post-launch price increase did not last long, leading to investor dissatisfaction.

According to Coindesk, many community members attributed the issue to the locked EIGEN tokens belonging to early investors who purchased them at a significant discount during funding rounds. They created substantial selling pressure by earning rewards through staking.

On October 2, EigenLayer investor TardFiWhale.eth posted on X, stating that many discussions about EIGEN's circulating supply are inaccurate. Currently, 95 million EIGEN are staked, and many mistakenly believe this portion is all claim tokens; in reality, a significant portion consists of early investors' locked tokens. This is similar to Celestia's approach, where early investors stake their locked tokens and continue to sell the rewards they earn.

Previously, @gtx360ti disclosed on X that Polychain invested approximately $20 million in Celestia's Series A and B funding rounds, and not a single token has been unlocked yet, but they have sold TIA worth over $82 million through staking rewards, achieving more than a 4x return on investment.

Furthermore, TardFiWhale.eth revealed that EigenLayer recently updated its documentation to allow this practice, but this information did not exist two weeks ago. EigenLayer's latest documentation shows that Eigen Labs investors' staking is unrestricted, and staking rewards are not subject to lock-up restrictions.

According to Dune data, as of October 8, the total amount of staked EIGEN exceeded 240 million, with investors staking over 180 million and users staking 5.727 million. From the statistics, the staking scale of investors' EIGEN alone accounts for 76.6% of the total.

Moreover, DeFi researcher Ignas recently pointed out that the amount of EIGEN currently staked exceeds the amount in circulation, with 242 million staked and 186 million in circulation (data from CMC and Coingecko on October 7). This is because EigenLayer allows tokens of investors in a "locked" state to be staked. This is a common issue in the industry; TIA seems to have a similar problem, diluting the staking rewards available to real users and limiting the token's appreciation potential, as the low APY is insufficient to attract people to buy these tokens from the market.

"Transparency will enable us to have a more honest and open discussion about these issues. Personally, I believe that considering the complexity and goals of Eigenlayer, it is reasonable from a governance perspective to allow locked EIGEN investors to stake, but I think the rewards obtained from staking should be locked until the cliff is reached at the end of the 12-month vesting period," TardFiWhale.eth stated, suggesting this to raise industry standards and end the dark "behind-the-scenes trading."

In response, Eigen Labs and the Eigen Foundation issued a disclosure regarding the handling of investor staking rewards, highlighting that the total annual EIGEN rewards provided to EIGEN stakers are limited to 1% of the initial total supply; investors can stake EIGEN and non-EIGEN assets on EigenLayer, and investor contracts require that any rewards must be unlocked; all EIGEN stakers can receive up to 1% of the initial total supply annually, claimable weekly, and it takes a full year to be released linearly. This 1% includes all EIGEN stakers, including investors; Eigen Labs and the Eigen Foundation prohibit their teams from participating for at least one year; investors are not eligible for Stakedrops based on EIGEN staking.

Token Lock-Up Transparency in the Wake of Hacking Incident

However, a hacking incident has pushed EigenLayer into the spotlight.

On October 4, according to Lookonchain monitoring, a wallet sold 1.67 million EIGEN at a price of $3.3 via MetaMask, reportedly these EIGEN tokens were received from the EigenLayer team wallet.

This on-chain operation also sparked controversy within the community. EigenLayer's official response stated that an isolated incident occurred this morning, where an investor's email regarding transferring vested tokens to a custody address was hijacked by hackers. The hackers replaced the specific address, resulting in 1,673,645 EIGEN tokens being mistakenly transferred to the hacker's address. The hacker has sold these stolen EIGEN tokens through decentralized exchanges and transferred the stablecoins to centralized exchanges. The platform is in contact with these exchanges and law enforcement, and some funds have already been frozen.

After this attack, some community members also participated in "rescue" efforts. According to an analysis by SlowMist's founder, Yu Xian, the attacker likely planned this for a long time. The attacker's address first received 1 EIGEN, and about 26 hours later received 1,673,644 EIGEN, all from a 3/5 multi-signature address. Then, over an hour later, various laundering activities began. Gas fees came from ChangeNow, and the illegally obtained EIGEN were mainly exchanged for USDC/USDT, primarily laundered through platforms like HitBTC. The official explanation for the attacker's success was "email was compromised." It is estimated that in the email content, the expected receiving wallet address for EIGEN was replaced with the attacker's address, leading the project team to send EIGEN to the attacker's address.

Despite the numerous crypto security incidents, EigenLayer has exposed issues regarding the unlocking of investors' tokens. In fact, according to the tokenomics disclosed in EigenLayer's documentation, the allocation ratio for investors' tokens is 29.5%, but they must remain fully locked for one year from the date the tokens are first transferred to the community. After one year, 4% will be unlocked monthly, meaning that investors' EIGEN will not be fully unlocked until three years later.

"Why can this investor receive such a large amount of tokens that do not require locking all at once? Is this compliant? Additionally, from Eigenlayer's official address, it can be seen that besides this 'investor,' there were also corresponding token distributions to dozens of other addresses prior to this, and each address I checked also has at least millions of Eigenlayer tokens. So are these addresses also investor addresses?" independent researcher Chen Jian Jason questioned in a post.

@yuexiaoyu111 stated that the hacker's successful attack exposed the existence of the project's insider trading, and it was precisely this insider trading that gave the hacker an opportunity, creating a causal relationship. It is surprising that a project with a luxurious background, a project listed on top industry exchanges, still has such undisclosed, opaque, and under-the-table transactions. It seems that the crypto industry is still far from the compliance level of the traditional financial world, lacking strong oversight.

"These VC projects are essentially stocks issued by companies, and there are no regulatory agencies. Even if 100% of the tokens are in circulation, they can still modify the tokenomics and issue tokens out of thin air, so it's no wonder everyone criticizes them as air tokens. Who will become the regulator to enforce tokenomics? Until this issue is resolved, the tumors of VC tokens will forever poison crypto," @Joensmoon expressed in the community.

Additionally, regarding the transparency and reasonableness of industry token distribution, Chen Jian Jason pointed out, "Currently, there are many issues regarding token distribution in the industry. If this continues, VC tokens will really dig their own graves. I actually do not oppose the founding team and investors selling some tokens; I even think that the one-year lock-up requirement for investor teams is unreasonable, a 'hypocritical' aberration, which will inevitably lead to more outrageous incidents. The reason many project teams engage in self-dealing or secretly obtain some chips is that the one-year lock-up is inhumane. If you want to distribute chips, just say it clearly; as long as it's reasonable, everyone can understand. But the current problem is that there's a facade on the surface while the reality is different, directly breaking everyone's trust. If other projects that would normally follow the rules see Eigenlayer, a 'model student,' engaging in shady practices, how will they feel? They will inevitably follow suit and slack off, leading to bad tokens driving out good ones, and everyone ends up flipping the table and going hungry. So the current issue is not about who runs first or last, but about the unclear rules of the race, and clear rules that are not followed. Moreover, the entire industry's token distribution still has huge problems; unlocking should be linked to more dimensions, such as the project's business and token price, with a powerful and flexible system in place to drive project teams to genuinely work hard and eliminate low-quality projects that treat the crypto space as an ATM."

Due to multiple controversies, EIGEN's price has continued to decline within about a week of its launch. CoinGecko data shows that as of October 8, EIGEN's price has dropped 19% from its post-launch peak, with the circulating market cap falling back to nearly $670 million.