Eigen Layer — What is it and why do we need it?

What problem is Eigen Layer trying to solve?

Bitcoin is an incredibly secure Proof-of-Work blockchain with an army of miners devoting hash power to it. At the time of writing 605.33 million terra hashes per second secure the Bitcoin network.

Ethereum is an incredibly secure Proof-of-Stake blockchain. At the time of writing, 31mn staked ETH (over US$100bn) are securing the Ethereum network.

DApps built permissionlessly on top of Ethereum benefit from its’ pooled proof-of-stake security, i.e. Users only need to trust the underlying blockchain. They do not need to trust the DApp developer to ensure that any transaction on the DApp does not get stuck or reversed.

However, software modules built on top of Ethereum that use inputs from outside Ethereum don’t benefit from Ethereum’s pooled security the way DApps do. Side chains, data availability layers, new virtual machines, keeper networks, bridges, oracles, etc don’t inherit the security of Ethereum and hence need to bootstrap their decentralized validation mechanism. We call these modules Actively Validating Services (AVS)

Not only do these modules not inherit Ethereum’s security but also they make Ethereum less secure. For example, if a DApp built on Ethereum is using services of an Oracle that is secured by only $10mn of stake, then to attack the DApp, one only needs to control 51% of the Oracle stake. At 5% interest, the cost of the attack is only $250k (10mn * 51% * 5%). If the Profit from Attacking the DApp is higher than $250k then the DApp is not secure even if Ethereum is secured by over $100bn worth of stake.

An AVS can bootstrap its security mechanism but that has 2 issues:

1. Building a secure validation mechanism is extremely hard and the time of developers would be better spent on maximizing the utility and features of their products than on bootstrapping security.

2. Every AVS having its own bootstrapped validating mechanism would unnecessarily increase costs for users. The cost of offering the service is likely a fraction of the cost of securing the service. For example, if a Data Availability Service has $10bn worth of locked tokens securing it. At a 5% rate of interest, the capital cost is $500mn. This cost which is likely much higher than the actual operational cost of data storage will be passed on to users.

So how can an AVS reach an acceptable level of security without bootstrapping?

=> Eigen Layer offers a solution — Tap on those already staking ETH and offer them the opportunity to earn additional yield by also securing modules built on top of Ethereum.

Proof-of-Stake works as follows — One earns yield (consisting of block rewards and transaction fees) by performing the function of validating blocks. To get the opportunity to validate blocks, one has to stake ETH. Staking ETH is essentially locking it in a smart contract. This serves as a disciplining mechanism. If validators perform their validating duties honestly and efficiently, they earn a yield. If not, their stake gets slashed i.e. they lose part or all of their locked ETH.

Mobilizing a decentralized quorum of validators is no trivial task - Validators are self-interested entities who want to earn rewards higher than the costs incurred. The major cost in the case of a proof-of-stake module is Capital Cost. Validators may not want to dedicate fresh capital to secure a new module to earn returns in a token of uncertain value. They’re much more likely to be open to securing new modules if they could re-use the capital that they’ve already locked in Ethereum. This will earn them additional revenues with no additional deployment of capital.

This is what Eigen Layer offers. An opportunity to restake the ETH that is already securing Ethereum.

Eigen Layer therefore offers a win-win. Validators earn additional revenues, and new modules don’t need to build decentralised security from scratch.

How does it work?

Modules built on top of Ethereum - register with Eigen Layer allowing restakers to secure them. The modules decide how best to incentivize validators with appropriate rewards while at the same time protecting users by specifying slashing conditions.

Ethereum Validators — download and run additional software required by these modules and opt-in to secure them by allowing Eigen Layer to impose additional slashing conditions on their staked ETH. Their beacon chain withdrawal credentials are set to Eigen Layer Smart contracts. This means that if their actions subject them to slashing, the moment they unstake from Ethereum, the unstaked ETH will be withdrawn to Eigen Layer where it’ll get slashed as per the on-chain slashing contract. Additionally, the moment slashable activity is identified, restakers will be barred from restaking at any other Eigen Layer module.

One issue with the above is that slashing requires stakers to themselves initiate unstaking from Ethereum Core. Unless they unstake, they cannot be slashed by Eigen Layer. This is likely to be a concern till “Smart Contract Triggered Withdrawls” go live on Ethereum.

Eigen Layer allows:

• Native Restaking — Validators restake ETH already staked in Ethereum’s beacon chain
• Liquid Staking Tokens (LST) Restaking — Validators restake LSTs representing ETH staked via staking pools like Lido and Rocket.

(It also allows staking of LP tokens of pairs that include ETH or LSTs but we’ll keep that aside for now)

Delegation

Anyone who wants to restake ETH or LSTs but does not want to take on the technical task of running an Eigen Layer Operator node has the option of delegating tokens to Eigen Layer Operators.

• Outsourcing both staking and restaking of ETH — Eigen Layer Operators take raw ETH, stake it on the Ethereum Beacon Chain and then restake it on Eigen Layer modules. They keep a fraction of the rewards earned on both the Beacon Chain and Eigen Layer and transfer the balance to the delegators.
• Outsourcing only restaking — Some ETH Staking nodes may not have the skills or inclination to run an Eigen Layer Operator Node. In that case, they can continue to stake on Ethereum, keep all the Beacon Chain Rewards with themselves, and earn additional rewards by delegating the staked ETH to Eigen Layer Operators.

Note that not all Eigen Layer modules require heavy computing power. Lightweight nodes would not only be sufficient but also preferred for securing modules like oracles.

Advantages

Eigen Layer offers some additional advantages

• Additional revenues for those with additional processing power — Blockchains like Bitcoin and Ethereum try to ensure that the processing power that a node needs to expend is kept at a minimum. This maximizes the number of entities that can provide validation services, thus reducing the risk of centralization. This means that some validators are sitting on excess processing capacity that remains unutilized. Eigen Layer offers an avenue for those validators to earn additional revenues
• Modules can select restakers with desired features — Some modules might prefer home stakers and not accept staked ETH from any staking pools. Eigen Layer makes such a selection possible

Risks

While Eigen Layer brings several benefits, some risks need to be highlighted:

• Operator Collusion — A validator is unlikely to attack a smaller network if the Profit from Corruption (PfC) is lower than the Cost of Corruption (CoC). One of the advantages of restaking is that if a 51% attack on a module can yield $2mn profit but would cause a loss of $10mn through slashing then no restaker will attack the module. However, if restakers could collude to execute 51% attacks on 10 different modules each of which yielded a $2mn profit then the potential profit ($2mn*10) would be higher than the cost (PfC > CoC) incentivizing an attack

Risk Mitigation — Transparently highlighting the information that a small group of validators together control 51% of multiple modules can give modules time to build protections against operator collusion.

• Unintended Slashing — The slashing mechanism of modules may have bugs that cause slashing even when the restaker executes correctly.

Risk Mitigation — A governance layer consisting of members from Ethereum and Eigen Layer will have the power to veto slashing decisions. This ensures that restakers are not erroneously slashed. Modules will have to opt-in to have this protection. Older modules with well-audited code will over time opt-out and free themselves of this potentially centralizing feature.

• Vitalik Buterin’s blog Vitalik Buterin through a blog post expressed concern about risks that emanate from using Ethereum’s consensus for other purposes.

This post was spoken about in the media as if it was a criticism of Eigen Layer. After reading the post, I learned that Vitalik’s analysis of Eigen Layer features is that they’re “low risk”. As long as validators and modules on Eigen Layer do not expect that Ethereum will be forked if something goes wrong, Vitalik comes across as supportive.

Why Restaking is superior to Merge Mining

Restaking takes inspiration from Merge Mining in Proof-of-Work blockchains.

• Merge Mining is when the hash power securing say Bitcoin can be used simultaneously to secure another network. The most popular live example of Merge Mining is Dogecoin which piggybacks off Litecoin’s hashpower.
• With Restaking, the Stake or Capital securing a proof-of-stake blockchain is used to secure additional networks.

One flaw with Merge Mining is that it doesn’t carry a real penalty when the smaller network is attacked. For example, if miners decide to attack Doge, the original hashing equipment securing Litecoin as well as the Litecoin in the miner balance sheet will continue to be as valuable. (Note that this example should be reversed as Doge today has a higher market cap than Litecoin)

Restaking on the other hand ensures a strong penalty for bad behavior in the smaller network with the attackers losing the capital staked in the larger network. In other words, the cost of corruption is substantial with restaking.