Plan to Boost ETH Staking Rewards May Grow $152B Sector

In recent years, staking has quietly emerged as a wellspring of profit for the DeFi community. With more than $152B worth of crypto assets locked up to secure Proof of Stake networks, it’s attracting institutional and retail investors alike by offering new ways to earn returns from digital assets.

Now the Proof of Stake movement may kick into another gear. On Tuesday, EigenLayer, a “restaking” protocol, released a plan that would let holders of ETH stake and earn higher returns by performing more tasks than simply tending the Ethereum blockchain.

Game Changer

In its whitepaper, EigenLayer said it was developing a way to enable stakers to add new applications and offerings to Ethereum’s Proof of Stake consensus process. Ethereum, which switched to PoS last September in The Merge, dominates the staking sector with almost $30B in staked capitalization.

Providing or staking tokens to manage blockchains has rapidly become a game-changing new business in crypto. Ethereum stakers lock up ETH in order to run a node and earn fees for validating Ethereum transactions. If a validator submits fraudulent transactions, the network will slash the staker’s ETH both as punishment and to disincentivize others from engaging in malicious conduct.

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The Defiant

As a restaking protocol, EigenLayer sets up a springboard for users to perform other services, or “modules,” besides staking in exchange for fees.

This lets stakers earn extra rewards by using their nodes to validate computation for protocols deployed on EigenLayer.

The document offers many examples of modules suited to using EigenLayer, including cross-chain bridges, oracle networks, data availability layers, new virtual machines, and trusted execution environments.

EigenLayer praised Ethereum for allowing dApps compatible with the Ethereum Virtual Machine — its core smart contract engine — to enjoy the security guarantees of the network’s stakers when deploying code.

“By being fully programmable on the Ethereum Virtual Machine, Ethereum pioneered the concept of modular blockchains, where distributed applications became modules that could be built permissionlessly on top of the Ethereum trust network,” EigenLayer said. “Innovation can come from any DApp developer, but the developer need not be trusted for the safety and liveness of execution of the DApp, since trust is underwritten by the blockchain.”

EVM

However, EigenLayer said that any code module that cannot be deployed on top of the EVM “cannot absorb the pooled trust of Ethereum,” limiting the scope of applications able to benefit from Ethereum’s consensus layer. Many modules aren’t compatible with the EVM because they process inputs from outside Ethereum and cannot be validated by the network.

The document offers many examples of modules suited to using EigenLayer, including cross-chain bridges, oracle networks, data availability layers, new virtual machines, and trusted execution environments.

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The Defiant

“Typically, such modules require actively validated services that have their own distributed validation semantics to do verification,” EigenLayer said. “Usually, these actively validated services (AVSs) are either secured by their own native token, or are permissioned in nature… Restaking vastly expands the space of blockchain applications over which security can be pooled.”

Users can opt-in to restake using EigenLayer by accepting additional slashing conditions on their Ether stake. While restaking allows stakers to earn additional yields on top of their usual rewards by securing AVSs, the profits come with increased slashing risks.

Cryptoeconomic Security

“A core idea of EigenLayer is to provision cryptoeconomic security through various slashing mechanisms which levy a high cost of corruption,” EigenLayer said. “If a staker who is restaked on EigenLayer is proven to have behaved adversarially while participating in an AVS, then that staker’s ETH will be subject to slashing.”

EigenLayer also supports staking through delegation, where users delegate their coins to entities operating EigenLayer operator nodes. This means Ethereum stakers who do not operate nodes can participate in staking in exchange for a small fee.

However, users’ assets are slashed if their delegated operator fails to meet their obligations. “Before delegating to any operator, EigenLayer restakers must do extensive due diligence on the operator to whom they are delegating,” the whitepaper said.

EigenLayer will also retain the right to veto any slashing event as a defensive measure protecting against module code bugs that could slash honest validators. EigenLayer will exercise the veto through multisig governance.

The multisig committee will comprise “reputed individuals in the Ethereum and EigenLayer community.”

“Before the AVS and its related infrastructure and contracts are battle-tested, there are various slashing risks that need to be mitigated in EigenLayer in order to avoid risk cascades,” the whitepaper said. “We think of the slashing veto process as similar to training wheels that will be eventually removed.”

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The Defiant

AVS operators can apply to use the veto committee as a way to assure restakers they will not be vulnerable to unfair slashing, pending approval from the committee. EigenLayer also urged AVS developers to seek security audits to demonstrate that their code is trustworthy to potential restakers.

AVS operators can support a variety of assets for restaking, including liquid staking derivatives, native tokens issued by the AVS operator, and staked ETH.They can also specify conditions for the restakers that secure their module, including requiring that they stake as a solo node to promote decentralization.
EigenLayer compared the role that validators play in its ecosystem to venture capital firms backing early-stage startups.

Merge

“Just as venture capital investments are both essential to innovation and profitable for venture capitalists, the restaking ecosystem of EigenLayer can accelerate open innovation of blockchain applications while increasing profit from contributing to the growth of pooled security,”
Ethereum transitioned to Proof of Stake consensus last September when its PoS consensus layer, the Beacon Chain, merged with its mainnet execution layer. The move booted Proof of Work miners for the network, driving a 90% reduction in ETH issuance and a more than 99.9% drop in the network’s environmental footprint.