Quick Overview of the EigenLayer Whitepaper: Restaking, Free-Market Governance, and Slashing...

2023.02.24

Quick Overview of the EigenLayer Whitepaper: Restaking, Free-Market Governance, and Slashing...

This article focuses on the core aspects of Eigenlayer, including its fundamental principles, operational mechanisms, security guarantees, governance framework, application scenarios, and commercial prospects.

2023.02.24 - 05:30:49

EigenLayer

Navigating Web3 tides with focused insights

Author: Bixin Ventures

On February 21st Beijing time, Eigenlayer—long anticipated and widely regarded by top-tier research and investment institutions as Ethereum’s most significant innovation in 2023, potentially opening a new narrative for Ethereum—finally released the V1 version of its whitepaper.

EigenLayer is a re-staking protocol built on Ethereum. Ethereum validators can use EigenLayer to re-stake their staked ETH and earn additional rewards. At the same time, it enables Ethereum's consensus layer security to be extended to various middleware, data availability layers, sidechains, and other protocols, allowing them to benefit from Ethereum-level security at a lower cost.

Bixin Ventures has conducted an immediate analysis of this long-awaited whitepaper, focusing on EigenLayer’s core aspects including fundamental principles, operational mechanisms, security guarantees, governance framework, application scenarios, and commercial prospects. We will continue to publish deeper analyses on EigenLayer—follow our Twitter and Medium column to receive timely updates on in-depth project insights and primary research.

With the release of the whitepaper, EigenLayer also plans to host a community Space tomorrow at 9 AM PT, where participants can ask questions and learn more about EigenLayer.

1) Fragmented Trust Networks

Currently, thousands of decentralized applications (DApps) are built on Ethereum, and the ecosystem continues to grow. The value foundation of a trusted decentralized infrastructure lies in the fact that developers can deploy DApps without relying on reputation or trust, enabling anyone who trusts the underlying blockchain to adopt and verify them. Rollups represent a key direction for scaling Ethereum: they do not execute transactions using the EVM but ultimately settle back on Ethereum. Although different Layer 2 solutions employ distinct security verification methods, users generally trust Ethereum-based Layer 2s.

However, any module not deployed or proven on the EVM cannot leverage the security of Ethereum’s trusted base layer—such as sidechains based on new consensus protocols, data availability (DA) layers, new virtual machines, oracles, and trusted execution environments (TEEs). These typically require building their own independent AVS (Actively Validated Services) and assuming responsibility for their own system security. The current AVS ecosystem faces several drawbacks:

Building a new AVS means establishing a new trust network, which is no easy task;
A new AVS forces users to pay not only Ethereum transaction fees but also additional AVS-specific fees, leading to value leakage;
For validators, joining a new validation system entails opportunity costs and increased risk exposure;
The current AVS model weakens security for some DApps. Specifically, DApps dependent on middleware inherit risks from both Ethereum and the middleware’s trust assumptions, increasing vulnerability since attacking the middleware is relatively cheaper.

2) Re-staking and Free Market Governance

EigenLayer introduces two novel concepts—re-staking and free market governance—to extend Ethereum’s security to external systems and improve governance efficiency.

Re-staking

EigenLayer allows users to re-stake ETH already staked on Ethereum onto EigenLayer. This re-staked capital can then secure services such as data availability layers, oracles, middleware, and Layer 2 networks. Validators providing these security and validation services are rewarded accordingly.

Free Market Governance

EigenLayer allows validators to freely choose which modules to participate in based on their own risk preferences, provided they ensure security. This governance model offers two key benefits: first, it integrates the stability of the base blockchain with faster and more efficient innovation; second, the opt-in validator model allows new modules to compete for resources among validators, better balancing security and performance.

AVSs on EigenLayer can rent security services from Ethereum validators, offering the following advantages:

A new AVS can enhance its economic security through Ethereum validators.
The overall cost of leveraging Ethereum’s security is minimized.
EigenLayer’s security model increases the cost of attack (up to $13 billion).
Value accrual: ETH stakers earn revenue from AVS operations.

Overview of the EigenLayer Whitepaper: Re-staking, Free Market Governance, and Slashing...

2.1 Support for Multiple Staking Models

EigenLayer supports multiple staking models similar to Lido’s liquid staking and superfluid staking. Superfluid staking even allows staking of LP tokens. Specifically:

Direct staking: ETH staked on Ethereum is directly re-staked into EigenLayer.
LSD staking: Assets already staked via Lido or Rocket Pool are further re-staked into EigenLayer.
ETH LP staking: LP tokens from DeFi protocols are re-staked into EigenLayer.
LSD LP staking: For example, stETH-ETH LP tokens from Curve are re-staked into EigenLayer.

2.2 Delegators

For those interested in EigenLayer but unwilling to operate nodes themselves, EigenLayer allows them to delegate their rights to node operators. These operators stake tokens on Ethereum and distribute a portion of the earnings back to the delegators. EigenLayer provides two models:

Direct staking mode: Stakers provide validation services and can either join AVS directly or delegate operations to other operators while continuing to validate for Ethereum themselves.
Trust mode: Users select trusted operators. If the chosen operator fails to perform as agreed, the delegator may face penalties. Additionally, delegators must consider fee-sharing ratios with operators, which could give rise to a new market. Each EigenLayer operator will deploy a delegation contract on Ethereum specifying how fees are distributed to delegators.

3) Slashing

3.1 Slashing Mechanism Design

Cryptoeconomic security quantifies the cost of attacking a network, known as the “Cost-of-Corruption.” When the Cost-of-Corruption exceeds the potential Profit-from-Corruption, the system achieves strong security. EigenLayer’s slashing mechanism increases the Cost-of-Corruption, making the network more secure.

3.2 No Homogeneous Tokens as Staking Receipts

EigenLayer does not issue fungible tokens as staking receipts because each user may have different delegation choices and thus different slashing risks. Moreover, using fungible tokens to represent all positions transparently could lead to conflicts between position holders and node operators.

3.3 Similarities and Differences with Merged Mining

The concept of re-staking in EigenLayer resembles merged mining seen in Bitcoin/Namecoin, Bitcoin/Elastos, Bitcoin/RSK, and Litecoin/Dogecoin. Merged mining saves costs because miners can simultaneously mine different PoW blockchains under the same cryptographic mechanism. For PoS blockchains, the main cost for validators is capital staking, and re-staking allows staked capital to be utilized across different execution layers.

However, the similarity ends there. Suppose a significant portion of validators on both PoS and PoW chains also validate smaller chains (i.e., merged mining in PoW, re-staking in PoS). If they launch attacks on smaller chains (e.g., signing incorrect state roots causing cross-chain asset issues), two scenarios arise:

In a re-staked PoS chain, fraud proofs can be submitted on the main chain for incorrect state transitions, and malicious validators’ stakes can be slashed.
For PoW chains, even if all major chain miners engage in merged mining, there is no significant cryptoeconomic security. The key reason is the lack of slashing: we cannot render malicious miners’ hardware useless or remove it—their hardware retains value.

Overview of the EigenLayer Whitepaper: Re-staking, Free Market Governance, and Slashing...

3.4 Risk Management

Two types of risks exist in EigenLayer:

Multiple operators may collude to attack a set of AVSs;
AVSs may have unforeseen slashing vulnerabilities, such as honest nodes being incorrectly penalized.

3.4.1 Operator Collusion

In practice, only a subset of operators choose to join any given AVS, and some may collude to steal funds from a group of AVSs, leading to complex attacks.

One solution is to limit the potential profit from corrupting any specific AVS. This depends on AVS design. For example,
- Bridges can cap value transfers during a slashing window,
- Oracles can limit total transaction value within that period, etc.
Another solution is for EigenLayer to actively increase the Cost-of-Corruption for AVSs. EigenLayer can create an open-source dashboard allowing AVSs to monitor whether operators participating in their validation tasks are also re-staking in many other AVSs. AVS contracts can then incentivize only those EigenLayer operators involved in a limited number of AVSs.

3.4.2 Accidental Slashing

Before AVSs and their associated infrastructure and contracts are battle-tested, many slashing risks must be controlled to prevent compounding risks. One such risk is accidental slashing vulnerabilities (e.g., code bugs) introduced during AVS creation, which could result in honest operators losing funds.

We propose two solutions:

Security audits: AVS codebases must undergo audits similar to smart contract audits.
Slashing veto power: EigenLayer features a governance layer composed primarily of key members from the Ethereum and EigenLayer communities, capable of using multi-signature control to veto slashing decisions.

3.5 Governance Framework

EigenLayer employs a reputation-based committee for governance, consisting of prominent figures from the Ethereum and EigenLayer communities. This committee is responsible for upgrading EigenLayer contracts, reviewing and vetoing slashing events, and permitting new AVSs into the slashing review process.

AVSs can leverage this committee to assure re-stakers that they won’t suffer malicious or erroneous slashing. Meanwhile, AVS developers can conduct real-world testing of their codebases. Once mature and trusted by re-stakers, an AVS can discontinue reliance on the committee. New AVSs on EigenLayer may initially require committee-led security audits and due diligence, including verifying system requirements for validators serving the AVS.

3.6 Maximizing Security While Minimizing Centralization Risks

We note that maximum security for an AVS is achieved when all ETH re-staked via EigenLayer is used to protect it. However, two obstacles remain:

Whether the expected income offered by the AVS to operators exceeds operational costs;
Whether operators possess sufficient computational resources to participate in AVS validation.

EigenLayer proposes two possible module designs to mitigate these concerns:

Hyperscale AVS: In a hyperscale AVS, total computational workload is distributed across all N participating operators. This reduces storage costs and per-node throughput demands, while the system achieves high throughput by aggregating performance across multiple nodes.
Lightweight AVS: Some tasks are computationally inexpensive and can be redundantly executed by operators, such as verifying zk-proofs.

4) EigenLayer Ecosystem

4.1 Enabling New Application Scenarios

By providing AVS services, EigenLayer can support a wide range of protocols, including: data availability layers, decentralized sequencers, lightweight bridges connecting to Ethereum, faster bridges between Rollups, oracles, event-driven activation functions, MEV management, low-latency sidechains, and helping Ethereum achieve single-slot finality.

4.2 Leveraging Heterogeneity of Stakers to Greatly Expand Block Space

Ethereum nodes vary in computing power, risk-return preferences, and characteristics:

To maintain decentralization, block limits are often set according to the weakest node. Higher-performance nodes can use EigenLayer to contribute excess resources to other protocols.
Nodes with higher risk tolerance can choose higher-risk, lower-liquidity, but higher-yield protocols to validate.
Combined with verifiable credentials, SBTs, and other technologies, different protocols can select more suitable nodes based on node characteristics.

4.3 Breaking the Trade-off Between Democracy and Flexibility

Ethereum upgrades currently progress slowly through robust off-chain democratic governance. EigenLayer enables rapid deployment of innovations atop Ethereum’s trusted layer, acting like a testnet to experiment with and gain experience for future mainnet innovations—thus avoiding the trade-off between fast innovation and democratic governance.

4.4 Advancing Decentralization of Ethereum Stakers

EigenLayer creates a monetizable market for AVS decentralization. AVSs can specify that only individual Ethereum node operators (home validators) may participate in tasks, helping maintain decentralization. At the same time, individual node operators earn extra income, incentivizing more users to run personal nodes and enhancing Ethereum’s overall decentralization.

4.5 Supporting Multi-Token Validator Quorums

EigenLayer allows a protocol’s AVS to run alongside re-staked ETH validator quorums. For example, Protocol A can define two quorums: one requiring re-staked ETH, and another requiring staked protocol token $A. A proposal is accepted only when both quorums agree. This mechanism gives utility to $A, enabling value accrual for the protocol.

4.6 Business Models

Protocols using EigenLayer can adopt various business models:

Pure wallet model: A protocol deploys an AVS on EigenLayer to offer services. Users pay fees, with revenue split between the protocol’s wallet and ETH re-stakers on EigenLayer.
Tokenized fees: A protocol deploys an AVS, users pay fees for services, and revenue is shared between protocol token holders and ETH re-stakers.
Native token payments: A protocol deploys an AVS, users must pay in the protocol’s native token, with revenue shared between token holders and ETH re-stakers.
Double-token staking: A protocol specifies two quorums—one staking ETH, the other staking its native token. This gives utility to the protocol token and protects economic security even if the token price drops.