EigenLayer's Potential Revenue Crisis: Massive TVL Far Exceeds AVS Requirements, Likely Leading to Significant Decline in Yields
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EigenLayer's Potential Revenue Crisis: Massive TVL Far Exceeds AVS Requirements, Likely Leading to Significant Decline in Yields
EigenLayer promises too much, and is trying to do too many things at once.
Navigating Web3 tides with focused insightsAuthor: chudnov
Translation: TechFlow
EigenLayer is facing a major yield crisis that no one is talking about. EigenLayer has over $15 billion in TVL, yet AVSs actually require less than 10% of that security—meaning yields could plummet dramatically.
First, this is not an article meant to spread FUD. EigenLayer is great technology, and nearly all AVSs are doing impressively productive things. However, EigenLayer has overpromised by opening up a deposit threshold exceeding $15 billion, effectively biting off more than it can chew.
To recap: when users deposit ETH via LRT, it gets delegated to node operators, who then use your ETH to secure AVSs and earn AVS rewards, which are passed back to you.
The problem is that no AVS will ever come close to needing $1.5 billion in security, let alone $150 billion. The entire point of proof-of-stake is that the value of staked assets exceeds the potential profit validators could gain from dishonest behavior.
Do AVSs really need $1.5 billion in security? Cases like EigenDA and Lagrange suggest otherwise.
Ironically, due to capital efficiency from pooled security, actual demand only needs to be the maximum of (security requirements for AVS 1 through n), since all tail-end AVSs can share the security base of the largest AVS. We’re not even discussing attributed security here.
So what’s the solution?
There are two approaches (not mutually exclusive):
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Bottom-up
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Top-down
The bottom-up path is the path of least resistance—and what’s currently being done behind closed doors: forcing AVS teams made up of ZK/FHE PhD researchers to launch junk tokens to justify massive security budgets.
In the absence of real demand, this becomes nothing more than an elaborate wealth transfer with no real utility for ETH.
The top-down approach involves building financial primitives on top of restaking to offset the opportunity cost of holding restaked ETH, and reducing the burden on AVS security budgets by capturing yield from other bases such as money markets and derivatives (organic).
I’m fully in favor of leading future security demand with artificially inflated token-based budgets, kicking the can down the road in hopes that one day these budgets will actually be useful.
However, no one is buying into anyone's token portfolio; if the altcoin market remains flat, every AVS project is destroying its own token just to hold onto capital it doesn’t truly need. It seems time is no longer on the side of token emissions.
Counterintuitively, aligning the utility of restaked ETH with that of native ETH naturally helps prevent outflows.
If the EigenLayer ecosystem can deepen its integration into the broader DeFi ecosystem through LRTs and financial primitives, it builds a more defensible moat and gives AVSs more time to solve their problems at a fraction of the cost.
Here’s a thought experiment: On its current trajectory, aside from brand recognition and the Eigen airdrop, I—as a restaked ETH holder—have no reason not to move my assets to Karak, EigenLayer’s competitor.
Weak moats:
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Brand in the most mercenary industry ever (crypto)
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Inflationary tokenomics. See: DeFi Summer
Strong moats:
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Monopoly over cryptoeconomic systems with organic security demand (AVS vs DSS)
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Deep financialization of the EigenLayer ecosystem within DeFi. See: Lido.
EigenLayer should start accepting this reality and hedge accordingly by actively pursuing both solutions—especially since Karak's DSS might begin using its own altcoin.
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@chudnovglavniy
