EigenLayer's Rapid Growth Poses Potential Yield Crisis, Deeper DeFi Integration Suggested as Solution
Summary:
EigenLayer, Ethereum's biggest restaking protocol, may be on the brink of a substantial yield crisis due to its rapid growth outpacing its Actively Validated Services (AVS). According to industry observer, Chudnov, EigenLayer's total value locked (TVL), which is more than $15B, may cause a sharp fall in yields, as the AVS only requires less than 10% of that for security. Concerns worsen as declining altcoin prices could disincentivize AVSs from retaining surplus on-chain capital. Solutions may involve deeper integration into the decentralized finance network and enhancing utility for liquid staking tokens.
EigenLayer, Ethereum's largest restaking protocol in terms of total value locked (TVL), may be on the verge of a significant yield crisis, warn industry experts. The rapid increase in EigenLayer's TVL suggests that the protocol is outpacing its Actively Validated Services (AVS), creating a potential for a significant decrease in yield, according to an analyst known as Chudnov from the 3Jane derivatives exchange. He pointed out in an April 22 post that while EigenLayer has over $15B in TVL, the actual requirement for AVS security is less than 10%, hinting at a potential sharp drop in yields.
EigenLayer's April 16 announcement mentioned the removal of restrictions on all liquid staking tokens (LSTs). The protocol was introduced on the mainnet on April 10. Users staking an LST via EigenLayer have it automatically assigned to a node operator, responsible for securing an AVS on EigenLayer and receiving staking rewards, a portion of which is shared with the user. But, less staked Ether is needed for security by the Actively Validated Services on the protocol. This disparity, as per Chudnov, could lead to problems in the near future.
As cited by Chudnov, “The key premise of Proof-of-Stake is that the stake value must outweigh the potential profits from a validator behaving dishonestly.” Requests for comments from EigenLayer have been initiated by Cointelegraph.
EigenLayer, the second largest Ethereum protocol after the liquid staking protocol Lido, has seen a rise of over 16% in TVL in the last month to the present $14.15 billion, as per DefiLlama. The issue could worsen if altcoin prices decrease as AVSs would lack incentive to hold excess on-chain capital. A possible initial fix could involve launching several tokens to augment security budget requirements, but this would only momentarily postpone the problem.
Creating deeper ties for EigenLayer within the DeFi (Decentralized Finance) network and enhancing utility for LSTs could offer a lasting solution. Chudnov highlighted that, “If EigenLayer integrates more extensively into the DeFi ecosystem using Liquid restaking tokens, then this will build a much better line of defense, offering AVS more time to strategize at a fraction of the cost.”
Published At
4/22/2024 12:06:45 PM
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