Disclosures and footnotes: Coinbase Ventures portfolio company backed projects are denoted with an asterisk (*) when first referenced in the article below.
TL;DR:
EigenLayer* is a protocol built on Ethereum that introduces restaking, a new primitive in crypto-economic security that has emerged as a leading narrative within the Ethereum community.
Restaking via EigenLayer enables developers to leverage Ethereum's existing economic security infrastructure (i.e., validator set and staked ETH) to bootstrap new Actively Validated Services (AVS).
Compared to how traditional cloud platforms and SaaS solutions were transformative to web2 development, we believe the emergence of EigenLayer and its burgeoning ecosystem of AVSs unlocks a "verifiable cloud" paradigm for web3.
As restaking and shared security models evolve, their impact on blockchain ecosystems will become increasingly evident, driven by growing demand from stakers and developers seeking to unlock new opportunities onchain.
What is EigenLayer?
EigenLayer is a protocol built on Ethereum that introduces restaking, a new primitive in crypto-economic security. At its core, EigenLayer consists of a series of smart contracts that allow users to opt-in to "restake" their staked ETH or liquid staking tokens (LST) to bootstrap new proof-of-stake (PoS) networks and services within the Ethereum ecosystem in return for additional staking yield/rewards.
EigenLayer's core objective is to unlock a new era of permissionless innovation and free-market governance by reducing developer complexity when building and bootstrapping these networks from scratch. This is done by leveraging Ethereum's established trust guarantees and economic security infrastructure.
EigenLayer launched in 2023, enabling users to restake their staked ETH or LSTs. As of May 14, 2024, more than 4.9M in ETH (worth ~$15B+) has been restaked into the EigenLayer protocol.
Source: EigenLayer Whitepaper
Why does it matter?
The Ethereum network utilizes a proof-of-stake (PoS) consensus mechanism, in which node operators stake their ETH and run validator software to secure the network (i.e., store data, process transactions, add new blocks to the beacon chain, etc.) in return for rewards (i.e., share of network fees). If a node operator fails to perform their validation function or misbehaves, they risk losing their staked ETH (i.e., slashing).
Now, developers seeking to build a protocol on top of Ethereum that requires external operators would typically need to bootstrap and secure their own PoS network. Doing so is an arduous undertaking that requires developers to design/launch a token, incentivize node operators to stake the token and run validator software, and implement fair reward distribution and slashing mechanisms. Additionally, per EigenLayer, forcing each new protocol to bootstrap its own PoS network fragments the security of Ethereum and siphons value (i.e., in the form of staked tokens) away from the beacon chain.
How does EigenLayer Work?
EigenLayer sought to solve the challenges above by enabling developers to leverage Ethereum's existing validator set and staked ETH from day one via an approach it calls "shared security." Not only do shared security and restaking mechanisms promise to lower entry barriers for developers and foster rapid innovation within the Ethereum ecosystem, but they also aim to create novel avenues for Ethereum stakers to actively participate in multiple networks that require crypto-economic collateral and external operators, thus maximizing their reward potential.
EigenLayer's protocol architecture consists of four key components: restakers, operators, actively validated services (AVS), and AVS consumers.
Restakers: individuals or entities who restake their staked ETH or LSTs to extend security to services in the EigenLayer ecosystem, known as Actively Validated Services (AVS).
Operators: entities that run specialized node software and perform validation tasks for AVSs built on top of EigenLayer in return for pre-defined rewards. Operators register in EigenLayer, allow restakers to delegate to them, and then opt-in to provide validation services for various AVSs. It's important to note that operators are subject to each AVS's slashing conditions.
Actively Validated Services (AVS): any system that requires unique distributed validation methods for verification. AVSs can take several forms, including data availability layers, shared sequencers, oracle networks, bridges, coprocessors, applied cryptography systems, and more.
AVS Consumers: end-users or applications that utilize the services provided by EigenLayer.
The "Verifiable Cloud" for Crypto
Sreeram Kannan, Founder of EigenLayer, is often quoted as saying, "EigenLayer is the Verifiable Cloud for Crypto," but what exactly does this mean? In traditional cloud architectures, centralized entities provide computing, storage, and hosting services to various web2 SaaS solutions. These SaaS solutions are often segmented into two categories: Horizontal SaaS (i.e., software solutions that are generalizable and usually target a broad audience of end-users, regardless of their industry) and Vertical SaaS (i.e., software solutions that target a specific niche, use case, or industry standard).
Compared to how cloud platforms and SaaS solutions were transformative to web2's development, we believe the emergence of EigenLayer and AVSs offers a similar paradigm shift for blockchain ecosystems. EigenLayer aims to provide crypto-economic security services to AVSs (e.g., "web3 SaaS"). Similar to the emergence and broad adoption of SaaS solutions in the web2 context, we see a similar trend of AVSs emerging, driven by increased demand from protocols and dapps.
Overall, EigenLayer's "shared security system" aims to drive rapid innovation onchain while offering enhanced decentralization, trust, and transparency, thus redefining the future of "verifiable cloud" computing.
The EigenLayer AVS Landscape (Today)
On April 9, 2024, EigenLayer launched its Operator and AVS modules on mainnet and is now home to a vibrant ecosystem of operators (200+ as of May 14, 2024) along with a growing pipeline of AVSs expected to launch in the coming months (11 live today). Similar to the traditional SaaS landscape, we expect AVSs to naturally segment into distinct categories (i.e., horizontal and vertical-specific).
This landscape is not exhaustive and contains Coinbase Ventures portfolio companies.
With the above framing in mind, we see the EigenLayer AVS landscape (today) as follows:
"Horizontal" AVSs
Developer Services: frameworks and tooling that help developers build and deploy PoS networks (e.g., AVSs, L1s/L2s, etc) that require shared security infrastructure (e.g., Othentic*, Blockless, Ethos)
Operator Services: services that help AVS operators manage their node infrastructure, validator tasks, and/or staking operations (e.g., Supermeta)
Payment Services: services for managing payment (i.e., AVS rewards) delivery to restakers and operators (e.g., Anzen)
"Vertical" AVSs
Rollup Services: enables the development of foundational services that scale Ethereum (e.g., rollups) while inheriting security from Ethereum’s trust network. Examples include: Data Availability (e.g., EigenDA, NearDA), Shared Sequencing (e.g., Espresso*, Radius), Rollup-as-a-Service (e.g., Caldera, AltLayer), or Interoperability (e.g., Omni*, Polymer*, Hyperlane, Polyhedra)
Decentralized Networks: networks that require distributed validator mechanisms. Examples include Oracles (e.g., eOracle), Proof Verification (e.g., Aligned Layer), DePIN (e.g., WitnessChain, OpenLayer), Security Monitoring (e.g., Drosera), or Smart Contract Policy Engines (e.g., Aethos)
Coprocessors: services that provide developers with cost-effective and verifiable offchain computing capabilities. Examples include Database coprocessors (e.g., OpenDB), ZK coprocessors (e.g., Lagrange, Brevis, Space and Time), Trusted Execution Environments and Encryption Coprocessors (e.g., Automata, Fairblock), or AI Inference (e.g., Ritual)
Applied Cryptography: services for creating robust cryptographic systems. Examples include Fully-homomorphic Encryption (e.g., Fhenix), Multi-party computation (e.g., Silence Laboratories), or Threshold Cryptography (e.g., Mishti Network)
MEV Management: emerging services that allow block proposers to make additional credible commitments on block inclusion and ordering
Application Layer
Atop the AVSs, we expect new onchain apps to emerge that seek to harness EigenLayer's unique economic security properties.
Emerging examples include Rollups, Liquid Restaking Tokens (LRTs) and associated LRTFi apps (i.e., DeFi protocols that use LRTs as an underlying source of collateral), social and gaming applications, decentralized physical infrastructure networks (i.e., DePIN), and identity / privacy-preserving apps.
Future Outlook
As restaking and shared security models evolve, their impact on the blockchain ecosystem becomes increasingly evident. The growing demand from stakers / validators seeking to maximize their yield potential and developers seeking to accelerate innovation at the infrastructure level has the potential to unlock new opportunities onchain. Additionally, while EigenLayer was the first to launch a restaking protocol, we are seeing the emergence of similar mechanisms across other ecosystems: Bitcoin (e.g., Babylon Chain), Solana (e.g., Solayer, Cambrian, Fragmetric), IBC (e.g., Picasso Network*), Omnichain restaking (e.g., Exocore), and Multi-asset restaking (e.g., Karak).
That said, while restaking and shared security models open up many exciting opportunities onchain, restakers need to understand the risks that may occur from smart contract security risks or unintended slashing events. It's worth noting that EigenLayer's slashing and payments (i.e., AVS rewards) mechanisms are not live as of this writing but will launch later this year.
Overall, Coinbase Ventures is excited about the potential of restaking and shared crypto-economic security. If you're building AVS management platforms (i.e., think API management-like platforms for developers to manage their AVS endpoints), AI coprocessors, or MEV management-related AVSs (on EigenLayer or other restaking protocols), we would love to hear from you. JK's DMs are open!
Related work
Coinbase Institutional Research: Restaking: Everything Old is New Again, April 2024
Coinbase Cloud: Guide to EigenLayer, April 2024
This material is for informational purposes only, and is not (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, (ii) intended to provide accounting, legal, or tax advice, or investment recommendations or (iii) an official statement of Coinbase. No representation or warranty is made, expressed or implied with respect to the accuracy of the information contained herein. Coinbase may have financial interests in, or relationships with, some of the entities and/or publications discussed or referenced in the materials. Coinbase does not endorse or approve links or third-party websites that may be provided in the materials.
Subscribe to Coinbase Ventures to receive new posts directly to your inbox.
First