The New Paradigm of LSDFI - EigenLayer

Background

Since Ethereum completed The Merge on September 15, 2022, it has transitioned from the original proof-of-work mechanism to proof-of-stake. Users can participate as validators by staking ETH and running nodes, earning rewards while ensuring the security of the Ethereum network. To become a validator, users need to deposit 32 ether into a deposit contract and run three separate software components: the execution client, consensus client, and validator.

For most users, this process still has a high barrier of entry. Consequently, liquidity staking protocols like Lido and Rocket Pool have emerged. Lido and Rocket Pool allow users to stake any amount of ETH. In return, users receive tokenized vouchers, such as stETH or rETH, which operate on similar principles to bonds.

As the staking rate on Ethereum increases, users are seeking additional ways to generate extra income by leveraging the tokenized vouchers obtained through staking ETH. This is where LSDFI comes in as an opportunity.

Current State

As shown in the chart, the ETH 2.0 Staking Rate has been experiencing an overall upward trend, with an accelerated increase from March to May.

Currently, the staking rate of ETH 2.0 is 22.38%, which is relatively low compared to other POS blockchains that often have staking rates of 60% or higher. The lower annualized yield is a significant factor contributing to the growth of the staking rate.

The staking annualized yield of ETH 2.0 is not as attractive as risk-free assets like US Treasuries. However, investors who choose to stake ETH may be looking to hold it for the long term and earn additional returns on their investment.

LSDFi, as a sub-track of Defi, has been widely recognized by the community. The core gameplay in the Defi track is like building with LEGO bricks, where various protocols are stacked together to unlock liquidity and achieve higher capital efficiency and returns. LSDFI plays a crucial role in this process, especially during bullish market conditions, possiably contributing significantly to the overall performance of the Defi ecosystem.

Currently, several LSDFI projects have gained significant recognition and attracted high TVL (Total Value Locked). For instance, Pendle enables LSD holders to trade their future yield. Agility, Lybra, and Raft are well-known lending protocols that allow users to mint stablecoins using their LSD holdings as collateral. Unsheth, Asymmetry, and Index offer users the opportunity to diversify their earnings across various LSD assets. These projects have contributed to the growing popularity and adoption of LSDFI within the Defi ecosystem.

EigenLayer

Recently, within the LSDFI sub-track, EigenLayer has captured the attention of WikiBit due to its impressive TVL surge, rising by 367% within just one month. We believe that this project is worth exploring and understanding further given its significant growth and potential impact within the LSDFI space.

Introduction

EigenLayer is an Ethereum-based protocol that introduces re-staking for native staked ETH or using liquidity staked tokens (LST). Users have the option to participate in the EigenLayer smart contract to re-stake their ETH or LST, thereby extending cryptographic security to other applications on the network and earning additional rewards.

Furthermore, with the help of EigenLayer, Ethereum stakers can enhance security by re-staking their staked ETH and simultaneously opt for various services, offering collective security protection.

In simple terms, the goal of this protocol is to enable other protocols and dApps to leverage the security of the Ethereum network. Does this resemble Polkadot and COSMOS a bit？

Ethereum validators stake ETH tokens to participate in the process of creating and validating blocks, and they strengthen the network's security by having a portion of their ETH seized (slashed) in case of malicious behavior.

EigenLayer takes this concept further by allowing the already staked ETH tokens to be restaked in other protocols and dApps to participate in their validation processes, thereby enabling other protocols and dApps to leverage Ethereum's security to some extent.

During the “restaking” process, the ETH tokens are subject to slashing effects imposed by other protocols as well as Ethereum itself. If validators participating in the restaking process lose their staked ETH tokens due to slashing penalties from another protocol, even if they abide by Ethereum's rules, they will still incur losses on their staked ETH tokens.

Currently, EigenLayer has opened three types of LST (Liquid Staking Tokens), namely rETH, stETH, and cbETH.

After the mainnet launch, EigenLayer set TVL (Total Value Locked) limits for rETH, stETH, and cbETH. On July 12th, the TVL limit for each token was increased to 15,000 tokens, and the staking volume quickly reached the new limit in a short period of time.

Team

EigenLayer is led by Professor Sreeram Kannan from the Department of Electrical and Computer Engineering at the University of Washington in Seattle, Washington. Most of the team members are based in Seattle, Washington. Professor Sreeram Kannan is also the head of the University of Washington's Blockchain Lab, and the initial members of the team come from this lab.

Funding

EigenLayer has completed two funding rounds, raising a total of $64.5 million:

Seed Round: Raised $14.5 million, led by Polychain Capital and Ethereal Ventures.

Series A Round: Raised $50 million, led by Blockchain Capital, with participation from Coinbase Ventures, Polychain Capital, Bixin Ventures, Hack VC, Electric Capital, IOSG Ventures, and others.

Airdrop Expectations

The market has high expectations for EigenLayer's potential airdrops, which may explain the rapid increase in TVL after the protocol opened up the TVL cap. Typically, well-funded Defi projects often conduct airdrops. Additionally, on-chain observations reveal that some addresses that have received significant airdrops are also participating in EigenLayer's staking activities.