There has been a lot of discussion recently about EigenLayer. Most of it revolves around the re-staking mechanism of EigenLayer and the shared security of Ethereum. However, there are few analyses of EigenLayer’s overall business model. So how does EigenLayer’s business model work? Will anyone actually use EigenLayer? Can it be profitable? Let’s find out.
TL;DR
We have conducted in-depth research on EigenLayer’s business model. After studying the relevant data and information, we have reached the following conclusions:
-
The number of potential business demand for EigenLayer (i.e., small and medium-sized application chains) is not likely to be large, and it is highly likely to gradually decrease in the future.
-
In the early stages, the main suppliers of EigenLayer’s business, AVS (i.e., node operators), are likely to be attracted due to the income. However, considering the accompanying security risks, the overall situation of AVS’s entry is not optimistic.
-
Although there are currently many users staking assets on EigenLayer, there is limited room for an increase in the number of users in the future.
Overall, EigenLayer is overrated. In the long run, its business model cannot achieve sustainable profitability after people’s novelty wears off.
What is EigenLayer
EigenLayer is a Restaking protocol based on Ethereum. It can be seen as an intermediary platform that connects stakers, AVS, and application chains.
-
Stakers, also known as Restakers, are users who stake assets on EigenLayer.
-
AVS, Actively Validated Services, is a security service protocol integrated on EigenLayer, which can be simply understood as node operators.
-
Application chains are small and medium-sized blockchain networks with node validation requirements.
The main function of EigenLayer is to serve as a platform that connects these three entities. It can:
-
Provide Restaking and opportunities to earn additional staking rewards for stakers
-
Provide staked assets for AVS
-
Provide the opportunity for application chains to choose AVS and purchase validation services
What is EigenLayer’s business model
EigenLayer’s business model revolves around stakers, AVS, and application chains. If we understand it from the perspective of demand and supply:
The specific operation process of EigenLayer’s business model is as follows:
-
Users stake LSD on EigenLayer.
-
The staked assets are provided to AVS for protection.
-
AVS provides validation services for application chains.
-
Application chains pay service fees. The fees will be divided into three parts and distributed as staking rewards, service income, and protocol income to stakers, AVS, and EigenLayer, respectively.
Can EigenLayer’s business model be profitable?
From the perspective of the entire business model, EigenLayer’s main customer base is small and medium-sized blockchain networks with node validation needs. Its main purpose is to use Ethereum node operators to provide validation services for non-EVM compatible blockchain networks.
In the entire business chain, both stakers, AVS, and EigenLayer’s revenue are provided by these small and medium-sized application chains. Therefore, if we want to determine whether EigenLayer’s business model can be profitable, the first question to discuss is whether there will be application chains that will use EigenLayer.
Will there be application chains using EigenLayer
First of all, there are two fundamental reasons why EigenLayer attracts non-EVM compatible small and medium-sized application chains as its main customer base:
Cost
Non-EVM compatible small and medium-sized application chains need to establish their own trust network and ensure network security by deploying separate nodes. However, deploying their own nodes is costly and burdensome for small and medium-sized blockchain networks. Therefore, they have a demand to seek third-party node operators to provide more cost-effective validation services. The AVS integrated by EigenLayer can provide these application chains with a more cost-effective validation service market.
Security
For non-EVM compatible small and medium-sized application chains, having the same level of security as Ethereum is very attractive. EigenLayer claims that it can use LSD as collateral to provide these blockchains with the same level of collective security as Ethereum. This undoubtedly hits the pain points of these application chains.
In terms of cost, EigenLayer can indeed meet the needs of small and medium-sized application chains to reduce node deployment costs. However, in terms of security, we believe that EigenLayer cannot “rent” the security of Ethereum and provide the same level of security as Ethereum for these application chains.
In terms of the staking mechanism, EigenLayer mainly uses LSD as collateral to protect AVS. But this does not mean that the validation service of AVS can provide the same level of security as Ethereum. Ethereum’s strong security is provided by its large number of nodes and ETH staking. It has over 10,000 nodes and a staking amount of 25 million ETH. Therefore, its network is highly secure. The number of nodes and staking amount purchased by application chains from EigenLayer cannot reach the same level as Ethereum. Therefore, EigenLayer cannot meet the pain points of customers in terms of security.
In addition, from a sustainability perspective, small and medium-sized application chains will not use EigenLayer for too long. In the early stages of development, these application chains may choose to purchase AVS services from EigenLayer due to cost considerations. However, in the later stages of development and after issuing their own native tokens, there is a high probability that application chains will switch to using native tokens as staking assets and establish their own security networks. This is inevitable for the development of blockchain networks.
Therefore, for the above reasons, EigenLayer can attract a limited number of customers and is likely to gradually decrease in the future.
Will AVS be integrated into EigenLayer?
For AVS providers, the income they can obtain from the application chain is an important reason for attracting them to join EigenLayer.
Essentially, AVS integrated into EigenLayer is actually making extra money. They are not only doing the verification work for Ethereum, but also taking on additional verification work on EigenLayer. So how much income can these additional verification work bring to them?
If we refer to the data from Lido Finance, the income that AVS can earn by joining EigenLayer is approximately between 5% and 10% of the service fees. The fees collected by Lido, 10% of them will be divided between the node operators and Lido itself. Among them, 5% is given to the node operators. However, since EigenLayer is in the early stage of development, there is a high probability that it will implement incentive measures and give a larger proportion to AVS to attract them to join.
However, although EigenLayer brings additional income to these node operators, the additional verification work also increases the security risks of the verification nodes. Vitalik Buterin also expressed the same opinion on this point. He believes that EigenLayer’s behavior of using Ethereum node operators to verify other blockchain networks will overload the consensus of the entire Ethereum network. The Restaking mechanism will add risks, thereby affecting the security of the entire network.
Therefore, we believe that early AVS are likely to be attracted to enter the scene because of the income. But considering the accompanying security risks, the overall situation of AVS settlement is not optimistic. In other words, the additional income they can obtain from the application chain may not be enough to compensate for potential losses.
Will there be users staking assets in EigenLayer?
Users choose to stake assets in EigenLayer mainly because of the staking rewards that Restaking can obtain and the airdrop rewards that may be obtained in the future.
According to the roadmap released by EigenLayer, EigenLayer is currently in the first phase: Restake Mainnet, and only the platform’s Restaking function is open. Node staking based on LSD and AVS services have not yet been opened. In other words, currently users can only deposit assets into EigenLayer, but there are no staking rewards. And for a long time in the future, that is, before the Service phase is open, users will not receive substantial staking rewards.
However, according to the data on EigenLayer’s official website, there are quite a few users staking assets in EigenLayer at the moment. Within the first two months of the launch of the mainnet staking function, the total staked amount in EigenLayer has exceeded 177K ETH. This is largely because users hope to become early supporters of the project to obtain potential airdrop rewards in the future. However, although this pie-in-the-sky way of attracting users can attract a large number of naive users with money in the early stage, it will become weak later. After all, users cannot get any substantial income in the short term. This is the most fatal problem.
In addition, from a long-term perspective, LSD asset holders can completely seek node operators to pledge assets on their own. There is no need to go through EigenLayer. EigenLayer is nothing more than eliminating the step of users searching for information and providing them with a platform to connect with node operators. Therefore, unless EigenLayer provides high enough pledge rewards, it will not be able to attract too many users to continuously pledge assets on its platform.
Therefore, we believe that although many users have pledged assets on EigenLayer at present, there is not much room for the number of users to increase in the future.
Conclusion
Overall, for EigenLayer, the application chain, AVS, and users are all indispensable.
-
From the perspective of the main demand side, the application chain, EigenLayer can indeed meet the needs of reducing costs for small and medium-sized application chains, but it cannot meet the security requirements. At the same time, the sustainability of the application chain’s demand is also poor.
-
From the perspective of the main supply side, AVS, early AVS is likely to be attracted by profits. However, the security risks brought by the Restaking mechanism may to some extent affect the situation of AVS settlement.
-
From the perspective of users, users cannot obtain any substantial pledge income in the short term, and the uncertainty of pledge rewards may affect the subsequent increase in the number of users.
Therefore, we believe that EigenLayer, as the flagship project of Restaking, has been “mythified” and overestimated. Its business model is not sufficient to achieve sustainable profitability after people’s novelty wears off.
Like what you're reading? Subscribe to our top stories.
We will continue to update Gambling Chain; if you have any questions or suggestions, please contact us!
