Gold or rubbish? How does EigenLayer's business model work?

Question

There has been a lot of buzz surrounding EigenLayer recently. Much of it was a discussion about the EigenLayer re-staking mechanism and the shared security of Ethereum. But there is very little analysis of EigenLayer's overall business model. So how does EigenLayer's business model work? Will anyone use EigenLayer? Can it be profitable? Let’s find out together.

TL;DR

We conducted an in-depth study of EigenLayer's business model. After studying relevant data and information, we came to the following conclusions:

The number of business demand parties (that is, small and medium-sized application chains) that EigenLayer can attract is not too large, and it is very likely that it will gradually decrease in the future.
In the early days, there is a high possibility that AVS (node operator), the main supplier of EigenLayer business, will be attracted to the market because of the profits. However, considering the security risks that come with it, the overall situation of AVS is not optimistic.
Although many users have pledged assets on EigenLayer at present, the number of subsequent users has little room for growth.

EigenLayer is overall overrated. In the long run, EigenLayer's business model cannot achieve sustainable profitability for the early people after their freshness declines.

What is EigenLayer?

EigenLayer is a Restaking protocol based on Ethereum. It can be seen as an intermediate platform connecting stakers, AVS and application chains.

The pledger, namely Restaker, is the user who pledges assets on EigenLayer. *AVS, Actively Validated Services, is a security service protocol integrated on EigenLayer and can be simply understood as a node operator.
Application chain is a small and medium-sized blockchain network with node verification requirements

The main function of EigenLayer is to serve as a platform to connect these three objects. It can:

Provide restaking and ways for stakers to obtain additional staking rewards
Provide pledge assets for AVS
Provide application chains with the opportunity to choose AVS and purchase verification services

What is the business model of EigenLayer?

EigenLayer's business model is built around stakers, AVS and application chains. From the point of view of demand and supply:

EigenLayer Supply and Demand

The specific operation process of EigenLayer business model is as follows:

The user will Restake LSD to EigenLayer.
Restaking assets will be provided to AVS for protection.
AVS provides verification services for the application chain.
AppChain pays for service fees. The fees will be divided into three parts and distributed to stakers, AVS and EigenLayer as staking rewards, service income and protocol income respectively.

EigenLayer business model

Is EigenLayer’s business model profitable?

From the perspective of the entire business model, EigenLayer's main customer base is small and medium-sized blockchain networks with node verification requirements. Its main thing is to use Ethereum's node operators to provide verification services to non-EVM compatible blockchain networks.

In the entire business chain, the income of pledgers, AVS and EigenLayer is provided by these small and medium-sized application chains. Therefore, if we want to judge whether the business model of EigenLayer is profitable, the first question that needs to be discussed is whether there will be an application chain to 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 group:

cost

Non-EVM compatible small and medium-sized application chains need to establish their own trust network and ensure network security by deploying nodes separately. However, the cost of deploying your own nodes is high, which is a certain burden for small and medium-sized blockchain networks. Therefore, they have a need to seek existing third-party node operators to provide them with more cost-effective verification services. The AVS integrated by EigenLayer can provide a more cost-effective verification service market for these application chains.

safety

For non-EVM-compatible small and medium-sized application chains, it is very attractive to obtain the same level of security as Ethereum. EigenLayer claims that it can use LSD as collateral to provide these blockchains with the same level of collective security as Ethereum. This will undoubtedly hit 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. But in terms of security, we believe that EigenLayer cannot actually "rent" the security of Ethereum and provide these application chains with the same level of security as Ethereum.

Regarding the pledge mechanism, EigenLayer mainly uses LSD as collateral to provide protection for AVS. But this does not mean that AVS's verification service can provide the same security as Ethereum. Ethereum's strong security is provided by its large number of nodes and the amount of ETH pledged. It has over 10,000 nodes and 25 million ETH staked. That's why its network is highly secure. However, the verification service purchased by the application chain from EigenLayer, the number of nodes and the amount of pledges cannot reach the same level as Ethereum. Therefore, EigenLayer cannot meet customers' pain points 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 middle and later stages of development and after issuing its own native tokens, there is a high probability that the application chain will switch to using native tokens as pledge assets and establish its own security network. This is inevitable for the development of blockchain networks.

Therefore, for the above reasons, the number of customers that EigenLayer can attract will not be too many, and it is very likely that it will gradually decrease in the future.

Will AVS be integrated into EigenLayer

For supply-side AVS, the benefits obtained from the application chain are an important reason to attract them to EigenLayer.

In essence, AVS integrated in EigenLayer is actually earning extra money. They are equivalent to receiving additional verification work on EigenLayer in addition to completing the verification work of Ethereum. So how much money do these extra verification efforts bring them?

If you refer to the data of Lido Finance, the income that AVS can earn by joining EigenLayer will be between 5% and 10% of the service fee. 10% of the fees charged by Lido will be divided between the node operators and Lido itself. 5% of this is allocated to node operators. However, since EigenLayer is in the early stages of development, there is a high probability that it will implement incentives and allocate a larger proportion to AVS to attract their presence.

However, while EigenLayer brings additional revenue for these node operators. The subsequent additional verification work also increases the security risk of the verification node. In response to this, Vitalik Buterin also expressed the same point of view. He believes that EigenLayer's use of Ethereum node operators to verify other blockchain networks will overload the consensus of the entire Ethereum network. The resttaking mechanism will superimpose risks, thereby affecting the security of the entire network.

Therefore, we believe that there is a high possibility that early AVS will be attracted to the market because of the benefits. However, considering the security risks that come with it, the overall occupancy of AVS is not optimistic. In other words, the extra revenue they gain from Lisk may not be enough to make up for potential losses.

Will there be any users staking assets on EigenLayer

Users choose to stake assets on EigenLayer mainly because of the staking rewards that can be obtained by Restaking and the airdrop rewards that may be obtained in the future.

According to the roadmap released by EigenLayer, EigenLayer is still in the first phase: Restake Mainnet, only the Restaking function of the platform is open. LSD-based node pledge and AVS services are not open yet. That is to say, currently users can only deposit assets into EigenLayer, but there is no pledge reward. And for a long time in the future, that is, before the opening of the Service phase, users will not receive substantial pledge rewards.

EigenLayer Roadmap

However, judging from the data on EigenLayer's official website, there are currently not many users staking assets on EigenLayer. Within more than two months after the mainnet staking function was launched, EigenLayer’s total pledged amount exceeded 177 K ETH. A large part of the reason for this is due to users wanting to become early supporters of the project to receive potential future airdrop rewards. However, although this pie-like method of attracting users can attract a large number of stupid and wealthy users in the early stage, it will begin to lose its effectiveness later on. After all, users cannot obtain any substantial benefits in the short term. This is the deadliest problem.

EigenLayer Restake official website interface

In addition, continuing to analyze from a long-term perspective, holders of LSD assets can completely find node operators to pledge assets by themselves. There is no reason to do it through EigenLayer. EigenLayer is nothing more than eliminating the steps for users to find information and providing them with a platform to connect to node operators. Therefore, unless the pledge reward provided by EigenLayer is high enough, it will not be able to attract too many users to continue to pledge assets on its platform.

Therefore, we believe that although many users have pledged assets on EigenLayer, there is little room for the number of subsequent users to increase.

write at the end

In general, for EigenLayer, the application chain, AVS, and users are indispensable.

EigenLayer business model three-element analysis

From the perspective of the main demand-side application chains, EigenLayer can indeed meet the cost-cutting needs of small and medium-sized application chains, but it cannot meet the security needs. At the same time, the sustainability of application chain demand is also poor.
From the perspective of the main supplier AVS, there is a high possibility that early AVS will be attracted to enter the market because of the profits. However, the security disadvantages brought by the Restaking mechanism may affect the entry of AVS to a certain extent.
From a user perspective, users cannot obtain any substantial staking benefits in the short term, and the unclear staking rewards may affect the subsequent increase in the number of users.

Therefore, we believe that EigenLayer, as the flagship project of Restaking, is "deified" and overestimated. Its business model is insufficient to achieve sustainable profitability for people after their freshness declines.

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