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The analyst proposed two potential remedies to EigenLayer’s yield crisis: a bottom-up and a top-down strategy.
A recent analysis by a crypto analyst has revealed a major threat to EigenLayer’s promise of enhanced security and scalability. The analyst chudnov on the X platform stated that an imminent yield crisis on the EigenLayer could potentially cause revenue to “fall off a cliff”.
Looming Threats on EigenLayer
While EigenLayer’s Token-Locking contract boasts an impressive $15 billion in Total Value Locked (TVL), the analyst noted that the Actively Validated Service (AVS) required to secure the network will require only 10% of this amount.
The EigenLayer protocol is an Ethereum (ETH)-based project that aims to improve the network’s Proof-of-Stake (PoS) consensus using a method known as restaking. The EigenLayer team claims to have solved several of Ethereum’s security inefficiencies and a recent report reveals that the protocol boasts more than $13 billion in user deposits.
However, chudnov expressed concern that opening the door to over $15 billion in deposits could be too much for the network to handle. He emphasized that this could lead to a yield crisis, where the supply outstrips the available demand, resulting in a downward pressure on prices.
The analyst’s argument is centered on the discrepancy between the amount of ETH deposited through EigenLayer’s LRT (Liquidity-Restaking Token) and the actual security needs of the AVS nodes.
Although the deposited ETH is delegated to node operators to secure the AVS and earn rewards, the analyst questions whether any of these AVS nodes need large amounts of ETH being deposited for security. As an example, he cited EigenDA and Lagrange, two services developed on top of Ethereum using the EigenLayer primitives that require less capital than $1.5 billion of security.
7/ So, what is the solution?
There are two ways (not mutually exclusive):
1. bottom-up
2. top-down
— chudnov (@chudnovglavniy) April 22, 2024
The Way Forward for EigenLayer
The analyst proposed two potential remedies to EigenLayer’s yield crisis: a bottom-up and a top-down strategy. The analyst’s bottom-up approach suggests that there may be an attempt to artificially create a market for ETH by incentivizing the creation of “shitcoins” that, in turn, require a larger security budget.
According to the analyst, this approach would effectively transform EigenLayer into a pass-through mechanism for a pool of airdrops without any real utility for the deposited ETH.
On the other hand, the top-down approach involves the Eigenlayer team developing financial tools on top of the existing restaking mechanisms within EigenLayer to offset the opportunity costs associated with holding restaked ETH.
The analyst argues that EigenLayer could potentially reduce the burden on the AVS security budget by creating additional financial products and services on top of the existing infrastructure, such as money markets or derivatives. This approach combines financial innovation to drive sustainable and organic growth for EigenLayer.
The analyst is tilted toward the first approach but highlights that it may not be a sustainable one because artificially inflating tokenomics and creating “artificial security demand” can be a short-term solution. He points out that the token prices can suffer if the alt market takes a hit and the excess capital held by the AVS nodes might not be efficiently allocated if the security budget is overestimated.
