TL;DR
- EigenLayer, the largest restaking protocol on Ethereum with over $15 billion locked, is facing a potential yield crisis due to a discrepancy between the Ether deposited and the actual security needs of its Actively Validated Services (AVS) nodes.
- The yield crisis could escalate as the prices of alternative coins decrease, causing AVSs to lose the motivation to retain extra on-chain funds. Chudnov, a builder at a derivatives exchange, warns that yields could plummet drastically.
- To address this crisis, Chudnov proposes two strategies: a bottom-up approach that involves creating a market for Ether by incentivizing the creation of new tokens, and a top-down approach that focuses on creating new financial instruments using EigenLayer’s current restaking mechanisms.
EigenLayer, which is currently the largest restaking protocol on Ethereum with a TVL of over $15 billion, could be heading toward a significant yield crisis. It seems that the protocol’s Actively Validated Services (AVS) may not be able to keep up with its growth, resulting in a substantial reduction in yield.
The issue arises from the discrepancy between the amount of Ether deposited through EigenLayer’s Liquidity-Restaking Token (LRT) and the actual security needs of the AVS nodes. The AVS nodes require less than 10% of the total Ether deposited for security. This imbalance could lead to a yield crisis, where the supply outstrips the available demand, resulting in downward pressure on prices.
Chudnov, a builder who goes by the name 3Jane at a derivatives exchange, is cautioning that yields could plummet drastically. He goes on to clarify that none of the Automated Verification Systems (AVSs) will require anywhere near $1.5 billion in security, let alone $15 billion.
This issue could escalate as the prices of alternative coins decrease since AVSs will lose the motivation to retain extra on-chain funds.
Proposed Strategies to Address EigenLayer’s Yield Crisis
To address this looming crisis, Chudnov proposes two potential remedies: a bottom-up and a top-down strategy. The bottom-up approach involves artificially creating a market for Ether by incentivizing the creation of new tokens that require a larger security budget.
On one hand, EigenLayer could potentially become a simple pass-through for a variety of airdrops, lacking any meaningful benefit for the Ethereum deposited. On the contrary, the bottom-up approach focuses on creating new financial instruments using EigenLayer’s current restaking mechanisms.
This 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.
The EigenLayer community must address growing challenges to sustain and profit from the protocol. While proposed solutions provide a foundation, the team must innovate and adapt to effectively navigate this potential yield crisis.
