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A Comprehensive Guide for Re-stakers
TLDR
Eigen Layer takes decentralization from theology to technology.
Re-stakers are the supply side and AVS are the demand side of the Eigen decentralized risk market
AVS are essentially demanding trust and we break that down into 3 different types Economic, Decentralized, and Trusted block proposer commitments
AVS will demand certain types of tokens for their service
It is important for re-stakers to choose AVSs that have a stable and sustainable business model, pay high APYs, do not have onerous slashing rules, AVSs that aren’t hacked, and provide perks to the re-staker such as airdrops or extra rewards on LP positions etc.
Introduction
Eigen Layer, much like Ethereum before it, is a complex ecosystem. While its complexity may seem daunting at first, a deep dive reveals an elegant design that serves a crucial role in the markets built around it. At Eigen Hub, our mission is to help you to be an informed and engaged participation in the Eigen Layer ecosystem, particularly from the perspective of re-stakers.
Re-stakers in Eigen can be likened to venture capitalists of the decentralized risk market. Your role is multifaceted—evaluating risks, appraising potential rewards, and determining whether the active validated services (AVSs) on the demand side deserve your support. To excel in this role, you should possess a thorough understanding of both the rewards and risks associated with your investment or re-staking decisions. Let's embark on this journey together, delving into the risks and rewards of Eigen's risk market.
Eigen’s Decentralized Risk Market- From Theology to Technology
Re-stakers, as the supply side participants in Eigen Layer, play a pivotal role, but what exactly are you supplying with your ETH? Let's delve into what active validated services (AVSs) borrow from you when you stake your ETH:
Decentralization
Trust assumptions inherent in Ethereum and the slashing contract’s trust assumptions agreed upon between the re-staker, the AVS, and Eigen Layers smart contracts.
Properties of the collateral you provide. Is it native eth or liquid staking token like Lido etc.
Decentralization
Decentralization is a fundamental maxim in both Ethereum and Eigen. It's more than a buzzword; it's a philosophy. While it's primarily enforced socially rather than through code, it's vital for reducing vulnerabilities and fostering trust. Re-stakers contribute to decentralization by utilizing Ethereum's decentralized nodes and participating in the network. AVSs demand decentralization through their node operators and their choice of validators. Some AVSs may require a hundred validators each staking 10 ETH, while others may opt for the opposite end of the decentralization spectrum just one validator with 1,000 ETH.
The Eigen Markets 3 types of trusts
Eigen's decentralized risk market thrives on trust, and there are three key types of trust at play:
Economic trust - A system that is secured by economic incentives and disincentives, gaining and losing money. Usually one party is incentivized to behave well by rewards and disincentivized from misbehaving by loss of funds, both Eth and Eigen do this through slashing conditions. An example would be the zk verification system. This system spends 1 million on gas to write proofs to eth. It does so every 8 hours instead of 8 sec due to gas expenses even though it hurts performance. If there was an AVS functioning as a prover, economically secured by 1 billion dollars through eigen validators, the 1 billion would be slashed if it presented a false proof. You get economic security without the expense of eth L1 proofs, thus better performance.
Decentralized trust- Where the system of trust is such that information or value is sufficiently split among participants that no one participant can control or reveal that information. This type of trust comes into play when the information is extremely valuable in certain circumstances but should remain secret in most others to prevent one entity from controlling the system.
Trusted block proposer commitments (BPC)- Ethereum and Eigen validators are one and the same. Native Ethereum stakers can become Eigen re-stakers, providing block commitments on the main chain. For example, if a loan-based AVS like AAVE needs specific blocks for checking liquidations, it can pay Eigen native ETH validators to reserve that space, improving the efficiency of its liquidation service. A mental model for this is airlines, all the big carriers buy oil/jet fuel through future contracts. The airline goes to an oil producer with a contract stating it will buy 100 barrels of oil from you (the producer) for this price no matter what the price is 6 months from now, guaranteed. The oil producer agrees cause they are happy to have a sure source of income 6 months from now and the airline is happy to have a guaranteed source of fuel at a fixed price. It eliminates volatility risk for both parties. Block space could be sold in a similar way to eliminate volatility risk.
It is also worth mentioning that inherent with Eigen is another type of trust, shared trust. AVSs get this automatically just by participating in Eigen, and every re-staker provides this. Shared security is simply the added security the network gets from pooling Eigen’s total eth and Ethereum total eth as the same eth pool. The security from a larger liquidity pool.
đź’µAVS demand
AVSs require varying degrees of trust and decentralization. Let's quickly identify the type of AVS, its trust demand, and the ideal decentralization model. Once we've done that, we can narrow down the best-fitting tokens.
*While any token might suffice, our predictions lean towards the most optimal choices.
**With Eigen’s innovation like erasure coding, data download requirements for DA are drastically reduced.
Oracles
Light: Oracles often provide real-world data to blockchain systems. Their operations are typically less computationally intensive than other services like Bridges, which might involve complex operations.
High Decentralization (↑): The accuracy of the data is paramount. A highly decentralized system ensures diverse data points, reducing the chances of inaccurate or manipulated information.
Economic Trust: Oracles rely heavily on economic incentives to ensure data providers (oracles) remain honest. If they provide inaccurate data, they risk financial penalties.
Bridges
Heavy: Bridges connect two different blockchains, requiring careful synchronization, complex consensus mechanisms, and secure handling of cross-chain transactions.
Very High Decentralization (↑↑): Cross-chain operations carry significant risks, so a highly decentralized system is crucial for security and robustness.
Economic & Decentralized Trust: Trust in both the economic incentives (rewards and penalties) and a decentralized system ensures no single party can corrupt or control cross-chain transactions.
Sequencers
Light: Sequencers mainly deal with ordering transactions. While important, this doesn't demand the same computational intensity as services like Bridges.
Medium Decentralization: While decentralization is beneficial, it's not as critical as with Bridges or Data Availability services. A balanced approach works well here.
Economic Trust: Incentives ensure sequencers maintain the correct order of transactions. Financial repercussions deter malicious actors.
Data Availability (DA)
Heavy: This service is about ensuring all transaction data is available for validation. Storing, retrieving, and validating large data sets is computationally intensive.
Very High Decentralization (↑↑): Data integrity and availability are critical. A highly decentralized system ensures data isn't lost if some nodes fail.
Decentralized Trust: Trust in the system arises from widespread data storage across nodes, ensuring data availability and resilience.
Side Chains
Medium: Side chains operate their own blockchain but are linked to a main chain. They balance between full autonomy and dependency.
High Decentralization (↑): Being a separate blockchain system, they benefit from decentralization for security and robustness.
Trusted BPC & Decentralized Trust: Side chains require trust in block proposers for accurate data, combined with the inherent trust of a decentralized system on both the native network and the chain they are linked to (usually eth).
Roll Ups
Light: Roll-ups batch multiple transactions into one. While they handle many transactions, their primary task (batching) is less resource-intensive than services like Bridges.
High Decentralization (↑): Batching multiple transactions demands accuracy and security. Decentralization ensures multiple checks and validations.
Economic & Decentralized Trust: Economic incentives ensure validators properly batch transactions, while decentralization offers multiple validation points for added security.
The Art of Token Selection 🪙
Selecting the right token isn't just crucial—it's an art. While Eigen Layer will strive for collateral impartiality after its guarded launch, it's important to recognize the optimum collateral for a specific AVS. Here’s a breakdown of the four major token types, highlighting their benefits and potential drawbacks:
Native Eth
The Gold Standard: Native ETH stands as the network's most secure collateral. Ideal for AVSs seeking maximum economic security.
Versatility: Most AVSs accepting other collateral types will likely accept native ETH, valuing its security and vast shared liquidity pool.
Downsides:
Steep Entry Barrier: Needing 32 ETH to be a native ETH re-staker can deter many potential participants.
For solutions to this like Casimir or DVT-related protocols, see our detailed review (https://www.eigenhub.org/avs-hub/casimir).
Lack of Flexibility: Being exclusively tied to native ETH might restrict opportunities to benefit from other token-specific incentives or rewards.
LSTs (Liquid Staking Tokens)
Variety: Popular tokens include stEth (Lido), rEth (Rocket Pool), and cbEth (Coinbase), with many more in the future.
Accessibility: LSTs offer a convenient collateral acquisition method with potential incentives. There could be on-chain incentives to favor specific LSTs, reminiscent of “bribes” in the Curve ecosystem.
Downsides:
Third-Party Risks: Entrusting intermediaries like Coinbase or Lido introduces an additional layer of risk, as the security and solvency of these entities become paramount.
Regulatory Uncertainty: Depending on the jurisdiction, the classification and treatment of LSTs can vary, which might impact their usage and acceptance.
Token Dilution: Some LST platforms could issue additional tokens, potentially diluting the value of existing tokens.
LP Tokens (Liquidity Provider Tokens)
Double Dipping: Earn rewards not just from staking but also from transaction fees generated by the liquidity pool.
Diversification: By holding a pair of assets in a liquidity pool, stakers can diversify their holdings, reducing the impact of adverse price movements in one asset.
Synergistic Rewards: Some protocols offer compounded rewards, where stakers can earn both from the protocol's native token and from re-staking rewards.
Downsides:
Impermanent Loss: Providing liquidity in decentralized exchanges can expose providers to impermanent loss, where the value of deposited tokens can decrease compared to holding them separately.
Compounded Third-Party Risks: Engaging with multiple protocols increases dependencies, magnifying potential vulnerabilities.
Complexity: Managing LP tokens requires understanding the dynamics of liquidity pools, fee structures, and potential token migrations.
Dual Quorum Staking
Twin Stakes: Requires re-staking for both Eigen and the AVS's native protocol. Offers innovative security models with unique incentive structures.
Enhanced Security: Dual staking systems can offer robust security, as any potential vulnerability would need to exploit both systems to be maximally effective.
Greater Rewards Potential: By participating in two networks, stakers might access multiple reward streams, maximizing their earning potential.
Innovative Designs: This system opens doors to unique security and incentive models tailored to suit both Eigen's and the native protocol's needs.
Downsides
Resource Intensive: Requiring staking on both Eigen and the AVS's native protocol can tie up significant resources, making it less accessible for smaller participants.
Complex Management: Handling stakes on two separate platforms might necessitate a deeper understanding of each system and can increase the administrative burden.
Increased Risk Exposure: By participating in multiple staking systems, participants could be exposed to vulnerabilities or potential issues in both networks, potentially magnifying the risk.
Liquidity Concerns: Having tokens staked across multiple platforms might limit the liquidity of assets, making it harder for stakers to quickly reallocate or liquidate their stakes.
Syncing Challenges: As both systems might have their own updates, maintenance schedules, or changes, ensuring both are in sync or compatible can present additional challenges.
đź”— Links
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