EigenLayer Is Facing Major Yield Crisis, Analyst Explains Why

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A crypto expert, identified as chudnov on the X platform, has shared concerns about EigenLayer’s supposed advancements in security and scalability. According to this analyst, an upcoming yield crisis on EigenLayer could lead to a significant drop in revenue.

Looming Threats on EigenLayer

The Tokens-Locking contract in EigenLayer has a large sum of $15 billion locked in, but an analyst pointed out that just 10% of this amount is needed for the Active Validation Service (AVS) to function effectively and secure the network.

The EigenLayer project, which operates on the Ethereum (ETH) network, is designed to enhance Ethereum’s Proof-of-Stake (PoS) consensus mechanism through a technique called restaking. The creators of EigenLayer assert that they have addressed certain security weaknesses in Ethereum. A recent analysis shows that over $13 billion worth of user deposits are held by the protocol.

Yet, Chudnov raised a warning: Accepting more than $15 billion in new deposits might overwhelm the network’s capacity. He highlighted the potential risk of a yield surplus, where the offerings exceed market demand, causing prices to plummet due to the resulting pressure.

The analyst’s point hinges on the difference between the quantity of ETH sent via EigenLayer’s LRT for securing AVS nodes, and the true amount required for adequate security.

The analyst raises doubts about whether all AVS nodes requiring large deposits of ETH for enhanced security is necessary. Two instances, EigenDA and Lagrange, were given as examples, built on Ethereum with lower security requirements than the $1.5 billion threshold.

7/ So, what is the solution?

There are two ways (not mutually exclusive):1. bottom-up2. 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.

Based on the analysis, this method could make EigenLayer function as a conduit for a collection of airdrops, providing no substantial benefit to the deposited Ethereum.

An alternate method is for the Eigenlayer team to create financial instruments above the current staking functions in EigenLayer, allowing them to cover the expenses of keeping staked ETH.

An analyst proposes that EigenLayer might alleviate financial strain on its AVS security budget by introducing new financial offerings, like money markets or derivatives, using the existing infrastructure as a base. By fostering financial ingenuity in this manner, EigenLayer can promote long-term expansion in a sustainable and natural way.

The analyst has a preference for the initial strategy, yet he cautions that it might not last due to potential drawbacks. By artificially boosting token economics and generating “false demand for security,” temporary gains can be achieved. However, this method comes with risks: if the altcoin market experiences downturns, token prices could plummet. Furthermore, if the security budget is overestimated, the excess capital controlled by AVS nodes might not be optimally utilized.

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2024-04-22 14:07