Eigen Layer holds more than $20B in reported value: Riskier than meme tokens?

Eigen Layer launched solely two months in the past on the Ethereum mainnet. Since then, the protocol reported fixed inflows of collateral deposits, reaching $20B. Skeptics view the deposit frenzy as much like meme tokens.

Learn: EigenLayer on the Fringe of Potential Yield Disaster

Eigen Layer nonetheless hinges on tokenless earnings, however these are based mostly on provable reserves. The supply of Eigen Layer worth is staked ETH, which is then used for securing new initiatives.

Eigen Layer doesn’t consolidate deposits and distributes them amongst a number of Actively Validated Providers, every with totally different guidelines. The aggressive AVS already reveals a set of leaders with the best liquidity.

Nonetheless, The Eigen Layer ecosystem is drawing in new initiatives that promise greater rewards, potential airdrops, and extra yield farming alternatives. Eigen Layer and AVS aren’t inherently dangerous or leveraged, however they’ve turn out to be linked to a dangerous atmosphere.

Eigen Layer holds the danger of the EIGEN token efficiency. The Eigen level market can be simply starting to indicate its worth. The alternatives to promote Eigen factors are nonetheless restricted. Solely Kelp DAO has tried to tokenize factors. Moreover, every AVS could reward its personal factors, which nonetheless want a market to find out their worth.

Can Eigen Layer endanger Ethereum’s safety?

Eigen Layer’s preliminary thought was to reinforce Ethereum’s safety whereas additionally providing safety to a brand new array of initiatives. Basically, restakers give entry to Eigen Layer, which is able to then have the appropriate to “slash” their staked ETH within the case they don’t fulfill their trustworthy validator companies.

To date, Eigen Layer has not signaled any liquidations or losses, and the slasher good contract reveals no exercise. The most important threat comes from AVS initiatives that are themselves coping with dangerous DeFi, particularly high-leveraged yield farming.

Eigen Layer itself holds a a lot decrease threat of slashing. In accordance with Eigen Layer paperwork, the large threat comes from protocols that subject Liquid Restaking Tokens. Eigen Layer itself doesn’t create leverage, however the issuers of LRT can try this.

Liquid staking protocols are for customers who maintain some ETH however not the 32 ETH required to stake immediately. Each Ethereum and Eigen Layer will quickly attain their restrict for including validators and prohibit new individuals. This makes LRT protocols the one technique to each achieve passive earnings from ETH whereas preserving a liquid place.

The issue is that finish patrons could open positions throughout a number of protocols. With that dependency, any risk-taking or worth crash may cause ripple results throughout LRT issuers, in addition to AVS initiatives, Eigen Layer and hypothetically, the principle Ethereum community.

Such an occasion remains to be seen as a “black swan”. Related over-leveraged occasions additionally precipitated the fallout of Terra (LUNA), the place loans have been used to create new belongings and use them as safety for different loans. Within the case of Eigen Layer, there’s a hypothetical risk for the same contagion occasion.

LRT protocols battle for dominance

Liquid re-staking protocols embody Ether.fi, Kelp DAO, Renzo, Puffer, Swell, Eigenpie and others. Eigen Layer itself has not endorsed any of the protocols and warned customers to do their very own analysis earlier than partaking.

Additionally learn: Pendle Finance Regains Management: Swift Motion versus the Unauthorized Use of Property

In complete, the liquid staking market has expanded to $67B market capitalization, even after a current correction. The preliminary feeding frenzy of recent launches has handed, and at this stage, separate protocols are combating for prime positions.

Greed could drive customers to protocols like Pendle, which additionally attracts in vital investments from TRON’s founder, Justin Solar.

Pendle additionally hosts new tokens, the place risk-takers can present liquidity to construct decentralized buying and selling pairs. Pendle’s worth locked has additionally gone exponential since Could and has now grown to $6.7B. To match, Solana’s DeFi is now all the way down to $4.75B. Pendle additionally redirects deposit funds to different protocols like Aave and Compound, probably making a contagion chain in different DeFi layers and swimming pools.

Thus, the present collection of LRT issuers has displaced a lot of the older DeFi kinds, promising larger rewards.

Cryptopolitan reporting by Hristina Vasileva