NAIROBI (Coinchapter.com) – EigenLayer, the largest restaking protocol on Ethereum by total value locked (TVL), could face a “major” yield crisis due to its rapid growth outpacing the security needs of Actively Validated Services (AVSs), according to a pseudonymous builder at 3Jane derivatives exchange.

Potential Yield Reduction Looming

EigenLayer’s dominance in the restaking sector is undeniable. However, its total value locked (TVL) surging past $15 billion has created a problem – this massive amount of capital dwarfs the amount necessary for secure operations. The result? Potential yield reductions for anyone who’s staked their assets on EigenLayer.

EigenLayer. Source: DefiLlama

Since its mainnet launch on April 10, 2024, EigenLayer has quickly become a major player in the DeFi world. The April 16th decision to allow all liquid staking tokens (LSTs) further fueled this expansion. However, too much capital is now chasing limited security needs, potentially leading to unsustainable yields for users.

This situation highlights the challenge of balancing rapid growth with yield sustainability. With only around 10% of EigenLayer’s TVL required for security and a limited number of active addresses (667 in the last 24 hours), finding a solution to maintain attractive yields will be crucial for the protocol’s future success.

Solving the EigenLayer Yield Crisis

In an April 22 X post, Chudnov proposed two potential solutions: bottom-up and top-down. The bottom-up approach involves forcing AVSs to launch tokens to prop up security budgets, which he described as “kicking the can down the road.”

Chudnov’s post on X

The bottom-up approach involves forcing AVSs, comprised of researchers in areas like zero-knowledge proofs and fully homomorphic encryption, to launch their tokens. This temporary solution could prop up the security budget but may ultimately become an elaborate pass-through for airdrops with no real utility for the staked Ether.

The top-down approach focuses on building financial primitives on top of liquid staking. By integrating EigenLayer into the decentralized finance (DeFi) ecosystem and creating more utility for LSTs, the protocol could source yield from other primitives like money markets and derivatives. This organic approach could provide a more sustainable solution to the potential yield crisis.

“If [the EigenLayer] ecosystem can more deeply entrench itself in the DeFi ecosystem via [Liquid restaking tokens] and financial primitives on top, then this is a much more guardable moat and gives AVS’s more time to figure things out at a fraction of the cost.”

Chudnov stated

EigenLayer’s juicy yields depend on its ability to be more useful. Integration with DeFi is key. Without this, yields could drop dramatically, hurting users and Ethereum’s liquid staking scene.

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Filed under: Bitcoin - @ April 23, 2024 1:07 am