Welcome to Elaborate VC! Today, I’m highlighting Eigenlayer, a restaking protocol based on Ethereum’s Proof of Stake model that allows ETH stakers to restake their ETH on different protocols. Through Eigenlayer, other protocols can essentially borrow the security layer from the largest and most secure and decentralized Proof of Stake network, Ethereum, to use as their own so that they don’t need to bootstrap their own consensus network. This will allow for the development of new protocols that can experiment on new networks without bootstrapping their own consensus layer.
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Statistics:
Total Funding: $64.4M
Stage: Pre-Seed/Seed/Series A
Investors: Figment Capital, Breyer Capital, Polychain, Ethereal Ventures, Wave Digital Assets, Coinbase Ventures, dao5, Blockchain Capital, Ambush Capital, Eclipse, TRGC, WAGMI Ventures
Current Team Size: 9+
Website: eigenlayer.xyz
Thesis: Ethereum was to Bitcoin as Celestia will be to Ethereum. And Eigenlayer builds on top of Celestia’s idea, repurposing Ethereum’s already staked security network.
As described in my previous investment memo about Celestia, I believe the development of a neutral data availability and settlement layer that will allow any app-chain or execution layer to build on top of it will pave the way for innovation in faster and more efficient execution layers. Innovation in blockchain execution environments has been held back because of the monolithic paradigm. Right now, in order to test a new execution environment, users need to bootstrap an entirely new blockchain, which is extremely time-intensive, difficult, and expensive. As stated before, this is similar to Ethereum’s case before Ethereum was introduced. Although Bitcoin uncovered the possibilities for decentralized dApps, there was no general purpose blockchain to build the dApps on. As a result, users had to create an entirely new blockchain just to test a new dApp. With the introduction of Ethereum, users could now build and run dApps without needing an entirely new blockchain.
In the same manner, Eigenlayer allows users to build new blockchains and execution environments without needing a new consensus and data availability layer. Additionally, Celestia aims to provide its own data availability layer and bootstrap its own consensus layer while Eigenlayer simply borrows Ethereum’s already built and secured Proof of Stake network. This will make it much easier for Eigenlayer to bootstrap itself while also being provably more secure than any currently existing network or other network that Celestia could build up now. I think it’s reasonable to say that Celestia’s own consensus layer’s Total Value Locked (TVL) would not surpass Ethereum’s TVL.
Solution: Eigenlayer aims to allow users who have staked their ETH in Ethereum’s Proof of Stake network to restake their ETH in another protocol(s) of their choice. This allows ETH stakers to earn additional yield on top of Ethereum fees and tips while also allowing other protocols who have issues bootstrapping a community of their own that is both decentralized and secure to leverage Ethereum’s network. If executed to vision, Eigenlayer will be a paradigm shift in the crypto industry as many protocols will no longer need to bootstrap their own community, which often times are smaller, less decentralized, and less secure. Moving forward, protocols would be able to tap into Ethereum’s Proof of Stake network for their own decentralized and secured validators through Eigenlayer.
Protocols like execution layers (Fuel Network) and app chains will also be able to use EigenDA, Eigenlayer’s data availability layer, to post data on-chain. Furthermore, Eigenlayer’s settlement layer, EigenSettlement, will allow for the different execution layers that run on Eigenlayer to settle upon the same layer. This would allow multiple execution layers to share liquidity and be interoperable, avoiding fragmentation in a modular blockchain ecosystem.
Team: The Eigenlayer team is led by founder, Sreeram Kannan, Chief Operating Officer, Chris Dury, and Chief Strategy Officer, Calvin Liu.
Sreeram Kannan is the founder of Eigenlayer and currently an Associate Professor at the University of Washington, Seattle, and the Director of the UW Blockchain Lab. He was a postdoctoral scholar at University of California, Berkeley and a visiting postdoc at Stanford between 2012-2014 before which he received his Ph.D. in Electrical Engineering and M.S. in mathematics from the University of Illinois Urbana Champaign.
Chris Dury is the COO of Eigenlayer with experience founding, advising, and investing in early stake startups including Salut, a streaming fitness community, Apsalar, a mobile marketing platform (sold to Singular); Ooma, a cloud phone service (IPO); Prove Identity, a mobile authentication service; and Tempo AI, a smart mobile calendar (sold to CRM).
Calvin Liu is the CSO of Eigenlyayer with experience as Strategy Lead of Compound Labs (Compound Finance, $COMP) and is still investing alongside Divergence Ventures, a crypto-focused venture fund who has invested in protocols including Frax, Lido, Compound, Gitcoin, Offchain Labs, etc.
Sreeram Kannan was initially interested in Peer-2-Peer (P2P) wireless networks at one time during his PhD from 2006 to 2011 for applications outside of the blockchain. However, in January 2018, his friend was at the Princeton Blockchain Center and invited Kannan to work in crypto because of his past expertise in P2P networks. Kannan remained skeptical but after reading Harari’s “Sapiens”, he saw blockchain networks as a way to remove the barriers of trust that Harari mentions in his book to allow for more cooperation in large networks. In this, Kannan saw the growth of blockchains as a way to upgrade societal infrastructure and provide an evolutionary advantage in the human species’ ability to work in large numbers, thus sparking his interest in crypto and leading him to work in the space. You can listen to him speak about his background in the first few minutes of Epicenter’s podcast:
Tokenomics: There are currently no concrete details of an Eigenlayer token; however, Sreeram Kannan has mentioned that Eigenlayer services will not be secured by an Eigenlayer token.1
Risks: Eigenlayer is currently in the early stages of its development and much of the risk of investing in Eigenlayer lies specifically with Kannan and the Eigenlayer team’s ability to execute its roadmap. The concept of restaking ETH is truly revolutionary and even though it seems applicable in theory, there is little public detail on how exactly Kannan and Eigenlayer envision will work besides stating in a tweet that the staked ETH on Ethereum will be “restaked” on Eigenlayer by setting withdrawal permissions to Eigenlayer smart contracts that can talk to middleware contracts and slash re-stakers for misbehavior.
Outside of execution risk, investing in Eigenlayer includes onboarding risk from the broader crypto industry. Currently, the crypto industry remains extremely niche with few serious use cases and few users exist outside of speculators. With additional issues like Celsius, Genesis Trading, FTX, and macro issues going into 2023, investing in Eigenlayer and crypto right now has heightened risk compared to 2021.
Use Cases: Eigenlayer’s retstaked ETH can be used for a variety of different protocols that could benefit from the security of Ethereum’s Proof of Stake network. As @MeirBank states in his Twitter thread here, the best applications that can take advantage of Eigenlayer are those that have a low chance of slashing:
Rollup Sequencers: Eigenlayer will allow rollup sequencers for layer-2 chains like Optimism and Arbitrum to run secure and decentralized sequencers, removing their reliance on centralized sequences that can be used to censor and reorder transactions.
RPC Nodes: Consensys’ Infura is feeling a lot of pressure for being such a crucial aspect of Ethereum infrastructure while being centralized but Eigenlayer will allow others to run RPC Nodes that are secure and decentralized off of Ethereum’s Proof of Stake model.
Appchains/Execution Layers: Appchains and execution layers like Fuel Network can use Eigenlayer to bootstrap its own consensus security layer from Ethereum and use it for its data availability layer. Eigenlayer will essentially provide every tool they need to launch while also leveraging the most secure blockchain network, Ethereum.
Oracles: Oracle solutions like Chainlink saw a recent move towards a staking model where LINK tokens can be staked by holders to secure the oracle network. However, LINK’s market capitalization is way below ETH’s at $3.4B and $148.6B, respectively, as of writing. Chainlink just opened early access staking to a number of holders but with only 10.8m LINK currently staked and a maximum of 22.5m LINK staked at first, there is currently only $74.2m worth of staked LINK and a maximum of $155m in staked LINK securing the network. Accessing even a fraction of the amount of staked ETH (15.6m ETH, $19.2B) would provide more security.
Bridges: Although 2022 was not a good year for bridges, bridges can use PoS ETH to validate its cross-chain messages and will provide more incentive and security to validators of the bridge. However, I think bridges may be a riskier use case compared to the aforementioned use cases due to the pace at which some of them have been exploited.
Each of the types of protocols listed above are essential to blockchain infrastructure and could benefit from a greater level of decentralization and security seen from Ethereum Proof of Stake model.
Competition: At the time of this writing, there are no other public companies tackling Eigenlayer’s primary focus as a ETH restaking protocol. Eigenlayer, as far as I know of, is the first and only protocol focused on allowing ETH stakers to restake their ETH with other protocols.
However, Eigenlayer’s data availability layer product, EigenDA, will have competitors:
Celestia: Celestia is a modular blockchain network focused on scalability by providing an agnostic data availability layer. Celestia aims to facilitate the development of new blockchain execution environments and change the current landscape of layer-1 and layer-2 blockchain by bootstrapping and providing their own consensus and data availability layer. You can read more about them here.
Polygon Avail ($MATIC): Polygon is an EVM network focused on scaling Ethereum. However, on June 28, 2021, Polygon announced Polygon Avail, a product extremely similar to EigenDA. They released further details on April 6, 2022. Polygon Avail is a modular blockchain that acts as an underlying data availability layer, similar to how EigenDA would operate.
zkPorter: zkPorter is an off-chain data availability layer being built by Matter Labs, the creators of zkSync. zkPorter will be a component of zkSync 2.0 along with zkRollup providing on-chain data availability. Both parts aim to be composable and interoperable to to allow for scalability.
Concluding Remarks: I believe an investment in Eigenlayer could see great upside in value, especially if it is able to execute its roadmap and become the first restaking protocol of its kind. The concept of restaking is still extremely new and without others currently crowding in the space, Eigenlayer is primed to be the first.
As I believed Celestia’s structural improvements to the blockchain space would be revolutionary, I think Eigenlayer’s products (Eigenlayer, EigenDA, EigenSettlement) will be an even greater improvement to the blockchain space. Eigenlayer will solve consensus bootstrapping issues for many protocols by giving them access to ETH PoS, which Celestia must address by itself, while simultaneously providing infrastructure solutions like EigenDA and EigenSettlement to allow for a new wave of innovation in execution environment. If done well, Eigenlayer will revolutionize the crypto space for innovation in new execution layers and provide a platform for more efficient, secure, and decentralized protocols across the entire crypto industry. But regardless of how much Eigenlayer could change the crypto industry, I think an investment decision would have to be based on the execution and final product of Eigenlayer. If, according to Mantle Network, Eigenlayer would simply restake liquid ETH staking assets, the product would not be as compelling as if it were able to leverage staked ETH directly from Ethereum’s PoS network.
To learn more about Eigenlayer, I’d recommend reading @SreeramKanna’s Twitter thread here, @MeirBank’s Twitter thread here, and @MeirBank’s podcast notes of Sreeram Kanna on the Bankless podcast here.
I am not a financial advisor. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.