The Next Frontier in Crypto: EigenLayer’s Vision for a Lower Cost of Capital

  • Mar 27
  • Portfolio
  • Bart Stephens

By Bart Stephens, Ryan Sproule, and Yuan Han Li

You have an amazing idea for a new cryptoeconomic network/protocol—whether an L1, oracle, bridge, data storage protocols, or something else—after building it, how would you go about bootstrapping it? Well, one of the first things you are likely to do is to try to find a robust and decentralized set of validators to stake your token and secure your protocol. However, thus far, doing this has been a challenging and expensive endeavor for builders. One reason for this is that the capital outlay required to do this is extremely expensive—put differently, the cost of capital for bootstrapping these new networks is incredibly high.

Cryptoeconomic networks use cryptography and economic incentives/penalties to motivate a decentralized set of validators and nodes to act in the interest of the network. Proper economic incentives generally require these validators and nodes to “stake,” or post collateral denominated in the network’s native token to earn token rewards. Any misbehavior by a validator or node operator, therefore, comes with the threat of economic impairment through the loss of collateral (slashing). However, given that native tokens of new networks may exhibit higher price volatility, the amount of rewards (via yield or inflation) demanded by validators and nodes to participate is commensurately high.

This is a problem that Sreeram Kannan has experienced first hand. Sreeram’s background is as a professor specializing in information theory and P2P systems—specifically focusing on maximizing throughput and minimizing latency in P2P systems. Thus, after falling down the crypto rabbit hole in 2018 when a colleague of his introduced him to Bitcoin, it was natural that Sreeram quickly had a variety of ideas on how existing cryptoeconomic networks, such as Ethereum, can be improved. However, Sreeram also quickly realized that implementing any of his many ideas would require either going through the lengthy EIP process, or building an entirely new cryptoeconomic network, just to experiment with a minor upgrade! This quickly dissuaded him from seriously pursuing any of his ideas—that is, until he dreamed up EigenLayer.

EigenLayer offers a solution to this dilemma through its core innovation of re-staking. As the term suggests, re-staking allows ETH that is already securing the Ethereum network to be reused into securing new cryptoeconomic networks. Since the validator’s collateral is denominated in Ether, the capital outlay required to incentivize, attract, and retain a decentralized set of high-quality validators is lowered in turn.

As an analogy, imagine that you invest your time and resources into a new infrastructure project in your local community. All participants in this project are required to put up collateral in either 1) CommunityBucks, a potentially volatile, speculative currency that exhibits a perfect correlation to the success of the overall project, or 2) USD. Naturally, those putting up USD as collateral will likely demand a lower yield than those electing to put up CommunityBucks, given its higher probability of capital impairment. In the world of blockchain technology and cryptocurrency, Ether is the equivalent of the lower risk option in this analogy.

Further, these new EigenLayer-enabled cryptoeconomic networks are drawing from the Ethereum validator set, perhaps the most diverse and decentralized validator set globally. EigenLayer therefore not only drastically reduces the cost of capital for bootstrapping new cryptoeconomic networks, it also makes it easier to decentralize (and potentially propels their adoption) since Ethereum has more validators than any other network.

While the types of cryptoeconomic protocols that are suitable to be built on EigenLayer are extremely broad and span everything from middleware to brand new blockchains there are a few that we think are particularly suitable and would be excited to see. These include things like hyperscale data availability layers, off-chain ZKP verification protocols, protocols augmenting Ethereum’s censorship resistance, novel oracle mechanisms, cross-chain bridges/messaging protocols, decentralized sequencing protocols, as well as completely novel protocols we cannot even begin to imagine.

Innovations that lowered the cost of capital have made it easier for people to start new ventures and enterprises; we have seen this time and time again throughout history with everything from the invention of the stock market, limited liability laws, and securitization to crowdfunding. EigenLayer is no different, and represents a paradigm shift that makes it easier for visionaries to start new cryptoeconomic networks. We could not be more excited about the wave of innovation EigenLayer is sure to unleash.

 

 


 

 

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