There is currently $11 billion worth of value locked up within the EigenLayer project. By TVL (total value locked) it’s below only the liquid staking platform Lido (which is so popular that Ethereum devs warn about its centralization risk) at $23bn TVL, and Aave, the well-established crypto lending and borrowing marketplace, which has $11.3bn TVL. The EigenLayer project has raised $600m in funding from investors such as Coinbase Ventures and a16z.
EigenLayer and restaking have therefore been hot topics on conference stages and are a key ecosystem narrative for 2024. However, while EigenLayer is an understandable fit for more risk-accepting retail investors, it doesn’t currently fully meet institutional needs. EigenLayer is therefore going to have to decide whether it’s building for the mass retail market or whether it needs to pay attention to the needs of institutional players coming into the space.
So why is EigenLayer, as currently built, unsuitable for institutions?
Firstly, the majority of institutions hold their assets with a qualified custodian or trusted institutionally-focused wallet provider. However the primary delegation flow for restaking with EigenLayer is via their user interface and requires a connection to DeFi wallets such as Metamask, Trust or Rainbow. Institutions therefore require their custodian or wallet provider to build the necessary integrations into the Eigenlayer ecosystem in such a way that their institution’s staking provider of choice, such as Twinstake, can also be integrated in the flow. However to date, most institutionally focussed custodians have limited EigenLayer integrations, therefore blocking access into the ecosystem.
The next crucial consideration for an institution is who they are restaking to – the Operator in EigenLayer parlance.
Institutional players will likely choose Operators that offer legally-enforceable performance guarantees, as seen with their preference to use staking providers over permissionless staking protocols. They will expect protections such as slashing risk insurance (the process of penalizing a validator for misbehavior); at present, no external providers currently offer this at the institutional level.
Another notable consideration and choice for institutions is deciding who should select the AVS (Actively Validated Services). These are services such as zero-knowledge provers, data availability layers and oracles. The Operator runs software and hardware in order to generate rewards for their delegators. However, should the Operator or their delegator choose the AVS support list?
The current model fits a retail client base whereby no individual delegator meets the minimum active delegation amount (currently 32ETH) and so the decision “power” lies with the Operator. They select the AVS based on their requirements and any delegators restaking with them simply subscribe to this.
However, institutions will be restaking well above a single Operator’s minimum amount, and could therefore have their own dedicated Operator. In this case, there needs to be a consensus on who is responsible for AVS selection and who will take on the reputation or legal risk of poor AVS selection.
A further institutional consideration is around rewards. Although the rewards distribution mechanism was recently launched, the majority of AVSs on EigenLayer still operate through the point-based system. Whilst this may avoid the challenging legal and regulatory position of token launches, it requires institutions to navigate an untested environment of points accrual and interpret tax laws that don’t currently account for conversions from points to blockchain-based token systems.
In line with this, the current model for AVSs allows for the rewards to be paid out in the AVS’s own token (as well as ETH and EIGEN). It’s likely that the majority of AVSs will have their own token however if this can’t be received into custody by the preferred institutional custodians then this could severely limit institutional options for AVS selection. Furthermore, institutions may have concerns about the stability and longevity of potential rewards when comparing the high restaked amount and what the total useful security budget for the current 16 AVSs may be.
Over the last few months there has been a steady decline in TVL, however still at almost $11 billion, one could question whether such an amount is required now or in the medium term for the projects using EigenLayer for their security budget. In line with this, many are new projects which are still looking to secure product market fit and sufficient level of use. The risk is that many of these AVSs aren’t able to find this and therefore don’t have sufficiently liquid and stable token prices. This could result in institutions holding rewards of illiquid assets, and the commission paid to Operators therefore outweighing the potential rewards that institutions can generate.
The overarching blocker to the institutional adoption of EigenLayer right now is the most simple of all – smart contract risk. This is the hardest to solve as no amount of audits can give certainty against a hack or code mishap, and one of the strongest proof points of safety is simply time.
Therefore while institutions are showing strong interest in the restaking narrative, realistically many are still getting comfortable with DEXs and anything beyond vanilla on-chain activity. It is therefore my view that institutions will continue to sit on the sidelines until the above aspects are resolved and until retail investors have tested the waters, which in my view still feels a little cold.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.