Industry observers are warning of a potential “major” yield crisis for EigenLayer, the largest restaking protocol on Ethereum by total value locked (TVL).
EigenLayer’s exponential growth in TVL may be surpassing the capacity of its Actively Validated Services (AVS), which could result in a significant reduction in yields, according to Chudnov, a pseudonymous builder at 3Jane derivatives exchange. In an April 22 X post, he expressed concern.
1/ EigenLayer is facing a *major* yield crisis, and nobody is talking about it. @eigenlayer has >$15B in TVL but AVS's will actually need less than *10%* of that for security, which means yields may fall off a cliff
— chudnov (@chudnovglavniy) April 22, 2024
EigenLayer removed limits on all liquid staking tokens (LSTs) on April 16, as announced on X. The protocol launched on mainnet on April 10.
Unpausing starts now!
All Liquid Staking Token (LST) caps have been removed. LST restaking is now open.
Explore the uncapped LSTs or restake ETH natively through an EigenPod on the EigenLayer app at https://t.co/k9qHVJdRhlhttps://t.co/nonr4oi0Fz
— EigenLayer (@eigenlayer) April 16, 2024
When users stake an LST via EigenLayer, it is delegated to a node operator, which secures an AVS on EigenLayer and receives staking rewards. However, AVSs require significantly less staked ETH for security, potentially leading to future issues, as explained by Chudnov.
4/ The problem is that none of the AVS's will come close to needing $1.5B in security let alone $15B. The whole point of Proof-of-Stake is that the value of the stake is higher than the potential profit earned from a validator behaving dishonestly.
— chudnov (@chudnovglavniy) April 22, 2024
EigenLayer is the second-largest protocol on Ethereum, following liquid staking protocol Lido. Its TVL has risen over 16% in the past month to reach $14.15 billion, according to DeFiLlama.
The situation could worsen as altcoin prices decline, as AVSs may lack incentives to hold excess on-chain capital. A potential solution could involve token launches to increase security budget requirements temporarily, but a more sustainable fix would involve integrating EigenLayer more deeply into the decentralized finance (DeFi) ecosystem and enhancing utility for LSTs, Chudnov suggested.
If EL ecosystem can more deeply entrench itself in the DeFi ecosystem via LRT's 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 (@chudnovglavniy) April 22, 2024
