#CryptoExplained: Eigenlayer, the Latest Innovation in Blockchain Infrastructure

Ethereum successfully transitioned from a proof of work system, to a proof of stake system during the merge on September 15, 2022. This was a historic event because nothing like this had been attempted before, and many thought it would be a failure. But it’s been over six months and the network is still going strong and its value continues to increase. By succeeding Ethereum opened innovation in proof of stake. Eigenlayer is one of the first protocols to build on Ethereum’s proof of stake success, and it could usher in a whole new era of crypto innovation.

Proof of stake

Before we explore Eigenlayer, let’s revisit proof of stake. Proof of stake is a way to incentivize many anonymous people to perform the task of recording transactions, without behaving maliciously. Simply put, when someone stakes, they place a sum of money in the network and say to the network ‘I’m putting up this large sum of money and if I misbehave, you can take this money from me.’  And, in exchange for putting up this sum of money and participating in the network, the network pays people.

In Ethereum, a staker (someone who puts up the sum of money) puts up 32 ETH currently valued at around $64000 USD to run a node, and earns approximately four to eight percent. A node is basically a computer that can create a list of transactions or check whether the list of transactions created by another computer in the network is correct. If the stakers node misbehaves or malfunctions, it loses funds and this process of losing funds is called slashing. Because USD 64000 is on the line, nodes very rarely behave badly, and this creates a lot of trust in Ethereum.

Creating this trust layer is hard to do and takes a long time. Only a few blockchain-based systems have been able to achieve this. Ethereum’s proof of stake system currently has a total of around USD 30 billion worth of Ethereum staked, to secure a network valued at over $200 billion. The USD 30 billion stake is an important number because the higher it goes the harder it becomes for the network to be attacked. 

Eigenlayer restaking

Professor and Eigenlayer founder Sreeram Kannan proposed that this layer of trust that Ethereum has been successful in creating can be utilized for things other than just securing the Ethereum network. Since we already trust this USD 20 billion to secure USD 200 billion, we can reuse this layer of trust to secure other services that applications might need. This would save a lot of effort involved in adding more decentralized services, and reduce the dilution of value in crypto. This is exactly what Eigenlayer proposes to do. It allows stakers who have put up their stake for Ethereum, to restake it as a bond for other services. If they behave badly, this restaked Ethereum will be slashed. And as a reward, they earn more. So, there is a strong incentive to re-stake. Simple.

The big picture

Eigenlayer proposes to create a marketplace for services secured by re-staking. This means that services like bridges, decentralized storage networks, decentralized computation, etc., can secure themselves quickly and easily by borrowing trust from Ethereum. This is huge, and can potentially accelerate the pace of innovation in crypto. 

Also, now that trust can be borrowed from Ethereum, there is no need to launch a separate token or crypto currency to secure a new set of decentralized services. This will reduce the entry of new tokens and support the increase in value of Ethereum which is already quickly becoming the currency of the internet. 

And this has a compounding effect. As Ethereum increases in value the value of the amount staked will keep increasing beyond USD 30 billion, and make it even less likely that someone will attack the network. This will lead to a further increase in trust and therefore more utilization of Ethereum. And this increased use of Ethereum will further increase its value and so on. It creates a virtuous cycle.

Eigenlayer is an innovation that could be as significant as proof of stake.