DeFi: Unpacking EIGEN's $10 Billion+ launch and restricted design
Perhaps the most important event in Web3 in 2024
Today we highlight the following:
PROTOCOLS: EigenLayer’s Universal Intersubjective Work Token
LONG TAKE: The political fight to kill Crypto reaches Robinhood and Square
CURATED UPDATES: Financial Institutions and Adoption; DeFi and Digital Assets; Blockchain Protocols; NFTs, DAOs and the Metaverse
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PROTOCOLS: EigenLayer’s Universal Intersubjective Work Token
Ethereum re-staking protocol EigenLayer has launched its widely anticipated EIGEN token. It is being distributed via a mechanism called a “stakedrop”, which eligible participants (i.e., non-Americans) can access here. The token is not transferable, but is a synthetic version is trading around $7 on derivatives exchanges at the time of writing, putting the total value at $10-15 billion.
As a reminder, restaking allows users to delegate staked ETH, either in native form or as a liquid staking token (LST), to validator nodes. Restaking can be used by protocols to bootstrap validator networks using Ethereum validators. Stakers get the yields of the recipient protocol, referred to as Actively Validated Services (AVSs), as well as the usual ETH staking rewards. Users earn more as a result, while protocols get capital.
Restaking extends the scope of ETH from being a work token securing the Ethereum protocol to securing infrastructure and services external to Ethereum. This innovation has made EigenLayer one of the most popular projects of recent years, attracting over $16B in TVL at its peak.
As described so far, restaking accrues all the value to ETH, which is in part why it has gotten so much traction. Yet nothing is free in Web3. Since there is no material company equity in most Web3 exits, Eigenlayer needed some sort of token to reward users and investors, and the token needed some sort of story about what it does. The design of EIGEN is to add additional functionality to EigenLayer’s security capabilities by providing capital to be staked against certain types of risk. For more detail, check out the full paper here, and we will provide a summary below.
According to EigenLayer, ETH staking and restaking have only been applicable to “objective” faults. These are situations where a clear mathematical or cryptographic “right” or “wrong” can be discerned — such as whether a transaction on Ethereum mainnet is valid or not. If the action is wrong, then the associated stake will be slashed, i.e., punished, accordingly to disincentivize malicious behavior. Objective faults on Ethereum must be verifiable on-chain.
EIGEN looks to expand token-based staking security to “intersubjective” faults, where there is a clear “right” or “wrong”, but the methods for determining this and the involved parties are disjointed. One such example would be price oracles. The on-chain price of a digital asset can either be right or wrong, but the price oracle may display an “incorrect” price. We can identify that the outcome is wrong in reality, but there is no way to determine this on-chain and penalize the price oracle using on-chain data.
To address intersubjective faults, EIGEN uses a two-token system and a mechanism called slashing-by-forking. AVSs can stake EIGEN, which becomes bEIGEN — more on this shortly — for protocols that could have intersubjective faults. If a user notices incorrect information, for example from a price oracle, they can propose a fork. Other bEIGEN stakers then must choose the correct fork or their tokens will be slashed. Malicious forks are disincentivized, as the proposer must put capital at risk to commence the fork. Equally, malicious actions will always be at risk of being identified and having capital slashed as well.
If you don’t stake EIGEN, the token can still be used for trading or in DeFi, and as a governance token for the system. Holders that do not participate in staking do not have to worry about addressing fork challenges. The chosen correct version of bEIGEN after a fork will always be exchangeable into EIGEN, whereas the incorrect forked version of bEIGEN will become redundant and lose its value.
Overall, the EIGEN launch marks a change from many of the other prominent airdrops of late, bringing with it novel token utility. It broadens proof-of-stake security to include Oracles, databases, Data Availability layers, AI systems, prediction markets, gaming VMs, intent and order matching and MEV engines, and more. And while it may seem to add complexity, EIGEN forking is intended to be a “last-resort nuclear option” and not frequently used functionality.
Challenges faced by EigenLayer revolve around adoption and airdrop pushback.
Adoption by AVSs is the biggest question mark around EIGEN. AVSs are required to opt for their users to stake EIGEN, instead of their own native token, while still emitting their native token to reward EIGEN stakers. They may benefit from the ubiquity of EIGEN tokenholders, helping to bootstrap security in exchange for their own token’s utility. But protocols sacrifice a token sink, in the form of staking, while still emitting tokens in return for a bootstrapped staking ecosystem — this likely results in sell-pressure of emissions.
We might see prominent services prone to intersubjective faults opt for a similar two-token and slashing-by-forking within their own token designs to bypass this issue. EigenDA, EigenLayer’s data availability solution, will be its first customer, so there will be demand for EIGEN even if this is to happen.
The airdrop distribution was also heavily criticized. First, EigenLayer geoblocked token claims for users in jurisdictions like the US, Canada, and China, despite having no geographic restrictions on deposits or points awarded. Second, tokens were stakedropped, meaning that they are initially non-transferable so as to incentivize participation within EigenLayer. Lastly, the team and investor allocation amounts to 55% of the total token supply — significantly higher than the 40% typically provided to these segments cumulatively.
Overall, we are fans of EigenLayer and like protocol designs that make Ethereum more useful. The pushback against the airdrop highlights the importance of marketing and tokenomic intricacies, like designing points systems that do not exclude those who contributed capital to the product’s growth.
However, many of the limitations of the airdrop are in direct response to the current state of crypto regulation and the limited tools lawyers have to make the distribution of value legal. Non-transferability and exclusion of Americans is a way of dealing with the SEC posture on digital assets. Hopefully, things change soon, and we are able to enter and exit these re-staking markets without any systemic collapse.
👑 Related Coverage 👑
Long Take: The political fight to kill Crypto reaches Robinhood and Square
We discuss the impact of the Internet on the distribution of financial products, notably through fintech applications.
Companies like Robinhood, Cash App, and Revolut, parallel to platforms like YouTube, prioritize distribution capabilities over the nature of the products they sell, which now include cryptocurrencies due to consumer demand. Unfortunately, political influence and partisanship have become entwined with the regulation of these assets. We discuss recent legislative efforts to counteract restrictive SEC regulations and the President’s preemptive veto. All this underscores a generational shift in financial engagement, with Gen Z owning more crypto assets than stocks.
Curated Updates
Here are the rest of the updates hitting our radar.
Financial Institutions and Adoption
⭐ Robinhood Met With SEC 16 Times 'In Good Faith': CEO - Decrypt
⭐ Securitize announces $47 Million Strategic Funding Round led by BlackRock - PR Newswire
Crypto Principal Trader Arbelos Markets Raises $28M Led by Dragonfly Capital - CoinDesk
Solana-Based Marketplace AgriDex Raises $5M to Tokenize Agricultural Industry - CoinDesk
Tokenized Asset Issuer Backed Raises $9.5M as Crypto's RWA Race Heats Up - CoinDesk
DeFi and Digital Assets
⭐ MarginFi To Launch Solana LST-Backed Decentralized Stablecoin This Month - The Defiant
⭐ Aave Proposes V4 Iteration With Cross-Chain-Liquidity Layer - The Defiant
Jupiter Aims To Launch Mobile App By July - The Defiant
Uxuy, a Singapore-based decentralized multi-chain trading platform, raised $7M in Pre-A funding - FINSMES
Blockchain Protocols
⭐ Cardano to Incorporate CIP-69 in Next Upgrade to Streamline dApp Development - The Defiant
Arch Labs Secures $7M to Launch Bitcoin-Native Arch Network - Crypto Times
zkSync 'hyperchain' Sophon raises $60 million via node sale - The Block
Thiel-Backed Cryptography Startup Lagrange Raises $13M - CoinDesk
Lava Foundation raises $11 million in token round ahead of airdrop - The Block
NFTs, DAOs and the Metaverse
⭐ Friend Tech Enjoys Activity Resurgence After V2 Rollout - The Defiant
BNB Chain's $1M Meme Innovation Contest Is 'Unleashing Meme Coin Creativity' - Decrypt
Galaxis Raises $10M, Doubling Down on Belief That NFTs Will Provide Real Value Everywhere - Yahoo Finance
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