Is EigenLayer Ready For Institutional Adoption?
The EigenLayer project currently locks up assets worth $11 billion. In terms of total value locked (TVL), it is second only to the Lido liquid staking platform, which has a TVL of $23 billion, and the mature crypto lending market Aave, which has a TVL of $11.3 billion. The EigenLayer project has raised $600 million from investors such as Coinbase Ventures and a16z.
As a result, EigenLayer and restaking have become hot topics and important narratives in the crypto ecosystem for 2024. However, while EigenLayer may be a understandable choice for more risk-tolerant retail investors, it currently does not fully meet the needs of institutional investors. Therefore, EigenLayer must decide whether to focus on the large-scale retail market or address the needs of institutional players entering this space.
So why is the current EigenLayer architecture not suitable for institutional use?
Firstly, most institutions keep their assets with qualified custodians or wallet providers that focus on institutions. However, EigenLayer’s primary restaking delegation process is through its user interface, which requires connecting DeFi wallets such as Metamask, Trust, or Rainbow. Therefore, institutions need their custodians or wallet providers to build the necessary integrations into the EigenLayer ecosystem so that their chosen staking service providers, such as Twinstake, can also integrate into this process. However, so far, most institutional custodial service providers still have limitations on integrating with EigenLayer, thus hindering institutional entry into this ecosystem.
For institutions, the next key consideration is who to restake with, or in EigenLayer terms, “Operator.”
Institutional investors may choose operators who provide legally enforceable performance endorsements, just as they prefer licensed staking service providers over unlicensed staking protocols. They would expect protections such as risk reduction insurance (i.e., penalties for validator misconduct). However, currently, there are no external providers that can offer these services at the institutional level.
Another important question for institutions to consider is who selects Actively Validated Services (AVS). These services include zero-knowledge proofs, data availability layers, and oracles. Operators generate rewards for their delegators by running software and hardware. However, should the operator or their delegators choose the AVS support list?
The current model suits the retail customer base because no single delegator can meet the minimum active delegation requirement (currently 32 ETH), so the “decision-making power” is in the hands of the operator. They choose the AVS based on their own needs, and any delegator restaking with them automatically subscribes to this selection.
However, the amount of staking by institutions will far exceed the minimum requirement of a single operator, so there may be dedicated operators. In this case, consensus needs to be reached on who is responsible for selecting AVS and who will bear the reputational or legal risks of choosing inappropriate AVS.
Another issue for institutions to consider is the allocation of rewards. While the reward allocation mechanism has only recently been launched, most AVS on EigenLayer still operate through a scoring system. While this may avoid legal and regulatory challenges related to token issuance, it requires institutions to accumulate scores in an untested environment and explain the tax implications of transitioning from a scoring system to a blockchain token system, which is currently not involved.
Correspondingly, the current AVS model allows rewards to be paid in the AVS’s own tokens (as well as ETH and EIGEN). Most AVS may have their own tokens, but if these tokens are not accepted by custodial services preferred by institutions, it severely limits the options for institutions when choosing AVS. Moreover, when institutions compare their high staking amounts with the overall security budget of the current 16 AVS, they may have concerns about the stability and durability of potential rewards.
In the past few months, the TVL has shown a stable downward trend, although it is still close to $11 billion, some may question whether these projects need such a large amount of funds for their security budgets in the current or medium term. In line with this, many projects are still in the stage of finding product-market fit and sufficient usage. The risk is that many of these AVS may not find product-market fit, resulting in unstable and illiquid token prices. This may lead to institutions holding illiquid asset rewards while paying commissions to operators exceeding the potential rewards they can obtain.
The most fundamental issue currently inhibiting institutional adoption of EigenLayer is smart contract risk. This is the most difficult issue to solve because no matter how many audits are conducted, there is no guarantee of protection from hacker attacks or code faults, and one of the most powerful proofs of security is time.
Therefore, despite strong interest from institutions in the restaking narrative, many institutions are still gradually adapting to decentralized exchanges (DEXs) and areas beyond on-chain activities. Therefore, I believe that institutions may continue to wait and see until the above-mentioned issues are resolved and retail investors have tested the waters. Currently, this area seems to be slightly cold.
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Original article link:
https://www.coindesk.com/opinion/2024/09/16/is-eigenlayer-ready-for-institutio…
Note: All articles from Bitpush represent the author’s viewpoint and do not constitute investment advice.
