EigenLayer, the leading restaking protocol on Ethereum, is facing a significant yield crisis due to its rapid growth surpassing the security requirements of Actively Validated Services (AVSs), warns a builder at 3Jane derivatives exchange.
The dominance of EigenLayer in the restaking sector is unquestionable. However, its total value locked (TVL) has exceeded $15 billion, creating a problem where the capital far outweighs the necessary amount for secure operations. As a result, users who have staked their assets on EigenLayer may experience potential yield reductions.
Since its mainnet launch on April 10, 2024, EigenLayer has quickly established itself as a major player in the DeFi world. The decision on April 16 to allow all liquid staking tokens (LSTs) has further fueled its expansion. However, the excessive capital chasing limited security needs could lead to unsustainable yields for users.
This situation highlights the challenge of balancing rapid growth with yield sustainability. With only approximately 10% of EigenLayer’s TVL needed for security and a limited number of active addresses (667 in the last 24 hours), finding a solution to maintain attractive yields is crucial for the protocol’s future success.
In an April 22 post on X, Chudnov proposed two potential solutions: bottom-up and top-down. The bottom-up approach involves compelling AVSs, which consist of researchers specializing in areas like zero-knowledge proofs and fully homomorphic encryption, to launch their tokens. While this temporary solution could support the security budget, it may eventually become a complex pass-through for airdrops without any real utility for the staked Ether.
On the other hand, the top-down approach focuses on building financial primitives on top of liquid staking. By integrating EigenLayer into the decentralized finance (DeFi) ecosystem and creating more utility for LSTs, the protocol could source yield from other primitives such as money markets and derivatives. This organic approach could provide a more sustainable solution to the potential yield crisis.
The ability of EigenLayer to offer attractive yields depends on its integration with DeFi. Without this integration, yields could plummet, negatively impacting users and Ethereum’s liquid staking scene.