#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 merger on September 15, 2022. This was a historic event because nothing like this had been attempted before and many believed 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, innovation opened up as 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 effort

Before we explore Eigenlayer, let’s look at 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 bets, they place a sum of money into the network and say to the network “I put up this large sum, and if I misbehave, you can take this money away from me.” And in exchange for putting up this sum 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 $64,000 USD to power a node, earning about 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 misbehave and this creates a lot of trust in Ethereum.

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

Own team turnover

Professor and Eigenlayer founder Sreeram Kannan suggested that this layer of trust that Ethereum has successfully created can be used for other things than just securing the Ethereum network. Since we already trust this $20 billion to secure $200 billion, we can reuse this layer of trust to secure other services that applications may need. This will 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 take it back as a bond for other services. If they misbehave, this restaked Ethereum will be cut. And as a reward, they earn more. So there is a strong incentive to bet again. Simple.

The big picture

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

Now that trust can be borrowed from Ethereum, there is also no need to launch a separate token or cryptocurrency 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 at stake will continue to increase above $30 billion, making it even less likely that someone will attack the network. This will lead to a further increase in trust and thus more utilization of Ethereum. And this increased use of Ethereum will further increase its value and so on. It creates a good cycle.

Eigenlayer is an innovation that can be as important as proof of stake.