TVL exceeds 15 billion US dollars, but EigenLayer begins to face a serious "revenue" crisis?

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EigenLayer is currently the largest re-staking protocol on Ethereum, with a TVL of over $15 billion. However, it may face a serious revenue crisis because the protocol’s active verification service (AVS) may not be able to keep up with its growth, resulting in a significant drop in revenue.

The problem stems from the difference between the amount of ETH deposited through EigenLayer's Liquidity Restaking Token (LRT) and the actual security needs of AVS nodes. For security reasons, AVS nodes need to deposit less than 10% of the total ETH. This imbalance can lead to a yield crisis, where supply exceeds available demand, leading to downward price pressure.

Chudnov

@chudnovglavniy

, a developer at a derivatives exchange, warned that EigenLayer’s yields could drop significantly. He went on to clarify that no active verification system (AVS) would need anywhere near $1.5 billion in security funds, let alone $15 billion.

This problem could escalate as altcoin prices fall, as AVS will lose the incentive to keep additional funds on-chain.

To address this impending crisis, Chudnov proposed two possible remedies: bottom-up and top-down strategies. The bottom-up approach involves artificially creating an Ethereum market by incentivizing the creation of new tokens that require a larger security budget.

On the one hand, EigenLayer could become a simple pass-through for various airdrops, but this would lack any meaningful benefit to the deposited ETH. Instead, a bottom-up approach focuses on creating new financial instruments using EigenLayer's current re-staking mechanism.

This could potentially reduce the burden on AVS security budgets by creating additional financial products and services on top of existing infrastructure (such as money markets or derivatives).

The EigenLayer community must address growing challenges to sustain and profit from the protocol. While the proposed solution provides a foundation, the team must innovate and adapt to effectively address this potential crisis in profitability.

Below is the full text of Chudnov’s post on the EigenLayer revenue crisis on the X platform. Translated by Followin :

When a user deposits ETH into EigenLayer via LRT, it is delegated to the node operator, who then uses your ETH to secure AVS and receives AVS rewards for doing so, which then flow to you (the depositor).

The problem is that the capital required to secure AVS is far less than $1.5 billion, let alone $15 billion. The point of Proof of Stake (PoS) is that the value of the stake is higher than the potential profit earned by a validator acting dishonestly.

Does AVS really have enough funds to need $1.5B? This is not the case with EigenDA, Lagrange, etc.

Ironically, due to the capital efficiency of the pool model’s security, the security requirement actually only needs to be the maximum (the security requirement of AVS 1 to n), since all tail AVS can share the security base of the maximum AVS. This does not count attributable security.

So, what is the solution?

There are two approaches (not mutually exclusive):

1. Bottom-up

2. Top-down

Bottom-up is the path of least resistance and is what is happening behind closed doors right now: forcing a bunch of AVS made up of ZK/FHE PhD researchers to launch shit coin to support a massive security budget, in which case it all becomes an elaborate pass-through by the airdrop alliance with no real use for ETH.

The top-down approach is to build financial primitives on top of re-staking to reduce the opportunity cost of holding re-staking ETH to compensate for ETH, and to reduce the burden on the AVS security budget by obtaining returns from other primitives such as money markets and derivatives.

I’m all for leading with future security needs via an artificially inflated token economy security budget and kicking the can down the road in the hopes that it will be needed one day.

However, if the alt market goes sideways and just holds all the capital they don’t really need, then no one will pick up the slack for everyone else and every AVS will destroy their token. And now is not the right time to issue a token.

Counterintuitively, a more natural way to prevent outflows is to have re-staked ETH match ETH in terms of utility.

If the EigenLayer ecosystem can solidify itself more deeply in the DeFi ecosystem with LRT and financial primitives on top, it will be a more protected moat and give AVS more time to solve problems at little cost.

Do a thought experiment: if I follow the current path, other than branding and potential EigenLayer airdrops, as a re-staked ETH holder, I have no reason to "not" move my assets to Karak.

Bad Moat:

Brands in the most mercenary industry ever (cryptocurrency)

Inflationary token economics. You can learn about this from the DeFi summer.

Good Moat:

Monopoly on cryptoeconomic systems with organic security requirements (AVS and DSS)

The deep financialization of the EigenLayer ecosystem in DeFi. You can learn about this from Lido.

EigenLayer should start accepting this reality and hedge against it by actively pursuing both solutions, especially as @Karak_Network DSS may launch its own shit coin.

Source

Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.

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