Source: CoinDesk
By Tara Annison
Is EigenLayer Ready For Institutional Adoption?
Compiled by: BitpushNews an
The EigenLayer project currently has $11 billion worth of assets locked. In terms of TVL (total locked value), it is second only to the liquid staking platform Lido, 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 in funding from investors such as Coinbase Ventures and a16z.
As a result, EigenLayer and restaking have become hot topics and one of the important narratives of the crypto ecosystem in 2024. However, while EigenLayer is an understandable choice for retail investors with greater risk tolerance, it does not currently fully meet the needs of institutional investors. Therefore, EigenLayer must decide whether to focus on the large-scale retail market or the needs of institutional players entering this field.
So why is the current EigenLayer architecture not suitable for institutional use?
First, most institutions hold their assets with qualified custodians or trusted institutional-focused wallet providers. However, EigenLayer’s primary re-staking delegation process is through its user interface and requires connecting to a DeFi wallet such as Metamask, Trust, or Rainbow. Therefore, institutions need their custodians or wallet providers to build the necessary integrations in the EigenLayer ecosystem so that their chosen staking service provider (e.g. Twinstake) can also be integrated into this process. However, to date, most institutional-focused custodians still have limited integrations with EigenLayer, thus hindering institutions from entering this ecosystem.
The next key consideration for institutions is who they will be re-staking to — this is called an “Operator” in EigenLayer terminology.
Institutional investors will likely choose operators that offer legally binding performance guarantees, just as they prefer permissioned staking service providers over permissionless staking protocols. They will expect protections such as slashing insurance (i.e., penalties for validator misbehavior); but currently, no external provider can offer this at an institutional level.
Another important question for institutions to consider is who should choose AVS (Actively Validated Services). 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 AVS support list be selected by operators or by their delegators?
The current model is suitable for retail customers, because no single delegator can meet the minimum active delegation amount (currently 32ETH), so the "decision-making power" is in the hands of the operator. They choose AVS based on their needs, and any delegator who re-stakes with them subscribes directly to this choice.
However, the amount of collateral pledged by an institution will far exceed the minimum requirement for a single operator, so it is possible to have a dedicated operator. In this case, there needs to be a consensus on who is responsible for selecting the AVS and who will bear the reputational or legal risks of poorly selected AVS.
Another issue that institutions need to consider is the distribution of rewards. Although the reward distribution mechanism has only recently been launched, most AVS (Active Verification Services) on EigenLayer still operate through a point system. While this may avoid the legal and regulatory challenges associated with token issuance, it requires institutions to accumulate points in an untested environment and interpret tax laws that currently do not cover the transition from points to blockchain token systems.
In line with this, the current AVS model allows rewards to be paid in AVS’s own tokens (as well as ETH and EIGEN). Most AVS will likely have their own tokens, but if these tokens are not accepted by the institution’s preferred custody services, this will severely limit the options for institutions when choosing AVS. In addition, when institutions compare the high re-staking amount with the current overall security budget of 16 AVS, they may have concerns about the stability and durability of potential rewards.
TVL (Total Value Locked) has been showing a steady downward trend over the past few months, and while still close to $11 billion, some would question whether these projects need such large sums for their security budgets in the current or medium term. In line with this, many projects are still in the phase of finding product-market fit and sufficient usage. The risk is that many of these AVS may not find market fit, and therefore their token prices are not stable and liquid enough. This could result in institutions holding illiquid asset rewards, while the commissions paid to operators exceed the potential rewards that the institutions can obtain.
The most fundamental problem that currently prevents institutions from adopting EigenLayer is actually the simplest one - smart contract risk. This is the most difficult to solve because no matter how many audits are conducted, it cannot be guaranteed to be free from hacker attacks or code failures, and one of the strongest proofs of security is time.
So while institutions are showing strong interest in the re-staking narrative, in reality many are still getting comfortable with decentralized exchanges (DEXs) and areas beyond base on-chain activities. As such, I think institutions are likely to remain on the sidelines until the above issues are resolved and retail investors test the waters first, which seem a bit cold at the moment.
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