EigenLayer, one of the largest restaking protocols on Ethereum by total value locked (TVL), is facing the risk of a major yield crisis. 3Jane’s pseudonymous protocol builder Chudnov warned that with EigenLayer’s rapidly growing TVL, the protocol could outgrow its available validator set (AVS), leading to a significant drop in returns. He wrote in an April 22 post:
“EigenLayer has >$15B TVL but the AVS would actually need less than *10%* of that to be secure, meaning the yields could fall off a cliff.”
EigenLayer removed all limits on liquid staking tokens (LST) on April 16, according to an April 16 announcement. In the meantime, EigenLayer officially launched on mainnet on April 10.
When users stake LST via EigenLayer, it is automatically delegated to node operators, who use the deposits to secure the AVS on EigenLayer while receiving staking rewards. A portion of the staking rewards is passed on to users.
However, Active Validator Services on the protocol require significantly less ETH staked for security purposes, which could lead to issues down the line, according to Chudnov:
“The problem is that no AVS comes close to needing $1.5B to secure, let alone $15B. The whole point of proof-of-stake is that the value of the stake should be orders of magnitude higher than the potential profit a malicious validator could make.”
EigenLayer’s TVL has surged over 16% in the past month to its current level of $14.15 billion. The situation could become worse if altcoin prices were to drop as there is no incentive for the AVS to hold excess capital on-chain.
A possible first step could be to launch a new token to increase security budget requirements, temporarily mitigating the issue. However, integrating EigenLayer with the DeFi ecosystem and creating more utility for LST could provide a longer-term solution.
Related: EigenLayer TVL crosses $10B mark
