Can EigenLayer Live Up to Hype?
EigenLayer is undoubtedly the most anticipated airdrop opportunity in the history of cryptocurrencies, but is a post-token drop inevitable for EIGEN and the broader Ethereum ecosystem? This article is sourced from the article “Can EigenLayer Live Up to Hype?” by Bankless, compiled, translated, and written by Bitpush.
Introduction:
What real use cases can the first batch of AVS from EigenLayer provide?
Background:
How many new airdrops and earnings can be unlocked by the Ethereum re-staking protocol EigenLayer?
Table of Contents:
Can EigenLayer airdrop satisfy users?
AVS earnings may become a source of concern
Will EigenLayer determine the success of Ethereum?
EigenLayer, which is at the forefront of re-staking, has established a shared security market that allows developers seeking to build decentralized networks to bypass the difficulties associated with establishing and operating their own trust networks, thereby lowering the barriers to entry for building these networks and empowering the long tail of encrypted security applications.
Just the EIGEN airdrop alone has the potential to join the ranks of the largest airdrops in the history of cryptocurrencies, and depositors can easily obtain additional allocations from the Liquidity Re-staking (LRT) protocol and the Active Validation Service (AVS)!
Due to the anticipated upcoming airdrops, nearly 5 million ETH (worth about $15.5 billion) has already been reallocated to EigenLayer. However, more and more people are concerned that the earnings generated by the AVS protocol will not be sufficient to meet the expectations of depositors in the post-EIGEN airdrop world.
Market participants deposit into EigenLayer not out of their own generosity, but because they believe that doing so will generate financial returns that exceed their opportunity costs or make money through alternative strategies (e.g. decentralized exchanges).
Although EigenLayer currently supports delegation to AVS, they have not generated any earnings yet. This means that depositors are merely speculating that future airdrops will compensate them.
In the absence of actual income, imagination can run wild when predicting valuations, but the inevitable arrival of these airdrops may pour cold water on the collective illusion that “EigenLayer is easily worth billions of dollars”. If the AVS yield is disappointing, the protocol will find it increasingly difficult to justify its high valuation.
Many AVSs do not have direct comparability, but Celestia (a blockchain that provides similar data availability services as EigenDA) generates only a few thousand dollars in revenue annually. This is just a drop in the bucket for a network worth $12 billion and relies on high token inflation to attract investors to protect its network.
AVS must adopt its own token inflation economics to provide security, which will further worsen the oversupply situation that the market has struggled to digest in recent weeks.
In order to prevent a massive outflow of TVL in the event of insufficient AVS yields, EigenLayer may only distribute a small portion of the total intended token airdrop in the first round, thereby fulfilling the promise of future EIGEN rewards as an incentive for depositors.
Unfortunately, if the market starts to examine this sustainability, it may perceive EigenLayer as overvalued, negatively affecting the perceived value of future airdrops and leading to a loss of TVL from the protocol until a balance is reached and remaining depositors feel adequately compensated for their capital opportunity costs.
Speculators seeking to maximize the opportunities of EigenLayer often engage in high leverage operations, thereby stimulating demand for various encrypted applications ranging from traditional currency markets to yield farming protocols.
Although the high-yield opportunities of EigenLayer benefit the entire Ethereum DeFi ecosystem, dissatisfaction with implied returns may lead depositors to liquidate, weakening the yield and causing negative consequences for projects relying on the success of re-staking.
Furthermore, since December, EigenLayer has been the main absorber of ETH, with deposits growing by 6,100% in less than five months. If EigenLayer users seeking airdrops convert their marginal funds flowing into ETH into sales while abandoning DeFi protocols that facilitate speculative activities, the prices of Ethereum and other related crypto assets will be negatively affected.
By targeting greatness and catalyzing the revolution of cryptographic economic security, EigenLayer has made its airdrop a clear strategy, but cryptocurrency returns do not come without risks, and the sustainability of EigenLayer’s current deposit level is questionable.
Although the protocol can freely mint and inflate its tokens, market participants must purchase the increasing supply, otherwise token prices will decline.
While the concept pursued by EigenLayer is certainly commendable, whether re-staking is truly the next great cryptographic innovation or just another reliance on cryptographic daydreams, remains to be seen. Token inflation is unsustainable and has generated almost no actual income.
If the latter scenario is proven to be true, EigenLayer will be classified as a “bad idea,” dealing a significant blow to the Ethereum ecosystem and losing a critical shared narrative.
Related Reports
“What is Authenticity?” The Battle surrounding Ethereum, EigenLayer, Celestia, and 2024
A16z invests £100 million in EigenLayer! TVL jumps to fourth place, close behind AAVE, Ethereum re-staking protocol is hot
Why did A16z heavily invest in EigenLayer? Detailed explanation of the value and economic security of the Ethereum re-staking protocol