Blockchain Innovation or Dangerous House of Cards? – Cointelegraph Magazine

Ethereum's rebranding — powered by the middleware protocol EigenLayer — has been a controversial innovation in the past year that has some bright minds worried about potential problems.

Redeem involves reusing held or locked Ether tokens to earn payments and rewards. The recaptured tokens help secure and authenticate other protocols.

Proponents believe that the retake will squeeze more security and rewards out of the already held ETH and grow the crypto ecosystem in a healthy way based on Ethereum's trust mechanisms. Retention can be used as a security precursor to send Ethereum trust generated by its validators to other projects.

However, Ethereum founder Vitalik Buterin and several key devs worry that restocking is an inevitable house of cards. Some of those Ethereum devs proposed a fork to get out of resetting EigenLayer.

Why are the founders of the project promoting “trust as a service” from Ethereum without the Ethereum founder and others willing to participate? Will the general concept of protecting the network from a catastrophic failure result in an Ethereum fork?

Pinching and lifting again

Staking is a crypto-native concept. On Ethereum, staking in ETH means that validators (verifiers of new transactions that secure the blockchain) can work reliably by verifying transactions instead of losing their held tokens. Stakers are paid rewards for locking up this ETH.

Essentially, stakeholders lock in their tokens to commit to producing Ethereum blocks – a way to support on-chain development, regardless of highly volatile token prices.

So what is regeneration?

In short, it is possible to re-hypothecate operations in already held Ethereum tokens (when the lender reuses the collateral posted from one loan to take out a new loan) to obtain different applications and obtain additional rewards.

However, repeaters are penalized or reduced for not actually performing their duties. (More below).

So the reissue is the oldest crypto to generate economic security since Ethereum's nine years of integrated developer activity and project history record.

“It's an expansion protocol to extend what Ethereum can do by introducing Ethereum stakeholders to other bridges and conversations beyond Ethereum,” EigenLayer founder Serram Kanan told the magazine.

He says EigenLayer ETH staking is selling its more general purpose, in crypto parlance, “staking is the root of trust.”

Kannan is a scholar on leave from the University of Washington, and Eigenlayer started as an academic researching “exported trust” as a communication protocol. Basically, he wanted to bring back the trust created by Ethereum to other ecosystems.

Kanan basically wants to export the “trust” created by Ethereum to other projects in the ecosystem and other chains. “In crypto, trust mechanisms mean investors need skin in the game. The virtual world needs a carrot and stick to distribute validators. He calls it ‘unauthorized innovation.'

The best each chain has to offer

EigenLayer's big idea is to bridge blockchains and create super applications, taking the best of what each chain has to offer. “All ecosystems are better to some degree, but not all dimensions,” Kannan said, and EigenLayer's development of a decentralized technology stack will benefit the industry.

Kannan says that what is being built by EigenLayer fits roughly into two categories.

First, EigenLayer allows for chain-to-chain bridging, say Ethereum to Avalanche. EigenLayer acts as a marketplace for “decentralized trust”, connecting stakeholders looking for a product, projects built on EigenLayer provide risk structures, and operators act as a bridge between stakeholders and projects.

Second, a set of smart contracts on the Ethereum chain allows ETH stakeholders to choose to run other software. EigenLayer, for example, can improve Ethereum transaction terminal speeds. ETH stakers can now take the layer-1 blockchain Fantom chain and fork it on EigenLayer, thus running a super fast completion layer with a layer EigenLayer trust layer.

But everything is still in theory.

The idea of ​​reissuing makes sense in theory, helping projects build Ethereum's security layer – but the problems worry many.

In theory, it is “like a NATO security alliance; Each country is still a sovereign country, but the collective defense treaty is protected by the sum of their military forces,” the founder of Osmosis Labs and creator of the same recovery system – Mesh, on the Cosmos chain – told the magazine. .

In practice, EigenLayer offers two ways to reset: whitelisted derivatives of liquid statistics via EigenLayer or EigenPod (a smart contract can be created to run a validator during a reset.) But most resactors do not run their own validators, so new networks can build validator projects without their own communities.

EigenLayer has not yet been released and its impact is still very speculative, according to Anthony “0xSassal” Sassano, a full-time Ethereum instructor, founder of the YouTube channel The Daily Guy and an early investor in EigenLayer.

To date, there is only one smart contract for ETH held in stake to launch the EigenLayer network, and perhaps because of EigenLayer's hype, people are putting ETH into that network, expecting to spawn an airdrop of unproven native EigenLayer tokens.

A force for good or evil?

New consensus protocols require a balanced alignment of incentives to succeed. Trust is like a scale that weighs competing interests. And trying to export Ethereum's security layers to different blockchain ecosystems worries some. Many are still trying to understand the power of good or evil – or both.

“There are two camps: those who are happy to expand the use case of ETH staking, and then there are those who are worried about the possible attacks on Ethereum if something goes wrong with Agenlayer and the negative consequences for Ethereum. My view is in the middle; I understand the concern and the excitement. Says Sasano.

“Naturally, this is all complicated; it depends on which rabbit hole you want to go down. The simple answer is that Ethereum as a network currently has more than 25 million ETH at risk – that's in the tens of billions of dollars. So what if we could use that economic security for something other than securing the Ethereum chain again?” ?

Sassano continued: “That's what EigenLayer is trying to do, is to generalize Ethereum's security with stakeholders and expand that to other things like the Oracle Network or the Data Access Network. It's naturally more technical and complicated than that, but that's the gist.

Restackers have two kinds of risks: first for the “restakers” and then for Ethereum itself.

Rebooking creates a lot of energy

Refinancing is controversial because it is similar to investing in loans. Some argue that the risk here is that the hunger for “real product” or real income in crypto in 2022 will lead to unfavorable developments.

Jay Sik Choi, portfolio manager at Greythorn Asset Management, told the magazine that rebalancing networks can work, but rebalancing is synonymous with leverage:

“Just as Terra was an overused ‘safe' Luna deal, there's always a risk that participants will overdo it on this new concept, and that risk can't be measured until we see more data sets throughout the crisis. History of this new story .

Dan Barr, chief investment officer at Bitfwd Capital – a boutique crypto-asset hedge fund – agreed that the reinvestment rate should be used, telling the magazine: “While modest reinvestment programs can be useful for capital efficiency purposes, any crypto asset manager and financier will appreciate their value. They value it. He knows very well how easily and quickly the use of salt can turn into many synthetic toxic financial instruments.

And maybe this is the first major problem. Investors only see resale as quick, easy-to-use financial products. EigenLayer's open-source build may fail to convince skeptics of decentralized network security.

Risks for Ethereum itself

One fear is that hacking EigenLayer will affect Ethereum itself.

Ethereum's Stake Proof Trust system puts everyone in control of clipping conditions – essentially non-performance penalties. Programmable interrupts mean that repeaters have additional computational responsibilities and face consequences for failure to do so.

Ethereum founder Vitalik Buterin fears an overload of the chain's consensus if the blockchain's computing power is suddenly diverted.

Kanan admits that Vitalik's concern is justified. “We don't want to compromise Ethereum's layer of trust and we don't want to be contaminated by malicious actors using Ethereum's trust system.”

Sasano is also designed to ensure that Ethereum's proof-of-stake functionality does not have a sudden influx or influx of validators, which would compromise the core features of the Ethereum consensus mechanism.

The case is that EigenLayer decides where to take ETH, but you can't hack a validator on Ethereum.

“In Ethereum, there is a queue for validators to enter or exit every day. Let's say, in a worst case scenario, a 30% stake ETH starts saving at EigenLayer and all 30% ‘spoils' at EigenLayer. Regardless of what the decline is based on, let's say that all this ETH is lost because they tried to do something very bad. Although everyone must withdraw 30%, there is a limit to how much you can withdraw per day. It literally takes years to get out of 30% ETH stake. So I understand people's concerns, but at the same time, other things built on top can't dictate what happens to Ethereum.

Therefore, restakis must play by Ethereum's rules.

However, Sassano's biggest concern is around the calculation of ETH staking, which could be a question of whether stakeholders will one day earn more from Ethereum than AgeLayer. This could overturn Ethereum's staking model over time.

But he's confident that Ethereum's technology can handle those systemic risks: “If you go down on EigenLayer, it's not a critical risk to Ethereum.” They are not discounted on Ethereum. EigenLayer cannot make you minify on Ethereum because Ethereum has its own minification conditions in the protocol. And EigenLayer has its own specific cutoff conditions built into the protocol as well.

Anything built on top of Ethereum introduces additional complexity and risk. Juan David Mendita Villegas, co-founder and chairman of crypto market maker Keyrock, told the magazine:

“EigenLayer is an exciting development, but it creates additional attack mechanisms without clear benefits for the Ethereum ecosystem itself. If we take a step back, ETH staking introduced a basic benchmark product for the industry, and it's important to note that that's a good development as it's almost ‘risk-free'.” ‘ You can think of it as a rate. Any additional layers, such as liquidity-absorbing derivatives and re-storage mechanisms, can carry additional risks such as concentration risk, security and smart contracts.

But Villegas wishes Eigenlayer well. “In general, we're advocates of innovation happening around blockchain and we'd like to see multiple protocols win because it helps decentralize and democratize the network.”

In other words, it wishes for EigenLayer's competitors to create similar products.

Rebooting can make or break new projects.

Cosmos Aggarwal's Resurgence only benefits blockchains with existing network effects for existing economic ties or overlapping communities.

It also looks to restructure protocols similar to the venture capital arm, which may discourage sole stakeholders and further centralize networks.

Finally, a competing layer-1 blockchain may not be re-aligned between chains. He feels that the design of EigenLayer could be improved because of this.

Although EigenLayer is designed as a security system that brings trust from Ethereum, developers create their own tokens and revenue models. This has pluses and minuses.

In some cases, new tokens may benefit from Ethereum's trust layer. “This advantage of the trust layer can arise because these alt Layer 1s are expected to export any trust because of the tokonomics they want to try and achieve (ie, using their own token — their own agendas),” Choi said. Ethereum is gone anyway.

On the other hand, experimental, well-meaning projects may now have a chance of success thanks to EigenLayer. That's why Choi thinks the ultimate potential benefit EigenLayer is offering is that other blockchains that don't need to run their own sets of validators and stakers have a chance to transition to success.

Aggarwal should also be re-placed in risk control parameters, with appropriate checks. Re-priming premiers require intelligently programmed management such as discounted voting power for re-minted tokens on another chain. For example, a resetter cannot have more than 20% of the vote for another chain.

So, is remining a good thing for Ethereum?

Purists say that Ethereum should only protect the Ethereum Beacon Chain and nothing else. [They] Ethereum security should not be transferred to anything else. But I don't think it's a bad thing to have the intersection operators do another job,” says Sassano.

“If it can happen on the Ethereum network, it will happen. If the network can't handle it and the Ethereum chain becomes unreliable because of it and there are side effects because of it, then Ethereum as a protocol was not properly designed and needs to be improved.”

We will have enough information soon.

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The highest parasol

Max Parasol is a researcher at the RMIT Blockchain Innovation Hub. He worked as a lawyer, in private equity and was part of an ambitious early-stage crypto startup.

Follow the author @maxparasol