Reset Introduces ‘Hidden Threats’ to Ethereum – Coinbase

Ethereum's reformulation could create a “bed” for a variety of new decentralized applications on the blockchain, but it could also introduce a number of new hidden risks, according to Coinbase.

In a research report on April 2, Coinbase analysts David Han and David Dung pointed out a number of risks with re-exit and so-called liquid recovery tokens (LRTs).

Ethereum's rebalancing protocol, Eigenlayer, allows users to earn additional rewards by enabling Verified Deposit Services (AVS), which are used to deposit Ether (ETH) through liquid deposit protocols such as Lido (LDO).

When the Eigenlayer protocol was first launched, analysts explained that the re-issuance process should be “very simple”, but the nature of EigenLayer is that tokens held on one AVS can be re-held on another AVS.

“While this may increase revenue, it may also increase risk,” the analysts said, adding that the same funds would be allocated to the same insurers for additional production.

Second, the rise of LRTs means that remanufacturers can concentrate in high-risk suppliers that offer the highest yields.

“Therefore, LRTs may be incentivized to upgrade their products to gain market share, but these may come at the cost of a higher (albeit hidden) risk profile,” he added.

The analysts also warned that LRT providers and decentralized autonomous organizations (DAOs) would be incentivized to “take multiple iterations to remain competitive.”

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Despite the risks, the analysts said that EigenLayer's staking protocol “seems poised to become a hub for a variety of new services and middleware on Ethereum, which, in turn, could create a meaningful source of ETH rewards for validators in the future.”

Han and Duong predict that although the amount of regenerated ETH will continue to grow in the long term, there may be a reasonable short-term reduction in Eigenlayer's TVL when point farming ends or if early AVS rewards are lower than expected.

In the year On March 6, Eigenlayer overtook lending giant Aave to become the second-largest DeFi protocol with a total of $11.5 billion in total locked-in (TVL) orders per Defillama — after Ethereum's liquid staking protocol Lido.

The market's enthusiasm for the relaunch has already drawn controversy, and Ethereum developers warn that it could create a worrisome profit.

Backers, on the other hand, claim that it will provide additional rewards to those who already hold their ETH.

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