Can EigenLayer Live Up to Expectations?

EigenLayer is undeniably the most anticipated airdrop opportunity in the history of crypto, but is a down-only move after the token drop inevitable for both EIGEN and the broader Ethereum ecosystem?

Building at the forefront of restaking, EigenLayer creates a marketplace for shared security, allowing developers who seek to create decentralized networks to circumvent the difficulties associated with bootstrapping and operating their own trust network, lowering the barriers to entry for creating these networks and empowering the long tail of crypto-secured applications.

The EIGEN airdrop alone is poised to rank among the largest that crypto has ever seen, and depositors can easily receive boosted allocations from liquid restaking (LRT) protocols and actively validated services (AVSs)!

Nearly 5M ETH, worth approximately $15.5B, has been restaked to EigenLayer in anticipation of these impending airdrops, but there is growing concern that the yield produced by the Protocol’s AVSs will fail to satiate depositors in a post-EIGEN drop world.

Market participants are not depositing to EigenLayer out of the generosity of their own hearts, but because they believe that doing so will produce financial returns in excess of their opportunity cost, or the yield that can be generated through alternative strategies (e.g.; providing liquidity to a DEX).

While EigenLayer currently supports delegation to AVSs, they are not yet producing yield, meaning depositors are solely speculating that future airdrops will compensate them.

In the absence of actual revenues, the imagination can run wild when projecting a valuation, yet their inevitable arrival risks pouring cold water on the collective delusion that EigenLayer is easily worth tens of billions of dollar; should AVS yields disappoint, the Protocol will find it increasingly difficult to justify lofty valuations.

Direct comparables for many AVSs do not exist, however, Celestia (a blockchain that offers data availability services similar to EigenDA) only produces a couple thousand dollars in revenue per year, mere scraps for a network valued at $12B, instead relying on hefty levels of token inflation to attract stakers to secure its network.

AVSs that must adopt their own inflationary tokenomics to afford security only serve to worsen the supply glut of alts that markets have struggled to absorb in recent weeks.

To avoid the mass exodus of TVL that would occur in the event AVSs yields are inadequate, it is likely that EigenLayer will only distribute a fraction of the total tokens it intends to airdrop during its first round, allowing the promise of future EIGEN rewards to serve as a carrot incentivize depositors.

Unfortunately, should the market begin to scrutinize this sustainability, it may take the view that EigenLayer is overvalued, negatively impacting the perceived value of future airdrops and causing TVL to drain from the Protocol until an equilibrium is reached where remaining depositors feel adequately compensated for their opportunity costs of capital.

Speculators seeking to maximize their exposure to the EigenLayer opportunity often operate on high degrees of leverage, inciting demand for a wide range of crypto applications from vanilla money markets to yield-splitting protocols.

Although high-yielding EigenLayer opportunities have benefited the entire Ethereum DeFi ecosystem, depositors discontent with implied returns would unwind their trades, nuking yields and triggering negative downstream consequences for projects interdependent on the success of restaking.

Furthermore, EigenLayer has been a major ETH sink since December, seeing deposits swell by 6,100% in just under 5 months. If the marginal inflows to ETH from EigenLayer users seeking exposure to airdrops were to switch into sales while they simultaneously abandon the DeFi protocols that facilitate their speculative activities, the price of Ether and other related crypto assets would be adversely affected.

By targeting greatness and catalyzing a revolution in crypto economic security, EigenLayer made front-running its airdrop an obvious play, but no return in crypto comes without risk and it is questionable whether EigenLayer’s current level of deposits is sustainable.

While protocols can freely mint and inflate their tokens, market participants must purchase the ever-increasing amounts of supply, or else token prices will trade lower.

Devoid of any live AVSs, it is impossible to know whether their emissions will be absorbed, and while the concept EigenLayer is pursuing is certainly laudable, it remains to be seen whether restaking is truly the next great crypto innovation or just another crypto pipe dream dependent on unsustainable levels of token inflation that generate little real revenue.

Should the latter case prove out to be true, EigenLayer will be relegated to the “bad ideas” bin, dealing a significant blow to the Ethereum ecosystem with the loss of a key shared narrative.