Unlimited deposit amount for EigenLayer, or the reason for the surge in TVL.
Author: Nan Zhi, Odaily Star Daily
Restaking is undoubtedly one of the hottest narratives in the past two years.
The leading Ethereum restaking protocol EigenLayer has a TVL of over 770,000 ETH, and the open deposit window has reached the upper limit in a very short time on multiple occasions. Within just three months of the launch of Renzo, a heavy restaking protocol based on EigenLayer, the TVL exceeded 100 million USD, a growth achieved mainly in January this year.
What advantages does Renzo have to occupy a place in the Restaking track?
Restaking and EigenLayer
What is Restaking
The concept of Restaking was proposed by Eigenlayer founder Sreeram Kannan. Its core mechanism allows ETH and various LST to be restaked on other protocols or chains and participate in their validation process. EigenLayer directly connects to Ethereum's security and liquidity through Actively Validated Services (AVS), allowing users to enjoy Ethereum's security without the need to establish a separate economic and validation system.
In short, EigenLayer is a token economic security leasing market.
Token economic security refers to the decentralized nature of protocols to ensure effective operation, requiring network validators to participate in projects by staking tokens. If validators fail to fulfill their obligations, their staked tokens will be slashed.
As a platform, EigenLayer raises assets from LST holders and uses the raised LST assets as collateral to provide convenient and low-cost AVS services to demand-side entities such as middleware, application chains, and Rollups. EigenLayer matches service providers and has dedicated staking service providers responsible for specific staking security services.
Supply and demand sides of Restaking
Before the emergence of the Restaking model, if a project wanted to achieve secure startup and operation by building its own validation node network, it would incur high economic and time costs. The project would need to establish a network, issue tokens at a high valuation to meet validator reward demands, validators would need to invest in hardware and stake initial tokens, leading to continuous incentive selling pressure.
Through Restaking, protocols can reduce the cost of building their own trust network, avoiding the need to build one and instead purchasing assets and validators on EigenLayer at a low cost to enjoy full security. They can also adjust security levels according to their different development stage needs.
For LST providers (such as stETH, rETH, cbETH, etc.), through EigenLayer, they can not only receive native staking rewards but also further receive a new layer of rewards from demand-side entities.
Renzo
What issues does EigenLayer face?
EigenLayer uses LST as collateral to provide protection for AVS. However, this does not mean that the validation services of AVS can provide the same level of security as Ethereum. Ethereum's strong security is provided by its large number of nodes and ETH staking amount, which the node quantity and staking amount purchased by demand-side entities from EigenLayer cannot match. In short, the security provided by EigenLayer is limited.
In addition, the Renzo whitepaper points out that EigenLayer also faces allocation strategy issues:
Users need to decide to protect one or more combinations of many AVS. The ideal situation is for users to be able to 100% protect all AVS, with honest operator behavior and minimal slashing risk. However, to establish a robust Restaking system, restakers must be able to quantify slashing risk and choose to protect certain more favorable AVS while reducing participation in other less attractive AVS.
Renzo assumes a scenario with only 3 AVS, which would result in 7 allocation strategies:
①Protect only AVS A; ②Protect only AVS B; ③Protect only AVS C; ④Protect AB simultaneously; … ⑦Protect ABC simultaneously
With the increase in AVS, the choices will grow exponentially. For example, there are 32,767 possible strategies for just 15 AVS running on EigenLayer. In addition, various factors need to be considered, including expansion requirements, AVS security audits, and the economic models of AVS themselves.
How does Renzo solve this?
Renzo abstracts the complex process of end-user Restaking, relieving restakers from the active selection and management of operators and reward strategies.
Renzo categorizes AVS risk into two types: slashing risk and liquidity risk, and quantifies them to build a portfolio.
Slashing risk: It calculates the maximum loss (MaxLoss) of protecting one or more AVS. The higher the maximum loss, the greater the strategy risk. This helps to assess additional risks of protecting new AVS or to weigh the risk of choosing one AVS over another.
Liquidity risk: Renzo defines a Risk-Adjusted Reward Ratio (RAR) by calculating staking rewards, base costs, and maximum loss. Similar to the Sharpe ratio, it evaluates the performance of investments by calculating the return and risk of investments. Users would want to maximize the RAR of their portfolio and allocate more funds to AVS that improve RAR (i.e., provide higher returns and lower slashing risk).
Renzo states that more details will be released in subsequent documents, but they are not currently public.
Funding situation
A week ago, EigenLayer's liquidity restaking protocol Renzo announced the completion of a $3.2 million seed round of financing, led by Maven 11, with participation from SevenX Ventures, IOSG Ventures, Figment Capital, Bodhi Ventures, OKX Ventures, Mantle Ecosystem, Robot Ventures, Paper Ventures, and others. According to OKX Ventures, this is their first publicly announced investment in the EigenLayer ecosystem.
Points program
On January 4th, Renzo announced the launch of the points program Renzo ezPoints. ezPoints aims to reward users who contribute to the protocol. The first way to earn points is by minting ezETH. ezETH is Renzo's liquidity restaking token, which automatically earns rewards and ensures liquidity. Users can participate in DeFi with ezETH while retaining restaking rewards. Users providing liquidity to ezETH in DEX will also receive additional multiplier rewards in ezPoints.
In addition, Renzo states that there is a limit on the amount of LST deposits in EigenLayer, but there is currently no limit on native ETH deposits. However, most users find it difficult to obtain this, as it requires users to own 32 ETH and run an Ethereum node integrated with EigenLayer to operate EigenPods. In Renzo, there is no limit to the amount of tokens deposited, which has become one of the main factors contributing to the surge in Renzo's TVL.
Conclusion
EigenLayer completed a $50 million Series A financing in March last year, and each round of deposit limits quickly reached the hard cap. Renzo's unlimited deposit offering provides users with a smooth way to participate and receive multiple rewards from EigenLayer and Renzo. On the other hand, EigenLayer will not begin protecting AVS until mid-2024, and the specific operational processes and details are still to be explored further. Renzo provides practical logic and method guidance for the fundamental token economic security allocation issues in Restaking.
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