EigenLayer’s Potential Yield Crisis

EigenLayer, a leading restaking protocol on Ethereum, may be facing a significant yield crisis, according to experts in the industry. The protocol has experienced rapid growth in total value locked (TVL), potentially outgrowing its Actively Validated Services (AVS) and resulting in a major reduction in yield. Chudnov, a builder at 3Jane derivatives exchange, expressed concerns in a recent post that with EigenLayer having over $15 billion in TVL, the AVSs would only require less than 10% of that amount for security, leading to a potential collapse in yields.

EigenLayer recently removed the limits on all liquid staking tokens (LSTs) on April 16th, as announced. The protocol was launched on the Ethereum mainnet on April 10th. When users stake LSTs through EigenLayer, they are automatically delegated to a node operator who uses the deposits to secure an AVS on EigenLayer and earns staking rewards, a portion of which is passed on to the user. The AVSs require significantly less staked Ether for security than what EigenLayer currently holds, which poses future issues as the protocol continues to grow.

Chudnov highlights the problem by stating that none of the AVSs will come close to needing $1.5 billion, let alone $15 billion, for security. The essence of Proof-of-Stake is that the value of the stake should be higher than the potential profit from dishonest behavior by a validator. has reached out to EigenLayer for a comment on this matter.

EigenLayer currently ranks as the second-largest protocol on Ethereum, trailing behind the liquid staking protocol Lido. According to DefiLlama, EigenLayer’s TVL has increased by more than 16% in the past month, reaching $14.15 billion. The issue may worsen as altcoin prices decline, as AVSs may lack incentive to hold excess on-chain capital.

To address this challenge, one potential solution could involve launching a series of tokens to increase the security budget requirements, although this may only serve as a temporary fix. Alternatively, integrating EigenLayer more deeply into the decentralized finance (DeFi) ecosystem and expanding the utility of LSTs could offer a more permanent solution. This approach would fortify EigenLayer’s position in the DeFi ecosystem and provide AVSs with more time to find sustainable strategies at a lower cost, explains Chudnov.