Episode 15 - The Open Metaverse Podcast
In this episode of the Open Metaverse Podcast, we demystify the buzz surrounding EigenLayer, a revolutionary project set to supercharge Ethereum. EigenLayer is presented as a platform that empowers middleware to leverage Ethereum's robust security, thereby broadening the horizons for trustless innovation. In addition, we delve into the potential risks tied to re-staking, EigenLayer's unique business model, and the necessity and value proposition of having a native middle-layer token of Ethereum in the presence of EigenLayer. We further address a key question: Does EigenLayer compromise the existing security and social consensus of Ethereum?
If you could work with any other L1 apart from Ethereum, which one would it be and why?
Of course it's Bitcoin. Even though they hate us, I started with like thinking about how to build chat trust on Bitcoin before figuring out that Ethereum is the right substrate. But it's also the philosophy of open innovation is much, much more at the center of Ethereum than it is at the center of say, Bitcoin.
Great to have you with us here on, on the Open Metaverse. I guess before we jump in, can you give us a quick intro into who you are.
Thank you Mohamed and Mehdi my pleasure to be here in the Open Metaverse podcast. I love the name by the way. We'll get into that later. I'm Sreeram, I'm a founder of a project called EigenLayer and also associate professor at the University of Washington, Seattle where I run the UW blockchain Research Lab.
I've been working on scaling and protocol research for blockchains on the infrastructure stack over the last six years. And my background. In peer-to-peer networks schools far back from 2006 to 2011, I did my master's in PhD in peer-to-peer wireless systems and before switching out to work on human genomics for 10 years and then coming back again to peer-to-peer blockchain systems. Pleasure to be here.
And pleasure to have you on board, and wow, what an introduction. So EigenLayer is a project that a lot of people have heard of in the space, I guess for those that haven't, how does EigenLayer work and what was the spark behind the idea for EigenLayer?
As I mentioned, I've done a bunch of research at the University of Washington on consensus protocols and scaling.
And when you work on consensus protocols are basically any infrastructure layer you run into a major problem. The problem is when you have a new idea, if you have a new idea for a smart contract application, you could just take your idea and then like put it on top Ethereum or some other big blockchains and just see if users want to use it, find product market fit, and then start scaling what you want do.
Whereas if you had an idea, which is at the consensus layer, scaling layer, virtual machine, any of these like really core layers, then what happens is, the only option you're left with is you have to go build your own like chain. And I think that's such a high bar, right? There are maybe like 5 - 10 successful like L1 chains.
There are thousands of successful applications of smart contracts. And we all know in the space that we are bottlenecked fundamentally, at a basic level by infra. Like, we need not like five ideas for infra. We need like 500 ideas for infra. And then figure out which one actually works.
And there's no place to actually go play, experiment, try in a low friction manner with a low entry barrier for innovators at the infrastructure layer to actually go deploy something new and see if it's working, see and improve it, and then scale it up. Because when you create a new infrastructure, you need a decentralized trust network that actually supports that particular infrastructure, right?
And the way you usually do this is create new token and then like, ask people to buy and stake that token and that is your like validator set for that particular system. And not only is it like really painful to actually do it because you have to create the token system, the economics around it.
And find a bunch of like decentralized validators around the world. But the more fundamental problem is that there is a certain, even after you do all of these things, your total economic security is the amount of token that has been staked and to, so the only way you get more security in your system, in a Proof-of-stake system, the security comes from the economics, which is actually how much, what fraction or like what amount of tokens have been staked and made a commitment that they're actually validating the blocks for that particular blockchain or system.
And if your own like tokens market cap is a hundred million, you cannot get more security than a hundred million. So that is a kind of like a fundamental problem there. And that makes it impossible for you to bootstrap because on the one side you'll have Ethereum sitting at 35 billion dollars staking. So how are you, what applications are gonna trust, like a hundred million staking. So an on a token, which itself is like highly volatile and speculative. So these are the kind of fundamental problems as we saw it as innovators in the infrastructure space and what we thought were bottleneck problems. So over several years we were playing around with architectures for what I called borrowing or renting trust. Right?
Right now the only way like you get trust is you build your own like decentralized trust network, which is actually huge like, powerlink. Instead of doing that, could we just go and rent trust from somebody? And we did a lot of different variations on this team before we actually arrived at EigenLayer.
So that brings me to EigenLayer. EigenLayer the name connotes Eigen in German for your own. So EigenLayer is your own layer. You can build anything you want. The this podcast is called the Open Metaverse Podcast. And like one of our vision is what we call open innovation. And open innovation is the ability for anybody to come and create new innovations without themselves having a huge amount of barrier.
And all of these innovations then interact and compose with each other to create very powerful systems. So EigenLayer, the Eigen name is connotes this idea of open innovation and layer, basically connotes the idea that all these layers interact with each other. You're not in your own silo, like you are building your own layer, but these layers all kind of compound and collaborate with each other to actually make something quite powerful.
So that's the name, but what does it do? How does it work? EigenLayer works by first getting into the root of trust of Ethereum. How is Ethereum secure? So EigenLayer is built on top of Ethereum. It's not a new layer one blockchain or a new system. It's a series of smart contracts on Ethereum. That's all it is.
It's actually just a set of smart contracts on Ethereum. What do these contracts do? These contracts allow Stakers in Ethereum. So if you look at Ethereum, where is the trust coming from? Trust is coming from Stakers, putting down some bunch of ETH, some money, and making a claim that they're going to validate Ethereum blocks correctly.
The EigenLayer system makes staking much more programmable. We call this paradigm restaking. You can also think of it as programmable staking. So you stake your ETH into Ethereum and then you make a claim saying that I'm not only validating Ethereum blocks, but I'm also validating. Like Mohamed's data storage protocol or maybe these Oracle protocol or like some other thing and say, not only one, but many of these different protocols that I'm actually validating for.
I make a command in the EigenLayer contracts and say that staking for Ethereum, but I'm also staking for all these other services. Okay, so that's it. That's the core idea. The core idea is restaking, which is just programmable staking the idea that when I stake in Ethereum, I'm also making a claim that I'm staking these other things correctly.
I'm validating these other things correctly. And the particular way in which you actually do it, there are two moats in our restaking we call liquid restaking and native restaking. Liquid restaking is if you're participating in any liquid staking protocol. So you already have, it could be Lido or Rocket Pool or Coinbase or any of these other protocols you actually get token, which represents your liquid staking position, take the liquid staking position and then deposit that into the EigenLayer contracts, the token, right?
And deposit that into the EigenLayer contracts, and then make claims on which set of services you're actually downloading and running. So when you make a claim, you have to actually go and of course, also download and run these services. That's how you're actually validating for all these services. So that's number one, like, liquid restaking, which is take a liquid staking token, deposit it to EigenLayer contracts.
Make a claim that you are going to serve a certain bunch of services. The second one is native restaking, but you deposit your ETH into the Ethereum contracts, and normally you would set yourself as the withdrawal address because you would be able to then withdraw the money from Ethereum. But in the EigenLayer workflow, you set the withdrawal address to the EigenLayer contracts.
In the EigenLayer contracts, you set the withdrawal address to yourself. So basically it's just one step along the withdrawal flow. So withdrawal goes from Ethereum to EigenLayer to you. So why this is important is that when you try to, if you did attack the system in any way, if you tried to attack the protocols for which you're staking, and it's true and on the EigenLayer contracts and the service contracts that you're actually working with, that you are created a malicious action, then you may not be able to withdraw your full amount.
And why would you do this? You do this because you're getting additional rewards from all of these systems. Every system that you make credible commitment to actually validate, they may have their own reward mechanics. EigenLayer is a free market. So you kind of figure out is it enough fees for you to compensate for your work that you're actually doing.
And you have to also evaluate whether the conditions that you're opting in are correct or not. So that's the core idea of EigenLayer. It is in some sense a multi-sided marketplace. On the one side you have stakers who put in the stake. They may themselves be node operators, or they may delegate to some node operators.
So the stakers and node operators on the one side. And on the other side you have people building new services. And these could be new consensus protocols, new scalability, new virtual machines, new kinds of Oracles, data storage, data availability, any of these, like whatever you need decentralized trust for. All of them can be a consumer of the staking trust created in EigenLayer.
So that's the, a brief overview of the EigenLayer system.
Sreeram, there's a lot to unpack here. So my first question is regarding those who are familiar with Cosmo's interchange security system. How would you say EigenLayer is similar or different? Because even in that ecosystem there is a pool security through a shared validator set.
How would you say EigenLayer is similar and different?
Yeah, absolutely. Great question. It would say that, I would say there are really two antecedents or like two precedents, too the EigenLayer system. On the one side, starting from Bitcoin, there is the concept called merge mining. So the idea of merge mining is, Hey, already I'm spending so much of energy in mining Bitcoin, can I also use that same energy to like secure other systems?
So this is the concept of merge mining and the problem with merge mining, oh, while it's a great idea, like, conceptually that you are expanding so much energy to secure Bitcoin, why not also use it to secure other systems? And, but the particular implementation has an economic problem, which is that even if like a lot of mining, the mining power uses merge mining technology to secure a new chain or a new coin.
The problem is even if a hundred percent of the miners opt in to, it's also an opt in system. So if you opt in to secure these other systems, you don't have to do additional mining. But also what it means is, if all the hundred percent of the Bitcoin stakers, if they, or even a few hundred percent of them decide to attack this new coin or new system, they have nothing to lose.
Because if they attack the system, we can, we are not going to be able to identify which miners did it. And even if you identify what are we gonna do, go and burn their mining equipment, like that's not a thing that we can do. So the problem is it's very difficult to transfer trust from Bitcoin to any other system.
So that's the problem with merch mining. So, which is part of why initially people were very excited. This dates all the way back to actually Satoshi Nakamoto has returned in the Bitcoin forums about, the idea of merge mining. But this problem basically limited its utility and the next precedent to EigenLayer is the interchange security paradigm from Cosmos, which is the idea that the, a chain in Cosmos can vote via governance's vote.
To say that I'm not only validating the Atom Cosmos Hub chain, but I'm also validating like this new chain and that new chain and so on. So, when in the Cosmos interchange security model, when you're opting into many systems, you are actually specifying via governance what other systems you're supposed to be validating.
And why is governance needed? It's because the entire chains validators also validate all these other systems, and if they, when they validate the other system, if they behave badly. The same example I gave in the merge mining, suppose you know, if the Cosmos behave badly on other system, the government is going to decide that's a bad thing.
And going to impose negative penalties on the Cosmos Hub validators. So that was the scope of the the interchange security. So having worked in blockchain and consensus research for five, six years. I had come to a point where anything that goes through governance, I'm like, okay, that's a highly political battle that I don't want to kind of participate in.
It's in some sense, like, I said one of our goals is open innovation. One the way of saying it is permissionless innovation. Permissionless innovation means I don't need really, everybody's permission to do what I'm doing. And this kind of a governance vote is actually a limitation.
And if you look at Ethereum, there is no governance, which can vote you in, that's a more fundamental problem. Like there's, Ethereum's not gonna say all Ethereum validators should also validate like, this new EigenLayer chain or something like, that's not a possibility. So we have a completely different set of constraints when you're trying to get trust from Bitcoin or Ethereum.
And then, like I mentioned, the trust from Bitcoin seems to be non-transferrable. Okay? So that's EigenLayer in the pre EigenLayer world. And like the idea of EigenLayer was basically why not make it an opt-in market? An opt-in market is where each staker individually can opt-in. Like it's not the whole system, not the whole Ethereum turning its eyes towards like, Hey, I like this new protocol.
But instead, every single node has a freedom to opt-in to the EigenLayer system. So that's a first difference. And, but then the problem immediately arises if each node is deciding whether to opt-in. What if some bunch of nodes opt-in to a new system? So this, by the way, another precedent to this is something like the Avalanche Subnets.
Avalanche had this concept called a Subnet, which is, hey guys, Avalanche validators can also opt in and secure some other systems. But this word secure is used very lightly there. Like, what does it mean to secure? Okay I take a bunch of like nodes and then those subset of nodes opt-in and like, validate my new system.
What if they attack my new system? What happens? Actually, nothing happens. So that's a problem. So that, in Ethereum land this is considered like, not secure. Okay. So because, security is, so, there are different kinds of security models one can think of. And the harshest or the sharpest security model, I think is the economic security model that says that if something bad happens, I know that attributably like this bunch of money is gonna be burnt.
Right? Like that is a very powerful statement. Why? Because even if everybody in the world colludes to like, imagine like all. Everybody in the system, all of the ETH in the system is controlled by a single person. If they create some invalid block or if they create two blocks with the same block number, whatever, they'll lose all their ETH.
That's what will happen. So that's a very powerful negative incentive. Okay, so can we bring this kind of like powerful negative incentive into an opt-in system? So the idea of EigenLayer basically EigenLayer solves that problem, which is when you opt into the EigenLayer system, you are opting into new slashing conditions.
That's the new thing with EigenLayer. It's different from all these other systems because when you opt in to EigenLayer, you are specifically saying each of the new services can write like slashing conditions. Slashing is the negative incentive mechanism in Ethereum, which says that if you opt in, if you are a, staked for Ethereum, and then do an invalid malicious action, then you may lose your ETH.
We bring the same theory and the same idea into the EigenLayer system. And say that you opt into the EigenLayer contracts, and now each service can build what we call a service contract. And the service contract specifies what's the registration condition? What is the payment condition, okay? If you opt into my system, why would you opt in If all you get is slashing no, you're opting in because you're also getting payments for your hard work.
But of course, if you claim to do hard work but do like, malicious work, you'll lose your ETH. So that's what like gives the carrot and the sticks are built together into the EigenLayer system. And this is only really possible I think, it's not possible in Bitcoin, but it's possible in Ethereum because you need two fundamental features. First feature is you need staking, staking should be the root of trust. And Bitcoin is not based on staking because in proof of work, you cannot impose negative penalties, improve of stake, you can impose negative penalties because you can take away stake. You cannot burn the mining equipment. So that's the kind of comparison between the two systems.
Sreeram, can you touch upon the carrot side with things?
So in terms of the carrot, how is the reward distributed? Is it the native token of a middleware or a protocol, or is it some kind of a business model, like a SaaS base sharing?
Oh, this is a, this is really, really important. Thank you Mehdi, for bringing that up. Okay. So when you think of building a service on EigenLayer you have many different kinds of business models. So EigenLayer is like, like I said, designed to be open innovation system, which means we want to keep the system as open as possible to the variety of economic models as well.
So what are the economic models? Model number one, you can think of just building a company like a SaaS company on EigenLayer, What would you do? You would say basically, Hey, here is my oracle service or ordering server, or here is my data storage service. Okay. And you would say that whenever, your users store one gigabyte of data, they're paying one ETH, some number.
Okay, one ETH. And when they're storing one gigabyte they're paying one ETH. And I ask the creator of the protocol, I have a wallet and I can take like 30%, 50% of it. You decide what these numbers are. It's not prefixed in the system, and I take this much, and then the remaining is paid to the stakers.
Okay. And the stakers look at it and say, okay, that means I'm getting like 0.7 ETH per gigabyte of storage. Is that good enough for me or 0.5 ETH per gigabyte? Is it good enough for me? They opt in. Right. So this is model number one is, you can actually build a pure SaaS model on EigenLayer. Like you just have a company and you have a wallet and you, so now what?
What this means is if you're a Facebook, if you're an IBM, if you're a Microsoft, if you're an Amazon, anybody, if you're a PayPal, anybody can come and create new services and they're themselves not a trust bottleneck in the system because they're not actually controlling the end nodes that's running the system.
The end nodes that's running the system are Ethereum stakers. It's not like Microsoft or PayPal or whatever, right? But they're the innovators creating new ideas and new systems. They just distributed on EigenLayer and EigenLayer nodes validate it. And as they validate it, there's a share of revenue that goes to the innovator and the share of the revenue that goes to the hard work, the stakers.
So that's one model. It's a very Web2 or like a non crypto model, but this actually is also huge unlocked you to EigenLayer, that everybody who's innovating doesn't have to worry about like, decentralizing themselves because decentralization is needed. On the validation side, decentralization is not needed on the, necessarily for each idea, or the innovator needs to be decentralized.
So that's number one. Number two is a different model where you could say, oh, I don't want to, I wanna have a token. I don't wanna be like a Web2 company. And depending on your jurisdiction, depending on various things, you may make a decision to say that actually I need my protocol to have an internal token.
You could say that the fraction of the fees that goes to the wallet is, doesn't go to the wallet, it goes to DAO, which is controlled by your own token. It's another model. A third model might be, you'd say, not only that there is a new token and I'm actually getting a fraction of the fees going to the token.
I also take my token and use that token to pay the stakers. So it's also the payment token, so you can add on, so, so you can add a DAO token, you can add a, you can add a payment token functionality as well. Then you say no, actually, like, I really use, it's useful for my system to also have my token be the staking token.
Then you say, but, EigenLayer is basically helping each stakers participate. But you can now create what we call dual staking models, where you have your own token stakers. Imagine you're building an oracle. You say that the price fee is valid only if your own token stakers give a certain price fee.
And the each stakers agree on the price fee. So you have two columns, two groups of people who could be somewhat distinct, but they're providing an input and you match those inputs and they should be within some tolerance, only then you agree that it's a valid input. So this is a variety of different models.
Going from I want be a company and, but I want to use decentralized trust in serving queries to my system, to, I'm basically like a fully crypto native project. I wanna use my token as a DAO, as a payment token, as a staking token. All of it. And the EigenLayer system's highly flexible. To accommodate all of these things.
So with that in mind, what would you say is the competitive edge of this specific business model and with the marketplace, how are you thinking about solving the existing chicken & egg problem? With regards to the staking?
Yes. So as a marketplace, so what happens is, just like any other, so one way to think of EigenLayer, it's a marketplace for decentralized trust.
So anybody who wants to use decentralized trust can go create one themselves or can borrow decentralized trust from Ethereum. So EigenLayer, so what's the marketplace dynamic? So you have two sites, fundamentally, the staking and the services, and there's a kind of like a natural flywheel. The more the stake, the more the security.
The more the security, the more the applications. The more the applications, the more the fees. The more the fees, the more the stake. So you have like the natural flywheel of a marketplace built in.
Okay. So how do we kickstart this kind of a flywheel? Firstly, we observe that the, the system is a kind of strict improvement for several categories of people.
And so, that's the natural value proposition. So systems that unlock locked are trapped energy, like, suddenly enable more things to be done with it. And for example I'll explain the different sides of the market and why it's suddenly opens up some trapped energy on the stakers side.
If you're staking on Ethereum, on your own, if you're an institution, if you are your own, like, home staker, any of these things, if you're staking, then your stake is only serving the Ethereum block production. It's not serving anything else. But if you could use that stake to also serve like several other applications, you are getting a strictly additional ETH.
Okay, so that's number one for the stakers. There is the value proposition of serving many applications and getting more fees based on that. So that's the value proposition for the stakers. And it's strictly better than what is there today. So that's a immediate attraction for them. And one thing to think about here is, they can do this without having to trust a particular liquids staking protocol or some other third party because they're themselves doing the validation services for all these services built on top of EigenLayer.
And because they're themselves, the agent for all these other services, they know that if they don't do any malicious or invalid actions on these other systems, they'll never lose ETH. So the kind of risk that you take in EigenLayer is very, very different from the kind of risk you would take in a DeFi protocol or take your staked ETH and put it into like a Aave or Compound, or a margin lending or like any kind of like perps or anything. Because the risks that you take in DeFi are price risks. The risks that you take in like, EigenLayer, is just a universal validation system, is validation risk and validation risks is endogeneous and you control it. Price risk is exogenous.
The price is not your determination. If you take a 10x leverage on a market, like, and the price moves by 10%, you'll liquidate it. Like that is the rule of that you're opting into. But if you opt into 10 services and validate all of them correctly, nobody can take your away from you. So it's a very, it's the lowest risk in the kind of hierarchy of risks.
So many more people will be willing because they can control it. I think that's the reason that they, because they can control it, they're willing to opt in. So that's number one. Of the supply side of security, the demand side of security is who's using the security services. And here I mentioned like my own like, history with this, which is as an innovator, you create new things.
And imagine you're a distributed systems builder and like you are really good at building consensus protocol or something. Whether you go today, you go work at the Ethereum Foundation or like Solana or something. Like there are five places you can go and work on. Instead, if you are, in the EigenLayer world, every distributed systems builder, infrastructure builder can come and say, ah, here is a problem.
I just solved this narrow problem, throw it on top of EigenLayer. And many, many such systems can be built one for each particular slice of a problem. And whenever a user is, or a user facing application is built, they'll use a composition of these different systems.
Exactly like what we saw in the cloud era where, you have, let's say 1994, if you wanted to build a web application, you are to build the application, you're to build the server, you're to build the identity stack, you're to build the payment stack, you're to build the DB stack.
You just had to build everything, right? Like that's the 1994 internet.
In 2023. If you wanna build an application on the internet, you would say, use AWS, use MongoDB, use Plaid, use Stripe, tie all of these together and build a user facing application. Use Shopify, whatever. Let's the stack that you're using, like you can just like tie all these together.
That's the same thing we envision in the crypto world, where once you have EigenLayer, people can build these services. There's an ordering service, there's a settlement service, there's a bridge service, there is a oracle service, there is a kind of metaverse adapter. Like all of these like really interesting things.
And everybody will come up with one narrow specific thing that they're really good at. Build that thing. And then let user facing applications compose these things and Ethereum becomes the trust layer for this crypto stack, So that's our reel, yeah.
So Sreeram, you did talk about the flywheel effect, which is great, but with regards to the inertia of the flywheel, especially stemming from the demand side of things. Trust becomes very important.
Because if people wouldn't stake, restaking wouldn't happen. Like if people wouldn't restake, the flywheel wouldn't move. And we also saw this issue with Lido where initially there was some reluctance to get that staked ETH, stETH. So how are you going to solve the issue with regards to the trust?
What will be the go-to-market strategy there?
We take a lot of precaution on the security side to assure stakeholder security. The two major precautions are, number one is withdrawal. So one of the really useful things with a system like EigenLayer, which is very different from most other systems, is the security risk you're most worried about is loss of funds, right? Like you have your ETH and you lose your ETH, its out of your control, like contract has. Gets hacked or something, and then you lose your ETH. Okay? How do we prevent that? We prevent that by basically enabling the.. A withdrawal lag. So whenever you withdraw money from the EigenLayer system, it takes seven days for the withdrawal to be complete. On for seven days it's on an escrow. And what this allows is, all kinds of human monitoring, automated monitoring systems to be tracking the system and seeing that all withdrawals are valid and correct. And if they're not correct, like, there is a, community multisig, which can actually step in and upgrade the contracts and so on.
So that's number one, is unlike systems like bridges where you can move a lot of funds instantaneously, because that is the utility that you're trying to serve with bridges is, oh, you can move funds back and forth instantaneously. EigenLayer is a staking system and staking is a long-term activity.
And long-term activity usually also has like entry and exit frictions, and you have a exit friction that potentially mitigates a lot of the risks. That's number one. Number two, like what if some service slashes you like Illegally, right? Like that is a risk that you have to be worried about. And we are coming up with a variety of solutions.
The simplest solution is what I'll start with, there is a slashing veto committee. Like the slashing veto committee basically can do only one thing. It looks at the slashing contracts and sees whether the slashing was done correctly or is there a bug in the slashing contract. And if there's a bug in the slashing contract and slashing was triggered, it can veto it before slashing actually happens.
So you have the protection of the slashing veto. So slashing occurs only if the automated contract triggers it and the human committee approach it. So that's the double, double protection model. Okay. So that's the slashing veto. But we are also looking at much more interesting and advanced systems for protecting slashing.
And one of the most interesting is we are working with a project called Cubist. Which is run by a professor out of the Carnegie Mellon University. And the idea there is to use things like secure on clicks, like, hardware security, where before you make a signature to an EigenLayer like system, you would actually check that this signature will not trigger a slashing on the EigenLayer contracts.
You, basically like proactively running through the system and checking that, okay, actually my signature will not violate any conditions. So this is like a universal module that can be used across many cells. So, but you know, these are under research right now, but the core ideas we are launching with are the withdrawal lags and the community multisig.
But over time we have a variety of different ideas to improve the resilience of the system so that as a participant in the system, you can have higher and higher trust that whatever is you are opting into is actually not gonna slash you maliciously. So this is on the security supply side.
So Sreeram, whatever you have mentioned it, it kind of feels like EigenLayer is going to become a very important primitive in the Ethereum ecosystem.
So my question is, how is EigenLayer ensuring decentralization with respects to different controlled mechanism it has, to ensure there is no single point of failure since a lot of protocol as well as middleware that will build on top of Ethereum will leverage this trust?
There are really two things going on.
Number one is the, so I'll separate this question into decentralization of control and power and also decentralization of the validator set. Because what we don't want, so firstly, when we worry about decentralization, we need to figure out like what particular aspects are we worried about? For example, in a liquids staking protocol, one of the things we are particularly worried about, if the, if there's a small group of validators which validate all of the Ethereum transactions, then they can participate in censorship and various things that can be to the adverse effect of the system.
And this happens in systems which have to make a choice, like a liquid staking system has to make a choice of the validator set and say that only these are like trusted validators because otherwise anybody can do something bad to the system. EigenLayer is not like that. EigenLayer is, does not restrict the set of validators, is actually a open system where anybody can be a validator and so because it's not a liquid taking protocol.
So that's one side to the answer, which is like, we don't control the validator set. The validator set is basically, will be similar to Ethereum. And in fact, we are already building incentives for decentralizing the Ethereum validator set even further. And why would you decentralize it even further? Because today, if you have like a validator. If you have a more aggregated or centralized validator, you actually have some economy of scale.
You don't have to actually go run thousand nodes. Instead you run one node and make thousand signatures. So that's actually like a small economy of scale in the Ethereum system, but there's no benefit to being more decentralized. So there's a minor benefit to be centralized. There's no benefit. So suppose I go and run like millions of nodes around the world, I don't get more yield.
Like that's not how it works. You get the same yield, but what can happen in EigenLayer is. There will be services which demand a more decentralized node base because they can say, I don't want the 10 decentralized nodes, I want the thousand decentralized nodes, or the 10,000 decentralized nodes. I don't, I wanna exclude these nodes.
So as services turn on EigenLayer and they say this actually, that creates an additional APR, an additional incentive for nodes to be more decentralized. So this is something we're quite excited about. In fact, we build, one of the first services that is building on EigenLayer is called Witness Chain, which is out of Princeton.
They are basically building a proof of location service. One of the damages of decentralization is geographic decentralization. So you want the node set to be geographically decentralized and you can use the Witness oracle to say that. Yeah, I want, I have node all around the world and in my system you'll get an additional incentive if you are, more decentralized, more geographically decentralized. So that's something that we are quite interested in, excited about.
But I think there's another point, which you bring up Mehdi, which is how are we thinking about decentralization of control? Which is a different question.
And I think the answer to that is, over time to make the EigenLayer contracts immutable, right? Like, as the contracts get battle tested and like formally audited and verified, like these are gonna take, a few years to be battle tested. That's the state of contract audits and verification that we are in right now.
But over the years, as it gets panel tested and verified, we can make it immutable. Except right now there is one subjective condition, which is. Who decides the slashing veto. That's the only thing that is kind of enshrined in the system. And, while in the intervening period, there'll be some governance to the protocol, which we will decentralize, which basically decides what the slashing veto is.
We're also thinking of a more open system we call, a more intersubjective system, where the slashing veto is not fixed by the governance. But anybody can come and say that, Hey, I want to be, I wanna create a new multisig for a slashing vito. And there can be many systems which actually play this role and stakers opt into, which slashing vitos they like and services opt into, which slashing vitos they trust.
And you get like this, marketplace of trust, which is another layer that can be built on top of EigenLayer.
So anyway, so that's the answer to our question. And I, just to kind of expand on our vision here, we really hope that the EigenLayer, like restaking system gets internalized and becomes default into the Ethereum protocol.
I think that's the right place for it, is over time, it's well tested and well adopted. Then basically the programmable staking should be a fundamental feature of Ethereum. It doesn't need to be a separate protocol.
Just to follow up, you did mention validator incentives. And you did ensure progression of EigenLayer.
Are you thinking about having a token in order to make sure the governance of EigenLayer is run smoothly and there are token incentives to onboard validators to create that decentralized and distributed validator set?
It is early in our life cycle to be talking about that. But we are committed to the progress of decentralization of the EigenLayer's governance, which is, because governance is not only making decisions about the upgrades of the smart contracts, but governance is making decisions about how to wet different distributed systems.
Like how do you know different systems that are building on top of EigenLayer? What measure of assurances can we give? Can there be a multi-tiered system where some of these systems are approved by the DAO or whatever? Like, so these are things we are thinking about and we are committed to the progress decentralization of, our own position in the system.
So I have a two-fold question. Typically for middleware such as Oracle or Bridges, for example security is the biggest token utility unlock. And my sense is if EigenLayer can help them secure the network, do they really need a token? So that's the first part of the question. The second part of the question is, do you think it can be a barrier of adoption or barrier of entry for EigenLayer to set up that marketplace flywheel if protocol main value proposition of having a native token is kind of gone.
And that also leads to another second order effect, where if there is no value proposition of a middleware having a token then the rewards that are issued also get slower. And then the flywheel, we were just talking about having validators and middleware is just doesn't spin. So what's your take on that?
I just want to point out first that applications already face the same exact scenario. If you're a smart contract application, your tokens not used for security. Still applications strive. In fact, applications strive the most on Ethereum. And you could've said, oh, why would you join Ethereum? In fact, you could go back to 2014 and read like all the conversations with Ethereum.
You see, why would you go and join? Like, why would you think a common staking system or a common like proof of work system will support all these applications? Why the, those systems won't have their own tokens and go their own ways? That's basically because the power of aggregated security is much higher than the power of individual security, right?
Like you go your own way, you can have a hundred million dollar token security. If you go to an aggregated security layer, you get a hundred billion dollar aggregated security over time. That's what we envision is basically, and everybody aggregates into an aggregate security model and everybody creates an additional unit of value.
And there is the additional unit of value that they create, they'll capture a portion of it. That's what happens in applications and smart contract tabs. And if you imagine a world that this possibility is available, just saying that, oh my token, this is exactly like the L1 premium kind of theory that people said, oh, L1's have a premium.
But in a world where L2's are possible, it's not clear L1's have a premium because, you don't need that. You have these different cost basis. So we cannot fight against what is possible. So that's the first answer to that question. So, in a competitive market, the economy essentially like cuts down the cost of production, and whoever is basically producing the service at the lowest cost will thrive.
And whoever is kind of like doing extraneous stuff will not thrive. Like, so that's a basic equation of the economy. Having said that, what's the utility of the token? Like, is the tokens useless? No, like I said, the tokens of like middlewares can be used for number one, governance and have a fraction of the fees channel to the DAO price fees.
That's number one. Number two, be used as a, as the token in which payments are made to the ETH stakers. Number two, number three. Participate in dual staking where one stake, one staking happens while I ETH staking and another staking happens while your token, you can ask like, why do you need two tokens?
And there is a actually like a purely game theoretical answer to this, which is that the thing that you get from ETH staking is if they ETH stakers, behave badly, you can slash them on a provable contract. But your own token stakers have a not additional different incentive, which is they have price exposure and if you do something bad, which is not provable on a contract, right, your own token stakers are still gonna be hit because their price goes up and down based on their own like systems merits.
So having a dual token model where you have like your own token stake and ETH stake is actually like generally provides new value and it hedges against like what I call endogeneous death spirals. Endogeneous death spiral is when like use only your own token for your security. And as the system, as some, if some of the token loses value due to some market shock, then people are like, oh, the system's not secure.
I'm gonna disconnect this oracle. I'm gonna move away from it. And as people do that, the token goes down even more and then completely dies. Whereas that won't happen in a dual taking model where you are like guaranteed a baseline amount of security by the ETH staking. So all of these together like assure me that actually the right configuration is in building something like the, in the EigenLayer stack.
Another example here is, we can look at 25 years of the cloud. People were like, when the cloud came it's really like, Ethereum is the decentralized cloud in the EigenLayer vision. Like you have the group of validators and they can serve Anything like that is the decentralized cloud.
And so if you think about the cloud, when the cloud came up, people were like, oh, who's got a relinquished control? Who's gonna pay somebody else for all this work? But no, actually having a team that figures out how to run, like, computational operations, upgrading of servers and making all of this correct over time is actually like a headache.
If you are a really good, if you're a snowflake, if you're a Salesforce, if you are like a hyper company, you don't wanna do that thing. It's not your thing. And you can still thrive to be a hundred billion business. And that's really what we are envisioning for crypto is people create genuine new additional aspects of utility and they capture value on that.
Of course, there is a whole other narrative story and how, we all know that crypto is shaped by narratives, but all the also, there, there is this thing that in, and, Warren Buffet has a famous quote, even though he is controversial in the crypto circles, he has hundred years of experience in the investment circles.
He says, the market is rooting mission in the short term and weighing mission in the long term, like weighing mission that weighs like the real pros and cons. And if you see, if you take that kind of a long view, what is the real value proposition? We all need to kind of think through that rather than only going through the narrative and so that's my answer to that.
Talking about narrative, one of the narratives I have been closely listening to, is alignment, like in AI. So with that narrative in mind, I have a slightly twisted question and maybe more of a thought experiment for you. So my question is on the alignment of Ethereum stakers. So for example, if initially the sole purpose of Ethereum staker was to provide security to Ethereum and generate yield from Ethereum, but now all of a sudden they can commit security to other networks, do you think with that train of thought. Can EigenLayer dilute the existing security of Ethereum?
The way we think about it is, thankfully, the Ethereum protocol is designed not assuming that people who are like stakers are going to be honest, but by imposing a system of like positive and negative incentives, and it's very tightly controlled system, it's actually insanely tightly controlled. When I looked into like all the conditions for which you could get slashed you could get slashed for missing blocks, you could get slashed for not signing on blocks for a long enough time.
You could get slashed, I, all of them are not really called slashing, but there is negative incentives for all of these different kinds of behavior. There's something called the inactivity leak. You're inactive for some amount of time. So Ethereum's tightly designed to be an economically incentivized staking system.
So as long as people are staking on Ethereum, they cannot get away scot free by like not. Like validating the Ethereum of docs correctly, number one. Number two, the structure of EigenLayer is that it is a secondary on the Ethereum staking, which means, so like I said, you deposit your stake in Ethereum, you said the withdrawal credential, who the EigenLayer contract in the EigenLayer contract is said the withdrawal to yourself, if you behave badly on Ethereum, Ethereum will slash you first, and then only we get like the chance for EigenLayer to slash you.
So if all your money's already slashed on Ethereum, so you have nothing to be slashed on EigenLayer. So it's in fact the other services are actually on a secondary position to Ethereum on the slashing hierarchy. Okay. So that's the first two things. Ethereum's an economically designed system and number two EigenLayer only takes a secondary position to Ethereum stake.
But the third one, which you mentioned is interesting is that, is it possible for some services to somehow accrue additional security. I think this is actually possible and not additional security in terms of necessarily economics, because fundamentally, all of these systems are still kind of running on Ethereum and depend on Ethereum security.
So you can never be more secure than Ethereums because whatever the EigenLayer slashing, everything is happening on Ethereum. So, you're kind of fundamentally limited by that. But there is a dimension which is, security or decentralized trust comes from two distinct aspects. One is economics and the other is decentralization itself.
And what you could do is, now one of the complaints you hear about Ethereum is, oh, there may be 10,000 nodes, but really 30 nodes, 40 nodes control, like, a majority of the voting power. But you may build the system on, EigenLayer where you know, you have only the 9,960 nodes.
And they're all like roughly equally distributed power. So you could do this and that means like you have more decentralization. Actually it's the same set of nodes, but you're just putting more weightage on you.
Your ability to apportion different weightage for different nodes is high on services built on EigenLayer than on Ethereum itself.
But actually we think it's good for Ethereum because all of these further lead to incentives for more people running Ethereum staking. So there's another economic effect which actually leads to, because there is now yield or like fees coming not only from Ethereum, but also from all services built on top of EigenLayer.
Ethereums staking itself will grow, right? If EigenLayer is very successful, more people wanna stay Ethereum, because not only now you're getting the 5% rewards from Ethereum, but also from some other like 3, 4% from EigenLayer. And so that basically means more stakers will come in and like there'll be more validation. So that's our kind of vision for Ethereum and EigenLayer.
Wow. Wow. Yeah, there's lot to digest. Just to summerize this more, just to summarize this for our audience, there could be some cases, if you select your validators appropriately, either based on geography or certain conditions, there could be some outlier cases where you can actually get more security than actually Ethereum, which is powerful, especially if you're trying to build, let's say, another L1 or another l2 or another middleware which needs that.
So I, I think that's very powerful.
So I'll Yeah, just for our viewers, I'll just..
Thank you Mehdi. I just wanna highlight something here. When we are building a marketplace for decentralized trust today, there's no marketplace for general decentralized trust. And when you're building a marketplace for something which was not a commodity, when it becomes a commodity, imagine the first time you're building a marketplace for like rice as a commodity, right? Like, some of us are from Asia here, and you'll market for rice. You need to first figure out how long is the rice, like, what is the, width and weight and like color and like you have to segregate across. Is it polished, un polished, is it, there are many dimensions.
And so that's roughly where we are right now, is we wanna build a marketplace for decent less trust. But decent US trust has many dimensions. It has dimensions of geography, decentralization, there's dimensions of economics. It has dimensions of, is all of them controlled by the same agent or different agents?
There are many dimensions to this. And so, over time we expect to have like, these different damages of calibration of decentralized trust and services will want different dimensions of it as they see fit.
I mean, my mind's going off in so many different directions based on the past hour.
So I'll try to just bring it down to two questions. We've spoken a bit about staking, I guess what we could discuss is maybe the role of decentralized validated technology or DVT in the context of, and retaking and how DVT could improve the security and reliability of restaking.
Yeah. This is a really amazing emerging paradigm called distributed validated technology.
For the viewers, I'll summarize it, the idea that, for example, to participate in Ethereum staking, you need 32 ETH and you're to have a node which runs and does the validation. Instead, maybe we have like 32 people, each of us putting in one ETH and run something called a distributed validator, which is as a group, we all come to some consensus and then that consensus represents itself as a single vote on Ethereum.
So it's a, you can think of DVT as a, either a mechanism for inducing more decentralization, or as a mechanism for scaling the number of signatures that can be kind of handled by Ethereum.
Ethereum can only handle so many signatures. That's why we have a 32 ETH cap. But now, because, many nodes aggregate themselves into one signature, that's a mechanism for scaling signature application.
Okay. So how is DVT related to EigenLayer? We're friends with both, both of the major teams building the DVT technology, both OAL and SSV. And the idea that is really important and powerful for not only for Ethereum, but for many services that will be on EigenLayer. So first one is, like I mentioned, things like if we had to measure geography decentralization, we don't have to know, measure it at the level of the validator, but you could measure it at the level of the distributor validator.
So you'd say, oh, actually, this group, like they have nodes here in, in India and China and like Africa and so on. Like, and that, that is countered as a kind of scope of decentralization. And the other thing is there are services, I think I alluded to this mildly before, there are services which absolutely only can use decentralization.
Imagine I take a secret, split it into small chunks, and then send it to end nodes. And then like, the only way I can recover the secret is by like a lot of the nodes giving their portions together. Like this is not, whether those nodes met in a room in in Seattle and disclose the secret or not, is not observable.
It's not easily observable. So what you have is the only measure of protection is. They're very decentralized, so it's gonna be difficult for those node to come and meet like, anyone. And so, for situations like that, things like DVT can significantly improve like the security of the system because you would say that it's not like, one guy has a secret as 32 guys, or like over time, hundreds of guys who actually hold portion of the secret.
So I think there is a lot of interesting synergies between like a DVT enabled Ethereum taking and how DVT can then participate in EigenLayer. There's also the other way around how EigenLayer can enable DVTs to do something better, which is if you're a distributed, validated group and you're, you, how do you incentivize people to behave, positive or negative incentives correctly on on your DVT.
You can use restaking for that. So there is synergies on both sides.
Excellent. I think, I know my brain is fried, I can only imagine what our viewers brains will be like after that. So we'll probably bring an end to that section of the podcast. And I think what would be super interesting is, We'll jump into a rapid fire round.
And try to condense it to within a minute.
So the first one, and this is something that, that I quite like digging deeper into, but what philosophical directions were at the forefront of your thinking when you were designing EigenLayer?
So the two, two things, two philosophical dimensions are, number one is open innovation, which I keep talking about, but the second one is intersubjectivity, which is the idea that, do not encode like subjective decisions into the platform. Let the agents, let the people, let the users of the system make subjective decisions. I think this was one of the major errors of the Web2 systems, is like the recommendation systems, the subjective things were enshrined into the system. We want to decouple all subjective things.
That's when your protocol is no subjective decision is made in the system.
As the founder of EigenLayer, can you tell us the most valuable lesson you have learned so far in your crypto journey?
Yeah. As a founder, I would say the most valuable lesson is focus. And, everybody talks about like, as a founder, focus on one thing and execute it.
And I didn't really understand it before. I think the way to think about it is like, startups are these. These entities that convert linear amount of work into exponential output. Okay. Linear amount of work into exponential output. And when you have that, if you try to split your energy between more than one things, then you get two much smaller exponentials rather than one really big exponential. So, focus as a thing is what I said I, I've learned.
I love it. I love it. What do you see is the biggest challenge for EigenLayer in the next 12 months? And how are you prepared to tackle them?
The big challenge for EigenLayer is actually getting all sides of the market together. I think EigenLayer is a system where if everybody comes together, it's just better for everybody.
If everybody doesn't come together and like, it's disposed, it's not good for everybody. So, bringing the different sides of market together is the hardest challenge, and we hope to at least show that we can get some aspects of the market together in the coming year. Yeah.
So Sreenam, what is the least understood about a EigenLayer?
Yeah, I think the thing that's least understood about EigenLayer is the scope of what can be built on top of it. And when people think about, things like the modular stack, they say there's settlement, execution, consensus. There's like three things. I think there's like 3000 things that can be built on a modular stack.
When you have a shared security layer, you can build new oracles, you can build bridges, you can build like a validation layer. You can build identity layers. You can build anything that requests end nodes to come together In consensus. You can build secret sharing, you can build secure multiparty. The scope of what can be built on EigenLayer, I think is badly kind of understood.
Just to follow up. You did mention validator incentives and you did ensure progression of EigenLayer. Are you thinking about having a token in order to make sure the governance of EigenLayer is run smoothly and there are token incentives to onboard validators to create that decentralized and distributed validator set?
That's totally true. Like one of the things you could do is to just, fork any of the L1's and then just like on top of EigenLayer, there'll be a subset of like, high value ETH stakers who would opt in and provide services for these things.
I think that's the perfect segue into the next one.
If you could work with any other L1 apart from Ethereum, which one would it be and why?
Of course it's Bitcoin and even though they hate us,
well in fact we, I started with like thinking about how to build chat trust on Bitcoin before, figuring out that Ethereum is the right substrate, because not only that Ethereum is the right substrate in terms of like technical things.
Like, you have staking and you have like programmability, but it's also the philosophy of open innovation. Is much, much more at the center of Ethereum than it is at the center of, say, Bitcoin.
Bitcoin is like, anti-state money and all this kind of stuff, which is fine, but I'm actually very interested in open innovation, which is how do you induce anybody, because it's really an absolutely mind boggling revolution that Ethereum and in general blockchain separated, which is that.
Anybody who's a pseudonym entity around the world can come and create new systems without themselves being trusted. And I think that's just such a, insane amount of like, freedom that has been given to all of us. And maximizing that is what I think is kind of my goal. And you can see this in Ethereum by, by Ethereum adopting a Layer2 like roadmap, which is by saying like, Hey, I'm not gonna do the execution layer stuff.
Like just somebody else do it. People were like, are you crazy? You are gonna lose all your value and all that. I said no, like open innovation. Just do it.
And I think I, I love that. I think that's what we wanna be ourselves too.
So, Sreeram, before we conclude any departing thoughts for our audience? I know there's test run, Testnet that's also running.
Yes. The EigenLayer system is right now on, the, we are doing a stage launch. So the first stage is right now on testnet we are running the restaking system. Stakers can come and retake ETH liquid staking or like, natively restake.
This is on the Goerli Testnet of Ethereum. And this is the first stage. Then we will have like, operator testnet, where you can actually delegate to operators and run services. And then the third one is actually real services can deploy on top.
We'll also have a stage launch on mainnet, basically reflecting these same stages, but with a lag so that things are tested enough.
So we are very excited about those upcoming stages. And another thing is, we are looking actively for people to come join our system. If you're interested in the vision of enabling more permissionless open innovation, please come and pick us. Particularly, we are looking for a blockchain security lead, which is, as we all know, very important.
So any of you like hackers and black hats out there, like who are very interested in a project like EigenLayer, please to ping me @eigenlayer or my ID @sreeramkannan, on Twitter.
Again, Sreeram, thank you so much for joining us. It was an honor to have you, and we learned a lot about EigenLayer.
Thank you Mehdi. Thank you Mohamed. Really enjoyed the questions and the discussion here. Look forward to more engagement in the future. Thank you.
This podcast is for information purposes only and should not be considered as financial advice. Any opinions provided in this podcast reflect the views of the speakers only.