EigenLayer on the brink of potential yield crisis

Liquid staking tokens on EigenLayer will require more utility in the decentralized finance space, to avoid a potential yield crisis in the future.

EigenLayer, the largest restaking protocol on Ethereum by total value locked (TVL), could be facing a “major” yield crisis, according to industry watchers.

Due to EigenLayer’s rapid growth in TVL, the protocol may be outgrowing its Actively Validated Services (AVS), which could lead to a major yield reduction, according to Chudnov, a pseudonymous builder at 3Jane derivatives exchange. He wrote in an April 22 X post:

“EigenLayer has >$15B in TVL but AVSs will actually need less than *10%* of that for security, which means yields may fall off a cliff.”

EigenLayer removed the limits on all liquid staking tokens (LSTs) on April 16, according to an X announcement. EigenLayer launched on mainnet on April 10.

When a user stakes an LST via EigenLayer, it is automatically delegated to a node operator, which uses the deposits to secure an AVS on EigenLayer, while receiving staking rewards. Part of the staking rewards are passed on to the user.

Yet, Actively Validated Services on the protocol require much less staked Ether for security, which could lead to issues in the future, according to Chudnov:

“The problem is that none of the AVSs will come close to needing $1.5B in security let alone $15B. The whole point of Proof-of-Stake is that the value of the stake is higher than the potential profit earned from a validator behaving dishonestly.”

Cointelegraph has approached EigenLayer for comment.

EigenLayer is the second-largest protocol on Ethereum, after liquid staking protocol Lido. EigenLayer TVL rose over 16% during the past month to the current $14.15 billion, according to DefiLlama.

Related: EigenLayer becomes 4th largest restaking protocol, nears $7 billion TVL

The issue could worsen as altcoin prices decline since AVSs won’t be incentivized to hold the excess on-chain capital. The first solution could be a series of token launches to increase the security budget requirements, which could temporarily be “kicking the can down the road.”

However, intertwining EigenLayer into the decentralized finance (DeFi) ecosystem and creating more utility for LSTs, could offer a permanent fix. According to Chudnov:

“If [EigenLayer] ecosystem can more deeply entrench itself in the DeFi ecosystem via [Liquid restaking tokens] and financial primitives on top then this is a much more guardable moat and gives AVS’s more time to figure things out at a fraction of the cost.”

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