In this article, you will discover the risks of using Eigenlayer. So, if you want more reviews like this, subscribe to Altcoin Buzz Alpha
Risks With Restaking (and Eigenlayer)
Restaking introduces an innovative concept, operating through intricate underlying technology. While it offers numerous benefits, as discussed earlier, it concurrently presents risks to the parent network, the renting network, and the stakers. Some of these potential risks encompass:
1. Slashing
Restaking terms may incorporate additional slash conditions to incentivize increased rewards. Depending on the protocol’s terms, slashing poses the risk of significant asset loss for validators.
So, stakers opting to commit to adhering to the contract rules face slash penalties for malicious behavior. Essentially, users engaged in restaking are susceptible to slashing penalties from both ETH and Actively Validated Services (AVS).
2. Yield Risks
EigenLayer to facilitate protocols in leveraging Ethereum for security. But, restakers are primarily incentivized by the reward systems of the protocols where they stake assets.
Restakers might prioritize protocols with higher yields to maximize returns. Concerns arise that investors could perceive restaking as a quick and easily leveraged financial product, potentially impacting the Layer 1 network.
3. Centralization And Collusion Risk
Using a centralized actor (CA) to coordinate and issue LSTs introduces a form of centralization within the Ethereum validator set, placing it under a different entity’s control. Even if this entity is a or a non-profit institution, it constitutes a distinct group with likely different goals and governance procedures compared to the foundational Ethereum chain.
The centralization risk becomes pronounced if a single validator controls approximately 33% of the network, as they can disrupt chain finality by going offline. Beyond 50%, they gain control over the entire chain’s future, and surpassing 66% allows them to potentially reverse the chain’s history.
These attack thresholds are well-documented in Ethereum documentation, emphasizing the need for a social layer (fork) to intervene and safeguard the chain should these critical thresholds be breached. Moreover, there is a potential risk of collusion, where multiple operators might simultaneously attack a set of AVS, compromising the network’s security.
4. Additional Risks
- ETH (or LSTs) must undergo staking, rendering it non-liquid during the staking period.
- The lack of immediate liquidity.
- EigenLayer smart contract risk.
- Single Point of Failure: Withdraw credentials received from ETH credentials create systemic risks for the mainnet.
- Risks related to the availability and stability of liquidity.
- Potential risks associated with the concentration of assets within the Restaking protocol.
- Some protocols may not have commenced the withdrawal process, introducing uncertainties.
5. Introduces supplementary risks to the security of Ethereum
In essence, through restaking, users leverage a token already susceptible to risks inherent in staking and overlaying additional risks, resulting in layered vulnerabilities.
A liquid restaking token that is backed by liquid staking tokens deposited in a restaking protocol which rehypothecates staked ETH
This is getting pretty deep, can we add another layer of liquidity and risk here? I don’t think we have enough https://t.co/uQ7UnkuT1Q
— ChainLinkGod.eth (@ChainLinkGod) December 18, 2023
Moreover, further development of primitives atop this framework would introduce heightened complexity and additional risk.
Apart from the individual risks restakers face, the Ethereum Developer community has expressed concerns about Restaking, particularly highlighted in the Vitalik article cautioning against overloading Ethereum consensus. The challenge with restaking lies in exposing staked ETH, which secures the mainnet, to new risks as a portion of it is directed to secure other chains, as chosen by stakers.
We welcome this excellent analysis of the different kinds of risks using restaking for different use cases a la @eigenlayer@VitalikButerin. It is consistent with what we have been advocating with Eigenlayer. A brief summary here: https://t.co/8ppF9jUp6t
— Sreeram Kannan (@sreeramkannan) May 21, 2023
Consequently, misbehavior according to rules of other protocols (which may have vulnerabilities) can lead to a slash penalty on the staked deposit. Ongoing discussions between developers and EigenLayer aim to coordinate efforts, ensuring that Ethereum remains robust amidst these technical advancements.
Repurposing the crucial layer responsible for securing Ethereum presents a formidable challenge.
6. Risk Management Challenges
Additionally, the level of risk management allowed for restakers is pivotal. While many Restaking projects entrust the whitelisting process for AVS to their DAOs, restakers may prefer to personally vet and choose which AVS to restake to mitigate the risk of being slashed by malicious networks and reduce potential new attack vectors.
7. Asset Valuation, Liquidation Vulnerabilities, and Comparisons to LUNA Crash
Additionally, amplifying an asset’s value by creating new Wrap Tokens or Tokens contributes to market inflation, resulting in a valuation that deviates from its true worth.
Besides platform-related implications, the persistent use of assets representing the value locked in the network’s validators can be leveraged to mint stablecoins, intensifying the risk and exposing the original assets to a heightened liquidation risk.
Various ETH varieties add to the complexity, as compromising one may create potential vulnerabilities across multiple variants. Furthermore, there is a prevailing comparison of restaking to the notorious LUNA Crash. Some argue that restaking may propel the next bull run but also potentially trigger its conclusion.
The appeal of high yet unsustainable yields on the Terra/Luna blockchain attracted investors during the 2021 surge, coinciding with record highs for crypto. However, Terra’s collapse in May 2022 had a profound impact, causing a significant downturn in the entire crypto economy.
