EigenLayer, the leading restaking protocol on Ethereum in terms of total value locked (TVL), is potentially facing a significant yield crisis, according to industry experts. The protocol’s rapid growth in TVL may be exceeding the capabilities of its Actively Validated Services (AVS), leading to a substantial reduction in yield.
On April 16, EigenLayer removed the limits on all liquid staking tokens (LSTs), as announced in an official statement. The protocol was launched on the Ethereum mainnet on April 10.
When users stake an LST through EigenLayer, it is automatically delegated to a node operator who uses the deposits to secure an AVS on the protocol. In return, the node operator receives staking rewards, a portion of which is passed on to the user.
However, the Actively Validated Services on EigenLayer require significantly less staked Ether (ETH) for security, which could pose future challenges, as highlighted by Chudnov, a pseudonymous builder at 3Jane derivatives exchange.
EigenLayer is the second-largest protocol on Ethereum, following the liquid staking protocol Lido. According to DefiLlama, EigenLayer’s TVL has increased by over 16% in the past month, reaching a current value of $14.15 billion.
The issue could be magnified as the prices of altcoins decline, as the AVSs would no longer be incentivized to hold the excess on-chain capital. One potential solution could be a series of token launches to increase the security budget requirements, although this would only be a temporary solution.
A more permanent fix could involve integrating EigenLayer into the decentralized finance (DeFi) ecosystem and creating more utility for LSTs, according to Chudnov.
Cointelegraph has reached out to EigenLayer for comment.
In summary, EigenLayer, the largest restaking protocol on Ethereum, may be facing a major yield crisis due to its rapid growth in TVL and potential issues with its Actively Validated Services. This could be temporarily addressed through token launches to increase security requirements or more permanently resolved by integrating EigenLayer into the DeFi ecosystem and enhancing the utility of LSTs.