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Ethereum Restaking Protocol Faces Yield Crisis as Growth Outstrips Security Needs, Warns Industry Expert

EigenLayer, recognized as the largest restaking protocol on Ethereum based on total value locked (TVL), is reportedly facing a significant yield crisis, industry experts suggest.

The protocol’s TVL has seen a swift rise, but this growth may be outstripping the capabilities of its Actively Validated Services (AVS), potentially leading to a drastic decrease in yields.

This concern was highlighted by Chudnov, a pseudonymous builder at 3Jane derivatives exchange, who noted on 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.”

On April 16, EigenLayer announced the removal of restrictions on all liquid staking tokens (LSTs), just days after its mainnet launch on April 10.

This protocol allows users to stake LSTs, which are then automatically delegated to a node operator.

These operators use the stakes to secure AVS on EigenLayer while also earning staking rewards, a portion of which is distributed to the users.

Despite the protocol’s popularity, the actual security needs for AVS are much lower than the current stakes, potentially creating future challenges. Chudnov elaborates on this issue, saying:

“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.”

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At present, EigenLayer stands as the second-largest Ethereum protocol, just behind the liquid staking leader Lido.

Its TVL has increased by over 16% in the past month to $14.15 billion, as per DefiLlama.

The sustainability of yields could face further threats if altcoin prices fall, diminishing incentives for AVSs to maintain excess capital on-chain.

A potential short-term solution discussed involves launching new tokens to boost the security budget. However, Chudnov suggests a more integrated approach for a sustainable solution:

“If [the 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.”

As the situation develops, the broader implications for the DeFi sector remain closely watched. Cointelegraph has reached out to EigenLayer for additional comments on these developments.

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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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