Eigen Layer In 2024

let's keep all the blockchain wars L1 L2 L3 like like aside right just let this sink and it's insane it's amazing it's unusual it's it's like we we're becoming this much much more coordinated in fact as a species I think our evolutionary Advantage is that we're able to cooperate in at a scale that is simply not possible for other species in a flexible way welcome to bankless where we explore the frontier of Igan lir Igan layer is

just about two quarters away from Main net and the excitement and demand for Igan layer has been relentlessly crescendoing and while recording this very episode with SRAM and Teddy from the enan layer team Igan layer passed a billion dollars in deposited value into the Igan layer system making the future of Anan layer in 2024 a very interesting topic to explore here on the show today and to help me explore a more technical topic I brought in a technical co-host Mike nder from the ethereum foundation is joining me today he's a researcher at

the EF he is a Mady on Twitter and he's most known on Bank list as my rock climbing buddy in Brooklyn Mike how's it going my dude it's going great David yeah thanks for having me on um have been a bankless listener for a long time so to be here hosting with you is is a real treat so thanks again well whenever we need technical co-hosts to explore technical topics uh I always learn more than a few things and that's definitely um what happened here on the uh on the episode today we just finished recording the episode with Teddy what were your big take takeaways did you get all of

your questions answered what did you think yeah I'd say my my biggest takeaway was uh kind of a new mental model for thinking about how igen layer fits into the system and that is as a way of democratizing access to restake rewards so the point Tron made was that um in today's world like without Igan layer a dominant liquid staking token issuer could have internalized all of that reaking yield and given it only to people who issued reaking uh liquid staking tokens with them um and this

would be like a stronger centralizing Force because you know only that single pool would have access to those rewards so the way Ian layer kind of fits into this picture is by creating an Open permissionless Marketplace for both the buyers of EC Economic Security and the sellers of Economic Security and to kind of allow everyone to access it in a more transparent way hopefully will help democratize and um distribute those rewards more evenly I think perhaps said another way I think and that description I think really fits into what the EF people care about the ethereum foundation people care about which is

antitrust antitrust forces around protocols I think that's kind of what you're alluding to with igen layer is that without igen layer there might be a monopoly in a single liquid re uh staking token becoming the dominant reaking token but I think maybe your mental model after this is Igan layer is kind of the resource traffic controller for restak assets and networks and yield and security is that a fair way to articulate this yeah exactly yeah a way of kind of opening up the market and and making sure that it doesn't centralize

around one single shelling Point yeah and also um another really cool point just to kind of add on to that is how he described igen laay as a way of kind of propagating the meme of eth as a unit of account right so the initial set of tokens that can be restak are all denominated in eth and so this Igan layer is kind of a vehicle by which eth as the the unit of account for Economic Security in the whole ecosystem continues to be spread um was another really cool mental model that he brought up so yeah that passet specifically I

think I I'm I resonate with on a very large degree and I think that's going to be a big theme in in 2024 so um Mike I mean we're going to have more reaking content throughout the year I think it's just it's it's nerd sniped to me I think it's nerd sniped to you I think it's nerd sniped a lot of people in ethereum what questions do you have left what is still on the frontier of this like reaking meta that you want to explore yeah I think the the last last thing that still sticks with me and and this is kind of one of the first things we talk about with seram is this idea of like what is economic security in the

context of Delegation right so um when the there's a principal agent problem where the principal is the person who owns the stake and is restak it and the agent is the node operator um how can we think about Economic Security when the slashing is um associated with the node operator not the person who actually owns the capital that's at risk so yeah I kind of want to keep deep diving on that and as Tron mentioned that applies like Beyond just IG layer that applies in in E delegated staking and across the board so I think the principal agent

problem is one of the main problems that plagues not just crypto although definitely crypto but really Humanity at large and now we are also discovering it inside of the Igan layer system guys we're going to get right into the episode with stram and Teddy from the igen labs team but first quick disclaimer me and Ryan are both advisers to igen Lair all bankl disclosures are available at bank.com disclosures and with that let's get into the episode bankless Nation I'm excited to introduce you to Teddy Knox a research engineer over at igen lay working on the Igan da team that's a data availability

previously Teddy was working inside of the cosmos ecosystem and later as a protocol specialist over at Steak fish and has joined Igan layer bringing all of his previous expertise into the world of reaking and with Igan da is as the first AVS developed in in housee by Igan lay Teddy skills being put to the test Teddy welcome to bank list thanks for having me dude and returning to bank list we have S Ram Canan the father of modern reaking s Ram was a professor over the the University of Washington where he ran a lab focusing on

information Theory and his applications in communication networks machine learning and blockchain systems but eventually the nerd snipe of crypto economics got him like the got like it got the rest of us and he started Igan layer in 2021 in order to open up a new dimension of trust networks built on ethereum RAM welcome back to bankless so we're excited to be here dude good guys I'm really excited for this conversation the excitement around Igan layer has definitely been heating up and there's been a lot of things happening inside of the Igan layer ecosystem and so today on

the show I kind of just want to get a download as to where things are and where things are going with the world of Igan Lair as it approaches uh real time like production in-house uh the main net all the cool things that is going to impact ethereum and all the trust it's going to bring so I kind of want to start just getting a high level snapshot of where we are with Igan layer s I'll start with you just the current state of Igan layer development where are we on the road map what is in the near-term road map and what are people over on the

igen layer side of things excited about yeah um the few things number one on the mainnet we started uh we launched the protocol uh just a staking site on mainnet you know around June July and uh it you know we started conservatively it was a GED launch with a small TV cap and we've been successively raising that over time as we test the stability of the protocol and so there was a cap rise uh day before yesterday of this recording and I think we are now at $1

billion tvl for reaking so that is uh on the main net the broader ecosystem of wagon L comprises stakers node operators people building new services and our own service called igda and all of these are live on our public test net where you know stakers have staked and delegated to node operators either the node operator can be themselves or they can delegate to a third party node operator we have a bunch of really strong node operators from the uh BL blockchain

ecosystem block T and coinbase Cloud Google Cloud uh peer-to-peer figment all the major operators on our uh test net um on the uh and also our service Igan da is live on the testnet so this is a data availability service which is intended to expand the data bandwidth available for ethereum uh rollups and layer tools and then finally um anybody can build and deploy actively

validated Services which are basically you can think of them as igon apps like applications but these applications are not necessarily consumer facing these applications will be used by consumer facing applications these could be oracles data availability bridging analization Services all these kinds of things so that's where we are on the ecosystem so that the test net is public and life we are going to this to the main net this exact same configuration to the main net between q1 and Q2 depending on audit and hard running so

very excited to have uh the full ecosystem kind of get together to start up more open Innovation yeah congrats on the um the recent raise of the amount that you're allowed to restake so just to add some color here for the listener there's about 447,000 um ether denominated um restak tokens um so yeah that's almost exactly one1 billion doar and about 200,000 of that so nearly half of that is with Ste so I was just kind of curious how you choose the different

um limits for the different liquid restak or liquid staking tokens that you um allow people to restake and also a follow-up question um why did you choose only eth denominated tokens like have you thought at all about people reaking like usdc or other you know tokens because generally speaking like it's just the the value of the token more so than the fact that it's e denominated that that adds value to the system yeah absolutely uh thanks Mike uh also excited to have this conversation with uh Mike here why are we choosing this

particular set of tokens why you denominated how do we choose the Caps uh all kind of complex questions but the the first thing is we chose a guarded launch so that we can test the protocol at various levels of tvl and safety right so that's the first thing and we chose the uh liquid staking protocols to have a cap whereas native staking does not have a cap so native staking is uncapped this is because native staking is already very complex to actually go and execute because you have to go and

when you stake in the beacon chain you have to set the withdrawal credentials to the igen Pod and furthermore any lags on so the withdrawal lags uh are exist on the IG layer EOS on the IG layer platform so whenever you want to withdraw any unit of e or any other token from the igon lay taking platform you can actually uh it takes 7 days before you can withdraw it this withdrawal lag is there so that if you know when you're staked and providing services to operators if there's

anything that malicious that you've done you can be slashed within this period so you know it's standard in all kinds of staking protocols but it also acts as a measure of safety for us because you know actions do not happen instantaneously like if you're doing on a bridge you know who knows somebody can drain a pool tvl like instantly whereas staking is a necessarily long-term activity so having this kind of like a onee withdrawal La gives us a measure of safety that you

know simply other protocols may not be able to achieve just because the time scale of saking is fundamentally very different from the time scale of other kind of financial activities but adding on to this is when you have native reaking you have the uh additional lags on etherium itself right because you have to go and like withdraw from the beacon chain becomes more noticeable so all of this means as far as the safety limits are concerned we can be more aggressive on the native reaking than we can be on uh liquid reaking so that's

why the native staking is uncapped and you know we have to decide onto some cap for for all of these different services and we just chose uh you know these numbers based on both Market representation that you know we do know that some lsds are more dominant than the others so we don't want to say that they're all very low but we want to also have representation of multiple different liquid saking tokens in the platform so that that's why we did that regarding a question why restrict to lsts you can think of the the questions

premise is absolutely right Ian ler you know even though we popularly call it a reaking platform and that's a narrative the fundamental thing is it is a permissionless programmable staking platform it's staking you stake your e you could stake your USD you could stake a bond you could stake whatever you want it is programmable so anybody can come and program it to like what the staking conditions are and it's permissionless programmable it's not programmed by us or anybody we know anybody can come and create these slashing staking and

slashing conditions so yes the premise is absolutely right that IG can incorporate all kinds of tokens but the reason we focus on you know the uh e and eth related tokens to begin with is that we think number one clearly there is a big Market opportunity there that you know e there is you know a lot of the lsds as well as native staking is locked in and when you're promising to validate ethereum you can might as will promise

to validate some of these other networks but more more broadly I think we are also trying to support a lot of the services for the ethereum ecosystem and when your risks are denominated in E it is much better for your underwriting economic safety mechanism to also be denominated an e imagine I'm doing like a like 100,000 e transaction between one rollup and another rollup and you want to say like hey I have enough economic

safety out of like igen layer to do this transaction now if I know that I have lsds worth maybe 120,000 e backing this claim that's actually like a much more rigid you know um mapping than to say oh I have 100,000 each but I have like some X dollar USD backing it because now I have to account for the volatility and slippage between these two different tokens over the period of you know the

collateral and unwrapping add to this the capital efficiency of lsts because LST is already earning certain amount of reward we found that this is the best configuration to stop this platform off it s is this just an articulation that The Ether unit of account has Network effects and so it's just easier to use that unit of account because the risk is denominated in eth the collateral is denominated in eth in these networks people tend to think in eth and so while it doesn't necessarily need to be eth it

just kind of makes sense to be eth is that just a fair uh summary that is absolutely right and this is what we want to incentivize the most and so you know the idea being that initially so over time we are going to completely make this permission list like anybody can list any token and each AVS can decide how to relatively value these tokens you know somebody may not like to use USD they may only want to use certain lsds some people may want to use any of them as long as they have enough

economic value so this is up to the services so we want to get out of like this layer of saying hey you can only do this or that and but you know we just have to Steward this platform in the beginning to add to one of David's point I think people when people think of the uh Network effects of E I think this is a new dimension of network effect of e which is that when you are transacting and denominating in e in the system that means the right backing collateral for

economic safety and validation is also e this creates so this is a network effect between the monetary premium of e which is that this is used as a unit of denomination to the utility of eat which is it is actually used as the backing system for economic safety I think this is a new um uh I would say um emergent effect that I brings to this Market that so that strengthens actually the dominant position of e cool yeah and just to kind of double click on this um

you know economic safety Economic Security Point um I think we might have talked about this offline but just so to kind of bring it into this conversation I guess one thing that always feels a little weird about the meme to me is the fact that the economic security denomination is in eth and like the owners of that eth aren't necessarily the ones running the services that that could be slashed right so this is the classic principal agent problem um it shows up in ethereum staking too right um so I guess how do you think about Economic Security when um the the people

who are um at risk of being slashed aren't actually the ones doing the the task of the ABS operation um they're they're the ones who the capital was delegated to but they're not actually the owners of the capital itself this is a great question and I think may be one of the most important for our entire field to actually consider and understand so I wouldn't claim to have you know simple answers to this question so to rephrase this question the the idea is economic safety

is coming because somebody's putting down their stake and then running the node operations let's say themselves and saying that hey if I don't run these operations correctly then I'm willing to lose my eat so the first point I want to bring here is that this if the Staker and operator are the same person this is a very unusual type of risk I call this endogeneous risk endogeneous risk means you know unlike going and putting your e into a landing platform with you know 10x margin position or 100x leverage

where you're underwriting certain kinds of price volatility risk that's what you're doing when you're doing that when you're sing in the igen layer platform and igen layer is constrained to validation tasks you are underwriting endogeneous risk endogeneous means something that you do yourself you can control yourself you not being malicious and if the protocol is correct you will not get slashed it's very different this is why the usual mental model of people thinking of oh this is leverage Leverage

is not quite accurate because you know it is endogeneous whereas all other forms of risks you know that people are used to when you think of re hypothecating stake or like reh hypothecating your house or any of these are subject to exogeneous price risks okay that's number one but the risk is purely endogeneous only if the Staker and operator are the same like that's what Mike's alluding to here and it's absolutely true the Staker and operator have to be same or in our view to be

inside the same trust zone so the Staker has to trust the operator that the operator will do right by them the the fact that the Staker and operator are not necessarily the same means now they have to establish some other mechanism of trust between themselves to actually make sure that I will delegate to somebody while putting my e at risk so this mechanisms these mechanisms can be manifold and one

mechanism is social or legal oh there are major operators and they're legally regulated and they're not going to go and do like something which is provably malicious when we think of all the kinds of of you know this is I think very important and people in crypto don't fully appreciate it I think that among the set of like you know things ways in which uh a a company or like a system can cheat they usually choose to cheat in ways that are not observable because

you know observable means like you're liable and what these systems do is make it completely transparent because there is a slashing condition there is an observation that you actually double sign this block or whatever the set of things are so it makes it perfectly naked that you're cheating like this doesn't happen very often I think this is something when people think about oh you know all these Wall Street guys they do this and that and all that nobody goes and like does something where it's perfectly universally observable that

they're actually cheating like this is very important so what the principal so how to solve the principal agent problem the real world mechanisms are hey I'm in a certain jurisdiction I trust certain other like entities outside my like blockchain protocol and I'm therefore going to delegate to them this might be one mechanism another mechanism is they use technological substrates to actually minimize the principal agent problem for example we're working with this platform called project called Cubist to build anti- slashers anti slasher is this idea

that hey there is a piece of code that simulates the slashing conditions and then makes sure that when I'm issuing a signature the slashing conditions will not be violated and this piece of code alone runs inside a trusted execution environment like an Intel sgx or an AMD trust zone so what this does is it gives a sense of correctness between the principal and the agent because even if the agent wants to manipulate it they're still running it inside the te so therefore they cannot really cheat the

um principle and in in our platform we have a protocol called Puff offer which is based on trusted execution environment and uh they are actually doing liquid staking for ethereum itself and also reaking based on these tees these are you know two different ways legal social uh and number two is um technical there's also like a third wave which is economic which is the rocket Pool wave which is saying hey yeah you know the principal and agent are the

agent's going to uh the principal is going to lose something but the agent's going to lose something twoo so like you just try to correlate the fates of these two people but in in our like fundamental analysis of the economics this really only works if the slashing is bounded or bounded for some reason or the other and uh on IG layer being a fundamentally economic safety platform it's not clear like what will be these bonds so that's the uh three different ways social Technical and economic to

minimize these kinds of principal agent risks and I think this is a generic question not for I layer but for the entire field to actually answer yeah for sure and just kind of one more high level question before we dig into some more of the details of a DA and stuff yeah one thing I think that comes into question when thinking about reaking is that it it does fundamentally change the incentives of being a Staker in ethereum right so um if you think of the protocol as kind of like having two two incentives now it has the consensus layer rewards and then the execution layer rewards like consensus is for

participating in in the block um you know voting on blocks what's the head of the chain execution rewards are kind of these congestion fees like uh gas fees and also the M Rewards given to proposers um Igan layer kind of tacks on a third set of rewards right like these these are reaking rewards so the main issue I see potentially with this is that um these rewards are outside the purview of what the protocol can see and and what the protocol is designed for right so if this kind of warps the incentives of the the protocol it might

um for example increase the demand for Stak e significantly or also it might make it so that solo staking um kind of the opportunity cost of solo staking is very high because reaking yields are are bigger than the other two components of the reward and so in order to be competitive as um as a Staker you also need to be a reaker so you know these are these are big big kind of themes that I've been thinking about but would be curious to hear your high level response on these before we we dive deeper yeah absolutely I think uh also

complex uh question and Landscape to think about and and filled with second order effects which are not totally anticipatable but I'll start with one thing this is the hard thing about building permissionless platforms who knows what somebody else somebody else can do right when ethereum is building in you know the me was one example liquid staking is another example reaking is another example where these are emergent effects that you know could not be anticipated fully so having said

that uh I want to make a bunch of observations so the first observation is that anything you could do with um reaking you can already do with liquid staking right one major lstd the dominant LST could just simply say hey you know the economics are simply not only being used for you know ethereum staking but I'm also making this promise as the dominant LST protocol that ABCD will happen right

and this leads to a completely different set of effects which is that like that LST because it is figured out that it can do ABCD now completely consolidates the market because it is able to tack on additional things this is exactly the kind of the problem that me boost was trying to solve which is that if you're a major player you can do auto protocol deals and you know if you're a smaller player you cannot do auto protocol deals and you're simply completely subverted by an auto

deal so just like me boost and the PBS road map basically tries to democratize the opportunity for making these out of protocol deals igen layer is an opportunity to democratize these out of protocol deals and make it as formal transparent clear and verifiable as possible so that anybody can enter into these kinds of agreements not only the like dominant player so that's the first thing anything that you could do with

reaking could have already been done with lsds the second thing I think U you know in order to affect ethereum's protocol economics I I mean uh when I hear some of the concerns about you know igen layer and reaking um makes me wonder in in one sense because you know these people are much more bullish about I ler than I am because they're basically saying the the the statement if once I formalize it

will the the will make it clear they're saying that the total amount of reward and yield that will come out of reaking should be higher or of exactly the same magnitude of all the defi yield that would come out of any kind of LST and other things so that is it's only at that scale that this starts to become you know significant okay but having said that maybe it can happen and you know we are of course you know Believers

in the technology that's why we're building it but how does it affect ethereum's protocol economics it does definitely warp the incentives but it warps it lesser than if igen ler wouldn't exist and like one LST basically significantly integrates this kind of an idea inside of its own protocol I think people don't see it like a lot of people on Twitter for example saying why doesn't igen layer commit to self-limiting or whatever uh ideas and I think think it is the same reason why me boost is a neutral

platform the same reason why PBS has to be neutral that has to be a mechanism for new protocols to be built to be completely neutral so that the the playing field is level because if we self limit the dominant lsts what what are they going to do they're going to say hey I I have to internalize this because these guys going to self limit so there are all these second order games that people don't transparently understand but these are you know and I'm not claiming to have all the answers for the second order games but at the

minimum the observation is that the presence of a more neutral platform democratizes reaking yield rather than centralizing reaking yield into only the ls now at least like if I'm a home Staker I can opt into Aon layer and then you know adopt at least a few of the protocols which are lightweight and easy to run and participate in that additional Rewards whereas in the absence of i l that would just simply not be possible so that's that's number two number three we we

know and you know hope that the number of such protocols is high but we know that there are some protocols which fundamentally rely on decentralization rather than relying purely on economics an igen L is a highly expressive platform because it has this feature we call Double optin Double optin means a Staker and operator have to op to the protocol and the protocol has to accept the optin so double optin basically means protocols can express subjective opinions on who can opt in to their

protocol you know into an AVS as well as give additional rewards to certain people than to other people so because I is this highly expressive platform and there are Services which fundamentally rely on decentralization rather than fundamentally relying on economic safety those Services could actually incentivize decentralization itself like for example we there one of the services building on top of us is this uh uh thing called witness chain which offers a proof of location protocol basically offers a geographic

location Oracle which itself is geographically decentralized it uses like stakers and then like tries to measure Network latencies across various notes to certify that hey you are in this zone or that zone now it's possible for an EVS to say I want to add a geographic decentralization bonus to my reward structure and home Akers being more geographically distributed could potentially you know take part in that you know other people can offer other kinds of subjective articles which try to analyze you know stake flows and

stake correlation to determine whether it's the same guy staking across these different you know entities or it's actually distinct you know home stakers so all these things give me confidence that there'll be some amount of incentives for decentralized home operators that can come through I layer which in its abs actually just makes it significantly worse than centralizing that was a a fantastic just highle overview of I think some of the big questions about igen layer and kind of reaking specifically and I want to bring Teddy into this conversation to open up