Restaking War: EigenLayer or Symbiotic, who will dominate the market?

Note: Between the drafting of this paper (August 2024) and its publication, EigenLayer announced a major update altering the nature of the competition between the two protocols. For clarity, we have added a dedicated section at the end of this analysis.

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Key Information:

• Restaking has become the 5th largest sector in terms of total value locked (TVL) on Ethereum, behind Liquid Staking, Lending, bridges, and decentralized exchanges (DEX).
• EigenLayer is now the second-largest decentralized finance (DeFi) protocol in terms of TVL across all blockchains, with $11 billion, behind Lido Finance and its $22 billion (as of September 9, 2024).
• Symbiotic, launched on June 11, 2024, in response to the success of EigenLayer, quickly reached $1 billion in TVL within just one month and now stands at $1.5 billion.

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Introduction

Restaking is one of the most captivating technological innovations in recent years in the field of securing and validating distributed networks. Introduced on Ethereum by EigenLayer, this sector has seen spectacular growth in 2024, reaching over $20 billion in total value locked (TVL) at its peak.

As with any promising sector, EigenLayer has seen the emergence of several competitors, with the most serious likely being Symbiotic. Backed by Paradigm and Cyber Fund, the fund led by the two co-founders of Lido Finance, Symbiotic quickly captured the market's attention, reaching a TVL of over $1 billion in less than a month.

Although EigenLayer pioneered the concept of Restaking, dissatisfaction among users, notably regarding the EIGEN airdrop and recent decisions to block access to U.S. and Canadian investors, has opened the door for competing protocols. In this analysis, we will examine the main differences between EigenLayer and Symbiotic, as well as the potential outcome of this "Restaking War."

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Overview of Restaking

The concept of Restaking was introduced by EigenLayer in 2022. The main idea is to allow investors to use their already-staked cryptocurrencies—either natively or in the form of liquid staking tokens—to secure other protocols within the Ethereum ecosystem.

This innovation aims to solve two critical issues on Ethereum: capital efficiency and the difficulty of developing a trust layer for decentralized protocols.

First, by allowing staked assets to be used for multiple functions, Restaking aims to significantly improve capital efficiency. Instead of requiring additional funds to secure each new protocol, thereby fragmenting available liquidity on Ethereum, the same tokens can be used to fuel a shared security layer.

Second, Restaking extends Ethereum's economic security to other distributed networks within the ecosystem, allowing them to borrow some of that security to build their own trust layer. This creates an ecosystem where security resources are amplified and pooled, reducing operational costs for distributed networks.

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EigenLayer: The Restaking Pioneer

Announced in 2022, EigenLayer is the protocol that designed, introduced, and popularized the concept of Restaking. It operates as a marketplace where decentralized protocols within the Ethereum ecosystem can borrow the economic security of the main network in exchange for recurring payments.

EigenLayer raised over $164 million, including a final $100 million round led by Andreessen Horowitz (a16z) in February 2024. Since its official launch, EigenLayer has experienced exponential growth, reaching a TVL of $11.5 billion as of September 1, 2024.

Technical Architecture

• Restakers: Users who contribute to the platform's operation by depositing assets, either natively (in the form of Ether) or via liquid staking tokens (Lido's stETH, Swell's swETH, RocketPool's rETH, etc.).
• Operators: Entities registered with EigenLayer responsible for receiving delegations from platform users. These can be individual or professional operators who develop the necessary technical infrastructure to host nodes for partner protocols.
• AVS (Actively Validated Services): Protocols built on top of EigenLayer that wish to benefit from Ethereum's economic security. These are selected by the EigenLabs foundation following a strict selection process.
• Slashing Mechanism: Each AVS must build its own dedicated smart contract for slashing. When an operator wishes to participate in securing two distinct AVS, they must adhere to each one's rules.
• Veto Slashing Committee (VSC): In the event of a slashing error, a veto committee can cancel or uphold the penalty. This committee, which must be agreed upon by both conflicting parties—i.e., the AVS and the operators—includes members from the Ethereum community.

Key Features

• Restaking Mechanism: The accepted assets are native Ether (ETH) and liquid staking tokens.
• Security: Allows developers to leverage Ethereum's existing security, reducing the costs and complexities associated with building their own security system.
• Flexibility: AVS can customize many parameters, including slashing conditions, quorum of stakers (e.g., the distribution percentage between ETH and AVS tokens), fee models, or operator prerequisites.
• Robustness: EigenLayer meticulously selects AVS, operators, and slashers to minimize long-term risks.

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Symbiotic: The Permissionless Competitor

Launched in 2024, Symbiotic is often seen as a direct response to EigenLayer’s rapid ascent. While the two protocols share many similarities, Symbiotic distinguishes itself in several key areas: modular and flexible architecture, permissionless nature, user deposit management, and collateral assets.

From the start, Symbiotic attracted considerable attention, raising $5.6 million from Paradigm and Cyber Fund. Just one month after its launch, the protocol had already captured over $1 billion in TVL.

Technical Architecture

• Collateral: The set of assets used to fuel Symbiotic's economic security layer. These vary: liquid staking tokens, ERC-20 tokens, LP tokens, and other assets to be determined in the future.
• Vaults: Custom contracts that manage user-delegated assets (collateral), from compatibility to restaking strategy and reward distribution.
• Operators: Nodes providing computation services to the network, responsible for managing assets deposited in the various vaults. They must accept and adhere to the terms specified by the networks.
• Networks: Protocols that need to build their own distributed trust layer to function (similar to EigenLayer's AVS).
• Resolvers: Entities designated to arbitrate slashing disputes, which can be centralized addresses, decentralized organizations, slashing committees, or others (similar to EigenLayer's VSC).

Key Features

• Diversified Collateral: Supports staked Ether derivatives and plans to expand to a wide range of ERC-20 tokens (liquidity pool tokens, etc.).
• Modular Architecture: Allows developers to customize the restaking protocol according to their needs, adjusting security parameters and integrating various assets based on their requirements.
• Permissionless Protocol: Any developer can build their trust layer and implement a restaking strategy without needing special permissions.
• Vault Management: Vaults manage deposits, withdrawals, slashing, reward distribution, and delegation strategies. Their smart contracts are predefined and immutable.

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Comparison Between EigenLayer and Symbiotic

Compatibility

EigenLayer extends Ethereum’s economic security to AVS by leveraging the existing validator network. The compatible assets are native Ether and its derivatives in the form of liquid staking tokens.

Symbiotic, on the other hand, offers a flexible model that allows various assets to be used as collateral (ERC-20 tokens, liquidity pool tokens, etc.). While this may attract more capital, it also increases the risks associated with asset volatility and longevity.

EigenLayer’s decision to limit itself to Ether and its derivatives reflects a desire to minimize risk while offering stable returns. Symbiotic, however, aims to attract a larger pool of investors and projects at the expense of the stability of restaking pools.

Ecosystem and Adoption

EigenLayer integrates seamlessly with Ethereum’s infrastructure, attracting all projects wishing to borrow a portion of the main network’s security rather than building their own trust layer. Since AVS (Actively Validated Services) are selected by EigenLayer, their number is limited, making the ecosystem relatively closed.

Symbiotic, however, aims to become a unifying capital layer for decentralized finance (DeFi), serving the security of a broader variety of projects. By allowing any decentralized application to integrate without approval, through its permissionless model, Symbiotic’s ecosystem is more open and could diversify more quickly.

However, this openness also increases the risk that one of the projects backed by Symbiotic could encounter problems. Whether it’s fraud or an attack, this could have devastating consequences for the entire ecosystem.

Slashing and Governance

EigenLayer uses specific governance mechanisms to manage slashing and reward processes. These mechanisms include a Veto Slashing Committee (VSC), which makes centralized decisions on how to penalize malicious or deviant behavior. This approach is intentionally standardized and centralized to ensure better network integrity.

Symbiotic, by contrast, handles slashing directly at the vault level via "Resolvers." These are designated by networks and have more freedom to respond to the specific needs of each network. However, this also opens the door to potential malicious activities by Resolvers, or even collusion with networks to arbitrarily penalize operators.

Philosophical Differences

EigenLayer’s philosophy is to extend Ethereum’s economic security to other protocols built on the main network, thereby strengthening the entire ecosystem. The goal is that each new protocol no longer has to build its own trust layer but can borrow Ethereum’s.

This is what EigenLayer’s founder refers to as "Fractured Trust": the more distributed networks based on Ethereum grow, the more liquidity is fragmented, thereby reducing the overall security of the main network. The Restaking concept, as presented by EigenLayer, is a direct solution to this problem. It creates a virtuous circle benefiting both Ethereum and distributed networks within its ecosystem.

Symbiotic, on the other hand, takes a different approach. Its goal is to create an open market for decentralized finance, where applications and protocols benefit from an influx of liquidity and users. Symbiotic’s vision focuses on maximizing returns and innovation while seeking to attract as many users as possible to compete with EigenLayer. However, the issue of "Fractured Trust" is not a priority, and Symbiotic’s operating model leads to capital outflows from Ethereum’s main network into distributed networks, resulting in a loss of security.

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What’s Next for This Restaking War?

Some Key Data

Paradigm vs Andreessen Horowitz (a16z)

To recap, Symbiotic was officially launched on June 11th, the date when the company closed a $5.8 million funding round, led by Paradigm and Cyber Fund, an investment firm run by the two co-founders of Lido Finance. These two entities have specific reasons for funding a Restaking platform that competes with EigenLayer.

According to sources close to the team, Paradigm approached EigenLayer co-founder Sreeram Kannan to invest in the project. However, Kannan chose to turn to Andreessen Horowitz (a16z), Paradigm’s direct rival, to lead a $100 million funding round.

While EigenLayer was valued at $500 million, the protocol has grown so much that its fully diluted value during the EIGEN token launch is estimated to be around $13 billion. This represents a 25x increase from a16z’s initial investment, although the details of token distribution are not yet known.

The rivalry between these two venture capital firms is well known, likely explaining Paradigm’s motivation to invest in EigenLayer’s direct competitor, Symbiotic. However, this story also reveals another confrontation, this time between EigenLayer and Lido Finance.

Lido Finance vs EigenLayer

The other major investor in Symbiotic is Cyber Fund, an investment fund co-founded by Konstantin Lomashuk and Vasiliy Shapovalov, who are also behind Lido Finance, a decentralized finance application. They clearly see EigenLayer’s success as a threat to their protocol’s dominance within the Ethereum ecosystem.

Moreover, Lido has been slow to enter Liquid Restaking, allowing Ether.fi and Swell to experience significant growth (with $5.7 billion and $1.5 billion in TVL, respectively). Numerous debates have occurred within the community about whether stETH should remain a Liquid Staking Token or become a Liquid Restaking Token.

Ultimately, the investment by the founders of Lido Finance in EigenLayer’s direct competitor is a strategy aimed at addressing these two issues while maintaining some sovereignty over their protocol and stETH.

What Impact on Innovation?

There’s no doubt that Symbiotic has entered this "Restaking War" as a serious challenger to EigenLayer. The rivalry between the two protocols goes far beyond a simple battle to capture the largest share of a growing market; it is fueled by influential players and strategic stakes.

For some, this competition could benefit the ecosystem since it will drive innovation, regardless of the underlying motivations. Naturally, this innovation will be oriented towards satisfying users, which bodes well for their wallets: airdrops, better returns, etc.

Update (September 6, 2024): However, while the battle between Symbiotic and EigenLayer could be a catalyst for innovation, it could also distort the protocols. We are already starting to see this; Symbiotic’s rapid development and success have led to a strategic shift at EigenLayer, pushing it to accept all ERC-20 tokens, just like its competitor, which was not initially planned.

As of September 6, 2024, EigenLayer has officially launched "Permissionless Token Support," an update allowing any ERC-20 token to be added to the assets usable for Restaking. EigenLayer aims to allow AVS to choose to use their own tokens, stablecoins, or Bitcoin (BTC) derivatives.

This announcement directly contradicts EigenLayer’s philosophy as described in its whitepaper and by its founder in various blog posts. Indeed, EigenLayer stood out by aligning itself with Ethereum’s needs and philosophy, particularly by addressing the "Fractured Trust" issue.

When questioned about this on X (formerly Twitter), EigenLayer’s founder, Sreeram Kannan, responded that the idea of supporting ERC-20 tokens had already been mentioned in the project’s whitepaper in 2022, so today’s update should not come as a surprise.

Indeed, as outlined in EigenLayer’s key features (see sections above), an AVS can choose the quorum of stakers, i.e., the token distribution between ETH and their own token. Thus, as Sreeram notes, we were prepared for EigenLayer to support AVS’s ERC-20 tokens.

Nevertheless, implementing "Permissionless Token Support" also means that AVS will be able to select various ERC-20 tokens, such as stablecoins, Bitcoin derivatives, liquidity pool tokens, and many other potentially volatile and risky assets. In this sense, EigenLayer’s philosophy (as aligned as possible with Ethereum, unlike Symbiotic) seems somewhat compromised.

As explained earlier, the ability to support any ERC-20 token could lead to a loss of value for Ethereum in favor of distributed networks, an effect that EigenLayer specifically sought to avoid.

This update raises questions about EigenLayer’s ambitions and the outcome of the war between the two protocols. Symbiotic’s growth in the market appears to have significantly influenced its competitor’s decisions, and we will closely monitor the coming months.