Investing in EigenLayer

Lisa Cuesta and I are proud to announce our angel investment into EigenLabs’ seed round (the team behind EigenLayer) led by Polychain and Ethereal. EigenLabs has since also raised an A led by our friends at Blockchain Capital, which we’re extremely excited about.

EigenLayer enables Ethereum validators to do more work by “restaking” their ETH to power additional services. Restaking enables staked ETH to be used as cryptoeconomic security for protocols other than Ethereum, in exchange for protocol fees and rewards. As a simple example — you can imagine paying Ethereum validators to also run a data availability protocol where they agree to store and serve data for a period of time and get slashed if they don’t perform that service.

If you’ve been on Twitter at all the past year, you’ve seen your share of bullish EigenLayer threads. There was even a solid 3 month stretch when it felt like every post on ethresear.ch had a “this is potentially solvable via EigenLayer” callout at the bottom. We call these folks EigenBulls and I am one as well, hence the investment.

Rather than writing yet another post rehashing all these reasons, I wanted to spend a little time sharing how I think about work token models like EigenLayer. I’ve personally invested in several (like Threshold Network, Pocket Network, and Audius) and have spent a lot of time on Livepeer, NuCypher, and The Graph as part of my role at Coinbase Cloud. EigenLayer is incredibly exciting and my hope is this piece will enable folks to see it as I do and better understand how it will find success.

There are only three things to know about a work token model like EigenLayer:

• It lives and dies based on whether the services it provides have PMF
• It has no choice but to have a sustainable fee market
• The cryptoeconomic incentive model must actually work

Protocols are valued kinda funny today aren’t they? Zero value accrual, zero fee capture, zero upside, and a heap of responsibility via governance can garner $10 billion FDV valuations. This suspension of disbelief, or perhaps unwavering belief that it’ll soon be possible to have tokens accrue value without risking being incorrectly classified as securities, is a boon to protocol teams lucky enough to receive those premiums. Flush with illiquid, but valuable, tokens the teams are able to grow into those valuations by investing in their ecosystems, making the suspension of disbelief justified all along.

In many ways, EigenLayer’s journey is more akin to web2 than web3 because (un)fortunately, work token models like EigenLayer do not have the luxury of a suspension in disbelief — their services either have PMF or they do not. No amount of incentives, partnerships, giveaways, or anything else in the world can change that. Paul Graham would be thrilled to see it.

One nice bit is that because the EigenLayer network is modular and extensible, once the restaking component is built and battle tested, the modules for performing actual work (oracles, computation, proofs, etc.) can be easily launched and adopted by the Ethereum validators running other EigenLayer services. The team and community can take many shots at PMF, and even have modules built by external teams (for which they could potentially earn a grant and receive a portion of fees their module generated).

PMF also means a sustainable fee market, so if EigenLayer ever launches a token, the fees generated from the provision of services must far outweigh any token incentives. Put simply, if you’re paying people to power or use your product, you don’t actually know if you have PMF. This is a problem web3 projects run into all the time, so I won’t harp on it, except to say that as far as I am aware, there is not a single work token model that has a sustainable fee market. This is an extremely difficult nut to crack that many have worked on for years, but these projects keep closing the gap, and eventually one will pass this litmus test.

Lastly, the cryptoeconomic incentive model must actually work. Work token models are among the most challenging to design so teams have tended to take shortcuts, such as

• Incentivizing things that are too general (e.g., giving token incentives for a daily check in, but not for useful work)
• Incentivizing things that are too nitty gritty (e.g., making node operators make too many decisions, which makes them templatize answers, rather than expressing true preferences)
• Not disincentivizing behavior (e.g., not slashing for behavior that is selfishly profitable, but harms the network a small amount)

EigenLayer will need to balance the incentives of Ethereum proper, their many services, and any potential governance structure on top to ensure these diverse stakeholders can work together in harmony without the opportunity for selfish, profitable behavior that hurts the whole.

Sreeram and team are tackling an incredibly difficult problem, but one that has the potential for an enormous amount of impact. There’s tens of billions of dollars of staked ETH. In the future there will be trillions. Making this capital useful will be a journey that can place crypto as an industry on a better path — centered on providing useful services, finding PMF, and playing infinite games. Lisa and I are incredibly excited to support them and can’t wait for mainnet!