EigenLayer overcomes drama with $11 billion in deposits and key role in Ethereum – Sreeram Kannan on the future – DL News

Within a year of its launch in June 2023, EigenLayer had the launch that crypto projects dreamed of.

The Ethereum restool company raised around $20 billion in user deposits and its parent company secured a $100 million investment from VC powerhouse a16z.

Even better, the project has quickly proven its value: According to founder Sreeram Kannan, more than 100 companies have joined EigenLayer, including crypto exchange Kraken and bridge developer LayerZero Labs.

But EigenLayer may have gone too far, too fast, as the project responded to a series of controversies, including allegations that it tried to buy out two influential – and often critical – crypto researchers.

“In some ways it’s the heart of Ethereum,” said founder Sreeram Kannan DL News in a detailed interview. “We were not prepared to be at the center of a large ecosystem.”

Asymmetrical attention

EigenLayer now has $11 billion in deposits. Although it originated in science with the goal of creating a “free market for decentralized trust,” its introduction has become a classic story about the pitfalls of overnight success.

After the project’s hot launch, Kannan took a breath and discussed his first attempt at building a crypto company and what’s next for EigenLayer.

EigenLayer makes it easier to launch certain protocols by having them piggyback on the computers and cryptocurrency Ether that run and secure Ethereum itself, a process called restaking.

At the Istanbul conference last year, Kannan compared the concept to a military alliance.

“Cities don’t have armies, nations have armies. Sometimes many nation states even coordinate to form alliances that actually work together,” he said.

“It’s exactly the same phenomenon. Common security is fundamentally better.”

“I am appalled that we EF researchers… are taking six- to seven-figure compensation packages from protocols.”

— Lefteris Karapetsas, Rotki

Some Ethereum researchers were quick to proclaim EigenLayer as a breakthrough. However, some also warned that the blockchain could be destabilized by having too many services rely on the same amount of Ether for their security.

In other words, if a project built on EigenLayer were to fail, it would take the newly staked Ether with it. Or, to extend Kannan’s analogy, if a city failed, the army could take it with it.

In short, critics feared that there could be cascading outages that would ultimately harm Ethereum itself.

To address concerns, EigenLayer has introduced individual features every month. Later this year, the security model will be changed to limit contagion if some applications fail.

But an attempt to emphasize safety didn’t go so well.

Earlier this year, Justin Drake and Dankrad Feist, prominent researchers at the Ethereum Foundation, were brought in as advisors.

They were hired to address the risks that restaking poses to Ethereum. And they were well compensated – Drake’s payment could one day be worth millions, he said.

Lucrative relationship

But the lucrative relationship only came to light when a crypto influencer wrote about it on social media.

The lack of transparency wasn’t just a violation of DeFi values. It also sparked criticism that the Ethereum Foundation was turning a blind eye to conflicts of interest.

“I am appalled that we have EF researchers receiving six to seven figure compensation packages from protocols to the people leading protocol development,” Rotki founder Lefteris Karapetsas wrote on X.

“Even if you promise me not to let this cloud your judgment and do it from a personal perspective, it is impossible.”

Big advantage

Both Drake and Feist said they would not compromise with EigenLayer’s money.

Feist said EigenLayer would be a “huge benefit for Ethereum” – if done right.

“I trust that current leaders intend this and I plan to hold them accountable,” he wrote on X. “I will not hesitate to speak out and/or resign my position if I believe that this is a no.” is no longer the case.”

Drake promised to direct all the money he makes from EigenLayer to other Ethereum projects in the form of grants or investments.

“I am also prepared to terminate advisory activities at any time, for example if EigenLayer takes a direction that I believe is contrary to the interests of Ethereum,” he wrote.

According to Kannan, EigenLayer delayed announcing the partnership at the request of the Ethereum Foundation, which wanted to disclose the relationship itself.

But crypto influencer Jordan Fish, better known as Cobie, urged action and wrote down

Drake confirmed the relationship on his website and on X, adding that he was paid cryptocurrencies that could ultimately be worth millions of dollars.

Feist did the same, although he only said that his salary represented “a significant amount of tokens.”

“Even if people think it’s a subversive thing. It’s not that,” Kannan said.

Completely transparent

“It was completely transparent, we spoke to the Ethereum Foundation. The Ethereum Foundation had asked us not to advertise it. … They said, ‘We’re going to promote it ourselves, and we’re going to do it the right way.'”

The Ethereum Foundation did not return DL News‘Please comment.

According to Kannan, the payments were also a thank you to two researchers who have already done a lot to shape the direction that EigenLayer has taken.

“We want to pay back the people who actually invested and created these ideas.”

— Sreeram Kannan, EigenLayer

“EigenDA is a protocol built on the ideas of Dankrad and Justin,” Kannan said, referring to an actively validated service developed by Eigen Labs, EigenLayer’s name for projects built on it.

“We want to pay back the people who actually invested and created these ideas.”

No sooner had matters calmed down than another controversy broke out.

Handing over of tokens

A CoinDesk An August article reported that Eigen Labs was pressuring partner companies to send their employees a portion of all newly issued tokens.

Eigen Labs denied the accusation. Then, in September, some critics pointed out that they feared it was evidence that early, deep-pocketed EigenLayer investors could circumvent the transfer of their tokens – the company’s fears were vastly overblown.

“It’s not enough to be right in crypto. In general, if you want to build trust, you have to be demonstrably right, and that’s a much, much higher bar,” Kannan said. “It’s really hard, it’s not easy. And we have an asymmetrical level of attention for a project of our size.”

To address this challenge, Kannan said the company is deploying more manpower to improve its transparency standards.

“If we want to become the coordination engine of humanity, it has to be able to withstand this [scrutiny]” he said.

Trifecta

Once skeptical of crypto as a speculative bubble, he now speaks like a true believer and often uses lofty rhetoric.

“I was at a dinner with a US congressman and he asked, ‘Can you tell me why you’re involved in crypto?'” Kannan recalls.

“Many founders of the DeFi protocol were all saying, ‘Improve the financial system and make it resistant to inflation,’ all those things we know and love. But I said, ‘It’s the greatest improvement to human civilization since the Constitution.'”

Kannan, who is passionate about peer-to-peer networks, delved into the crypto industry in 2018.

He wrote academic papers on the topic and eventually set out to create his own blockchain called “Trifecta.”

But he couldn’t raise the money.

It would have been easier to start a blockchain if he had successfully courted VCs. But it would also have been easier if new blockchains didn’t require their own distributed computer network. That is, if he could have used the computers that were already running Ethereum.

“EigenLayer was kind of designed as a mechanism to solve my own problem,” he said.

Aleks Gilbert is a DeFi correspondent at DL News. You can reach him at [email protected].