Ethereum restaking is emerging to be one of the dominant crypto narratives this year and leading protocols such as EigenLayer are seeing a surge in activity.
The total value locked on Ethereum restaking protocol EigenLayer has surged 70% over the past week.
Furthermore, it is currently at an all-time high of $3.4 billion, according to DeFiLlama.
The reason for the surge is a reopening of deposits on the restaking platform and the removal of staking limits or caps.
On Feb. 6, the protocol stated, “All pools are fully uncapped, featuring both the existing pools,” and welcomed new partners Frax Finance, Liquid Collective, and Mantle.
The EigenLayer team said the “unpause marks the temporary removal of TVL caps, paving the way for a future where pauses and caps are lifted permanently.”
“This puts the EigenLayer protocol at a critical juncture, seeking to balance neutrality with decentralization over the long-term.”
Essentially, restaking allows users to stake the same ETH on both Ethereum and other protocols. By leveraging Ethereum’s validators and staked tokens, smaller and newer blockchains can benefit from its robust security and trust system, reducing the risks of attacks or failures.
However, the EigenLayer protocol faces a tradeoff between neutrality, allowing free market behavior, and decentralization – preventing dominance by a single token.
The protocol temporarily lifted token restaking caps to be more neutral. However, a fully neutral protocol risks a single token dominating governance and incentives.
To balance neutrality and decentralization, EigenLayer proposed three rules on Feb. 5. These were no caps on staked token value, no caps on payments from apps to stakers, and a cap on EigenLayer protocol incentives and governance at 33% for any token or participant.
“This proposal is designed to navigate the delicate balance between neutrality and decentralization. However, the ultimate decision to discuss, refine, and implement these suggestions rests with the EigenLayer protocol community.”
It added that the cap raise signifies a major event “as it marks the first instance of eliminating the TVL caps for each token for a fixed period.”
Low Initial Returns
DeFi researcher Thor Hartvigsen offered his take now that EigenLayer has reopened deposits with support for mETH, sfrxETH, and lsETH.
He noted that returns were not that great, but there were other potential upsides. EigenLayer is still attractive for ETH parking despite low initial earnings due to the potential for increased earnings and airdrops, he said.