Coinbase Analysts Spot EigenLayer’s Potential Risks: Report

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Coinbase’s Research Identifies Ethereum Restaking’s Risks
  • Coinbase analysts spot the potential risks associated with Ethereum’s EigenLayer restaking protocol.
  • As per the analysts, the protocol involves both security and financial risks.
  • The analysts also highlight the protocol’s potential to foster Ethereum’s innovation and infrastructure development.

In a research post dated April 2, Coinbase analysts David Han and David Duong shed light on the hidden risks of both security and finance, inherent in restaking, a zone that has grown into Ethereum’s second-largest DeFi sector.

According to the analysts’ insights, Ethereum’s restaking protocol, EigenLayer, has the potential to become “the bedrock for a wide range of new services and middleware on Ethereum.” They added that the restaking protocol helps generate “a meaningful source of ether (ETH) rewards for validators in the future.”

Reportedly, EigenLayer, which currently boasts a TVL of around $12 billion, permits validators to earn extra rewards or LRTs through participation in actively validated services (AVS). While restaking protocols park assets with EigenLayer and results in increased earnings, they pose additional challenges. The analysts wrote, “While this can increase earnings, it can also compound risks.” They added,

“We think that restaking and LRTs may pose additional risks compared to existing staking products, both from a security and financial perspective. These risks could become increasingly opaque as the number of AVSs grow and LRTs differentiate their operator strategies.”

Sharing more insights into the potential risks, the analysts stated that the restakers are involved in a “higher-risk profile” for the highest yields. Also, the LRT providers and decentralized autonomous organizations (DAOs) will be incentivized to restake multiple times in the competitive space. The analysts cited,

“We believe what matters will be the risk-adjusted rewards and not absolute rewards, but it may be difficult to have transparency on that. This could lead to additional risks as LRT DAOs are incentivized to maximally restake multiple times to remain competitive.”

Despite these challenges, the analysts highlighted EigenLayer’s significant role in Ethereum. As per the analysts’ prediction, the restaking protocol could critically help foster Ethereum’s innovation and infrastructure development.

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