Ethereum is the most popular smart contract platform in the world, but it also faces some serious scalability challenges. The current proof-of-work consensus mechanism limits the network throughput to about 15 transactions per second, which is far from enough to meet the growing demand for decentralized applications. Moreover, the high gas fees and environmental impact of mining make Ethereum less attractive for users and developers.
One of the proposed solutions to improve Ethereum’s scalability is to switch to a proof-of-stake consensus mechanism, which is expected to happen with the launch of Ethereum 2.0. However, this transition will take time and will not solve all the scalability issues. For instance, proof-of-stake still requires validators to run full nodes and store the entire state of the network, which can become impractical as the network grows.
This is where EigenLayer comes in. EigenLayer is a novel layer-2 scaling solution that leverages the power of restaking to achieve hyperscaling on Ethereum. Restaking is a mechanism that allows users to stake their tokens on a layer-2 network and receive rewards from both the layer-1 and layer-2 validators. This way, users can enjoy the security and decentralization of Ethereum, while also benefiting from the high performance and low cost of EigenLayer.
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EigenLayer is designed to be compatible with any layer-1 blockchain that supports smart contracts and staking, such as Ethereum, Polkadot, or Cardano. However, in this blog post, we will focus on how EigenLayer works with Ethereum as an example.
EigenLayer consists of two main components: a layer-2 network and a restaking contract. The layer-2 network is a set of validators that run a Byzantine fault-tolerant consensus protocol called EigenBFT. EigenBFT is based on Tendermint, but with some modifications to improve its efficiency and security. The layer-2 validators process transactions and generate blocks much faster than the layer-1 network, achieving thousands of transactions per second with sub-second finality.
The restaking contract is a smart contract deployed on the layer-1 network that acts as a bridge between the layer-1 and layer-2 networks. The restaking contract allows users to deposit their tokens on the layer-1 network and receive corresponding tokens on the layer-2 network. These tokens can then be used to interact with any decentralized application running on EigenLayer, or to stake them on the layer-2 network and earn rewards from both the layer-1 and layer-2 validators.
The restaking contract also allows users to withdraw their tokens from the layer-2 network and redeem them on the layer-1 network. However, this process requires a waiting period of several days, during which the layer-2 validators submit proofs of their activity to the restaking contract. This is to ensure that no double-spending or fraud can occur on EigenLayer.
In April 2023, the Shapella Upgrade enabled Ethereum Validators to unstake their staked ETH from the blockchain, allowing Validators to exit their positions as a Validator. As DeFi continues to grow, EigenLayer introduces an innovative solution that allows Validators and LSD stakers to reuse their staked assets without the need to unstake them.
EigenLayer offers several advantages over other scaling solutions, such as:
Hyperscaling: EigenLayer can achieve orders of magnitude higher scalability than the layer-1 network, without compromising its security or decentralization. By restaking their tokens on EigenLayer, users can access a wide range of decentralized applications with high performance and low cost.
Interoperability: EigenLayer can connect any layer-1 blockchain that supports smart contracts and staking, creating a cross-chain ecosystem that enables seamless value transfer and collaboration among different networks.
Incentive alignment: EigenLayer aligns the incentives of all participants in the network, including users, developers, validators, and miners. Users can enjoy both the rewards from the layer-1 and layer-2 networks, while also supporting the security and decentralization of both layers. Developers can build scalable and user-friendly applications on EigenLayer, without worrying about gas fees or network congestion.
Validators can earn fees from processing transactions and blocks on EigenLayer, while also contributing to the consensus of the layer-1 network. Miners can benefit from increased demand for their services, as more users join EigenLayer and interact with the restaking contract.
In simple terms, Restaking allows Ethereum already staked by Ether stakers on Ethereum to be reused on a different network – EigenLayer, thus earning more rewards in the process. It’s like a scaling solution for Ethereum. In essence, using staked ETH again to enhance security for different services not only saves money for those who put it in but also makes services more trustworthy.