Another staking war has begun, is EigenLayer's position no longer secure?

Original title: The Restaking Wars: Eigenlayer vs Symbiotic

Original author: Ignas, DeFi researcher

Original translation: Ismay, BlockBeats

I was originally writing a blog post about emerging trends in the crypto space this week, but had to quickly change direction to focus on restaking.

The reason is that Eigenlayer's biggest competitor, Symbiotic, had just launched and the deposit limit almost reached $200 million in one day. Emerging trends can be watched later, but high-yield farming opportunities cannot be missed.

In addition to Karak, we now have three restaking protocols. So what exactly is going on, how are they different, and how should we respond?

Symbiotic’s motivation

The hot gossip is that Paradigm approached Eigenlayer co-founder Sreeram Kannan to invest, but Kannan chose Paradigm competitor Andreessen Horowitz (a16z), which led a $100 million Series B round.

Since then, Eigenlayer has grown to become the second largest DeFi protocol with $18.8 billion TVL, only Lido is larger with $33.5 billion TVL. EIGEN tokens are not yet transferable, but have reached $13.36 billion FDV.

Considering Eigenlayer’s valuation in March 2023 is $500 million FDV, this is a 25x paper gain.

No wonder Paradigm was unhappy, and in response, Paradigm funded Symbiotic, making it a direct competitor to Eigenlayer. Symbiotic received $5.8 million in seed funding from Paradigm and Cyber Fund, and it is not yet known what its valuation is.

The rivalry between Paradigm and a16z is well known (and a joke), but there is a second part to the story.

Symbiotic’s second-largest major investor, Cyber Fund, was founded by Lido co-founders Konstantin Lomashuk and Vasiliy Shapovalov.

Coindesk reported in May that “people associated with Lido see Eigenlayer’s restaking approach as a potential threat to its dominance.”

Lido has missed the trend of LRT tokens, and in fact, stETH’s TVL has stagnated and decreased by 10% over the past three months. Meanwhile, EtherFi and Renzo have seen inflows soar, reaching $6.2 billion and $3 billion in TVL, respectively.

Restaking with LRT is particularly attractive because it offers higher yields, although currently much of the yield is actually points farming.

To solidify Lido’s position, the Lido DAO launched the “Lido Alliance”, whose primary mission is to develop a permissionless, decentralized re-staking ecosystem.

“…given the rapid rise of the re-staking market, among other factors. In response to some of his calls, we propose the following framework to support the emergence of an ecosystem around stETH while keeping the protocol intact.”

By the way, one of the strategic priorities listed is to reaffirm that stETH is an LST, not to become an LRT.

This is great because we get more tokens and have more airdrop farm opportunities.

Just a month after the initial discussions, key alliance member Mellow launched LRT deposits on Symbiotic backed by stETH deposits.

But before we dive into the unique features and farming opportunities of Mellow LRT, let’s take a step back and discuss how Symbiotic differs from Eigenlayer.

Symbiotic vs. Eigenlayer

Symbiotic: Permissionless and Modular

Symbiotic features a permissionless and modular design, providing more flexibility and control. Its main features are as follows:

Multi-asset support: Symbiotic allows direct deposits of any ERC-20 token, including Lido's stETH, cbETH... This makes Symbiotic more diversified than Eigenlayer, which mainly focuses on ETH and its derivatives (as far as I know, Eigenlayer may also support other assets in the future).

Customizable parameters: Networks using Symbiotic can choose their collateral assets, node operators, reward and penalty mechanisms. This modular design enables the network to freely adjust its security settings according to its specific needs.

Immutable core contract: Symbiotic's core contract is non-upgradeable (similar to Uniswap), which reduces governance risks and potential failure points. Symbiotic can continue to operate even if the team disappears.

Permissionless Design: By allowing any decentralized application to integrate without permission, Symbiotic provides a more open and decentralized ecosystem.

Symbiotic co-founder and CEO Misha Putiatin said in an interview with Blockworks, "Symbiotic means 'avoid competition like avoiding fire, and be as selfless and as unbiased as possible.'"

Misha also told Blockworks that "Symbiotic will not compete with other market participants - so no local staking, aggregation or data availability services will be provided."

When dApps launch, they usually need to manage their own security model. However, the permissionless, modular and flexible Symbiotic design allows anyone to use shared security to protect their network.

"Our project goal is to change the narrative - you don't have to launch locally - it will be safer and easier for you to launch on top of us, on top of shared security," Misha told Blockworks.

In practice, this means that crypto protocols can launch native staking for their native tokens to increase network security. For example, Ethena worked with Symbiotic to enable USDe cross-chain security by staking ENA.

Ethena is integrating Symbiotic with LayerZero’s Decentralized Verification Network (DVN) framework to enable cross-chain security for Ethena assets like $USDe, backed by staked $ENA. This is the first of several parts of their infrastructure and systems that will leverage staked $ENA, - Symbiotic blog post.

Other use cases include cross-chain oracles, threshold networks, MEV infrastructure, interoperability, shared sequencers, and more.

Symbiotic launched on June 11th, and the deposit cap for stETH was reached within 24 hours. Oh, and did I mention the depositor points? !

Eigenlayer: A Curated and Consolidated Approach

Eigenlayer takes a more curated and consolidated approach, focusing on leveraging the security of Ethereum ETH stakers to support a variety of dApps (AVs):

Single-asset focus: Eigenlayer primarily supports ETH and its derivatives. This focus may limit its flexibility, compared to Symbiotic which offers broader multi-asset support. However, more assets could be added.

Centralized management: Eigenlayer manages the delegation of staked ETH to node operators, who then validate the various AVS. This centralized management helps simplify operations, but can lead to bundling risk, making it more difficult to accurately assess the risk of individual services.

You can read about how it works in my previous blog post .

Dynamic Market: Eigenlayer provides a trustless marketplace that allows developers to launch new protocols and applications using pooled ETH security. Risk is shared among depositors in the pool.

Slashing and Governance: Eigenlayer's management approach includes a specific governance mechanism for handling slashing and rewards, which may provide less flexibility.

To be honest, Eigenlayer is an extremely complex protocol, and the risks and overall workings are beyond my understanding, haha. I had to compile criticisms from various sources to write this section. One of them was from Cyber Fund itself.

I’m not biased towards either side, and I’m sure the comparison of Symbiotic to Eigenlayer will spark a lot of discussion among DeFi geeks.

Meet the Mellow Protocol: Modular LRTs

What surprised me most after Symbiotic went live was the immediate launch of LRTs on the Mellow protocol. As a member of the Lido Alliance, Mellow benefits from Lido’s marketing, integration support, and liquidity onboarding.

As part of the deal, Mellow will reward Lido with 100 million MLW tokens (10% of total supply), which will be locked in a Lido Alliance legal entity after the TGE.

These tokens will follow the same vesting and cliff period terms as the team tokens: a 12-month cliff period after the TGE, and a 30-month vesting period after the cliff period ends (terms modified based on feedback).

Two other benefits are mentioned in the alliance proposal:

“Lido’s node operators can launch their own composable LRTs and control the risk management process by choosing an AVS that fits their needs, rather than facing the imposition of an LRT or re-staking protocol.”

“This will help expand Lido’s geographic and technical decentralization efforts beyond Ethereum validation.”

It will take time for the impact of the partnership to be felt, but LDO is up 9% in 24 hours. That’s pretty remarkable!

Interestingly, the $42 million cap on one of the four LRT pools had already been reached before the Lido partnership tweet.

Anyway, if you’re familiar with Eigenlayer’s LRTs like Etherfi and Renzo, you’ll know that depositing funds into Mellow is doubly fun: you get points in both Symbiotic and Mellow.

But Mellow is different from Eigenlayer’s LRTs…

What problems does Mellow solve for LRTs?

The Mellow protocol allows anyone to deploy an LRT. Hedge funds, staking service providers (like Lido!), and even me can (theoretically).

This also means a sharp increase in the number of LRTs, which hurts their liquidity and complicates their integration in DeFi protocols.

However, it also has some advantages:

Diversified risk profiles: Current LRTs typically force users to accept a uniform risk profile. Mellow allows for multiple risk adjustment models, enabling users to choose their preferred risk exposure.

Modular infrastructure: Mellow’s modular design lets shared security networks request specific assets and configurations. Risk curators can create highly customized LRTs based on their needs.

Smart contract risks: By allowing modular risk management, Mellow reduces the risk of errors in smart contracts and shared security network logic, providing a safer environment for re-stakers.

Operator Centralization: Mellow decentralizes the decision of operator selection, preventing centralization and ensuring a balanced and decentralized operator ecosystem.

LRT Loop Risk: Mellow’s design addresses the risk of liquidity crunch due to withdrawal closures. Currently, withdrawals take 24 hours.

Interestingly, Mellow specifically mentioned that they can launch LRT on top of any staking protocol, such as Symbiotic, Eigenlayer, Karak, or Nektar. But I would be very surprised to see Mellow working directly with Eigenlayer.

However, I would not be surprised to see the current Eigenlayer LRT protocol working with Symbiotic or Mellow. In fact, Coindesk reported that a source close to Renzo and Symbiotic mentioned that Renzo was already discussing integration with Symbiotic a month ago.

Finally, the cool thing about permissionless Mellow vaults is that we may have LRTs for DeFi tokens. Imagine an ENA LRT token that is liquid re-collateralized ENA on Symbiotic, used to secure USDe cross-chain.

Not much innovation in token economics this cycle, but Symbiotic may make holding DeFi governance tokens attractive again.

DeFi Degen’s Restaking Warfare Strategy

As of this writing, there are four LRT vaults on Mellow, managed by four unique curators. The deposit cap is about to be reached.

The timing of the launch of Symbiotic and Mellow LRT is perfect: the EtherFi S2 points event ends on June 30th, Renzo S2 is underway, and the Swell airdrop should come soon when withdrawals are enabled.

I almost worry about what to do with my ETH after the LRT farm airdrop expires. Thanks to the game of VCs and big players, the airdrop farmers will also be well fed.

The game is very simple at the moment: deposit Symbiotic to earn points, or increase the risk level and farm directly on Mellow.

Note that since Symbiotic’s stETH deposits have been capped, you will no longer earn Symbiotic points, but will receive 1.5x Mellow points.

The airdrop farm game will likely be similar to how Eigenlayer is played: Mellow LRTs will be integrated into DeFi, and we’ll see leveraged farms on Pendle, as well as farms on multiple lending protocols.

But I think the Symbiotic token will likely be live before EIGEN is tradable.

In an interview with Blockworks, Putiatin said that the mainnet could go live “as early as late summer for some networks.” Does this mean the token will also go live at the same time?

Stealing the re-staking heat from Eigenlayer could be a smart move, especially if the market turns bullish soon, given Symbiotic’s aggressive partnership strategy.

The two partnerships that shocked me the most were: The Blockless and Hyperlane. Both protocols initially partnered with Eigenlayer as AVSs for shared security, but are they changing alliances?

Perhaps Symbiotic has promised more support and token distribution? I need more answers!

Anyway, these restaking wars are good for us airdrop farmers as it provides more opportunities and may prompt Eigenlayer to launch its tokens earlier than expected.

Symbiotic is still in its early stages but the early deposit inflows are very bullish. I am currently farming on Symbiotic and Mellow but plan to migrate to Pendle YTs once the strategies are open.

I believe Pendle’s Symbiotic YT token expiration date will provide us with more insights into the Symbiotic TGE timeline.

One last note: Karak

You thought I forgot about it, right?

Karak is a hybrid. It is similar to Eigenlayer, but instead of using AVSs, it calls them Distributed Security Services (DSS).

Karak also launched its own Layer 2 (named K2), a sandbox for risk management and DSSes. However, it is more like a testnet than a real L2.

But Karak managed to attract more than $1 billion in TVL! Why? There are two main reasons:

Karak supports Eigenlayer LRTs: So, farm users deposit LRTs and earn points in Eigenlayer, LRT and Karak at the same time.

Karak successfully raised more than $48 million: Investors include Coinbase Ventures, Pantera Capital and Lightspeed Ventures. The support of well-known investors is expected to bring high airdrops.

Learn more about Karak in my post below:

Since the April announcement, Karak has not announced any major partnerships, notable LRT protocols launching on Karak, or any exclusive DSS/AVS partners.

I really want to see more aggressive developments from Karak, as Symbiotic is playing catch-up to Eigenlayer in a big way. Karak needs to step up their game.

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