DeFi Grows Up: Restaking and the New Utility-Based Yield Curve

26 Jan 2023

From the frenzy of DeFi Summer, to its aftermath, we’re now entering Ethereum and DeFi’s next evolution with the introduction of EigenLayer.As DeFi comes of age, it's worth looking back at the events of the past two years. Only eighteen months ago, DeFi was a burgeoning ecosystem of startups, all offering new and innovative ways to use blockchain technology to shake up traditional finance. Investors, traders, and bored degens–trapped in pandemic lockdowns–poured money into these projects, convinced they were on the cusp of something big.  But the fervor dissipated, and the DeFi landscape has become more subdued.What happened? It was a tale of hype meeting reality. The initial excitement surrounding these groundbreaking projects gave way to an endless proliferation of forks and derivatives, diluting the potency of each subsequent iteration.  Hacks, rugs, and competition pushed easy returns down, raising questions about the long term viability of DeFi.But all is not lost. The DeFi ecosystem is still in its infancy and the road ahead is long, winding and bumpy.  And, as we've seen before, true innovation often emerges from humble beginnings.The lull we've seen in the past year is not a sign of failure, but rather a necessary stage in the development of any new technology. And if we look closely, we can see signs that DeFi is growing up.What will kick off the next wave of DeFi? Our prediction is that it will be with the launch of EigenLayer (who the LAO and its members have supported since its inception). EigenLayer will enable Ethereum validators to provide security and earn fees on multiple blockchains. By offering a utility-based service—shared security—and generating a stream of fees, EigenLayer will create opportunities for new, sustainable DeFi applications and services.It's important to remember that progress is never a straight line. The future of DeFi is not predetermined, but rather something that we will shape together. The launch of EigenLayer is a promising step forward and it will be exciting to see how the ecosystem evolves in the coming months.DeFi is Dead; Long Live DeFiDeFi has undergone a metamorphosis, evolving from a frenzy of yield farming, to a more mature and sustainable ecosystem. The initial phase, dubbed "DeFi Summer," was marked by a deluge of governance tokens being doled out as rewards for trying out new projects. This led to a rush of early crypto enthusiasts, as well as funds and institutional capital, all chasing the perceived easy profits.But, as is often the case with hype, the reality was less rosy. Many of these projects were underdeveloped, overhyped, and short-lived, resulting in a market correction and significant losses. Users—lured in by the promise of quick returns—collected tokens, harvested profits, and then abandoned these projects, leaving them barren and devoid of activity.In the aftermath of the first wave of DeFi projects, a new breed emerged. These were the Ohms, the Terras and the Lunas, the algorithmic stablecoins and other bold experiments in financial engineering. They came with new mechanism and token designs, and they grew with extraordinary speed. But their ascent was also, in many cases, their undoing.Despite these setbacks, the underlying technology and principles of DeFi remain sound. Amidst the recent market volatility and risks caused by the collapse of centralized platforms, smart contract-based financial projects such as Uniswap, Aave, and Maker have remained strong, without the drama and cascading risks presented by less decentralized crypto companies.DeFi projects continue to evolve and improve, with new projects still emerging, albeit at a lower frequency. The growing demand for alternative financial solutions and the increasing adoption of blockchain technology continue to fuel the development of DeFi. Though the market may have hit a rough patch, DeFi is here to stay and will serve as the backbone for global, permissionless marketplaces, and other financial products and services.To a certain degree, DeFi can be analogized to the development of e-commerce. Like e-commerce, DeFi is a revolutionary force that has swept through its industry with a tide of excitement. Like the early days of the internet, when e-commerce companies were hyped and overvalued, DeFi has seen a similar surge of speculation and inflated valuations. And as we saw with e-commerce, when the market corrects, many investors are left holding the bag, a la the dot com bubble.Restaking and the Next Wave of DeFiAs the world of DeFi continues to mature, it's becoming increasingly clear that the staking will be the driving force behind the next key wave of growth in DeFi. Decentralized networks are expanding at an unprecedented rate, and with this growth comes a surging demand for reliable validation services and network security.From the early days of Bitcoin to the most recent upgrades of Ethereum and other layer 1 networks, establishing robust crypto economic security has been a complex issue, fraught with trade-offs. One of the most pressing challenges in blockchain design is fragmented security, particularly on the Ethereum network. Middleware and non-EVM applications built on top of the Ethereum network are responsible for generating their own trust network, which is inefficient, expensive, and time-consuming.Enter EigenLayer, a new platform that has pioneered a mechanism called "restaking" to overcome these challenges and aggregate security across the Ethereum network. Restaking functions as a set of smart contracts in which users that stake ETH can repurpose their locked ETH to extend crypto economic security to other applications built on the network. The protocol creates an opt-in middle layer where users can grant EigenLayer additional enforcement rights on their staked ETH, allowing it to be restaked on other applications.

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