No Cap: Buzzy Eigenlayer Blows Past $3 Billion Total Value Locked

Eigenlayer, an Ethereum layer 2 protocol that allows staked ether (ETH) to be "restaked" to provide security for other blockchains, has seen its total value locked (TVL) nearly double after temporarily lifting a cap that was initially put in place to prevent the network from becoming too centralized.

According to data site DeFiLlama, Eigenlayer's TVL jumped from $2.16 billion to $3.84 billion in just 24 hours after the protocol removed caps for certain types of tokens on Monday. The surge was fueled mainly by stETH, a liquid staking token issued by Lido that accounted for $560 million of the new deposits.

Eigenlayer introduced the caps last year as a way to prevent any single token from dominating the network. Rather than issuing its own tokens, the protocol relies on an open marketplace where validators can choose which services to help secure.

"In a totally neutral protocol, it is possible that a single token dominates the protocol and undermines decentralization," Eigenlayer explained in a blog post announcing their original posture. "This could lead to the market for programmable trust being subverted by a single counterparty... which would have the power to pick AVS winners and losers, or engage in other harmful activities."

The protocol resumed token restaking yesterday, along with suspending the 200 Ethereum (ETH)—or about $475,000—cap for a week-long run. However, the team said they hope to eventually remove the caps permanently to "invite organic demand," while introducing new limits to prevent any token or participant, such as an exchange, from controlling more than 33% of governance.

Eigenlayer is part of a growing trend of "shared security" protocols that are putting Ethereum's $34 billion in staked ETH to work securing other chains. Users deposit staked ETH or liquid staking tokens into Eigenlayer's smart contracts, allowing them to earn extra rewards for taking on risk. This also gives newer projects instant economic security without having to bootstrap their own networks of validators and hardware.

Ethereum founder Vitalik Buterin has praised the idea, but simultaneously warned that some implementations could overload the base chain.

"We should be wary of application-layer projects taking actions that risk increasing the ‘scope’ of blockchain consensus to anything other than verifying the core Ethereum protocol rules," he wrote last year. "We should... preserve the chain's minimalism, support uses of re-staking that do not look like slippery slopes to extending the role of Ethereum consensus, and help developers find alternate strategies to achieve their security goals."

Proponents say, however, that Eigenlayer strikes a good balance by remaining blockchain-agnostic. The concept earned the protocol $50 million in Series A funding last March.

Ethereum's transition to proof-of-stake has led to an explosion of centralized and decentralized services for earning yield on staked coins. With its mainnet launch slated for later this year, the protocol is positioning itself to capitalize on the booming interest in staking.

Many investors are now using platforms like Eigenlayer to "restake" tokens they've already locked up, compounding their rewards. But as Buterin articulated, it is also raising concerns about unintended consequences.

For now, tens of millions of dollars continue to flow into Eigenlayer daily. The team says they will reimpose a temporary cap on Friday, Feb. 9, as they continue to explore ways to achieve "a reasonable balance between the dual priorities of neutrality and decentralization." What happens next will be up to the protocol community.