- In an exclusive interview, Kannan describes how the restaking protocol's hot start was hard to handle.
- Controversy ran thick and fast in EigenLayer's first six months.
- Now he's talking lessons learned and EigenLayer's next act.
Within a year of its June 2023 launch, EigenLayer had the kind of start crypto projects dream about.
The Ethereum restaking venture amassed some $20 billion in user deposits and its parent company secured a $100 million investment from VC powerhouse a16z.
Even better, the project rapidly proved its value: More than 100 companies have flocked to EigenLayer, according to founder Sreeram Kannan, including crypto exchange Kraken and bridge developer LayerZero Labs.
But EigenLayer may have come too far, too fast, as the project found itself responding to a series of controversies, including allegations it had attempted to buy off a pair of influential — and often critical — crypto researchers.
“Somehow, it’s at the centre of Ethereum” founder Sreeram Kannan told DL News in a wide ranging interview. “We were not prepared to be at the centre of some major ecosystem.”
Asymmetric attention
EigenLayer now has $11 billion in deposits. While it may have originated in academia with an ambition to create a “free market for decentralised trust,” its rollout has become a classic tale of the pitfalls of overnight success.
Taking a breath after the project’s hot start, Kannan discussed his first attempt at building a crypto company, and what’s next for EigenLayer.
EigenLayer makes it easier to launch certain protocols by letting them piggyback off the computers and cryptocurrency, Ether, that run and secure Ethereum itself, a process called restaking.
At the conference in Istanbul last year, Kannan likened the concept to a military alliance.
“Cities don’t have armies, nations have armies. Sometimes even many nation states coordinate to create alliances that actually work together,” he said.
“It’s exactly the same phenomenon. Shared security is strictly better.”
‘I am appalled that we have EF researchers... take six, seven figure compensation packages from protocols.’
— Lefteris Karapetsas, Rotki
Some Ethereum researchers quickly heralded EigenLayer as a breakthrough. But some also warned that it could threaten to destabilise the blockchain by having too many services rely on the same batch of Ether for their security.
In other words, if one project built atop EigenLayer failed, it would take the restaked Ether along with it. Or, to extend Kannan’s analogy: if one city failed, it could take the army along with it.
In short, critics feared it could lead to cascading failures that would eventually harm Ethereum itself.
To assuage concerns, EigenLayer has debuted features one at a time, months apart. Later this year, it will change its security model, to limit contagion in the event some applications fail.
But one attempt to highlight security didn’t go so well.
Earlier this year, it brought on as advisers Justin Drake and Dankrad Feist, prominent Ethereum Foundation researchers.
They were hired to solve the risks that restaking poses to Ethereum. And they were well compensated — Drake’s payment could be worth millions one day, he said.
Lucrative relationship
But the lucrative relationship wasn’t disclosed until a crypto influencer wrote about it on social media.
The lack of transparency wasn’t only a violation of DeFi values. It also triggered criticism the Ethereum Foundation was turning a blind eye to conflicts of interest.
“I am appalled that we have EF researchers, the people who guide the protocol development, take six-, seven-figure compensation packages from protocols,” Rotki founder Lefteris Karapetsas wrote on X.
“Even if you pinky promise to not let this cloud your judgement, and do it on a personal capacity that’s impossible.”
Major benefit
Both Drake and Feist said they would not be compromised by EigenLayer’s money.
Feist said EigenLayer would be a “major benefit to Ethereum” — if done right.
“I trust the current leaders are intending to do that, and I am planning to hold them accountable for it,” he wrote on X. “I will not hesitate to speak out and/or to quit my position if I believe this is no longer the case.”
Drake promised to direct all the money he makes from EigenLayer to other Ethereum projects in the form of grants or investments.
“I also stand ready to end the advisorship at any time, e.g. should EigenLayer go in a direction I deem to be against Ethereum’s interests,” he wrote.
According to Kannan, EigenLayer delayed announcing the partnership at the request of the Ethereum Foundation, which wanted to disclose the relationship itself.
But crypto influencer Jordan Fish, better known as Cobie, forced its hand, writing on X that Ethereum Foundation researchers were “taking life-changing $ packages” from projects that “may have conflicted incentives with Ethereum,” before naming EigenLayer.
Drake confirmed the relationship on his website and on X, adding that he was paid crypto that could eventually be worth millions of dollars.
Feist did the same, though he said only that his pay amounted to “a significant amount of tokens.”
“Even though people think it’s some kind of subversive thing. It’s not,” Kannan said.
Fully transparent
“It was fully transparent, we talked to the Ethereum Foundation. The Ethereum Foundation had asked us to not advertise it. … They said, ‘We will advertise it ourselves, in the right way.’”
The Ethereum Foundation did not return DL News’ request for comment.
But the payments were also a thank you to a pair of researchers who have already done much to shape the direction EigenLayer has taken, according to Kannan.
‘We want to pay back the people who actually invested and created these ideas.’
— Sreeram Kannan, EigenLayer
“EigenDA is a protocol built on Dankrad’s and Justin’s ideas,” Kannan said, referring to an Eigen Labs-built actively validated service, EigenLayer’s term for projects built atop it.
“We want to pay back the people who actually invested and created these ideas.”
No sooner had the issue cooled down than another controversy went to a boil.
Vesting of tokens
A CoinDesk article in August reported that Eigen Labs had pressured partner companies to send its employees a cut of any newly issued tokens.
Eigen Labs denied the allegation. Then, in September, some critics flagged what they feared was evidence that early, deep-pocketed EigenLayer investors could circumvent the vesting of their tokens, fears the company said was far overblown.
“It’s not enough to be right in crypto. In general, when you want to build trust, you have to be demonstrably right, which is a much, much higher bar,” Kannan said. “It’s really hard, it’s not easy. And we have an asymmetric amount of attention for a project of our size.”
To meet that challenge, Kannan said the company is dedicating more manpower to improving its transparency standards.
“If we want to become humanity’s coordination engine, it needs to be able to withstand this [scrutiny],” he said.
Trifecta
Once sceptical of crypto as a speculative bubble, he now speaks like a true believer, frequently using soaring rhetoric.
“I was at a dinner with a US congressman, and he asked, ‘Can you tell me why you’re in crypto?’” Kannan recalled.
“A lot of DeFi protocol founders, they all said, ‘Improve the financial system and make it inflation resistant,’ all this stuff that we know and love. But what I said was, ‘It’s the biggest upgrade to human civilization since the Constitution.’”
Kannan, passionate about peer-to-peer networks, dove into crypto in 2018.
He authored academic papers on the subject and eventually set out to create his own blockchain, dubbed “Trifecta.”
But he couldn’t raise the money.
It would have been easier to launch a blockchain had he successfully wooed VCs. But it would have been easier, too, if new blockchains didn’t require their own distributed network of computers. That is, if he could have used the computers that were already running Ethereum.
“EigenLayer was kind of conceived as a mechanism to solve my own problem,” he said.
Aleks Gilbert is a DeFi correspondent at DL News. You can reach him at aleks@dlnews.com.