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LST Update: EigenLayer and Yearn
Osgur Murphy O Kane
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Key Takeaways
6 min read
  • The report first looks at data from the first round of deposits into EigenLayer. The top address accounts for ~10% of total deposits. Keep a close eye out this week as they are expected to raise deposit caps.
  • The report then looks at Yearn’s yETH. It is a basket of LSTs, similar to unshETH, and governed by st-yETH, rather than veYFI.
  • yETH Deposits are opening on the 14th of July where users can deposit ETH (locked for 16 weeks). Depositors receive incentives from LST protocols and other users as they vote which LST will be included in the first instance of the protocol.

EigenLayer

EigenLayer is undoubtedly one of the most exciting and anticipated developments in Ethereum and the wider crypto ecosystem. Why? It introduces restaking, which is a mechanism that enables users to rehypothecate their staked ETH to get additional yield. By doing so, users can extend the underlying security of their staked ETH to applications integrated with EigenLayer. In short, restaking allows applications to access shared security from Ethereum.

There are a number of applications that can benefit from EigenLayer. Some of which include data availability layers, oracle networks, bridges, new consensus protocols, and of course, blockchains. Other implementations may be discovered over time, as the design space is quite large.

EigenLayer recently opened its first pool, which filled up within a day. This is because there were limits on the allow listed assets; 3200 of stETH, rETH, and cbETH, respectively. Let’s look at the data from this below.

EigenLayer - Top Depositors

Source: Nansen Query

The top wallet did:

  • 15 transactions of 32 stETH and 1 transaction of 27 stETH, and
  • 15 transactions of 32 cbETH.

This accounts for approximately ~$1.9m in value or ~10% of the pool’s capacity. The reason why the address made so many transactions is that there was a 32 ETH limit per transaction. However, despite the caps on deposits in the pool, various wallets send multiple transactions to accumulate a larger share. This is only what is visible from unique addresses, but it cannot be ruled out that there could be some entities controlling multiple wallet addresses.

At a high level:

  • 40 distinct wallet addresses have deposited more than $100k worth of LSTs (at the time of writing).
  • The top 10 unique wallet addresses deposited ~$7.1m. This accounts for approximately 38% of total deposits.
  • The top 20 wallets account for ~$9.65m and account for over 51% of the total deposited.
  • Approximately 39% of wallet addresses (401) deposited 1 token or more, accounting for around 98% of the total value deposited.

This data shows that a relatively small number of distinct wallets have taken a large share of the initial pool. Note that the pool filled up within a day of launch, which could imply that anyone wanting to get in on the second round will need to be fast and keep a close eye on their announcements as to when the pool will open.

EigenLayer stated in their blog:

“Closer to the exact time, we will provide updates on Twitter, this blog post, and Discord. We expect the caps to be raised sometime during the week of July 10.”

The caps will be lifted, in which the LSTs will have a cap of 15,000 each. However, the pool will close after the total of all LST deposits reaches 30,000. Each LST has reached a 3,200 cap from the first round, meaning there is scope for an additional ~11,800 for any single LSD. This is out of 20,400 additional capacity. This means that it is only possible for one or none of the LSTs reach the 15k cap. It is most likely that stETH will take the largest share.

Yearn Finance

Yearn Finance is launching yETH. This is in many respects similar to unshETH - which we covered in-depth here. Read the report to familiarize yourself with the rationale behind a basket of LSDs.

yETH Overview

  • Users can deposit their LSDs for yETH and redeem by burning the yETH.
  • The pool has its own AMM and can be likened to a Curve stable pool except the pool composition has assigned weightings for each asset which can only fluctuate within a target band. This is to protect yETH in the event that a collateral type is problematic e.g. an extreme example is the UST 3pool on Curve where LPs lost significant funds due to the uncapped weights of assets in the pool when UST collapsed.
  • The value proposition of the yETH basket for LST protocols is that they can avail of the shared liquidity in the pool. It is difficult for many smaller LSDs to compete due to the need to bootstrap sufficient liquidity for their token. Shared liquidity is intended to lower the barriers and create a more even playing field.
  • 1 yETH is directly redeemable for 1 LST in the pool.
  • yETH doesn’t natively earn yield but can be staked as st-yETH to earn the rewards of the assets in the pool and also trading fees from the pool.

Impact on YFI

yETH is special in that YFI holders will not govern it; instead, it will be st-yETH. This is to ensure that the protocol is governed in the best interests of the yETH holders, not the YFI holders. This drew some criticism in the Yearn community as it adds little additional utility to YFI. However, it is more optimal for the asset. YFI does get some benefits, and veYFI holders will receive 10% of the yETH vault performance fees and 1% of incentive rewards will go to the Yearn treasury which can be used for YFI buybacks.

Participating in the Launch

Yearn has decided to launch this, with some important points to bear in mind.

  • Protocols can have up to 45% weighting in the basket.
  • Protocols that apply after the bootstrapping phase can only start with an initial 1% weight.
  • Incentives start in week 3 for depositors. Between weeks 3 and 5, users can deposit ETH for st-yETH which will be locked for 16 weeks. They can vote for which LSTs will make up the yETH at launch. Holders and the LSDs can create incentives for st-yETH holders to vote for specific pools. Users will receive rewards for voting. If one provides incentives for a protocol that is ultimately not successful, they will receive their incentives back. The top 5 protocol’s incentives will be distributed among all holders.
  • ETH deposited is locked for 16 weeks.
  • Depositors will receive incentives for voting on which LSDs will be included in the initial epoch of yETH.
  • Anyone voting on which LSTs should be included will receive incentives from the top-5 protocols, regardless if they voted for them or not. This is to ensure that there is more objective voting towards the LSTs rather than initial high bribes to include a potentially unstable LST in the initial weighting.
  • The ETH deposited in the pool will then be used to purchase the LSTs that were voted for.

Learn more about the bootstrapping phase: Twitter thread and website.

Read the full Snapshot proposal here.

Potential Advantages For Yearn

Yearn is one of the OG DeFi protocols. It has been around for years, has progressively decentralized, and is generally well-regarded in the ecosystem. This makes it more favourable for LST protocols to engage with a battle-tested protocol rather than a new protocol which has much more uncertainty. In addition, its expected that the protocol will be immutable within 90 days of launch.

In addition, while YFI holders may not be happy that they are not governing the protocol, it is arguably more beneficial that the st-yETH holders govern it. This has better incentive alignment.

The value proposition of a basket of LSTs is interesting. If it can have competitive swap rates and gains sufficient adoption where competitor products like unshETH do not, it could be a great success for Yearn.

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Disclosure: The authors of this content and members of Nansen may be participating or invested in some of the protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Nansen does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Nansen at any time without notice. Nansen accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.