New Ethereum App Gets $6.5 Billion In Deposits, Concerns Around 'The Next FTX' Emerge

In early 2024, Ethereum decentralized application (dApp) EigenLayer made huge waves in the Ethereum community by offering a new technology called restaking. The service attracted huge amounts of attention, and amassed more than $6.5 billion in deposits in just a few months, with most deposits coming in the first week of February, according to Defi Llama. 

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Restaking is a novel technology on the Ethereum chain. It allows users to stake the same amount of Ethereum across multiple protocols at the same time, allowing the rewards to stack on top of each other. The technology works by creating a new token that represents your ETH holding and is created 1:1 with the ETH that comes into the protocol. These new tokens, called liquid staking tokens (LST), can then be used to stake on other protocols on the EigenLayer platform. 

The platform is meant to give individual investors access to more rewards on ETH that they already own or are already staking. Another benefit is that it can give new projects efficient access to capital. For some startup projects, the founders are forced to provide large incentives for users to stake their tokens as the prices can be volatile. However, these new projects can use EigenLayer and restaking to help secure their chain.

While there are some benefits to EigenLayer, others are worried about some of the potential implications of such a project. The main concern is that it could create over-leverage on projects, as the underlying amount of collateral can be extended across many projects. This could potentially be an issue similar to that of FTX Trading Ltd., which used customer deposits for proprietary trading. 

FTX became insolvent in late 2022. The firm amassed more than $13 billion in leverage, with which they are careless and mismanaged behind the scenes. 

Because of the inherent leverage that EigenLayer creates, many are looking at FTX and believe that EigenLayer could be making the same mistakes. 

However, FTX's downfall was a result of a combination of human error and lack of internal clarity. Former FTX CEO Sam Bankman-Fried (SBF) was reckless and overconfident with company funds. Additionally, not many people knew what was going on inside of FTX, allowing SBF's crimes to continue for months without notice.

However, these issues are more related to private companies and not public blockchains. All transactions on the blockchain are public, so anyone can see how the funds on EigenLayer are used. This makes the risk of mismanagement and recklessness less prominent.

Ethereum creator Vitalik Buterin also spoke about EigenLayer and restaking recently, saying that he supports "uses of restaking 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." 

So, with EigenLayer's slow rollout of its restaking protocol, placing limits on the number of projects offered and total volume locked (TVL), it is unlikely that EigenLayer will fail in a similar way to FTX. However, the presence of leverage in crypto brings up memories of past failures. 

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