EigenLayer’s Token Giveaway Sparks Quick Sell-Off: What’s Next for the Ethereum-Based Protocol?

In recent weeks, the crypto community has been abuzz with EigenLayer, an innovative protocol on the Ethereum blockchain that is now offering new restaking features.

In an effort to promote the protocol, EigenLayer has been giving away tokens—$EIGEN tokens to be precise. However, many of the recipients seem to be experiencing a bout of seller’s euphoria, as The Block’s Tim Copeland has reported. After receiving the free tokens, the token-givers’ past sins seem to have caught up with them and been visited upon the protocol. The wallets that received $EIGEN were hardly insulated from the consequences of rewarding free-token-seekers, while the token holders were hardly insulated from the temptation to dump their free tokens.

EigenLayer is primarily a restaking mechanism built on the Ethereum network. Restaking allows users with staked Ethereum (ETH), or with liquid staking tokens (LSTs), to engage in the consensus layer of extra applications on top of Ethereum. For stakers, using their staked assets in this manner is an attractive proposition. They can earn extra rewards for doing so beyond just participating in the Ethereum network’s security and validation process.

EigenLayer provides an opt-in service to users who directly stake ETH or use a liquid staking derivative. They can, if they wish, restake their assets into smart contracts created by EigenLayer. This is an important point because it highlights that EigenLayer is not something Ethereum users are forced into (as some are forced, by virtue of holding cryptocurrencies, to comply with know-your-customer rules). When you restake, you extend the net cryptoeconomic layer secured by Ethereum’s consensus itself. You could think of it as if you were using your assets to do double duty (with some people doing triple duty, as will be described in the next point): securing Ethereum and securing an EigenLayer app.

EigenLayer’s introduction of restaking is seen as a significant step forward for Ethereum. As the network continues to evolve, its security mechanisms are crucial for supporting the decentralized applications (dApps) that rely on Ethereum. By offering additional layers of security through the restaking process, EigenLayer hopes to foster a more resilient Ethereum ecosystem. At the same time, ETH stakers can earn passive income on the restaking layers. But why does restaking potentially add so much extra security? And why has the recent giveaway of $EIGEN tokens sparked such excitement—and skepticism?

Distributing $EIGEN tokens to promote EigenLayer could have been a well-intentioned act to give early users a reason to engage with the protocol. But what has occurred since is probably what any observer could have foreseen. Many of the “early users” offloaded their tokens as fast as they could, which in turn has given the appearance on-chain of many more people using the EigenLayer token. From our vantage point, the appearance of many more “EIGEN” addresses isn’t an act of spontaneous user engagement but rather an act of premature user engagement.

When users obtain tokens without having to put up their own cash, they often sell them as quickly as they can to take profits—especially if the tokens are at all tradable on the open market. Although this is a common and understandable reaction to free token distributions, it does not necessarily reflect a lack of faith in the protocol giving the tokens away. Instead, it shows how many crypto traders have a short-term mindset, particularly when they see free tokens as windfalls rather than potential long-term investments.

The increase in addresses that have zero balances is a straightforward indication that the first stirrings of enthusiasm surrounding the giveaway are now history. However, this should not overshadow EigenLayer’s potential to become a long-term success story. Like any new protocol, the way EigenLayer holds on to the users it’s already attracted and the way it grows from here will determine the kind of future it has.

Even though $EIGEN tokens were sold off immediately after the launch, EigenLayer could be a long-term success, particularly if Ethereum’s staking and restaking features gain more adoption from users. These features allow users to not only secure the Ethereum network but also to rent out part of that security to other projects—like EigenLayer—that want to build on Ethereum. In so doing, Ethereum’s stakers essentially create a more robust ecosystem for DeFi, NFTs, and dApps in general.

Building a strong and involved user base that sees real value in EigenLayer’s staking rewards and security benefits is what will make EigenLayer successful. Sure, we might have greeted it with some early enthusiasm, maybe a little too early, right after the token giveaway, when a bunch of us were just figuring out what EigenLayer was. But real users with real DEFI risk/reward profiles making use of the restaking mechanism in a secure, scalable way throughout Ethereum’s future growth? That’s when we’ll have achieved something closer to content-based user acquisition.

If you are still committed to putting your Ethereum to work in a staking role, EigenLayer offers an interesting set of possibilities to maximize the utility of the staked asset. When you restake ETH or LSTs, you’re not just stacking rewards upon rewards. You’re also securing a whole host of different Ethereum-based applications. EigenLayer is almost an order of magnitude involved compared to the traditional staking role.

This is likely to draw new users into the Ethereum ecosystem as it continues toward ever-greater maturity and an expansion of the decentralized app frontier.

Although many recipients may have quickly sold their $EIGEN tokens, EigenLayer’s restaking mechanism is a lovely innovation within the Ethereum ecosystem. As Ethereum grows and matures, the restaking mechanism could become a major contributor to the security of the network. Reactions to the token giveaway might not accurately represent the long-term value of what EigenLayer is doing, but as more and more users realize that they can stake and restake their ETH, this DEFIFi project could easily become integral to the Ethereum experience and the network’s future scalability.

The response from the crypto community to EigenLayer’s initial giveaway underscores a common trend with many new blockchain projects: initial buzz often dissipates, and what really matters is the long-term adoption and usefulness of a protocol. EigenLayer has to work pretty hard for at least two reasons to accomplish this useful adoption. One is that, unlike some layer-2 projects, EigenLayer’s actual workings are hard to see and understand. The other is that Ethereum’s vision for useful adoption is so ambitious that it has to clear a very high bar compared to what seems to be the current Bitcoin standard for value.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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