Intro to AVS Evaluation by YieldNest Risk Team
This post initiates a discussion on the emerging landscape of AVSs and how the YieldNest DAO can start to categorize and evaluate these systems both individually and as part of a portfolio of whitelisted AVS protocols. We will focus on key considerations for assessing risk and reward projections, which will be further elaborated in our forthcoming AVS Assessment Framework. Additionally, we plan to roll out a series of blog posts that will delve into specific aspects of EigenLayer and AVSs that all DAO members and YieldNest users should understand.
What is an AVS
Actively Validated Services (AVSs) are blockchain-based systems that use the Ethereum PoS consensus mechanism, facilitated by EigenLayer, to boost their security and efficiency. These services engage Restakers and Node Operators, registered with EigenLayer, who execute tasks essential to the AVS’s functionality. By staking tokens and supplying computing resources, Restakers and Node Operators support the integrity and robustness of the AVS.
Unlike traditional Ethereum staking, where staked ETH solely maintains Ethereum's network consensus, AVSs utilize these assets and others to validate specific operations.
If a Restaker or a Node Operator acts against the AVS's slashing conditions, they face penalties through asset slashing, providing a crypto-economic incentive to adhere to the AVS's rules. Conversely, compliance with these rules ensures financial rewards from the AVS they support.
Why an AVS
Any application requiring trust may consider transforming into an AVS.
Using EigenLayer, developers can embed verifiable trust into their applications, turning them into AVSs. There are three forms of trust that application developers can leverage, as categorized by EigenLayer in their recent blog post, The Three Pillars of Programmable Trust: The EigenLayer End Game:
Economic Trust - Trust derived from individuals making commitments and backing their promises with financial stakes. Economic trust is trust based in capital. These types of assurances are accepted when certain commitments are backed by financial stake at-risk that makes it irrational for a rational economic actor to behave badly.
Decentralized Trust - Trust sourced from a network operated by independent, geographically isolated operators. Decentralized trust is trust based in decentralization. These assurances derive from having a large and distributed enough validator set that you can be comfortable that they are not all colluding.
Ethereum Inclusion Trust - Trust that Ethereum validators will construct and include your blocks as promised, in accordance with the consensus software they operate. While the first and second trust models absorb the economics and decentralization of the Ethereum trust network, the fact that it is the Ethereum validators who restake enables a whole suite of powerful new features where you can experiment with new opt-in features to the Ethereum protocol without modifying the core Ethereum protocol. These opt-in features open up new proposer commitments on top of the existing proposer commitments from the consensus protocol.
How Does an AVS Work
An AVS functions by integrating with Ethereum's consensus layer via the EigenLayer protocol, enabling blockchain applications to utilize Ethereum's security features without establishing their own consensus mechanisms. This process involves:
Restaking on EigenLayer - AVSs leverage EigenLayer to restake Ethereum (ETH), or supported ERC20 tokens, via Restakers, directly connecting to Ethereum's security and validation mechanisms. This allows AVSs to achieve up to the same level of security as Ethereum’s native transactions, and perhaps more importantly, bootstrap security in an effective way.
Decentralized Consensus - Through decentralized consensus mechanism, an AVS's off-chain operations are independently validated while benefiting from Ethereum's extensive validator network.
Operator Involvement - Node operators secure AVS operations by restaking their ETH or supported ERC20 tokens on EigenLayer, via Restakers, receiving additional validation rewards from AVS operations on top of Ethereum rewards. This creates a financially incentivized ecosystem to support AVS networks.
Security and Efficiency - By connecting with Ethereum via EigenLayer, AVSs bypass the need for creating and managing separate consensus operations, significantly reducing vulnerability to attacks and operational costs.
Network Flexibility - AVSs are free to define their own slashing condition (i.e. what happens when an operator fails to comply with the AVS's requirements) and their own Restakers/Node Operators requirements (e.g. what assets can to be staked, how much, geographical location of operators, and more).
The technical essence of AVS operation lies in its innovative use of Ethereum's established security infrastructure through EigenLayer's restaking mechanism, facilitating a secure, efficient, and scalable validation process for blockchain applications outside the EVM scope.
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