EigenLayer Faces Mass Withdrawals After Airdrop Backlash

EigenLayer recently introduced a new token, EIGEN, but despite its innovative approach, the token’s airdrop was met with disappointment due to its geographic restrictions and the very small initial allocation to early users. This caused a big increase in withdrawals and frustration in the crypto community. The controversy has given other protocols like Karak the opportunity to capitalize on EigenLayer's challenges and gain a larger share of the market.

EigenLayer Introduces EIGEN

On Apr. 29. EigenLayer introduced a new token named EIGEN through a white paper. This token will be used for apps that rely on intersubjective agreement, including prediction markets, storage services, and gaming virtual machines.

The white paper outlines that while staked Ether will still be used for consensus on verifiable on-chain data like transaction validity, EIGEN will support consensus on statements that cannot be verified on-chain but can be validated by humans using off-chain data. One example is the incorrect statement that "1 Bitcoin equals 1 USD," which can very easily be verified as wrong using available off-chain data. The new EIGEN token will be very useful for forming consensus around these kinds of statements, which it calls “high concordance with intersubjectively attributable faults.”

EigenLayer's EIGEN builds on the concept that was first introduced by Augur's REP token, which was also meant for intersubjective agreements but limited to prediction markets. In contrast, EIGEN is now called a "universal" token for these agreements that is applicable in a much broader array of contexts. It can also be isolated from decentralized finance apps during forks, helps measure the cost of social consensus, and compensates users for losses due to faults.

There was also a lot of speculation about a possible airdrop making the rounds on social media after the release of the white paper.

EigenLayer’s Airdrop Generous or Unfair?

This ended up being the case as EigenLayer revealed in an Apr. 29 blog post that it would distribute 15% of its total 1.67 billion EIGEN token supply to the community. However, only 5% of this initial allocation will go to early users from the first season, with the rest spread over other seasons. This distribution plan, with its very modest size for early participants and the confusing documentation, caused a lot of anger and disappointment among users.

Adding to the frustration, the tokens received will initially be non-transferable, and there is no date for when they will become tradable just yet. EigenLayer explained this restriction is there to stabilize key features like payments and slashing parameters before full liquidity is enabled. People were also not happy with the linear distribution model of the airdrop, which directly ties the number of tokens received to the amount staked. Most critics seem to agree that this approach favors larger stakeholders while sidelining smaller ones.

The airdrop also has very strict geographic restrictions that prevent users from about 30 countries, including major markets like the United States, Canada, China, and Russia from claiming their EIGEN tokens. To make things worse, attempts to bypass these restrictions using VPNs will be blocked by EigenLayer.

Despite these criticisms, some people like Henrik Andersson from Apollo Capital believe that the negative reactions from the crypto community are over dramatic. Andersson called the 15% total allocation generous and supports the linear distribution model for its fairness and security against Sybil attacks. He also made sure to mention the convenience of the stakedrop process and pointed out that users can check their allocations without needing to connect a wallet or sign any transactions, which he sees as a positive aspect of EigenLayer's approach.

EigenLayer Faces Mass Withdrawals

Despite Andersson’s optimism, people still seem very unhappy with EigenLayer. In fact, EigenLayer has seen a huge exodus of funds due to the dissatisfaction with its planned EIGEN airdrop.

Dune analytics data indicates that more than 12,412 withdrawal requests have been lodged since Apr. 29, which represents about 11.6% of its 107,000 unique depositors. The first day recorded 4,336 withdrawals before climbing to 6,496 by the next day. Although the exact sizes of these withdrawals are not known, this volume of exits could push down EigenLayer's total value locked (TVL) from $14.8 billion to just above $13 billion.

The trigger for this mass withdrawal seems to be the protocol's decision to exclude participants from certain countries from its airdrop. This move not only caused widespread disappointment but is also expected to greatly impact the protocol’s TVL in the coming weeks.

Anndy Lian, an intergovernmental blockchain expert, believes that by excluding these regions, where participants might have been contributing to the TVL by actively restaking their assets, it could lead to a serious decrease in the protocol's overall financial stability. Considering the fact that EigenLayer requires a seven-day processing period for withdrawals, the full impact of these withdrawals will only be seen in the next few weeks.

What is EigenLayer?

EigenLayer is a protocol built on the Ethereum network that introduces a new concept known as restaking, which aims to improve crypto economic security. This is a critical component in the blockchain domain. The protocol allows users to rehypothecate their staked Ethereum (ETH) through smart contracts, extending their crypto economic security contributions to additional applications developed on Ethereum. This not only broadens the scope of security across the network but also validates new projects and applications, thereby aggregating security features across the platform.

One of the underlying challenges in blockchain design, especially when it comes to Ethereum, is the fragmented nature of security as more applications are added to the network. Middleware and non-EVM applications have to generate their own security measures, which can be costly and time-consuming.

EigenLayer addresses this issue by making it possible for users to restake their ETH, which is then deployed to other applications within the Ethereum ecosystem. This is facilitated through an opt-in model where users grant EigenLayer additional enforcement rights over their staked assets.

EigenLayer's system allows for the extension of staked ETH to support other applications like bridges and data layers, which are crucial for the network’s expansion. The protocol incorporates additional slashing conditions to ensure compliance and discourage dishonesty. This design principle ensures that staked ETH is not only used for securing Ethereum itself but also supports a broader range of applications.

The New Challenger to EigenLayer's Throne

Ethereum-based restaking protocol Karak saw a 25% increase in its TVL to surpass $440 million over the past week. This caused many people in the industry to speculate that Karak could challenge EigenLayer. The interest in Karak has been steadily increasing after the very disappointing outcome of EigenLayer's airdrop, and experts now believe it could start eating into EigenLayer’s market share.

Anndy Lian, a blockchain expert and author, suggests that Karak’s ability to support a very wide variety of assets, including Ether, various staking and restaking tokens, stablecoins, liquidity provider tokens, and Wrapped Bitcoin, positions it perfectly to attract a diverse user base. This certainly gives Karak a competitive edge over EigenLayer as it only supports a very limited asset range.

In addition to this, Karak’s impressive financial achievements has also caused quite a few interested heads to turn in its direction. At the start of April, the protocol successfully closed a $48-million Series A funding round, which pushed its valuation over the $1 billion mark.