Memorandum on AVS Selection

Introduction

This document will present an initial AVS screening methodology we use to inform our advisory to YieldNest in the temporary absence of slashing conditions. We supply the community with concise overviews of AVSs currently live on EigenLayer which may be referred to for an initial review of YieldNest's AVS exposure. We plan to subsequently perform a comprehensive risk assessment of the most promising AVSs so that, when slashing conditions are introduced, YieldNest is prepared to adjust its AVS selection such that it optimizes its risk exposure. See our EigenDA AVS Risk Assessment for reference to the depth and breadth of our upcoming AVS risk analyses.

List of YieldNest Risk AVS briefs:

Expedited AVS Selection

The first section of this memorandum is intended to provide advisory on expedited AVS selection. The AVS ecosystem on EigenLayer currently includes more than ten active projects, each requiring high levels of shared security. Many more are in testnet phase with limited functionality and sometimes immature product offering. A significant challenge within this landscape is the lack of transparency concerning the economics of reward distribution. This ambiguity persists across both developmental projects and those operational on mainnet, primarily because reward mechanisms on EigenLayer have not yet been activated. Restakers are anticipated to receive a variety of tokens as compensation for providing security; however, these expected returns are currently confined to the future potential value derived from token airdrops. This delay in reward activation temporarily eliminates the need for a resource-intensive reward management process, presenting a unique, albeit temporary, advantage.

One of the primary benefits of the current phase in EigenLayer's development is the absence of active slashing. This no-slashing period provides a significant opportunity for restakers to engage with multiple AVSs without incurring opportunity costs, maintaining a favorable risk-reward balance. Restakers gain exposure to potential yields from AVS-originated rewards, which are anticipated to be activated before slashing mechanisms according to recent updates from the EigenLayer team.

Considering the current environment, it is advisable for YieldNest to capitalize on this opportunity by adopting a more liberal approach to AVS onboarding. This strategy is viable only within the no-slashing phase, allowing YieldNest to maximize exposure to a variety of active AVSs with minimal risk. However, it is critical to implement certain risk mitigation tactics to safeguard against future changes in the operational landscape of AVS.

A thorough, retroactive review should be conducted in alignment with the methodologies described later in this memorandum. This review will identify any contradictions or concerning risk factors within the selected AVSs. Should the slashing mechanism be activated, it is imperative that each AVS undergoes a comprehensive risk assessment to determine its suitability relative to YieldNest’s risk preferences and strategic objectives.

AVS Screening Methodology

The second section of the memorandum outlines a proposed methodology for a quick preliminary assessment of AVSs on EigenLayer. In the rapidly evolving ecosystem of EigenLayer, numerous services are launched with varying levels of readiness for market deployment. It is crucial to identify those services that merely ride the wave of EigenLayer's growing popularity, possibly without sufficient readiness to reliably serve customers and partners. We aim to refine the process of identifying the most promising AVSs by considering multiple indicators of project diligence.

Upon an in-depth review of EigenDA—the inaugural AVS deployed on EigenLayer—we have identified a prevalent risk of centralization in newly introduced projects. Primarily driven by the necessity to secure funding, correct coding errors, and enhance smart contracts or address security concerns, the control of these projects often remains with a select few. Notably, EigenDA, a leading example among EigenLayer AVSs, exhibits similar traits. Despite the recent introduction of the native EIGEN token, EigenLayer itself has not progressed significantly towards decentralization—a goal stated on their development roadmap.

EigenLayer's team wields significant influence over protocol development trajectory, shouldering the critical responsibilities of designing and implementing core features and upgrades. Compounding this risk is the reality that, despite EigenLayer's promotion of an open marketplace for AVSs, the initial selection and support processes are not entirely permissionless. Instead, they are curated to a certain extent by the EigenLayer team, introducing an element of centralized oversight. Moreover, we must remain cognizant of the inherent risk that larger operators, leveraging economies of scale, could potentially dominate the market, leading to an undesirable centralization of validation power.

The centralisation concerns discussed above raise pertinent questions about the level of trust users place in the EigenLayer team. Currently, the community appears to trust their decisions on the protocol design and operational implementations. This situation typifies early-stage AVS businesses where centralization is unavoidable; however, the character and reputation of the individuals holding power, along with the trust placed in them by investors, are critical.

The strategy for selecting AVSs on EigenLayer can afford to be moderately relaxed due to the absence of slashing mechanisms. EigenLayer's mainnet launch announcement has shed light on the forthcoming activation of the penalizing mechanism. Although the slashing has not yet been fully activated, it is scheduled to be implemented later this year once the EigenLayer marketplace stabilizes and further security measures are in place.

Without the threat of financial penalties for misconduct, operators and restakers are not currently held financially accountable for any infractions. This presents YieldNest with the unique opportunity to integrate various services without the risk of slashing repercussions. However, this advantage is temporary as the activation of slashing on EigenLayer is anticipated in the future and should logically follow the provision of rewards to operators. This situation necessitates that our proposed method for shortlisting AVSs be adaptable and subject to review once slashing becomes operational.

The screening process for AVSs should incorporate rigorous open-source data validation across several critical categories:

Unique Selling Proposition: What specific challenges within the target blockchain sector does AVS aim to resolve? What unique solutions and functionalities does AVS employ?
Economic Model: What crypto-economic mechanisms does the AVS implement to sustain its ecosystem and incentivize participation? How does AVS intend to pay for rented security?
Points Program: Does AVS currently operate any points or rewards programs to enhance engagement and users/partners loyalty?
Builders: Who comprises the project team? What are their backgrounds and reputations?
Backers: Who are the investors and announced partners of the project, if any?
Centralization: Which elements of the system are centralized, and who controls them?
Security: Has the project undergone a comprehensive security audit? Is there an ongoing active bug bounty program?
Maturity: How long has the project been operational? When was the codebase deployed, and how frequently are updates committed?
Opt Out: Under what conditions node operators are allowed to exit from AVS validation?
Regulatory Complexity: Differentiate between the requirements (legal structure, licenses, compliance, etc.) imposed over infrastructure AVSs and these engaging with novel business models or financial-related activities

This checklist is tailored specifically for the expedited AVS selection process and serves as an initial screening tool. The evaluation criteria included in this checklist do not delve into the depth and complexity characteristic of a comprehensive risk assessment. The screening process is streamlined to provide preliminary insights, which are less detailed than those derived from full-scale evaluations. The effectiveness of the screening relies heavily on the availability and reliability of public data. Items on the checklist are checked against publicly accessible information, which may not provide a complete picture of the AVS’s risk profile. The use of this checklist is not intended, nor should it be used, as a substitute for the full-scale risk reports produced by the YieldNest Risk Team.

Introduction

This document will present an initial AVS screening methodology we use to inform our advisory to YieldNest in the temporary absence of slashing conditions. We supply the community with concise overviews of AVSs currently live on EigenLayer which may be referred to for an initial review of YieldNest's AVS exposure. We plan to subsequently perform a comprehensive risk assessment of the most promising AVSs so that, when slashing conditions are introduced, YieldNest is prepared to adjust its AVS selection such that it optimizes its risk exposure. See our EigenDA AVS Risk Assessment for reference to the depth and breadth of our upcoming AVS risk analyses.

List of YieldNest Risk AVS briefs:

Expedited AVS Selection

The first section of this memorandum is intended to provide advisory on expedited AVS selection. The AVS ecosystem on EigenLayer currently includes more than ten active projects, each requiring high levels of shared security. Many more are in testnet phase with limited functionality and sometimes immature product offering. A significant challenge within this landscape is the lack of transparency concerning the economics of reward distribution. This ambiguity persists across both developmental projects and those operational on mainnet, primarily because reward mechanisms on EigenLayer have not yet been activated. Restakers are anticipated to receive a variety of tokens as compensation for providing security; however, these expected returns are currently confined to the future potential value derived from token airdrops. This delay in reward activation temporarily eliminates the need for a resource-intensive reward management process, presenting a unique, albeit temporary, advantage.

One of the primary benefits of the current phase in EigenLayer's development is the absence of active slashing. This no-slashing period provides a significant opportunity for restakers to engage with multiple AVSs without incurring opportunity costs, maintaining a favorable risk-reward balance. Restakers gain exposure to potential yields from AVS-originated rewards, which are anticipated to be activated before slashing mechanisms according to recent updates from the EigenLayer team.

Considering the current environment, it is advisable for YieldNest to capitalize on this opportunity by adopting a more liberal approach to AVS onboarding. This strategy is viable only within the no-slashing phase, allowing YieldNest to maximize exposure to a variety of active AVSs with minimal risk. However, it is critical to implement certain risk mitigation tactics to safeguard against future changes in the operational landscape of AVS.

A thorough, retroactive review should be conducted in alignment with the methodologies described later in this memorandum. This review will identify any contradictions or concerning risk factors within the selected AVSs. Should the slashing mechanism be activated, it is imperative that each AVS undergoes a comprehensive risk assessment to determine its suitability relative to YieldNest’s risk preferences and strategic objectives.

AVS Screening Methodology

The second section of the memorandum outlines a proposed methodology for a quick preliminary assessment of AVSs on EigenLayer. In the rapidly evolving ecosystem of EigenLayer, numerous services are launched with varying levels of readiness for market deployment. It is crucial to identify those services that merely ride the wave of EigenLayer's growing popularity, possibly without sufficient readiness to reliably serve customers and partners. We aim to refine the process of identifying the most promising AVSs by considering multiple indicators of project diligence.

Upon an in-depth review of EigenDA—the inaugural AVS deployed on EigenLayer—we have identified a prevalent risk of centralization in newly introduced projects. Primarily driven by the necessity to secure funding, correct coding errors, and enhance smart contracts or address security concerns, the control of these projects often remains with a select few. Notably, EigenDA, a leading example among EigenLayer AVSs, exhibits similar traits. Despite the recent introduction of the native EIGEN token, EigenLayer itself has not progressed significantly towards decentralization—a goal stated on their development roadmap.

EigenLayer's team wields significant influence over protocol development trajectory, shouldering the critical responsibilities of designing and implementing core features and upgrades. Compounding this risk is the reality that, despite EigenLayer's promotion of an open marketplace for AVSs, the initial selection and support processes are not entirely permissionless. Instead, they are curated to a certain extent by the EigenLayer team, introducing an element of centralized oversight. Moreover, we must remain cognizant of the inherent risk that larger operators, leveraging economies of scale, could potentially dominate the market, leading to an undesirable centralization of validation power.

The centralisation concerns discussed above raise pertinent questions about the level of trust users place in the EigenLayer team. Currently, the community appears to trust their decisions on the protocol design and operational implementations. This situation typifies early-stage AVS businesses where centralization is unavoidable; however, the character and reputation of the individuals holding power, along with the trust placed in them by investors, are critical.

The strategy for selecting AVSs on EigenLayer can afford to be moderately relaxed due to the absence of slashing mechanisms. EigenLayer's mainnet launch announcement has shed light on the forthcoming activation of the penalizing mechanism. Although the slashing has not yet been fully activated, it is scheduled to be implemented later this year once the EigenLayer marketplace stabilizes and further security measures are in place.

Without the threat of financial penalties for misconduct, operators and restakers are not currently held financially accountable for any infractions. This presents YieldNest with the unique opportunity to integrate various services without the risk of slashing repercussions. However, this advantage is temporary as the activation of slashing on EigenLayer is anticipated in the future and should logically follow the provision of rewards to operators. This situation necessitates that our proposed method for shortlisting AVSs be adaptable and subject to review once slashing becomes operational.

The screening process for AVSs should incorporate rigorous open-source data validation across several critical categories:

Unique Selling Proposition: What specific challenges within the target blockchain sector does AVS aim to resolve? What unique solutions and functionalities does AVS employ?
Economic Model: What crypto-economic mechanisms does the AVS implement to sustain its ecosystem and incentivize participation? How does AVS intend to pay for rented security?
Points Program: Does AVS currently operate any points or rewards programs to enhance engagement and users/partners loyalty?
Builders: Who comprises the project team? What are their backgrounds and reputations?
Backers: Who are the investors and announced partners of the project, if any?
Centralization: Which elements of the system are centralized, and who controls them?
Security: Has the project undergone a comprehensive security audit? Is there an ongoing active bug bounty program?
Maturity: How long has the project been operational? When was the codebase deployed, and how frequently are updates committed?
Opt Out: Under what conditions node operators are allowed to exit from AVS validation?
Regulatory Complexity: Differentiate between the requirements (legal structure, licenses, compliance, etc.) imposed over infrastructure AVSs and these engaging with novel business models or financial-related activities

This checklist is tailored specifically for the expedited AVS selection process and serves as an initial screening tool. The evaluation criteria included in this checklist do not delve into the depth and complexity characteristic of a comprehensive risk assessment. The screening process is streamlined to provide preliminary insights, which are less detailed than those derived from full-scale evaluations. The effectiveness of the screening relies heavily on the availability and reliability of public data. Items on the checklist are checked against publicly accessible information, which may not provide a complete picture of the AVS’s risk profile. The use of this checklist is not intended, nor should it be used, as a substitute for the full-scale risk reports produced by the YieldNest Risk Team.