Chaos Labs <> ether.fi AVS Onboarding Framework

Protocol & Proposals
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This post has been co-authored by Chaos Labs and ether.fi .

Onboarding the right mix of Actively Validated Services (AVSs) is crucial for laying a strong foundation for the success of the ether.fi protocol. A well-designed framework for assessing AVS options is essential to ensure that decisions around delegation and partnership strategies keep the benefits of the different stakeholders of ether.fi in mind. This framework should address the fundamental risks that could impact holders (eETH) and node operators, helping drive the protocol’s competitiveness:

  1. Low ROI: Suboptimal reward APYs can undermine the interests of all ether.fi stakeholders. Selecting high-quality AVSs with consistently strong reward performance is crucial to maintaining the protocol’s appeal and value.
  2. Slashing Risk: Slashing events result in direct losses for holders (eETH) and node operators. They also also damage trust in the ether.fi protocol. The AVS onboarding framework helps to proactively manage slashing risk across the ether.fi portfolio.
  3. Operational Costs: High operational costs can make it difficult for node operators to maintain sustainable operations. Node operators may be forced to exit, leading to reduced network participation and stability, which could compromise the overall resilience of the ether.fi protocol.
  4. Systemic Risk: Systemic risk arises from the interconnectedness between AVSs. A failure in one AVS could spill over onto others and eventually disrupt the entire ether.fi protocol. Mitigating these chain events is required to reach operational scale.

To properly evaluate potential AVS partners, Chaos Labs in cooperation with ether.fi has developed a comprehensive framework that employs a three-pillar approach. For each pillar, Chaos Labs has identified potential factors that could contribute to the aforementioned fundamental risks.

Given the nascent state of restaking, we recommend the following assessments using presently available information. This framework will iterate rapidly as more data and reliable metrics are created. We attempt to remain systematic, relying on data wherever possible. Where data is unavailable, we propose initial qualitative measures temporarily while the category matures.

Product

The product assessment aims to determine whether the AVS can offer a reliable and differentiated product that meets the current needs of the ecosystem and generates reliable income. Additionally, the nature of the product determines the AVS’ security requirements, the type of work performed by node operators, and its slashing mechanism —all of which directly affect the operational burden and profitability of node operators.

It is crucial that the product secured by an AVS is sound. Restaking rewards are value generated by the product, and there is a risk that products that cannot gain traction will not generate value to distribute to their stakers and operators.

The AVS slashing conditions represent the potential for capital loss to stakers and node operators securing the product. This has rightly gained significant attention in the space to date. However, most frameworks are unsatisfactory for determining a priori whether a particular set of slashing conditions exposes ether.fi holders (eETH) to excessive slashing risk. The study of slashing risk assessment will likely evolve rapidly as the space develops, but we need a robust initial methodology to protect holders (eETH) and node operators today.

The cost of managing the operator infrastructure required to secure an AVS will likely determine the level of rewards necessary to ensure the long-term sustainability of operators. The marginal cost of securing each active AVS should afford an equitable share of rewards to both tokenholders providing the stake and operators performing service validation. Within this pillar, we identify the following risk factors and propose measures for their evaluation and management:

  1. Traction: Does the product have traction? What is the target audience of the product, and what usage metrics are important to focus on? Is there any data we can use to give assurance that sufficient revenue will be earned to cover the security budget over the long term? This is not a necessary condition at this stage in restaking’s growth, but helps provide comfort in future product usage.
  2. Value Added: Is the team solving an existing problem? This is a qualitative judgement on whether we expect the product to earn sufficient revenue to pay for their security budget.
  • Can we explain the problem being solved?
  • Can we identify the customers who are willing to pay to have this problem solved for them?
  1. Slashing Conditions: How will slashing result in financial loss? ****It is extremely difficult to predict exactly how restaking will evolve, especially as ongoing modifications are being made around the usage of leveraged stake.
  • The slashing penalty for double signing represents an infrequent but possible unintended slashing event common to all AVSs. This represents a common severe slashing penalty.
  • The slashing penalty, if any, for downtime. This represents a measure of a more frequent but lighter slashing penalty.
  • The existence of clean AVS slashing audits provides a level of comfort that operators will not be inadvertently slashed without wrongdoing.
  1. Operating Costs: Do the fixed and variable costs involved with operating the service leave a sufficient share of rewards for node operators providing economic security?
  • Compare hardware requirements and gas costs for validating an AVS with current fixed costs for validating on the Beacon Chain
  • Does AVS already implement validator relations practices?

Sustainability

While the product assessment focuses on whether there will be demand for the product secured by the AVS, the sustainability assessment evaluates whether the underlying business model is viable and makes sense for long-term success.

An AVS that cannot sustain itself may result in inconsistent rewards for ether.fi stakeholders and increase the risk that rewards fail to meet expectations. In the event of failed monetization or difficulty scaling AVS operations, restaking tokenholders may not earn a favorable return relative to the risks involved, and node operators might become unprofitable and leave the platform. A sustainable return for ether.fi stakeholders also relies on the nature of the reward asset. If the asset is volatile, lacks liquidity, or is held by a concentrated group, it can create significant income uncertainty for tokenholders as well as node operators. In this context, we consider the following risk factors and recommend measures to analyze and manage them:

  1. Protocol Monetization: Can we describe a revenue generation mechanism or alternative value capture of the native token?
  • A qualitative assessment of whether a sound revenue generation mechanism is in place or on the roadmap. This can be at a reasonable time in the future to cover cases where revenue is not earned right away.
  1. Scalable Use Case: Does the use case scale? Qualitative assessments of the ability of the product to grow to a meaningful scale and provide a worthwhile return for ether.fi stakers:
  • Do we foresee any likely fatal bottlenecks in scaling (demand / supply)?
  • Are there enough resources available for this to reach scale?
  1. Reward Asset: Can we measure the utility of the reward token?
  • How much liquidity does the reward token currently have (if any)?
  • What is the price volatility of the reward token (if measurable)?
  1. Other Factors: Some possible characteristics that could influence the sustainability assessment of any service launching with an AVS include:
  • The teams reputation and prior work
  • Funding secured
  • Other partners
  • Roadmap

Utility

This section focuses on the functionality of the product utilizing the AVS. This is crucial in assessing whether the product or service can be integrated into ether.fi’s own infrastructure. As a large, well-integrated protocol with a suite of applications, ether.fi can facilitate the early bootstrapping and growth of AVSs, while they can return value by performing essential services on ether.fi, for which restaking tokenholders earn rewards. In this context, the design of the AVS architecture, particularly its level of centralization, is critical. Centralized components introduce vulnerabilities, where the failure or malicious actions of a single entity could compromise not only the AVS itself but also the broader ether.fi platform and its products.

We have identified the following risk factors and recommend strategies for assessing and managing them:

  1. Architecture: Does it contain centralized components?
  • Are there any centralized elements within the architecture?
  • Are there third-party dependencies involved?
  • What are the selection processes for entities that hold significant decision-making power within the protocol?
  • Could any entities control more than 1/3 of total stake on the AVS?
  1. Ecosystem Integration: Are there any synergies between the AVS product and ether.fi?
  • Is there a technical collaboration between the integrated AVS product and the ether.fi ecosystem?

Conclusion

Choosing the right AVS is essential to establishing a solid foundation for the success of the ether.fi protocol. It’s important to strike a balance between ROI, operational costs, slashing risks, and systemic risks to ensure the protocol remains competitive and resilient. By implementing a structured framework to evaluate the product, sustainability, and utility of potential AVS partners, can help mitigate the fundamental risks the protocol is faced with. As the restaking ecosystem continues to mature, regularly updating and refining this framework will be crucial.

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