This partnership aims to co-develop the Economic Security Index for Actively Validated Services (AVS) on the EigenLayer platform. Additionally, they plan to launch an Economic Security Pool to mitigate adverse market conditions, enhancing the security & stability of AVSs. By collaborating, Chainrisk & DeFcor Finance aim to leverage their combined expertise to create a more secure, transparent, & user-friendly environment for participants in the EigenLayer ecosystem. This partnership is expected to set new standards in economic security & risk management for blockchain protocols.

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Objectives & Scope of the Collaboration

The primary objective of the partnership is to create a robust Economic Security Index for AVSs on the EigenLayer platform. This index will quantify the security of AVSs by assessing various risk factors & determining their overall risk profile. By doing so, it aims to provide users with a clear understanding of the security landscape, enabling them to make informed decisions.

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Another key goal is to establish an Economic Security Pool in collaboration with DeFcor Finance. This pool is designed to provide coverage against adverse market conditions, ensuring that AVSs maintain high economic security even during market volatility. By pooling resources & spreading risk, this initiative aims to enhance the resilience & stability of AVSs.

One of the significant outcomes of this partnership is the development of the Risk Conversion Ratio (RCR). This ratio, ranging from 0 to 1, serves as a quantitative measure of the overall risk profile associated with AVSs. An RCR of 1 indicates low risk, similar to traditional Liquid Staking Tokens (LSTs), while an RCR of 0 signifies high risk, potentially involving complete slashing of funds.

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Risks Associated with Actively Validated Services (AVS)

Actively Validated Services (AVS) are the various projects & services built on top of EigenLayer, run by operators who validate transactions & ensure the security & functionality of the network. Each AVS carries specific risks that need to be assessed & managed to ensure the safety & reliability of the re-staking process.

One of DeFcor Finance's primary objectives is to provide transparency into the risks associated with each AVS within a pool. This transparency is crucial for enabling users to make informed decisions based on their risk tolerance. The main risks associated with AVSs are:

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Slashing Risk

It refers to the potential for validators to be penalized (or "slashed") due to downtime, double-signing, or other forms of misbehavior. In the context of re-staking, validators participate in securing multiple AVSs to earn additional yields. However, if a validator fails to perform its duties correctly or engages in malicious activities, it can be penalized by losing a portion of its staked assets. This risk is particularly significant in the EigenLayer ecosystem, where validators are incentivized to support multiple AVSs, increasing their exposure to slashing events.

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Operator Collusion Risk

It involves the possibility of validators conspiring to manipulate or exploit the AVSs. In an ideal scenario, operators would distribute their stakes evenly across all AVSs, maximizing the cost of corrupting any single AVS. However, in reality, a subset of operators could collude to steal funds or undermine the network's integrity. This collusion could lead to significant financial losses for the restakers & destabilize the network. EigenLayer's white paper addresses this risk by analyzing complex attack vectors where collusion among operators could occur.

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Concentration Risk

It  arises when a large portion of the total staked ETH is concentrated within a single AVS. This scenario poses a threat to the Ethereum consensus layer, as a major slashing event affecting this concentrated stake could exceed the network's Byzantine Fault Tolerance (BFT) threshold. The BFT threshold represents the number of validator faults the network can tolerate while maintaining security. If an AVS with a significant portion of staked ETH is compromised, it could lead to a catastrophic loss of staked assets, potentially compromising the overall security of the Ethereum network.

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LST Liquidity Risk

It pertains to the potential for Liquid Staking Tokens (LSTs) to become illiquid when locked up in re-staking protocols. Solo-restakers & validators deposit LSTs into EigenLayer's smart contracts, making these assets unavailable for trading or other uses while they are restaked. If a large percentage of LSTs become illiquid, it could cause volatility in their price. Downward pricing pressure on an LST would adversely impact the security of the AVSs secured by those restaked LSTs. Liquid Restaking Platforms (LRPs) aim to mitigate this risk by providing restakers with LRTs representing their restaked positions, thereby maintaining some level of liquidity.

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Eigen Layer Smart Contract Risks

These risks are inherent in any decentralized protocol that relies on automated, self-executing code. The EigenLayer ecosystem depends on smart contracts to manage the restaking process, including the allocation of assets, distribution of rewards, & enforcement of slashing penalties. These contracts must be secure & free from vulnerabilities to prevent exploits & ensure the integrity of the re-staking protocol. Any flaws in the smart contract code could result in financial losses or the manipulation of the AVSs.

Each of these risks must be carefully assessed & managed to ensure the safety & reliability of the AVSs within the EigenLayer ecosystem.

Risk Conversion Ratio (RCR)

The Risk Conversion Ratio (RCR) is a crucial metric developed by Chainrisk & DeFcor Finance to quantitatively represent the overall risk profile associated with Actively Validated Services (AVSs). This ratio serves as a comprehensive indicator, helping users understand the level of risk involved in their investments within the EigenLayer ecosystem.

The RCR is a numerical value ranging from 0 to 1, where:

• RCR of 1 indicates a risk profile comparable to a Liquid Staking Token (LST) product, generally carrying a lower risk of slashing & reward token value fluctuations.
• RCR of 0 indicates a scenario where there is a high likelihood of complete slashing of restakers' funds & a potential drop in the value of the AVS native reward token to zero.

The primary purpose of the RCR is to provide a clear, standardized measure of risk that can be easily understood & utilized by users to make informed decisions about their staking & re-staking activities. Values between 0 & 1 offer varying degrees of risk, allowing users to choose AVSs that match their risk tolerance & investment strategy.

Scenario 1: RCR of 1

• These AVSs typically have strong safeguards against slashing, reliable operators, & stable reward mechanisms.
• Example: A well-established data availability layer with proven performance, minimal slashing incidents, & stable reward token prices might receive an RCR of 1.
• Implication: Users can confidently restake their assets with minimal risk of losing their staked funds or facing significant fluctuations in reward token values.

Scenario 2: RCR of 0‍

• An AVS with an RCR of 0 indicates a high-risk environment. These AVSs are prone to frequent slashing events, have unreliable operators, & exhibit high volatility in reward token prices.
• Example: A newly launched bridge service with little to no track record, frequent operational issues, & unstable reward tokens might receive an RCR of 0.
• Implication: Users should be cautious when considering restaking their assets in such AVSs, as the likelihood of losing staked funds & facing drastic reward token value drops is very high.

By offering a clear & standardized measure of risk, the RCR enables users to make informed decisions about their staking activities, balancing their desire for yield with their tolerance for risk.

Economic Security of AVSs

The economic security of Actively Validated Services (AVSs) is a crucial aspect of ensuring the stability & integrity of the EigenLayer ecosystem. This concept revolves around the idea that an AVS’s security is determined by the amount of slashable stake committed to validating the network.

Slashable stake refers to the portion of staked assets that can be penalized (or "slashed") in case of validator misbehavior, such as downtime, double-signing, or malicious actions. The higher the slashable stake, the greater the financial deterrent against malicious activities, thereby enhancing the economic security of the AVS.

The security of an AVS is not solely determined by the amount of slashable stake but also by the relationship between the Cost of Corruption (CoC) & the Profit from Corruption (PfC).

• Cost of Corruption (CoC): This represents the total financial loss a validator would incur if they were to be slashed for engaging in corrupt activities. A high CoC acts as a significant deterrent against malicious behavior, as the financial penalty outweighs any potential gains.
• Profit from Corruption (PfC): This denotes the potential financial gain a validator could achieve through corrupt activities, such as manipulating transactions or colluding with other validators.

For an AVS to be considered economically secure, its CoC must significantly exceed its PfC. This means that the financial penalties for engaging in corrupt activities should be much higher than any potential profits, creating a strong deterrent against malicious behavior.

The primary goal of maintaining high economic security is to deter validators from engaging in malicious activities. By ensuring that the CoC is substantially higher than the PfC, the economic incentives are aligned in such a way that honest behavior is rewarded, & dishonest behavior is penalized.

Economic Security Pool

The Economic Security Pool is an innovative initiative introduced through the partnership between Chainrisk & DeFcor Finance. This pool is designed to enhance the security & stability of the Actively Validated Services (AVSs) within the EigenLayer ecosystem by providing a safety net against adverse market conditions & potential risks associated with re-staking. Here’s a detailed explanation:

It aims to mitigate risks for users who participate in the re-staking process by pooling together resources to cover potential losses. This initiative is particularly important for maintaining user confidence & encouraging wider participation in the EigenLayer ecosystem. The pool acts as an insurance mechanism, providing coverage against various risks that could negatively impact the value of staked assets.

1. Risk Mitigation: The primary benefit of the Economic Security Pool is its ability to mitigate risks associated with re-staking. By providing a financial buffer, the pool can cover losses incurred from slashing events, operator misbehavior, & other unforeseen risks. This protection encourages more users to participate in re-staking, as they have the assurance that their investments are safeguarded.
2. Enhanced User Confidence: The existence of the Economic Security Pool boosts user confidence in the re-staking process. Knowing that there is a safety net in place, users are more likely to stake their assets, contributing to the overall growth & decentralization of the EigenLayer ecosystem.
3. Promotion of Best Practices: The pool incentivizes validators & operators to adhere to best practices. Since the pool covers losses due to slashing & other risks, operators are motivated to maintain high standards of performance & security to avoid triggering these protective measures. This results in a more reliable & secure network.
4. Support for New AVSs: The Economic Security Pool also supports the onboarding of new AVSs by providing a layer of financial security. New AVSs, which might initially be perceived as risky, can benefit from the pool's protection, making it easier for them to gain user trust & attract staking participants.

The partnership between Chainrisk & DeFcor Finance facilitates a comprehensive risk assessment process. By combining their expertise, they can accurately evaluate the risks associated with different AVSs & ensure that the Economic Security Pool is adequately funded to cover potential losses.

Conclusion

The economic security of AVSs in the EigenLayer ecosystem is fundamentally tied to the concept of slashable stake & the balance between the Cost of Corruption (CoC) & the Profit from Corruption (PfC). By ensuring that the CoC significantly exceeds the PfC, the system creates strong financial deterrents against malicious behavior, thereby enhancing the overall security & stability of the network. The Economic Security Pool is a critical component of the partnership between Chainrisk & DeFcor Finance, designed to enhance the security & stability of the EigenLayer ecosystem. By providing a financial buffer against risks, the pool encourages user participation, promotes best practices among operators, & supports the growth of new AVSs. This approach not only protects the interests of stakeholders but also promotes a trustworthy & reliable staking environment.

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About DeFcor Finance

DeFcor Finance is an innovative financial platform that offers the first Multi-Strategy Liquid Restaking Token. DeFcor's approach allows users to restake their assets in various strategies mapped one-to-one with AVSs, providing users with greater choice & control. Their goal is to bring transparency & informed decision-making to users by clearly outlining the risks associated with each AVS within a pool.

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About Chainrisk

Chainrisk is a comprehensive risk management platform focused on the DeFi sector. It aims to identify & mitigate economic risks associated with DeFi protocols. Chainrisk provides a suite of tools & services designed to stress test DeFi protocols under various market conditions, using agent-based & scenario-based simulations. This helps uncover potential economic exploits & vulnerabilities within these systems before they can be exploited maliciously.

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