Final answer:
The germinal layer of Echinococcus granulosus is responsible for cyst formation in the parasite's life cycle. Therefore, the correct option is C.
Step-by-step explanation:
The germinal layer of Echinococcus granulosus has a specific role in the life cycle of the parasite. It is involved in the formation of hydatid cysts in the internal organs of the intermediate host. Within these cysts, the germinal layer is responsible for producing the larval stages of the parasite, which includes further development into protoscolices that have the potential to develop into adult worms if ingested by the definitive host. Therefore, the correct answer to what the germinal layer does is C. Cyst formation.