Galaxy Digital research associate Christine Kim joins Ash Bennington to discuss the rise of staking through her report on Maximal Extractable Value (MEV).
Read our notes below to learn more.
Liquid Staking, MEV, Shanghai Explained
Ash
Liquid staking has taken over lending as the second largest sector in the DeFi space, according to data from DefiLlama cited by CoinDesk.
The value of liquid staking has reached more than $14 billion.
CoinDesk says that the upcoming Shanghai Upgrade which will allow people to withdraw Ether that's already been staked has boosted interest in liquid staking.
Christine
Liquid staking is when someone deposits Ethereum into the Beacon Chain, Ethereum's consensus layer, to earn staking rewards.
When they deposit their ETH for staking purposes, they get an exchange token, a liquid staking token that maintains the same value to earn interest.
It represents the staked ETH that they have on-chain so it should hold the same value as that ETH.
Rebasing is when they can either have those rewards, increasing in increment to the number of ETH that they have.
Lido's ETH or stETH is the most liquid, the most popular liquid staking token out there.
Proof of Stake
Christine
From miners, to validators.
For validators, instead of running computationally intensive software, they're running extremely minimally intensive software and they all have to stake a minimum balance of 32 ETH.
The collective stake of validators is what helps secure the network, what allows validators to have the credentials to vote on the next block, propose the next block, participate, and earn rewards from the Beacon Chain and fees and from MEV.
The biggest change was switching from a system where security is provided by miners and their equipment and their energy to a system with a blockchain that is now secured by validators and the stake that validators put into the network.
The issuance of Ethereum has gone down significantly.
Ash
Proof of stake is far more friendly in terms of the environmental footprint of this consensus algorithm.
It is less processor-intensive, which makes it less cost intensive to maintain the overall network.
It creates this opportunity to create yield and organic yield within the network itself as a consequence of the staking.
The general idea is the cost to miners now validators is lower, therefore, they need to pay them less in terms of competition in the organic ETH itself. Therefore, the monetary policy becomes less expansionary.
Maximum Extractable Value (MEV)
MEV is one of the big things about the merge.
MEV is a type of reward that validators can earn by ordering transactions in a specific way within a block.
Before the merge MEV, was primarily earned on one off-chain marketplace that was operated by Flashbots.
Validators are the ones that propose the block, but you want the activity of searching for the MEV to be offloaded to a different party.
And that different party is called searchers. Searchers search for MEV opportunities on-chain.
Front Running and Back Running
Christine
It's very similar actually to traditional finance. If people think about the strategies that searchers are deploying.
Once they understand that there is an arbitrage opportunity here, there are dedicated marketplaces where people can auction off these bundles.
People call them a transaction bundle because oftentimes the ordering of the transactions is so specific, that they want them to be executed in that order alone and only then will they be able to get that value extracted.
Within the relay, they've got other entities called builders that are packaging multiple different bundles from different searchers and trying to create the most valuable block.
The builder is the one that's packaging the bundles from searchers, creates a block, and then submits it to a validator.
Changes in MEV
Christine
The changes are really that there are many new actors that have entered the space.
That marketplace used to be a single marketplace but now they've got several.
Validators were not security providers before the merge. Validators were really only securing the Beacon Chain and the Beacon Chain was not responsible for the consensus of Ethereum.
Instead of mining pools, they've got staking pools, they've got liquid-seeking derivatives.
Flashbots
Christine
Flashbots has been one of the leaders in MEV research and development.
They were the ones that identified and maybe as a problem, MEV as a potential centralization of force that would create centralization on-chain.
They also created MEV software, which allows validators to connect to multiple relays instead of just one.
Issues about sanctions enforcement for Ethereum
Christine
Slashing on Ethereum generally happens when validators are identified to break the rules of the network.
Certain rules are enforced as in a validator should not be proposing two blocks at a time, they should only propose one at a time.
If someone wants to prioritize transactions by priority fee, that's up to a validator, if they want to accept a block from a builder, that takes out transactions that are harming users.
If all validators were censoring transactions from sanctioned entities, that would definitely be a concern of the network. But to be clear, that is not happening on Ethereum today.
There is a percentage of validators that are not accepting blocks from builders, that are censoring transactions, or relays that are censoring transactions.
All U.S.-based entities that are running validators on behalf of other users are verifying not only the validity of blocks that do not contain any OFAC censor transactions, like any sanctioned entities transactions, but they're also validating blocks that do.
Want more Notes like this?
We create 10+ of these Notes every day for our members and you can access 2-3 notes per day for free on our site.
Sign up for a FREE Revelo Intel account here
Solana Suffers New Outage
Ash
Solana is back up and running after another outage over the weekend. The Solana Foundation says the reason is yet unknown.
CoinDesk says on Saturday, transaction settlements slowed down so much at the blockchain effectively ground to a halt.
New blocks were not being produced on Solana and transactions were not being validated. This means that users were not able to move their funds off the network.
Engineers twice tried to restart the whole network, which had recently gone through an upgrade.
Christine's Thoughts on Solana News
It's hard to say without knowing exactly what caused the outage.
This really makes people question and wonder if the way in which Solana supports cheap and fast transactions is inherently unsustainable and unreliable.
She thinks Solana will need to contemplate some serious changes to its tech stack to alleviate these frequent outages while still maintaining their promise of cheap and fast transactions.
IMF Crypto Ban
Ash
The head of the International Monetary Fund (IMF) says banning crypto outright should not be off the table.
International Monetary Fund Managing Director Kristalina Georgieva says a ban is an option if regulation is slow to come and crypto assets become a threat to financial stability.
The IMF has recently published a nine-point plan for crypto regulation.
New York Magazine spoke with Gary Gensler and he said that every crypto transaction apart from buying spot Bitcoin and purchasing goods or services with crypto falls under the definition of a security, and thus, the SEC supervision.
Christine’s Thoughts on IMF Crypto Ban News
It wasn't super surprising to her, it didn't sound like IMF were suggesting that cryptocurrencies should be banned, but just that in their very early investigations, they're considering all possibilities.
Other Crypto News
A new survey from the U.S. exchange, Coinbase shows that 20% of Americans own crypto.
The Block has filed an interesting project in Japan. Several Japanese conglomerates are building a new joint Metaverse.
Fujitsu and Mitsubishi are among the companies working on a "Metaverse economic zone" for the country.
The Defiant says there was some feverish activity on the NFT marketplace Blur over the weekend.
A collection called Mochi sold more than 1000 NFTs for $18 million dollars. He then bought NFTs for $14 million.
Christine’s Thoughts on Crypto News
ETH as Security
Christine
Ethereum remains the most decentralized general-purpose blockchain in the world.
She thinks that it is one of the big reasons why she doesn't think that Ethereum should be considered a security.
Q&A
Q: What is the state of Ethereum classic? And second, what is Eigen Layer?
Christine doesn't know what the latest is on Ethereum classic, other than it did see a pretty big pump along with Ravencoin and ETH Paw in the weeks leading up to the merge.
Eigen Layer is a re-staking protocol that is being developed on Ethereum.
Q: Do you expect confidence in ETH staking to boost and thus, the percentage of ETH staked to increase post-Shanghai upgrade?
Yes.
Chrsitine thinks they’re already starting to see that activity on-chain in the weeks coming leading up to Shanghai.
Q: What is your take on stacks being built on Bitcoin? Do you consider it to be an ETH competitor?
Christine thinks the programmability of Bitcoin and stETH protocol is significantly less developed than what's on Ethereum.
However, there is a place for Bitcoin NFTs.
Key Takeaways
Christine
The MEV supply chain has become increasingly more complex since the merge and because of that, there are greater risks for centralization to happen on-chain.
Staked ETH unlocks happening very soon, they will likely see a greater inflow of staking activity on Ethereum.
Ash
This is an incredibly interesting time for the Ethereum ecosystem.
Check out these important links
Want more Notes like this?
We create 10+ of these Notes every day for our members and you can access 2-3 notes per day for free on our site.
Sign up for a FREE Revelo Intel account here