Ethereum
Recovery is hot in Ethereum (ETH) and entry into Solana (SOL). Should we be worried?
If you’re reading this from a traditional financial career, you know the principle: if money is idle, put more work into it.
Are you, for example, a broker with collateral sitting quietly in a safe? It’s boring! Do this rehypothecation thing! Use it to finance your own transactions! (The global financial crisis fomented by Lehman Brothers in 2008 illustrates this situation well. what can go wrong.)
The cryptocurrency industry has invented its own version of remortgaging, of course called something else: reprise. It caught fire on Ethereum (ETH) with the help of EigenLayer (which is gradually approaching a airdrop of its EIGEN token).
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Like a proof of participation blockchain, Ethereum’s plumbing relies on people called validators “staking” their ETH on the network. Validators are rewarded for pledging their assets, granting them something akin to paying interest. But this ETH is locked. Sitting around doing nothing. Financial engineers hate it, don’t they?
With retaking, this locked ETH is somehow released via the creation of a derivative, and the owner of this ETH can make a little more money. (The same goes for recovery platform like EigenLayer which allows this.)
This idea does not appeal to everyone. For supporters, the rollback can help make Solana startups’ blockchain-based applications more secure. See Nelson’s story to talk about it. Critics worry about systemic risks (if something goes wrong, entanglements can escalate very quickly, as the 2008 example showed).
Meanwhile, ETH restakers are likely earning more than the current Ethereum staking yield (3.13%, according to CESR).
It’s all fun until it’s not.
MetaMask vs. MEV
It’s confession time: I’m both very curious to know MEV (i.e. the maximum extractable value) and really baffled by this.
In the most general terms, MEV involves validators changing the order in which they add transactions to a blockchain to maximize their profits. To my (perhaps naive?) eye, this looks partly like arbitrage. Some resemble transactions from high-profile clients in TradFi.
As you can imagine, some people love it (they make money either by engaging in MEV or by creating tools that enable it or fight it or whatever) and others hate it (they get sandwiched).
Regardless, MetaMask, the wildly popular Ethereum wallet, is introducing a new feature designed to protect MetaMask users from MEV. This reminds me of TradFi dark pools: stock trading platforms that hide order details until they are executed, to protect against those who want to move prices against larger order placers.
Crypto has MEV, TradFi has high frequency traders. There is (almost?) nothing new in the world of money.