“Blockspace” is becoming the cornerstone of cryptocurrencies, with Bitcoin and Ethereum leading the charge. While ethereum’s deflationary path is appreciated by its fans in the community, in reality, usability is the key to the future development of ethereum. To ensure Ethereum’s success, it must continually scale while prioritizing user experience. Therefore, it is necessary to control the fee within a reasonable range, but the faster expansion speed is the ultimate goal, which will be the key to driving the price of Ethereum soaring.
In this Bing Ventures special report, we will explore the revenue opportunities in the Ethereum block space and analyze its impact on the entire Ethereum ecosystem.
Ethereum’s block changes
In the early days of Ethereum, most block producers were independent individuals or small groups who used personal computers or small servers to run Ethereum nodes and provide computing power. These block producers are called miners, and they use mining software to try to solve puzzles and solve puzzles to generate new blocks. Miners have the opportunity to be rewarded for producing new blocks, which includes newly issued ETH and transaction fees.
As the Ethereum network has grown, the role of block producers has changed. Many miners started to use professional-grade mining machines to improve mining efficiency, and began to cluster mining machines in large data centers for better bandwidth. This has led to increased competition among miners and increased demand for computing resources and electricity.
In PoS (Proof of Stake), the center of gravity of the role in the block changes again. Ethereum PoS is a new type of consensus mechanism. It allows nodes in the network to participate in the consensus mechanism, protects the data in it from tampering, and can allocate resources more effectively to improve overall efficiency.
Source: DeFiLlama
miner economy
PoS and PoW (Proof of Work) are two different consensus mechanisms. Under the PoW system, miners can get mining rewards. Under the PoS system, miners cannot get mining rewards, but are paid to miners through deposit rewards. As Ethereum moves to PoS, miner income will change dramatically.
First, since PoS does not require miners to invest a lot of computing power, it does not require miners to purchase expensive mining machines, so the income of miners will be greatly reduced. Second, under the PoS system, miners’ income mainly comes from deposit rewards, not mining income, which means that miners’ income will become unstable. Third, under the PoS system, PoS node operators will have the opportunity to obtain more income, which also means that the income of miners will be relatively less.
Before the merger of Ethereum, miners’ income mainly came from block rewards and transaction fees. With the implementation of EIP1559, the transaction fee part has changed, and part of the transaction fee will be burned, resulting in a reduction in miners’ income. In addition, with the transformation of Ethereum from PoW to PoS, miners no longer need to consume a lot of electricity to mine Ethereum, so the cost of miners will also be reduced. However, for those miners who continue to run PoW nodes, they need to face increasing competition as they will compete with fewer and fewer PoW nodes for block rewards and transaction fees.
At the same time, the explosion in block space demand pushed up average gas fees, which created a period of raw Ethereum net supply crunch. However, the overall supply of Ethereum continues to increase as congestion clears and fees decrease. The PoS mechanism achieved through the merger significantly reduces the net issuance of Ethereum, creating the conditions for the deflation of Ethereum supply.
Source: Dune
Validator Economy
In PoS, validator economics are replacing miner economics. Validators are responsible for validating new transactions and adding them to the blockchain. Unlike PoW, PoS does not require validators to produce blocks by solving computational puzzles, but instead selects validators based on the amount of Ethereum tokens they have (called a stake). This means that validators with more Ethereum tokens have more say.
Additionally, PoS introduces new incentives to encourage validators to continue participating in the consensus process. In PoS, the verifier can get the fee for producing the block as a reward. This is different from PoW, where miners are only rewarded with newly mined Ethereum tokens. The change of the role of the block space includes two aspects: one is the improvement of the Ethereum block space itself; the other is the development of new functions and new roles of the block ecology.
Source: Attestant
The role of the Ethereum block has changed a lot, from the previous simple blockchain node to today’s complete blockchain node including a series of functions such as verification, storage, support and maintenance. This development brings more responsibilities and obligations to participants in the Ethereum block space, while also bringing more incentives and revenue opportunities.
In addition, the ecology of the Ethereum block is still developing, including more developers and capital participation, as well as more community activities. As the participation of the Ethereum developer community increases, the role of block producers is also evolving, from pure block producers to participating in voting, contributing code, participating in community activities and other roles.
The relationship between MEV and block space
MEV (Maximum Extractable Value) refers to the maximum value that a verifier can extract in block production that exceeds standard block rewards and gas fees by adding, deleting, and changing the order of transactions in a block under PoS. Now MEV generally refers to the maximum transaction extractable value. In the Ethereum network, the MEV ecosystem includes Seekers, Builders, and Relays. The Seeker runs the MEV strategy and sends the transaction sequence to the Builder. Builders aggregate transactions from Seekers and other sources to build blocks, and pass the most profitable blocks to Proposers through relayers. Relayers receive blocks from builders and send them to proposers. During this process, Seekers need to trust Builders not to steal or front transactions; Builders need to trust Relays to deliver the most profitable blocks, and want to connect to Relays that have multiple validators connected; Relays The server needs to accurately evaluate and send the most profitable block, and the payment needs to be guaranteed.
Attraction of MEV
MEV plays an important role in the Ethereum PoS ecosystem, can improve the efficiency of DeFi, and rely on Searcher to quickly equalize the price difference. Since MEV is a rich source of income, it is also the driving force for maintaining the blockchain system. In theory, the more active transactions on the chain, the higher the upper limit of MEV. After the merger of Ethereum, MEV is very attractive to validators. In addition to a higher minimum staking yield, verifiers can earn considerable rewards, and currently the highest reward for MEV-Boost verifiers is obtained by Lido. Since the merger, MEV-Boost has rapidly gained widespread adoption, with nearly 90% of validators already running it.
Source: Dune
After the merger upgrade, most MEV revenue started flowing to validators as they replaced miners as the core of the network. That is to say, as long as users in the Ethereum block space conduct transactions through DApps, its value will be captured by roles such as verifiers. In the long run, Ethereum will implement sharding technology, and relayers will no longer be needed. MEV-Boost enables validators to maximize their staking rewards by selling their block space to an open and competitive block building market. For large staking providers like Lido, this means more stable staking returns. Built by Flashbots in collaboration with Ethereum core developers, MEV-Boost is software that enables validators to connect to multiple off-chain markets to auction off block space. With this relay model, validators receive blocks containing priority fees and MEV built by third-party block builders.
There is a very close relationship between MEV and Ethereum blocks. After Ethereum moved to PoS, the barriers to obtaining MEV were further lowered as the process of becoming a validator became more democratized. Under the premise of the further deflation of Ethereum and the increase in the income of verifiers, the attractiveness of MEV has been greatly enhanced. On a philosophical level, MEV acts as a value transfer layer between users and the Ethereum network.
Self-binding of MEV
MEV itself is a zero-sum game. There are limited opportunities to extract value from reordering transactions, and the fastest searchers to identify MEV opportunities are usually the ones that earn the most MEV. To maximize revenue, competing searchers write scripts to automate tasks that exploit easily identifiable MEV opportunities. Additionally, Seekers can run dedicated hardware or subscribe to paid services that provide a low-latency view of the Ethereum mempool to more quickly utilize pending user transactions.
In order to outperform other searchers, seasoned and seasoned searchers may deploy complex strategies including multiple token swaps, bots, and manual searches through on-chain activity to achieve higher profits. This has caused MEV participants to become professional in disguise, so for ordinary Ethereum users, they are naturally kept out of MEV.
In addition, MEV sometimes affects user experience. For example, users who are attacked will face higher slippage and poorer user experience. Due to the existence of gas priority fees, searchers sometimes increase gas significantly, resulting in network congestion. The huge benefits of staking ETH give large liquid staking service providers a greater scale advantage in MEV adoption than individual stakers and regular staking pools, the so-called “winner takes all”.
Source: Bing Ventures
Outside of centralized exchanges, the only other entity that is best suited to compete as a staking pool is the service that provides users with liquid staking derivatives (LSD), and among those service agreements that provide users with LSD, so in the near future The LSD protocol has the highest DeFi market depth. The attractiveness of MEV will lead to the “winner takes all” of large staking pools, which will intensify the centralization of validators.
Countermeasures
From a theoretical point of view, the ideal state of the MEV market is a healthy and fully competitive landscape. In this state, the MEV market will be highly competitive with multiple suppliers competing to provide the best service and price. This will create a level playing field for all players, enabling them to benefit from the most competitive terms.
But in fact, after Ethereum transitions to PoS, whoever can generate the most Gas will own everything in Ethereum. Ethereum’s blockchain network no longer verifies and records transactions by ordinary miners, but by more specialized nodes called validators. After the change, Ethereum’s blockchain network will pay more attention to transaction fees rather than mining fees, which also means that transaction fee income will become the main source of income for verification nodes. Therefore, under the PoS mechanism, there will be a MEV monopoly to a large extent, that is, some specific nodes can have enough power to obtain more transaction fees.
Source: Bing Ventures
The competition pattern of MEV after the merger of Ethereum is mainly composed of several block builders. Currently, the market is mainly dominated by five builders, but some new builders have appeared recently, such as builder0x69, beaverbuild, and 0x4737. Flashbots, one of the biggest builders out there, runs its own builder and relay, and has open-sourced its builder to encourage competition. Other builders such as bloXroute, Eden, sendbundle.eth, and Manifold also have their share of the competition. There is competition and cooperation among these builders, and in order to get more order flow, they adopt different strategies, such as reducing profits, offering rebates, competing execution guarantees, etc. At present, there is no monopoly builder, so how to balance the benefits of MEV in the future will be a key issue.
The MEV market should be highly secure and resilient, making it an attractive option for both investors and traders. All transactions will be settled securely on the Ethereum blockchain, and the market will be protected from malicious actors through a variety of security measures, including programmable privacy transactions, front running as a service (FRaaS), and fair Sorting service Fair Sequencing Services (FSS), proposer, builder separation, Proposer Builder Separation (PBS), etc. MEV is becoming an investment strategy that investors can realize on Ethereum. In the future, it can obtain higher returns from the derivatives market such as LSD, and it will not be affected by the congestion of the Ethereum network, nor will it be affected by investors’ own technical level. limit.
Rigid structure of interests
In the long-term, the interest pattern in the Ethereum block space seems to have begun to ossify. Under the PoS consensus mechanism, the presence of verifiers begins to exceed that of miners. Validators can earn money on staking, and the more staked a validator is, the more they will be paid. A validator’s stake can also affect their power in the network, so they have an incentive to stake more Ethereum tokens in order to get paid more.
Bottom censorship
The censorship problem in the Ethereum block space is mainly manifested in the presence of signal interference and censorship nodes. Among them, Flashbots Relay is currently the most widely used censorship node. In addition, there are other review nodes, such as Bloxroute’s “Regulated” Relay, etc. These censor nodes result in quite a few blocks censoring user transactions. The root cause of this problem is that in the Ethereum block space, review nodes such as Flashbots Relay rely too much on the MEV supply chain, making it vulnerable to regulatory restrictions and controls.
Source: relayscan.io
At present, there have been some solutions to the censorship problem, such as launching non-censorship nodes, such as Gnosis, Ultrasound Money, and Builder 0x69, to improve Ethereum’s censorship resistance. However, Flashbots Relay’s dominance hasn’t declined significantly, as Flashbots Relay has maintained a near-perfect uptime record since its launch and features free, no-whitelist connections. These advantages make it one of the review nodes trusted by many validators and builders.
In the Ethereum block space, stability is one of the most important competitive characteristics for review nodes. Therefore, as Flashbots Relay runs stably for longer, it will increasingly become one of the review nodes that all validators trust and connect using MEV-Boost. Companies like Flashbots and bloXroute currently dominate the builder market, but the market is starting to diversify. However, the relay market is still monopolized by Flashbots, raising concerns about relay censorship. Censorship of relays can lead to blocks being tampered with, so builders want to pass their bids to relays that can connect to the most validators. At the same time, validators will also seek to connect to the most profitable builders and relayers who can accurately pay profits. Therefore, Flashbots became the first choice of most builders and verifiers. But this also leads to the hidden danger of more and more blocks being censored.
dark game
The transformation of mining pools is also one of the possible impacts of the PoS mechanism. Since the mining pool may see itself as an independent node, this will lead to large mining pools having a lot of power and thus obtaining more transaction fees. The temptation of validators’ right to speak has led to mining pools and super nodes seeking to provide attractive pledge services to attract more ETH holders to lock their ETH. Whether this will inhibit the long-term ecological vitality of Ethereum remains to be seen. Longer-term observations.
In addition, Ethereum’s POS withdrawal process may face some complications. Among them, socialized sharing and time cycle mismatch are the main causes of the problem, which may lead to different arbitrage/attack behaviors. Poor design of some protocols may lead to a “hacked” situation after withdrawals are open. In this case, the following arbitrage/attack behaviors may occur:
- It is possible that someone will monitor the confiscation situation of the POS network and preempt the secondary market stETH in advance. In this way, when the secondary market is very deep, purchasing stETH and initiating a withdrawal request will lead to a large-scale withdrawal of operator nodes.
- Secondly, there may be situations where unscrupulous merchants directly purchase stETH with the ETH mortgaged by users, such as FraxETH. This behavior may result in the loss of the user’s mortgage assets.
- In a more extreme situation, since the operator does not have a mortgage, there may be a large amount of withdrawal request and cooperate with the operator’s estimated penalty. In such a case, it may have adverse effects on the entire system.
Source: mevwatch.info
Therefore, in order to prevent these problems, it is necessary to conduct sufficient security assessment and risk control on the POS withdrawal process of Ethereum. At the same time, it is necessary to consider various arbitrage/attack behaviors when designing the protocol, and take corresponding preventive measures. If the staking mechanism is not updated or changed in the short term, then the deterministic income on the MEV track will still belong to those top staking agreements and super mining pools, and the attractive income generated by this piece of fat can only be obtained through these large service providers or The agreement can be transmitted to small and medium investors in Ethereum.
When block builders bid for blocks, the MEV they reserve will directly affect the size of their bids. To make money, builders need to win some high-value blocks, but most of the time they just barely break even or lose money. Some profitable builders may get private order streams. At the same time, builders can increase the rate of block selection by adding funds to their bids, thereby increasing order flow and earning more profits. In other words, these block builders and mining pools are building a barrier between Ethereum holders and the dark forest, which is good in the short term and seems a little dead in the long term.
bloated consensus
There is a validator paradox problem in the Ethereum PoS mechanism, that is, in order to participate in the verification, the validator needs to lock the tokens and release the tokens at a certain point in the future. If it cannot be unlocked, then the PoS algorithm becomes a one-way process, and no one wants to participate in such an algorithm. Therefore, once the tokens are released, the penalties set at the consensus level are no longer binding on the validators. In this case, the penalty constraint mechanism of the Ethereum PoS algorithm cannot limit the verifier’s behavior.
The overhead of the Ethereum PoS algorithm on consensus verification will increase as the number of verifiers increases. This is because in PoS, each validator corresponds to a state. If there are 100 validators, there are 100 states, 1,000 validators have 1,000 states, and 10,000 validators have 10,000 states. This has profound implications for the cost of operating an Ethereum node. The Ethereum PoS algorithm essentially separates the state of the verifier from the state of ordinary users, and the verifier is still stateful. Each node participating in the consensus is stateful, which will lead to the problem of state expansion, which will cause the problem of rising verification overhead.
The larger the number of verifiers, the worse the verification efficiency will be, so it needs to be limited. In addition, the block producer in the PoS algorithm needs to keep communicating with others and collect the signatures sent by other witnesses, which will cause a lot of communication overhead. In addition, when other witnesses do not know the network address of the signature collector, they have to send the signature in a normal manner, further increasing the communication overhead. These problems will have an impact on the operating costs of Ethereum nodes.
centralized monopoly
The issue of a centralized monopoly of the Ethereum block space is worrisome because, outside of relay censorship, block building activity is likely to be concentrated in a small number of specialized entities. Validators have the privileged position of building, proposing, and validating blocks, a resource-intensive activity. Validators must run many different block simulations in an extremely short amount of time to determine the block that maximizes the block reward. This gives large, complex staking pools an advantage over independent validators, as the former can invest in the best block building solutions. However, this would make MEV a centralizing force on Ethereum. To avoid this from happening, MEV-Boost separates block building activities from validators, who are block proposers under PoS.
However, outsourcing block building activities to third-party block builders means that the block builder market still has the potential to become centralized. To mitigate the negative externalities of builder centralization, Flashbots made some small tweaks to the MEV-Boost software, most notably the ability for validators to set minimum bids for blocks they receive from relayers. By setting the minimum bid above zero, validator node operators can automatically build blocks natively from the Ethereum mempool if the reward for blocks built by third-party builders does not exceed a certain threshold.
Source: Dune
Currently, the dominance of the Flashbots builder is waning due to increasing builder competition. Additionally, Ethereum core developers and the Flashbots team are discussing a number of other solutions to further mitigate the negative externalities of block builder centralization. Ethereum core developers are also working on tweaks to the Ethereum Engine API to help validators more easily compare rewards for blocks built locally with those built by third-party builders. These adjustments help reduce the dominance of the Flashbots builder, thereby mitigating the risk of block builder centralization.
sure chance
In general, the development trend of MEV after the Ethereum merger needs to solve the problems of censorship and builder centralization. While some steps have been taken, continuous efforts are still needed. At the same time, establishing a decentralized network of builders is also an important direction for long-term problem solving.
MEV
MEV mainly includes three forms: 1. DEX risk-free arbitrage; 2. Liquidation in lending; 3. Sandwich attack. DEX risk-free arbitrage is arbitrage by using data on the chain, combined with price difference and flash loans in DEX. The liquidation in lending is to determine which borrowers can be liquidated by querying the data on the chain, and then obtain the liquidation fee. The sandwich attack is a transaction attack that can be used to control the price. By using high-speed submission of transactions and prioritizing the order of transactions, greater profits can be obtained. Although MEV has the possibility of failure, it can be seen from the data that the cost of failure is negligible, so this strategy is still very popular.
As more and more users enter the MEV market, the competition in the market becomes more and more intense. Seacher’s profit began to be reduced, and Producer’s profit began to increase. In addition, although the MEV market also exists on other chains, such as BSC, Avalanche, etc., the competition of these chains is relatively weak, and the ceiling is relatively low. Therefore, it is foreseeable that the competition in the Ethereum MEV market will become more intense in the future, and the market structure will also change accordingly.
Source: rated.network
The author believes that when investing in MEV-related projects, the cryptocurrency exchange or pledge pool entity with the ability to provide pledge services is the first choice. These entities provide staking services by providing deposit yields to users and insurance against failures in the validator’s technical setup. In addition, investment institutions may consider investing in MEV Searcher, an entity that focuses on trading using MEV’s strategies. However, as more and more newcomers began to enter this field, the original oligopoly competition of Searchers gradually turned into perfect competition, and the excess returns were greatly reduced.
Therefore, investment institutions need to carefully consider potential risks and returns. After the merger of Ethereum, the development trend of MEV faces two major problems: censorship and builder centralization. For these problems, a range of solutions can be focused on. With the official landing of PBS, there will be no relay problem. The separation between proposers and builders will be built directly into the Ethereum protocol. Validators will be able to add “censorship resistant lists” to force builders to include transactions. But it is important to note that even with an oligopoly of builders, the risk of censorship will not be completely eliminated.
In the long term, it is worth looking at projects that really help build a decentralized network of builders, where not only are there many builders, but builders work together, each building partial blocks to combine into a full block.
DVT
As Ethereum adopts the PoS (Proof of Stake) consensus mechanism, its protocol also faces problems such as centralization and single point of failure. DVT (Distributed Validator Technology) provides a solution to increase the fault tolerance and decentralization of Ethereum validators by decentralizing validator responsibilities and private keys. The reward method of the PoS mechanism will make the verifier with more equity (mortgage) get more rewards, which may lead to the risk of power concentration. Second, the PoS mechanism requires the verifier to use a single machine to sign two keys, which may lead to the risk of a single point of failure. DVT solves these problems of the PoS mechanism by using techniques such as distributed key generation, multi-party computation, Shamir’s secret sharing, and Byzantine fault-tolerant algorithms to distribute validator responsibilities among multiple nodes.
Source: ssv.network
DVT has significant advantages. DVT uses distributed key generation technology to disperse the validator private key on multiple nodes, thereby reducing the risk of single point of failure. In addition, DVT adopts a multi-signature system, which can disperse the responsibilities of the validator on multiple computers, which improves the fault tolerance and decentralization. DVT provides Ethereum validators with a higher degree of fault tolerance and decentralization, which solves some of the problems faced by the PoS mechanism to a certain extent.
For the DVT project, noteworthy features include: First, having a fully decentralized architecture, using key sharing technology and MPC threshold schemes to manage the validator network. Secondly, have a variety of validator clients to reduce the risk of single point of failure and improve fault tolerance. In addition, there needs to be a sound incentive mechanism to attract node operators to participate in the operation of the verification network while protecting the rights and interests of operators.
pledge
As some staking service protocols grow, we will see this area become a stuck entry point for Ethereum. Retail investors will open more transaction custody authorizations based on the decentralized pledge agreement. As long as agreements such as Lido can guarantee sufficient security, they will be derived into a giant financial custody institution around Ethereum in the future, which will generate more complex financial services for users of different sizes.
The launch of stSaaS staking service agreements such as Lido provides more users with the opportunity to participate in POS staking. The staking value of Lido has reached 5.9 billion US dollars, surpassing MakerDAO to become the protocol with the highest TVL in the DeFi ecosystem. To become a native staking node, you need to pass the access and lock-up thresholds, and install DAppNode to run. Additionally, node reliability has a large impact on rewards and the amount of time a node is online.
These thresholds make the native staking model not suitable for all users, so three other staking models have been derived: staking as a service (stSaaS), joint staking, and centralized exchanges. The stSaaS model separates staking and node operations. Users only need to deposit 32 ETH and hand over node operations to staking service providers, such as Lido. This model provides users with a more convenient way to participate in POS pledge.
Source: Tumilet
Small and medium-sized centralized exchanges can increase the attractiveness and competitiveness of their exchanges by cooperating and competing with Lido, stSaaS and other DeFi protocols. By providing more financial services and Staking options, small and medium-sized centralized exchanges can attract more users and liquidity, and remain invincible in the highly competitive market. Here are some cooperation and competition strategies:
- Access to agreements such as Lido: Small and medium-sized centralized exchanges can use Lido as one of the pledge options for their ETH and other PoS tokens. This improves the liquidity and security of exchanges, as staking reduces the risk of malicious attacks, and users benefit from staking rewards. In addition, the exchange can also provide more staking options by cooperating with more liquidity staking service protocols, such as adding support for other PoS token staking services.
- Launch your own staking service: Small and medium-sized centralized exchanges can also develop their own or cooperate to launch their own staking service. This allows users to stake tokens on the exchange and earn rewards, increasing user retention and activity. The advantage is that the exchange can independently determine the proportion of staking rewards, which allows the exchange to optimize according to its own situation.
- Utilizing stSaaS’s pledge model: stSaaS is a blockchain-based pledge service provider that allows users to pledge Crypto assets for loans, lending and other financial services. Small and medium-sized centralized exchanges can integrate the stSaaS pledge model into their own exchanges to provide more financial services, such as providing loans or lending functions. Exchanges can also partner with protocols like MakerDAO to offer stablecoin lending services, which can improve user retention and activity. For users, such combined packaging products are more attractive.
- NFT market + liquidity staking: Small and medium-sized exchanges can promote the development of the NFT market by providing liquidity staking services for NFT transactions. This can provide NFT holders with more liquidity and make it easier to buy and sell NFT assets. One way of thinking is to combine NFT with liquid mortgage derivatives, such as futures, options, etc., to provide users with more investment opportunities. By utilizing the uniqueness of NFT and the leverage effect of DeFi derivatives, exchanges can create more income opportunities. At the same time, small and medium-sized exchanges can also use the liquidity pledge service to allow users to use their NFT assets as collateral to obtain lending services. This allows users to obtain liquidity while holding NFT, and supports more NFT transactions.
re-pledge
The re-pledging scheme also brings new opportunities to the Ethereum ecosystem. This scheme can pledge Ethereum, lsdETH and LP tokens on other public chains, oracles, and middleware as nodes and get verification rewards to release the security of the ETH consensus layer. The re-pledging plan has a number of narrative logic blessings, including the expansion of the ETH consensus layer, the revitalization of LSD assets, and the capture of real income, which will be an important driving force for the next bull market of the ETH ecology. However, this plan also has some shortcomings, and attention needs to be paid to its upstream and downstream tracks and the decline in yields.
Taking Eigenlayer as an example, its re-pledging scheme becomes a verification node by pledging “ETH-like value assets”, and borrows the security of the main network by “violent means” of pledging and confiscating. The security of the consensus layer of the ETH network is guaranteed by the “potential confiscation risk” of pledged funds, which is what we often call violent means to maintain security. Therefore, this scheme makes full use of the biggest advantage of ETH – security, and expands the utility of the ETH consensus layer outward, similar to the shared security narrative of Cosmos2.0. This has brought new opportunities for the next round of bull market in the ETH ecosystem.
Source: Messari
Eigenlayer’s re-pledging scheme can serve as a continuation of the LSD narrative. Although the upgrade of Shanghai will bring about an increase in the total pledged amount of ETH, this is a stock market. Therefore, more attention should be paid to its upstream and downstream tracks, upstream DVT, downstream aggregators, and lsdETH re-staking. In addition, lsdETH acts as a loan asset>trading asset in DeFi, and its leveraged income limit is also limited, and the rate of return will gradually decrease with the TVL scale, so external income is needed to support such a large amount of lock-up. Eigenlayer’s re-mortgage scheme can bring higher value to LSD assets.
in conclusion
The role of block producers on Ethereum is rapidly evolving, and as community activity increases, so do their responsibilities and obligations. The implementation of the PoS consensus mechanism will have a profound impact on the income of miners, especially the reduction of block rewards and transaction fees. However, the PoS mechanism can create the deflationary conditions of Ethereum, increase network security, and improve network congestion. At the same time, MEV plays an important role in the Ethereum PoS ecosystem, which can improve the efficiency of DeFi and attract more participants.
For investing in MEV-related projects, it is recommended to pay attention to cryptocurrency exchanges or staking pool entities that provide staking services. These entities can provide staking services by providing deposit yields to users and insurance against failures in the validator’s technical setup. Additionally, institutions could consider investing in projects that help create a truly decentralized network of builders.
We believe that the interest pattern of Ethereum is becoming clearer, and the presence of verifiers begins to exceed that of miners. The reliance of censorship nodes such as Flashbots Relay in the Ethereum block space has led to censorship issues, and current solutions have not significantly reduced their dominance. The monopoly of mining pools may also appear. Validators and super nodes absorb ETH holders to lock assets, and the ecological vitality may be suppressed. Ethereum’s PoS withdrawal process may face complex problems, leading to different arbitrage/attack behaviors, such as monitoring the PoS network fines and slashing the secondary market stETH, etc. Attention should be paid to the impact of these issues on the Ethereum ecology.
We have also seen that the stSaaS model provides users with a more convenient way to participate in PoS pledge. Small and medium-sized centralized exchanges can improve the attractiveness and competitiveness of their exchanges by cooperating and competing with Lido, stSaaS and other DeFi protocols. In terms of staking, the launch of stSaaS staking service agreements such as Lido provides a more convenient way to participate in PoS staking. Small and medium-sized centralized exchanges can cooperate and compete with these agreements to improve the attractiveness and competition of their exchanges force. It is recommended that small and medium-sized centralized exchanges access Lido as one of the pledge options for their ETH and other PoS tokens to improve the liquidity and security of the exchange. At the same time, small and medium-sized exchanges can attract more users and liquidity by providing more LSD financial services and Staking options, and remain invincible in the highly competitive market.