If you’re reading this ensconced in a traditional finance career, you know the deal: If money is idle, make it do more work.
Are you, for instance, a broker with collateral quietly sitting in a vault? That’s boring! Do that rehypothecation thing! Use it to finance your own trades! (The Lehman Brothers–fomented global financial crisis of 2008 helps illustrate what can go wrong.)
The cryptocurrency biz has invented its own version of rehypothecation, called something else, of course: restaking. It caught fire on Ethereum (ETH) with the help of EigenLayer (which is inching toward an airdrop of its EIGEN token).
You’re reading Crypto Long & Short, our weekly newsletter featuring insights, news and analysis for the professional investor. Sign up here to get it in your inbox every Wednesday.
As a proof-of-stake blockchain, Ethereum’s plumbing relies on folks called validators “staking” their ETH to the network. Validators are rewarded for pledging their assets, given something akin to interest payments. But that ETH is locked up. Sitting idle. Financial engineers hate that, right?
With restaking, that locked-up ETH is kinda sorta freed up via the creation of a derivative, and the owner of that ETH can earn a bit more money. (So, too, can the restaking platform like EigenLayer that enables this.)
Many billions of dollars of ETH are now restaked. CoinDesk’s Danny Nelson just reported that several firms are trying to bring restaking to Solana (SOL), including a titan of that blockchain: Jito (JTO).
Not everyone is keen on the idea. To proponents, restaking can help make Solana startups’ blockchain-powered apps more secure. See Nelson’s story for some discussion of that. Critics fret over the systemic risks (if something goes wrong, the entanglements can get ugly real quick, as shown in 2008).
Meanwhile, ETH restakers are presumably happily earning more than the current Ethereum staking yield (3.13%, according to CESR).
It’s all fun until it isn’t.
MetaMask vs. MEV
Confession time: I’m both really curious about MEV (aka maximal extractable value) and really befuddled by it.
In the broadest terms, MEV involves validators tinkering with the order they add transactions to a blockchain to maximize their profit. To my (possibly naive?) eye, some of it resembles arbitrage. Some looks like front-running clients’ trades in TradFi.
As you can imagine, some people love it (they’re making money, either by engaging in MEV or by building tools that enable it or fight it or whatever it) and some hate it (they’re getting sandwiched).
Anyway, MetaMask, the widely popular Ethereum wallet, is introducing a new feature designed to protect MetaMask users from MEV. It reminds me of dark pools in TradFi: those stock trading platforms that obscure details of orders until they’re executed, to protect from those who want to move prices against the placers of larger orders.
Crypto has MEV, TradFi has high-frequency traders. There is (almost?) nothing new in the world of money.
Read the full article here
