In the Weeds #2
Welcome to Decentral Park’s new research sub-newsletter: In The Weeds.
This weekly instalment will focus solely on key technical developments and themes within Web3, keeping you ahead of the game on upcoming trends.
Let’s get stuck into this week’s key highlights.
1: EigenLayer
What is it? Since Flashbots modified the official Ethereum client to enable the use of off-chain auction systems for MEV, we have seen little innovation at the Ethereum base layer. This was true until EigenLayer came along.
EigenLayer is a staking primitive that allows validators to rehypothecate their staked ETH, used to secure Ethereum, to simultaneously secure other infrastructure and middleware layers. Note, the rehypothecation can be used to secure both Ethereum-based and non-Ethereum-based networks.
The result of this innovation is that the 16M ETH (~$22.4B) securing the Ethereum network at the time of writing becomes available to secure applications and services such as oracle networks and bridges. This removes the bottleneck requirement that these infrastructure and middleware services must develop their own security.
Each additional network would have its own risks based on network design and will be able to define specific criteria, such as the criteria under which a validator would be slashed. In return for securing additional networks, node operators opting into EigenLayer will receive additional staking yield from the networks it chooses to secure. This ultimately creates a marketplace for security.
Potential use cases include data availability services, oracle networks, bridges, RPC nodes, MEV management etc.
Why is it important? Given EigenLayer facilitates the ability for infrastructure and middleware services to leverage Ethereum's existing security, it removes all costs associated with establishing a unique security layer. EigenLayer could therefore be a material catalyst in the development of new infrastructure and middleware services.
EigenLayer could also play a pivotal role in the topical modular blockchain thesis, by providing modular blockchain applications and services with the ability to leverage Ethereum’s security, while optimising for execution/consensus and data availability layers.
Further to this, EigenLayer reduces systemic risk by dramatically enhancing the security of infrastructure and middleware protocols. These protocols are crucial to the sound functioning of the Ethereum ecosystem, for example, oracle networks that underpin DeFi.
Prior to EigenLayer, the need to build unique security mechanisms for each infrastructure and middleware protocol resulted in security that was far inferior to the security of the Ethereum network itself. At the time of writing, a 51% attack on Chainlink would theoretically cost ~$1.57B, 55X lower than the theoretical cost of a 51% attack on Ethereum.
Of course, there are risks that have to be considered when leveraging EigenLayer. These risks include slashing, given the rehypothecation exposes the original ETH stake to a second layer of slashing criteria that could be far harsher than those on Ethereum. Another risk of course is simple dApp and smart contract risk associated with EigenLayer itself. An infrastructure or middleware service could potentially steal staked ETH if there is a security flaw with EigenLayer.
Where does it go from here? EigenLayer CEO Sreeram Kannan has publicly stated that the target testnet launch date is February/March 2023, while the target mainnet launch date is between May and July 2023. We can reasonably expect that by EOY 2023 a marketplace for staked ETH rehypothecation will have gained traction. This marketplace could give ETH stakers a catalogue of services to whom they can supply their staked ETH, based on criteria such as the team behind the service, conditions for potential slashing, compensation, network design etc.
Given options on the EIgenLayer marketplace will vary in risk, insurance offerings for different rehypothecation strategies will pay out in the event that a service steals your stake through a security flaw.
The future of EigenLayer is not limited to new chains that will leverage rehypothecated staked ETH entirely, but also existing offerings with their own security sets. It is possible we see the development of dual-staking models for these services, such as Chainlink and Forta.
One crucial step in the adoption of EigenLayer will be due diligence performed by validators on which services to support. In the event that a very large subset of validators all opt to support a vulnerable service, it could result in the slashing of a large percentage of the ETH stake. To this end, it may be that limits are set in place, or that specialised due diligence services become a highly desired service.
2: Flashbot’s SUAVE
What is it? MEV, or Miner-Extractable Value, refers to the profit a miner can make through their ability to arbitrarily include, exclude, or re-order transactions from the blocks they produce. MEV has led to a host of negative externalities for Ethereum, with the development of priority gas auctions leading to congestion on the Ethereum network, and inflated gas fees.
Flashbots, a research and development organization formed to mitigate the negative externalities and existential risks posed by MEV, developed MEV-Geth and MEV-Boost to combat some of these negative externalities. However, one challenge remains, block builders are relatively centralised, with the top four block builders building over 80% of Ethereum blocks in the past seven days. This centralisation poses a significant risk to the security of the Ethereum network.
SUAVE, or the Single Unifying Auction for Value Expression, is an independent network that can act as a plug-and-play mempool (a pool of unconfirmed transactions) and decentralized block builder for any blockchain, developed by Flashbots. It aims to address the centralisation of block building that currently exists in the Ethereum network. SUAVE is open-sourced, thus promoting transparency, trust and collaboration.
Why is it important? By addressing the issue of block builder centralisation, SUAVE is safeguarding the decentralisation of the Ethereum network. Centralisation poses a threat in the sense that a small number of actors have a significant amount of control over the transactions that are processed on Ethereum. SUAVE is vital to the ultimate decentralisation of Ethereum.
SUAVE creates a more efficient market for block building, allowing users to transact with optimal execution. Additionally, it allows for honest MEV actors to profit more than dishonest ones, which aligns with Ethereum’s goal of preserving shared ownership and competition with a global ecosystem of permissionless actors.
Where does it go from here? The SUAVE roadmap is split into three stages, dubbed Centauri, Andromeda and Helios.
Centauri will see the launch of the SUAVE chain testnet. There is currently no public information regarding an estimated release of this testnet. Andromeda will see the SUAVA chain deployed to mainnet, while eliminating processes that rely on trust, and will mark the beginning of SUAVE adoption.
The final stage, Helios, looks to the future of SUAVE and references cross-domain MEV solutions. We may ultimately see SUAVE offering its decentralised mempool and block builder solution to various ecosystems beyond Ethereum, as well as building customised solutions for nuanced networks.
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3: Skiff
What is it? For a long time, true blockchain-native use cases beyond DeFi have been disputed, even in the face of a wave of NFT adoption. In the past few months on-chain social media has come to light, with the adoption of protocols such as Lens Protocol. Another exciting non-DeFi use case is the use of blockchain-verified email: a privacy-first, end-to-end encrypted, open-source, blockchain-native email. This is exactly what Skiff offers in their Skiff Mail product.
Skiff Mail connects directly to existing email infrastructure, enabling all the features we’ve grown to love since its inception in 1971. Only now, half a decade later, Skiff lets you sign in, send, and receive mail using a crypto wallet, to gain all the feature enhancements of a trustless blockchain. Skiff has integrated with ENS, to enable user-friendly domain name addresses.
Why is it important? As it stands, web3 onboarding requires a financial commitment, whether purchasing assets to participate in governance or paying for transaction fees. This acts as a huge bottleneck for potential users.
Skiff, and more broadly on-chain social/communication protocols, represents a path by which a user's first interaction with the blockchain is social and importantly, requires no financial commitment. This unlocks blockchain to the masses, and could ultimately create a shift in mindset to thinking about blockchain technologies as a utility, as opposed to a financial hub.
What’s important to note here is that email on Skiff is indistinguishable from non-blockchain-enabled email. Onboarding could occur while users aren’t even fully aware that blockchain is powering their service provider.
Where does it go from here?: The qualities of being privacy-driven, end-to-end encrypted and open-source are inherent to blockchains and can be extended to other use cases beyond email. Skiff currently offers Pages, a competitor to Google Documents and Notion, Drive, a competitor to Google Drive, and a calendar product. All of these products are blockchain-enabled and inherently share the same qualities as Skiff Mail.
Given the inherently superior features to web2 alternatives, we’ll see an explosion of blockchain-enabled offerings for all of the above-offered products. In terms of user adoption, it will likely be limited over the coming year as the stigma attached to the web3 brand persists.
The real adoption will arise once 1) existing large providers adopt the technology on their back-end and/or 2) competitors utilising blockchain technology gain trust from retail users because of the technical superiority of the offering itself. Both seem like reasonable outcomes.
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