“In this journey towards freedom of money,” he wrote in response to the CFTC lawsuit, “we do not expect everything to be easy.”

Crypto’s Richest Man Is Waiting Out the Chaos

What has the market learned one year after the UST fiasco?

Bankless Writer:&nbsp;<a href="https://twitter.com/563defi?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">563</a>The death spiral of Terra USD (UST) and the corresponding collapse of LUNA squashed hopes of 2022 all-time highs in the crypto markets, toppling the first (of many) leverage dominos scaffolded by cheap money, hype, and outright fraud. Billions of dollars and countless fortunes were wiped out in a matter of days from users that placed their hopes in UST’s idealistic algorithmic design.Many early supporters of the Terra ecosystem were enthralled with the notion of a completely decentralized stablecoin. And while UST’s architecture was ultimately shown to be unsustainable, some would argue that the idea that DeFi users should completely segregate themselves from traditional systems is a very worthwhile goal.So as we reflect, one year later, we ask ourselves, “What have we learned?” and “Where are we now?”<hr>While algorithmic ("algo”) stables have lost favor (though USTC, at one-and-a-half cents, still commands a $150M market cap), the broader stablecoin sector has gone on to cement its product-market fit. Whether that is to represent a medium of exchange or just a store of value during bearish periods, today’s DeFi market is awash with stables.The only problem?&nbsp;We’re trending in the wrong direction.Though many felt comfortable relishing in their USDC and laughing at the Terra bagholders, all of DeFi got a reality check in March when<a href="https://decrypt.co/123211/usdc-stablecoin-depegs-90-cents-circle-exposure-silicon-valley-bank?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">&nbsp;USDC de-pegged below 90 cents</a>&nbsp;after it was discovered Circle had funds tied up in the now-defunct Silicon Valley Bank. Users flocked to the relative “safety” of USDT (and just saying this feels wrong).<img class="PlaygroundEditorTheme__image editor-image" src="https://hx24-prod.mars-block.com/image/news/2023/06/01/1685584563911024.png" alt="USTC" width="inherit" height="inherit">via&nbsp;<a href="https://twitter.com/dgntec/status/1634621865485271041?s=20&amp;ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Twitter</a>For a point of comparison, in April of 2022, the market cap of stables was roughly 82% centralized (major culprits being USDT, USDC, BUSD, and TUSD). Today - we’re at about 95% centralization. Tether (USDT) alone has ballooned from making up 44% of total stablecoins to over 63% today, following the USDC de-peg. Not a great look.So, on one side of the spectrum, we have algo stables, which (while decentralized) are vulnerable to death spirals. And on the other, we have centralized fiat-backed stables, which are open to both bank failures and censorship. How do we reconcile this?Lucky for us, these bearish times have been the ideal environment for buildoors to hunker down and do what they do best – innovate.In today’s article, we’re going to walk through a few of the new decentralized stablecoin projects that excite us. And these new projects aren’t just improving the anti-fragility of token designs – novel mechanisms and truly innovative use cases for stablecoins are around the corner as well, threatening to chip away at Tether’s dominance and provide some much-needed decentralization to the market.<h3 class="PlaygroundEditorTheme__h3">1. Curve’s crvUSD</h3>Curve Finance is DeFi's go-to platform for stablecoin trading.It’s difficult to overstate the market impact that Curve has imposed since entering the space. Whether it is innovating on the AMM model with their stable pools or reinventing tokenomic design with their vote-escrow architecture and subsequent gauge mechanics, there is a good reason why entire ecosystems are built on top of this mainstay.<img class="PlaygroundEditorTheme__image editor-image" src="https://hx24-prod.mars-block.com/image/news/2023/06/01/1685584592500572.png" alt="USTC" width="inherit" height="inherit">Via&nbsp;<a href="https://twitter.com/0x_koro/status/1654423692783529984?s=20&amp;ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Twitter</a>In the same way that users can mint DAI against their ETH using Maker, Curve users will soon be able to mint crvUSD against assets on Curve (such as ETH and its derivatives). With their new<a href="https://mirror.xyz/albertlin.eth/H0m3nyq65anotTWhTdWDIWEfMPOofNPy-0qyARYXNF4?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">&nbsp;Lending-Liquidating AMM Algorithm, or LLAMMA</a>, Curve intends to improve upon DAI’s tried-and-true Collateralized Debt Position (CDP = “a loan”) stablecoin design.Here is the ELI5 version on why crvUSD liquidations could be a big improvement over legacy designs:<ul class="PlaygroundEditorTheme__ul"><li value="1" class="PlaygroundEditorTheme__listItem">Collateral is liquidated gradually over a range of prices, instead of instantaneously when the liquidation price is reached. This reduces the chance of market volatility from large-scale liquidation.</li><li value="2" class="PlaygroundEditorTheme__listItem">The design of crvUSD aims to offer lower prices on Curve's AMM, which incentivizes liquidators to arbitrage the difference on external DEXs. Additionally, the strategy of gradual liquidations reduces the need for external DEX liquidity and, consequently, the likelihood of bad debt accumulation.</li><li value="3" class="PlaygroundEditorTheme__listItem">Liquidations can be reversed if prices rebound back above the liquidation price. This means that “scam wicks” won’t be a major worry for borrowers.</li></ul><h3 class="PlaygroundEditorTheme__h3">2. TapiocaDAO’s USDO</h3>Liquidity is the lifeblood of financial markets — without it, incentives dry up and economic activity limps.Today, stablecoin liquidity resides in its own little bubbles scattered around DeFi. While we can say that $130B of stablecoins exist, not all ecosystems are created equally. And if your protocol exists in a market with a low allocation of capital, you’re fighting against gravity.<img class="PlaygroundEditorTheme__image editor-image" src="https://hx24-prod.mars-block.com/image/news/2023/06/01/1685584599694116.png" alt="USTC" width="inherit" height="inherit">Source:&nbsp;<a href="https://defillama.com/stablecoins/chains?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">DeFi Llama</a>TapiocaDAO is building an omnichain decentralized bank — where users can borrow, lend, and mint their stablecoin (USDO) seamlessly across ~17 EVM and non-EVM chains (and counting) — all with no bridges involved. Tapioca does this by utilizing LayerZero’s generalized messaging network as its omnichain infrastructure, with the goal being to build a robust stablecoin for our multi-chain future.USDO is another CDP design that uses network gas tokens (like ETH, MATIC, etc.) and their LSDs as collateral. Beyond simple transfers of funds, omnichain lending, borrowing, and leveraging is possible. For example, you could:<ul class="PlaygroundEditorTheme__ul"><li value="1" class="PlaygroundEditorTheme__listItem">Mint USDO on Berachain by opening up a Collateralized Debt Position (CDP = “a loan”) against your stMATIC on Polygon, which can be leveraged up to 5x with a single click</li><li value="2" class="PlaygroundEditorTheme__listItem">Borrow USDO on Starknet by using your yield-bearing jGLP on Arbitrum as collateral, where your yield will help pay off your loan</li><li value="3" class="PlaygroundEditorTheme__listItem">Lend out your USDO from zkSync to users on any of the ~<a href="https://docs.tapioca.xyz/tapioca/information/supported-chains?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">17 chains</a>&nbsp;supported by LayerZero — a massive improvement in capital efficiency over legacy lending platforms</li></ul><img class="PlaygroundEditorTheme__image editor-image" src="https://hx24-prod.mars-block.com/image/news/2023/06/01/1685584604003424.png" alt="USTC" width="inherit" height="inherit">DeFi’s liquidity fragmentation problem has been the bane of established and budding protocols alike. With Tapioca’s use of LayerZero, we might soon see the day where new projects are not forced to default to the liquidity market leader.<h3 class="PlaygroundEditorTheme__h3">3. Redacted Cartel’s DINERO</h3>Redacted Cartel, famous for their establishment of meta-governance and their unrivaled bribe marketplace, Hidden Hand, is now peering into the world of stablecoins and LSDs with their much-anticipated announcement of the Dinero project.<img class="PlaygroundEditorTheme__image editor-image" src="https://hx24-prod.mars-block.com/image/news/2023/06/01/1685584612121772.png" alt="USTC" width="inherit" height="inherit">via&nbsp;<a href="https://twitter.com/0xMughal/status/1644032602356215808?s=20&amp;ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Twitter</a>The<a href="https://github.com/redacted-cartel/dinero-litepaper/blob/master/Dinero%20Protocol%20litepaper%20-%2020230406%20-%20v1.0.pdf?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">&nbsp;initial litepaper</a>&nbsp;released in April revealed the basic design and motivation behind Dinero. In essence, Dinero aims to provide users with premium Ethereum blockspace via a private RPC (remote procedure call), called the Redacted Relayer. RPCs are what send transaction data from dApps/wallets to a blockchain.Instead of using a default RPC for transactions, using the Redacted Relayer offers up some advantages:<ul class="PlaygroundEditorTheme__ul"><li value="1" class="PlaygroundEditorTheme__listItem">Protection against malicious actors looking to exploit MEV opportunities (<a href="https://www.bankless.com/eths-top-5-gas-guzzlers?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">hi Jared!</a>)</li><li value="2" class="PlaygroundEditorTheme__listItem">Meta transactions – the ability to use the DINERO stablecoin for gas payments instead of ETH</li><li value="3" class="PlaygroundEditorTheme__listItem">Once a certain scale is reached, private transactions and additional use cases such as<a href="https://www.youtube.com/watch?v=4t7qbv4Wzn4&amp;ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">&nbsp;payment for order flow</a>&nbsp;become a possibility</li></ul>The DINERO stablecoin itself is a CDP that is overcollateralized by a combination of USDC and Redacted’s own LSD, pxETH; where the ETH that is used to mint pxETH is used to run Redacted’s validators. This closed-loop system allows Redacted to carve out a cozy ecosystem of blockspace in which to operate. By marketing DINERO as the medium of exchange and gas token on their blockspace island, Redacted is flipping the script – offering up a novel use case that is unique to their stablecoin.<h3 class="PlaygroundEditorTheme__h3">The trend going forward - on-chain and overcollateralized</h3>For the decentralization-maxis among us (myself included), 2023 is shaping up to be an exciting year for stablecoin innovation.With most projects shying away from algorithmic designs and veering towards overcollateralization, the likelihood of a UST-esque death spiral is diminishing with every subsequent code commit.Even Frax, who’s own moniker refers to its fractionalized architecture, has<a href="https://snapshot.org/?ref=bankless.ghost.io#/frax.eth/proposal/0x6d43531f54de3d52ad439dcb6c56e3eae1b833fceb4d484dcb3b20be070ca25d" class="PlaygroundEditorTheme__link">&nbsp;decided to become fully collateralized</a>&nbsp;– showing that the market’s appetite for “unstable stables” is at a new all-time low. We’re also observing experiments with non-pegged DeFi-native assets such as&nbsp;<a href="https://medium.com/reflexer-labs/stability-without-pegs-8c6a1cbc7fbd?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Reflexer’s RAI</a>&nbsp;in the works, pushing the boundaries of the centralization/decentralization dichotomy.In total, we see that DeFi users are excited about having decentralized stablecoins that are fully-backed by on-chain assets. And whether the future is dominated by crvUSD, USDO, DINERO, FRAX, RAI, or something new, at least we can all agree, it’d be better than Tether dominance.

Terra

Stablecoins

Stablecoins: 1 Year After Terra

The purpose of this post will be to explain in detail the argument why, in my view, a certain subset of these techniques brings high systemic risks to the ecosystem and should be discouraged and resisted.

Ethereum

Vitalik : Don't overload Ethereum's consensus

After Taproot, BTC Holders No Longer Need wBTC for DeFi

BITCOIN

DeFi

DeFi on Bitcoin: Breakthrough or Bubble?

MEV, Incentive Re-Engineering, and the Perennial Perils of Decentralized Systems

Flashbots

MEV and Flashbots: The Uniquely DeFi Tale

There seems to be a common misconception that Ethereum only scales via L2s.

There seems to be a common misconception that Ethereum only scales via L2s. I may harbour some blame for that for writing aggressively about L2 rollups and not covering the L1 scaling roadmap enough, for which I apologise - here I’m attempting to fix that mistake now that L2s are well understood, accepted and adopted by the space. Arbitrum One, in particular, has arguably proven itself as&nbsp;<a href="https://polynya.mirror.xyz/1ZTJ3_BG2-wnBTy6dJLM5E3TPH8wvLGKQVDAnv7VLIw" target="_blank" rel="noreferrer" class="PlaygroundEditorTheme__link">the #2 smart contract chain</a>&nbsp;after Ethereum L1 by economic activity.But first, an even worse version of this is “ETH” scales only with L2s. To be clear, ETH as a monetary asset scales via L1, sidechains, other L1s, L2s, L2-like constructions like validiums and optimistic chains, and indeed, even CEXs and centralized service providers.There’s&nbsp;<a href="https://l2beat.com/bridges/tvl" target="_blank" rel="noreferrer" class="PlaygroundEditorTheme__link">millions of ETH bridged to L2s and non-L2 chains</a>&nbsp;alike and untold millions more to non-blockchain venues. Yes, ETH on L1 and (mature) L2s offer you native security guarantees, but even though the other solutions may have different security assumptions, they still scale ETH or ether, the asset. As an aside, indeed, BTC is the perfect example of an asset that scales largely via centralized services, and it’s still the dominant asset in the industry. Remember - all you need for an asset to be valuable is for the top 1% wealthy people, families and institutions to believe in it.Of course, this doesn’t mean Ethereum scales, my point is it’s imperative to distinguish ETH or ether from Ethereum. Now, there’s further nuance to this. For example, BSC scales Ethereum’s tech stack, and it does bridge ETH and ERC-20s, but some may argue it does not scale Ethereum the network.With that little side-rant aside, let’s get back to upgrading Ethereum L1 to zkEVM. Actually, before, that usual disclaimer - I’m an amateur blogger, I have zero&nbsp;knowledge&nbsp;experience on how blockchain development works, and I have no idea if what I’m talking about is even possible. So, just take it as an armchair hobbyist day-dreaming.Scaling blockchains using ZKPs is an old concept. I don’t know when it was first talked about, but I believe it was about Bitcoin and predates Ethereum itself. ZK-SNARKing Ethereum specifically also predates the concept of rollups. Of course, research on ZK-SNARKing Ethereum went into overdrive when ZK rollups proved the concept in Q1 2020 with Loopring and later in Q2 with StarkEx and zkSync (now Lite) and also Mina. In 2021, I believe it was Matter Labs that popularized the “zkEVM” terminology, which stuck.&nbsp;<a href="https://github.com/privacy-scaling-explorations/zkevm-specs" target="_blank" rel="noreferrer" class="PlaygroundEditorTheme__link">Ethereum Foundation’s Privacy &amp; Scaling Explorations team is the primary innovator on L1-zkEVM</a>, later joined by Scroll, Consensys, Taiko and other contributors.Is it zkEVM, ZK-EVM, ZkEVM, Zkevm? Who knows, but let’s just call it zkEVM.So, how will the L1 zkEVM upgrade work? There are many ways to do it, but here’s my perception. Once again, I have no idea if it’s even possible, so just take it as concept art.The first step is to see Type-2/2.5 and Type-1 zkEVM rollups battle-test the concept in production - upcoming projects include Scroll, Linea (?) and Taiko, get proving times down etc. The next (these happen in parallel, so saying “next” may be misleading) pre-requisites are EIP-4844, statelessness and PBS. (Note: of course, zkEVM can be done without these, but I’m going to just talk about how I perceive it, as mentioned above.)Next, I’d like to see an&nbsp;<a href="https://twitter.com/apolynya/status/1629651981768990720" target="_blank" rel="noreferrer" class="PlaygroundEditorTheme__link">Enshrined zkEVM bridge</a>. This will allow Type-1 zkEVMs to be deployed on top of L1. This will battle-test the exact code and zk circuits that’ll eventually be used for L1 zkEVM. It’ll also allow L2s to exist fully decentralized without any smart contracts - effectively enshrined L2 zkEVM rollups. These will plug in to the PBS infrastructure, with builders acting as sequencers. You only need one honest builder. These builders will sequence blocks and submit to L1 every slot. This means finality of these enshrined rollups will be identical to L1. This will also open up fun new possibilities like atomic composability between these enshrined rollups.It’s worth noting that Type-1 zkEVM rollups can exist outside of such an enshrined zkEVM bridge - like Taiko - so perhaps we can differentiate by calling these Type-0? To be clear that these use identical code to the future L1 upgrade.Once these are battle-tested in prod, the L1 execution layer is finally ready for the zkEVM upgrade. Once again, builders will sequence transactions, generate proofs and submit proofs and data to the consensus layer. Note that for the L1 zkEVM, the proofs are now verified on the consensus layer. Builders will not just generate validity proofs, but also verkle/state proofs and data availability/kzg proofs. Non-builder nodes will then simply have to verify these proofs, effectively verifying a gazillion TPS - including on L2s, L3s, whatever, all of this is proven by a single succinct proof of the L1 zkEVM, one proof to rule them all - on consumer smartphones or laptops.The enshrined zkEVM bridge will continue to exist on top of the L1 execution layer. An alternate approach would be to move this to the consensus layer, and we can have many enshrined L1 rollups. But I believe the best approach is to have one canonical L1 enshrined rollup. As an aside, I used to call them “canonical rollups” in 2021, later I saw Justin Drake refer to the same idea as “enshrined rollups” and that nomenclature has stuck. So, anyway, you have one L1 enshrined rollup, many Type-0 enshrined L2 rollups on top, and of course, traditional L2s and sovereign rollups.At this point, it’s important to note that enshrined L2 rollups come with their own set of trade-offs. By the time all of this happens, zkEVM will be very slow-moving, there’ll be throughput and functionality restrictions, and we may only have an upgrade every few years, if ever. There’ll also be no governance or sovereignty - they’ll be completely enforced by Ethereum noderunners. As a result, the innovation will always be on traditional L2s, which in a mature state would have&nbsp;&gt;99%&nbsp;of benefit of the enshrined rollups without any of their drawbacks, and I expect &gt;90% of users to continue on them. Traditional L2s, L2-like hybrids like validiums or optimistic chains, enshrined L2s, and enshrined L1 rollup all offer different tradeoffs and functionality to users, and I believe all combined they’ll be able to satisfy almost every need in the blockchain ecosystem for decades to come.Of course, it’s just as likely that all of this is overkill, we don’t really need so much throughput, and it’s more prudent to ossify L1 as is, and we may never see zkEVM on L1. Even if it happens, I’d say we’re looking closer to the end of the decade. Who knows? But I for one would like to see the vision come to life because it sounds fun. I’ll leave you with an old post,&nbsp;<a href="https://polynya.medium.com/fanciful-endgame-5e760d427076" target="_blank" rel="noreferrer" class="PlaygroundEditorTheme__link">Fanciful Endgame</a>. Of course, things have evolved since, but the spirit remains.

Ethereum L1 zkEVM

Staking

5 Staking Opportunities for Beginners

A Q&A Session With CT Influencers About What’s Next in Web3

Web3.0

Crypto Twitter Talks 2023 Trends

And A Thorough Review of the Breathtaking 2022 on MEV's Top Protocols, Best Bots, and much more that you can't afford to miss.

MEV Outlook 2023: Walking Through the Dark Forest

The long-awaited Shanghai and Capella upgrades go live today. It's a big moment for the Ethereum network – one that skeptics thought might never come!

Bankless Writer:&nbsp;<a href="https://twitter.com/JackInabinet?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Jack Inabinet</a>The moment has arrived: withdrawals are finally being enabled!Last September,&nbsp;<a href="https://www.bankless.com/ethereum-merge-launch-release-date-roadmap?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Ethereum developers implemented the Merge</a>, hot-swapping out the original proof-of-work (PoW) consensus layer for the proof-of-stake (PoS) Beacon Chain that had been running in parallel to the canonical chain since its launch in December 2020,&nbsp;<a href="https://consensys.net/shanghai-capella-upgrade/?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">reducing</a>&nbsp;ETH issuance by 88% and energy consumption by 99.95%.<div data-lexical-tweet-id="1570309366187978752">https://twitter.com/i/web/status/1570309366187978752</div> Post-Merge, Ethereum is secured by stakers, instead of miners.Stakers each post a 32 ETH bond to the Beacon Chain to store network data, process transactions, and add blocks in exchange for ETH rewards for securing the network. Stakers, however, have been unable to withdraw accrued&nbsp;<a href="https://blog.stake.fish/ethereum-consensus-and-execution-layer-rewards/?ref=bankless.ghost.io#:~:text=The%20consensus%20layer%20rewards%20awarded,and%20participating%20in%20sync%20committees." class="PlaygroundEditorTheme__link">consensus layer rewards</a>&nbsp;or their initial 32 Ether collateral from the Beacon Chain. That paradigm changes&nbsp;today.For everything you need to know about this historic network upgrade for Ethereum, check into&nbsp;<a href="https://www.bankless.com/guide-what-is-shanghai-capella-shapella?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">yesterday's Bankless newsletter</a>.With Shapella unlocking such a massive amount of ETH, Crypto Twitter has been awash with immediate-term market price predictions. Yet, the flows and their impact on price are only a portion of the story.Today, we take a look at why you should care about the Shapella upgrade:<h2 class="PlaygroundEditorTheme__h2"> The Great Derisking</h2>Staking is being derisked, the age of the Internet Bond is upon us, and crypto will never be the same.Solo staking and staking-as-a-service (SaaS) offerings allow crypto participants to generate yield on Ether, however, users’ stake remains locked and is unable to be sold or transferred.Liquid staking derivatives (LSDs), including Lido’s stETH and Coinbase’s cbETH, are an attempt to solve this problem of illiquidity. LSDs have captured over $14.5B in total-value-locked and enable ETH holders to earn yield while retaining liquidity on staked ETH.<h3 class="PlaygroundEditorTheme__h3">Subpar Stand-Ins</h3>For many Ethereians, LSDs have become the&nbsp;de facto&nbsp;method of staking, representing 42% of all ETH staked.Despite improved liquidity offered by LSDs, these instruments are popularly misunderstood as being "pegged" 1:1 to ETH like stablecoins are supposed to be pegged to the value of a dollar. But LSDs can be inherently less liquid than the underlying ETH collateral.This flaw was on full display during periods of a credit crunch. During the liquidations of 3AC and Celsius stETH positions beginning in May 2022, stETH depegged by 6% over the next month and a half, creating a crisis of confidence for LSD holders who, without withdrawals enabled, had little more than a promise of eventual future redeemability to maintain the peg.<img class="PlaygroundEditorTheme__image editor-image" src="https://lh3.googleusercontent.com/G2SsTygBA9WDQj4K1TErIeXUhmlTWWz1xcq1dl3mI7kRfcpU4aBMkAnxDxfg8YV70srgeEFHVHMBrIfsHj4Wl85xFfNBBFULGUpqkm_BjRegMiW0DTelcKQX8_UAP8rqlqBWA3vUPUduAJYz" alt="" width="410" height="271">Source:&nbsp;<a href="https://dune.com/LidoAnalytical/Lido-Finance-Extended?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">Dune Analytics</a><h3 class="PlaygroundEditorTheme__h3">Tax Headaches</h3>Staking derivatives also pose numerous tax and regulatory hurdles for many sophisticated institutional investors. Take Lido’s stETH, for example. This go-to staking derivative, representing 74% of the ETH LSD market, is a&nbsp;<a href="https://docs.lido.fi/contracts/lido/?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">rebasing</a>&nbsp;token and&nbsp;creates a taxable event&nbsp;for its holder every time a rebase occurs. For tax-sensitive investors, this is a non-viable option.While investors may consider ETH to be a commodity, the conclusion cannot be easily drawn for many forms of staking.Many crypto exchanges, decentralized protocols, and SaaS providers pool staking returns to provide consistent yields to investors. This imbues their programs with security-like properties, a feature the SEC was keen to kibosh in their recent Kraken&nbsp;<a href="https://www.sec.gov/news/press-release/2023-25?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">settlement</a>.Further muddying the regulatory waters, protocols like Lido and RocketPool have previously chosen and continue to incentivize liquidity on their LSDs. An argument can be made that these incentives further contribute to the security-like properties of the derivatives, as maintenance of the peg is partially dependent on token emissions.<h3 class="PlaygroundEditorTheme__h3">A Magical Solution</h3>For the first time since the inception of the Beacon Chain, SaaS and solo staking solutions are viable options for ETH holders looking to retain liquidity of stake. All it took was two Ethereum Improvement Proposals (EIPs) plus an Ethereum hard fork! Enabling withdrawals is a game changer for sidelined institutions and hardline "not my keys, not my crypto" users.As&nbsp;<a href="https://fortune.com/crypto/2023/04/08/ethereum-shanghai-upgrade-ether-crypto-markets/?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">put</a>&nbsp;by the CTO of a London-based staking firm, institutions are finally able to access liquidity on their stake while retaining control, and no longer must argue “with the taxman that [they’ve] sold [their] Ether and swapped it for magic beans.”And just like magic, avoiding complicated tax headaches and potential SEC enforcement actions -- while earning risk-free yield at the protocol level and retaining liquidity on staked ETH -- is now easier than ever. Not only do today’s upgrades provide liquidity of stake outside of LSD solutions, they also allow the market to begin to reallocate stake and chip away at Lido’s massive 31% control of the validator set.Shapella empowers stakers and is a crucial step to further the decentralization of network security.<h2 class="PlaygroundEditorTheme__h2">Internet Bond</h2>Gigabrains have&nbsp;<a href="https://www.bankless.com/eth-the-internet-bond?ref=bankless.ghost.io" class="PlaygroundEditorTheme__link">long</a>&nbsp;drawn parallels between Ethereum staking and fixed income instruments in TradFi.In exchange for providing 32 ETH as validator collateral (principal), stakers accrue rewards (interest). This relationship does not depend on any party’s ability to repay the loan and is instead backed by the future economic activity of Ethereum, in the form of fee revenue. Essentially, staking on Ethereum is an indefinite perpetuity with zero risk of default.<h3 class="PlaygroundEditorTheme__h3">Moving to Market</h3>For a finance nerd like&nbsp;moi, Shapella is a huge development.&nbsp;Lending rates&nbsp;in traditional financial markets are often calculated as&nbsp;a spread over a risk-free rate&nbsp;(typically represented by specific maturity US Treasury yields).The spread between the risk-free rate and cost of borrowing is intended to capture additional risks (particularly default risk) of lending to borrowers other than the U.S. Government. Treasuries trade daily, with yields respondent to supply and demand forces, intersecting at the market rate. Sadly, despite having near-zero default risk (similar to US Treasuries), ETH staking yield has failed to gain traction as crypto’s risk-free rate as it has fallen short of being a market rate.The yield paid out by the network on Ether is a function of two variables:&nbsp;Number of Validators&nbsp;and&nbsp;Fees Generated.&nbsp;As the number of validators increases, fees are distributed to an increasingly large validator set, decreasing the expected revenue of a given node, somewhat subsidized by a higher rate of ETH issuance.Currently, the market can only respond to&nbsp;increases&nbsp;in relative attractiveness of the ETH staking opportunity. As ETH holders see staking yields increase in attractiveness relative to alternative yield sources, more market participants are willing to stake. In theory, the market responds to attractive staking rewards by increasing the number of validators, arbitraging away the temporary opportunity.Until now, we have been unable to respond to&nbsp;decreases&nbsp;in the relative attractiveness of staking, resulting in artificially low yields during periods of limited block demand or when enticing investment alternatives surface. Capital flight from staking has not been an option; post-Shapella, this dynamic changes. Stakers can now withdraw their 32 ETH from the Beacon Chain to chase yield or run for the exit when the risk-free rate is no longer sufficiently attractive.Due to the constraints of PoS consensus, necessary withdrawal and exit queues limit rapid exodus from staking. Similar mechanisms exist in traditional finance, with circuit breakers halting asset trading at predefined bounds. While not a perfect “market rate,” with Shapella, Ethereum has taken its final step to&nbsp;establish itself as&nbsp;the&nbsp;internet bond.The question “how much does money cost?” is the basis of finance, and the risk-free rate of return is the backbone of that system. Shapella transforms Ethereum’s staking rewards rate into something more closely resembling a market risk-free rate.If Ether is to become a money, having a native US Treasury-like, risk-free rate serving as the cornerstone for loan pricing and financial valuation will go a long way in fostering adoption, especially among the finance professionals and institutional investors the space has had limited success in attracting.<h2 class="PlaygroundEditorTheme__h2">Historic Moment</h2>Forget the flows, over the long term, enabling withdrawals will serve as a major derisking moment for a variety of crypto market participants for whom LSDs simply didn’t cut it.And no matter what happens in the immediate-term, today will go down as a pivotal moment in crypto history: Ethereum’s Shapella upgrade represents the largest step towards establishing a crypto-native monetary system since the launch of the Beacon Chain.

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