Bessie Liu

Decentralizing Ethereum layer-2 solutions has been an ongoing challenge for ecosystem participants, but Figment Capital thinks that distributed sequencer technology (DST) could put an end to this headache.



Sequencers are blockchain nodes run by layer-2 solutions to reach consensus. They are a critical tool to help build and propose blocks, and significantly reduce the cost to transact on Ethereum.&nbsp;



In today’s ecosystem, layer-2 solutions largely maintain only one sequencer — meaning that it is subject to centralization risks.&nbsp;



If rollups end up being centralized systems built on top of a decentralized network, then it defeats the purpose of having a decentralized system in the first place, Dougie DeLuca, an investor at Figment Capital, told Blockworks.



“We came up with a new idea for a potential sequencer design,” DeLuca explained. “What we’ve been ideating is a new solution that can essentially serve as a stop gap solution until a more complex and maximally decentralized design is available to be used.”



This design is largely similar to distributed validator technology (DVT), where the responsibilities of a validator are distributed across different operators or machines.



“Right now with validators you have one operator, one machine, and if a validator becomes compromised or goes offline, they would be subject to slashing conditions — which basically means they will get penalized for not doing the work that they’re supposed to do,” DeLuca said.&nbsp;



With DVT, you can have one validator being serviced by six different machines, DeLuca noted.&nbsp;



“What that accomplishes is fault tolerance, which means if one sub-validator cluster goes offline, the other five are still working as intended, so as a result we get a more resilient network,” he said.&nbsp;



DVT also enables features such as network geographic distribution — making networks less prone to regulatory risks and network outage (such as the <a href="https://blockworks.co/news/beacon-chain-temporarily-stops-finalizing">most recent Etheruem outage</a>).



Using DVT as a framework, DeLuca noted that he and other Figment team members had an idea of repurposing it for sequencers.



“There are people using it today who can testify that it works, so instead of thinking of a brand new design that would take forever to implement, let&#8217;s think of something that can be used in the mid-term…so just like DVT, DST can be applied to a single sequencer and it can distribute responsibilities of running the sequencer across a cluster of machines and operators,” he said.



Although Figment Capital will not be building out the technology themselves, DeLuca shared that Obol Network is currently having conversations with different rollup teams to explore the possibilities of this technology.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Figment Capital wants to bring distributed validator technology to sequencers

Drew Mailen

Decentralization isn’t a spectrum. It is one side of a sliding scale. And in crypto, finding an objective middle that distinguishes between centralized and decentralized projects is close to impossible.&nbsp;



It is a subjective endeavor where projects can only measure their degree of decentralization or centralization in relation to each other. And because this measurement is essential to communicating how resistant a blockchain is against censorship and attacks, centralization accusations from competing projects are a common and persistent occurrence.&nbsp;



It is no surprise, then, that the debate on Ethereum decentralization surged after its <a href="https://cms.blockworks.co/ethereum-switches-to-proof-of-stake-after-7-years-of-work/" target="_blank" rel="noreferrer noopener">transition to proof-of-stake</a>. After such a major event, investors and builders across the crypto community were motivated to defend the decentralization ranking of their consensus protocol.



Read more: <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">Proof-of-Work vs. Proof-of-Stake: What’s the Difference?</a>



We spoke with the experts at Figment, a leading <a href="https://www.figment.io/staking" target="_blank" rel="noreferrer noopener">institutional staking service provider</a>, to separate the signal from the noise in this debate. Instead of asking the black-and-white question of, “Is Ethereum now centralized?,” we asked how the network now compares to the rest of the industry. In short, Figment has reported that a deep analysis of on-chain metrics indicates that Ethereum decentralization has increased since the Merge.



A thorough examination of this data will address the concerns and accusations from competing chains.&nbsp;



<h3 class="wp-block-heading">Ethereum decentralization — can only three entities halt the blockchain?</h3>



Only hours after Ethereum’s successful Merge to proof-of-stake (POS), various critics propagated a rumor that just three entities now have the power to halt the chain. This alarming accusation was quickly refuted with a closer examination of the stakers in question. Figment’s research team explained that some of these entities are composed of several or dozens of independent operators. Take Lido, for example.&nbsp;



Lido represents the <a href="https://beaconcha.in/charts/pools_distribution" target="_blank" rel="noreferrer noopener">largest entity on Ethereum by stake</a>. At the time of publication, more than $5 billion worth of ETH is staked on Lido. Although that seems like a lot of Ethereum in one place, Lido is composed of about 30 independent operators — Figment being one of them. Additionally, the cumulative deposits have grown to over 4,000,000 ETH, and the number of Lido’s unique depositors has increased to over 90,000 depositors as of Oct. 16.&nbsp;



<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="936" height="387" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg" alt="Lido unique depositors and Lido cumulative deposits" class="wp-image-36843" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=936 936w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Lido-unique-depositors-and-Lido-cumulative-deposits-1.jpg?w=50 50w" sizes="(max-width: 936px) 100vw, 936px" /><figcaption>Lido unique depositors and Lido cumulative deposits | Source: <a href="https://dune.com/LidoAnalytical">@LidoAnalytical</a> via Dune</figcaption></figure>



To attempt a 51% attack, you’d need collusion from all 29 Lido operators and two other major validators. Even if all entities colluded, the remaining honest validators could decide to keep building on the minority chain and ignore the attacker&#8217;s fork.&nbsp;&nbsp;



Secondly, if an attacker attempted to revert a finalized block, they would commit to losing at least one-third of the total supply of staked ETH. Because finality <a href="https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/" target="_blank" rel="noreferrer noopener">requires a two-thirds majority</a>, the attacker would effectively need to meet that requirement to get around the penalty. It is important to bear in mind that this explicit penalty — slashing — did not exist for miners on POW Ethereum. In other words, miners only needed to contend with opportunity cost as a deterrence to attack the network. The point is that, regardless of level, diversity on a post-Merge Ethereum is a difference in kind than what it was pre Merge.



It is clear that the cumulative stake of Lido validators does not present an existential threat to Ethereum. When compared to the number of validator participation prior to the Merge, the network has moved toward greater diversity and security. But community participants still <a href="https://research.lido.fi/t/should-lido-on-ethereum-be-limited-to-some-fixed-of-stake/2225" target="_blank" rel="noreferrer noopener">debate the extent of power Lido validators have</a> over other staking protocols and independent validators.&nbsp;



<h3 class="wp-block-heading">Wen withdrawal?</h3>



Ethereum critics argue that the inability to withdraw their staked ETH removes the ability and leverage needed to keep validators accountable. While it is true that withdrawals are currently frozen, anyone can exit a validator set at any time. So if a validator did something a token holder disagreed with, they could exit in protest. Their ETH would still be inaccessible, but neither the validator nor the token holder will earn rewards from those tokens..&nbsp;



Secondly, the option to <a href="https://www.youtube.com/watch?v=tKjs8bBQ3sk" target="_blank" rel="noreferrer noopener">transfer stake</a> may soon be an option. So instead of simply exiting a validator set, the token holder would be able to transfer their stake to any validator of choice.&nbsp; This promise, in addition to the future promise to withdraw, reinforces accountability across independent validators and liquid staking protocols.&nbsp;



A common misconception is that Lido operators function like POW mining pools — where miners combine their computational resources to increase the odds of winning block rewards. Operators do not contribute their own stake like miners do computational power. And they operate differently from the independent validator. Rather, the protocol uses the following procedure:



<ul><li>Step 1: Lido users first send ETH to a Lido staking smart contract in return for stETH.&nbsp;</li><li>Step 2: The Lido DAO recruits and approves node operators who will be responsible for running validator clients. These operators do not contribute their own stake or anyone else&#8217;s to the validator node.&nbsp;</li><li>Step 3: The smart contract then evenly assigns the ETH across a set of validator nodes managed by these operators.&nbsp;</li><li>Step 4: A price oracle monitors the rewards from the staking validators.</li><li>Step 5: The oracle feeds the new balance to the staking smart contract.</li><li>Step 6: The staking contract then mints more stETH and splits the 10% of the rewards among operators and DAO treasury.</li></ul>



The operators never take custody. So when withdrawals are enabled, these operators have no authority or power to take ownership of the staked ETH. Only users holding stETH will be able (when withdrawals are enabled) to exchange withdrawn ETH from the Lido protocol.



The important takeaway is that, even though these operators do not directly manage the staked ETH, they still retain autonomy in validating blocks and approving chain finality. There is no back door access that would force them to censor transactions, move to a different client, approve an invalid transaction, or finalize an invalid chain.



The majority of Ethereum core developers have stated that withdrawals of staked ether will be enabled in the Shanghai Upgrade. Ethereum Improvement Proposal, EIP-4985, is the specific governance initiative being considered by the Ethereum Foundation. Whether or not that will come in the next Ethereum upgrade is debated. Additionally, a date has not yet been set for the Shanghai Upgrade. While <a href="https://www.reuters.com/technology/cryptoverse-after-merge-ether-heads-20-billion-shanghai-splurge-2022-09-20/" target="_blank" rel="noreferrer noopener">some sources</a> cite within six months, it may come sooner or later than expected.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Shanghai, here we go🙂<a href="https://twitter.com/nethermindeth?ref_src=twsrc%5Etfw">@nethermindeth</a> draft implementation of EIP-4895 &#8211; Beacon chain push withdrawals as operations &#8211; is almost ready.&mdash; DanielC (@_D4nie1_) <a href="https://twitter.com/_D4nie1_/status/1577539582043856897?ref_src=twsrc%5Etfw">October 5, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



While the industry should constantly strive toward decentralization, we must realize where Ethereum is relative to other protocols today. To this extent, let&#8217;s briefly compare the decentralization of POS to POW.



<h3 class="wp-block-heading">Decentralization in POS vs. POW&nbsp;</h3>



One of the fairest litmus tests to test Ethereum’s decentralization is to compare it to the proof-of-work consensus mechanism that Bitcoin uses. Looking at Lido once again, after Lido’s validators are accounted for, it requires more collusion than Bitcoin’s PoW.&nbsp;



<h3 class="wp-block-heading">Comparing validators to mining pools</h3>



Bitcoin has historically operated through mining pools. When comparing the decentralization of stake between validators to BTC mining pools, one could argue that ETH is more decentralized.



Take the cost as one example. The barrier to entry for POW mining is much higher than POS validation. While you can become an Ethereum validator by depositing 32 ETH (today valued at ~$41,129), you’d need a multi-million dollar operation, or at least be part of one, to mine bitcoin successfully. When asked about the difference in cost, Benjamin Thalman, Ethereum protocol expert at Figment, explained:



“Mining, generally, has a higher barrier of entry than staking and the fixed costs scale linearly. Typically, mining is a business where you lose position if you stand still; you need to continually add to your hardware while managing your costs. Running a profitable mining operation is especially challenging for so-called solo miners. Being a validator on a proof-of-stake network is much different. There are associated costs, but there isn’t the same increasing returns to scale; in other words, there isn’t the same pressure to continually be investing more. In fact, on Ethereum, the bulk of consensus rewards comes from attesting, rather than proposing. Even though an individual validator might only propose a block once every two months, they still receive rewards from attesting &#8211; an activity that happens roughly every six-and-a-half minutes. In other words, proof-of-stake is less likely to push towards centralization the way mining does.”



In a <a href="https://www.youtube.com/watch?v=tKjs8bBQ3sk" target="_blank" rel="noreferrer noopener">Bankless interview</a>, Ethereum co-founder Vitalik Buterin further explained that in addition to the cost barrier, an adversary would need a larger percentage of network control to exploit the system. Plus, even if such an event occurred, Ethereum offers more recovery options.



<h3 class="wp-block-heading">Validators understand the importance of Ethereum decentralization</h3>



Validators generally understand the value of decentralization and the threat centralization poses to network credibility. The continuing rise of validator participation after the Merge is a sign that the network is maintaining a healthy level of participation and isn&#8217;t facing an existential risk of exploitation.&nbsp;


<div class="wp-block-image">
<figure class="aligncenter size-full is-resized"><img loading="lazy" decoding="async" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg" alt="Ether deposited to beacon chain validators" class="wp-image-36844" width="698" height="393" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=698 698w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=464 464w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/11/Eth-deposited-to-beacon-chain-validators-1-2.jpg?w=50 50w" sizes="(max-width: 698px) 100vw, 698px" /><figcaption>Ether deposited to Beacon Chain and Validators | Source: Dune</figcaption></figure></div>


Validators also understand the threat that decentralization poses to Ethereum. It has been a contested topic, especially since 2018, when former SEC Director Bill Hinman <a href="https://www.lexology.com/library/detail.aspx?g=0eedd0af-abb9-4730-863d-ebd82d02f9b3" target="_blank" rel="noreferrer noopener">gave his thoughts</a>. In short, he made a statement that alluded to how a digital asset trumps the <a href="https://www.investopedia.com/terms/h/howey-test.asp" target="_blank" rel="noreferrer noopener">Howey test</a>. He assessed that an investment contract would no longer exist if a crypto asset or DeFi platform were sufficiently decentralized.&nbsp;



The key to passing this test was that a platform or protocol would no longer require the promoter or original operator to perform “entrepreneurial efforts.” If that key moment happened, then the “information asymmetries between that enterprise and its investors might diminish to the point where the protections of the securities laws were no longer necessary.”&nbsp;



Regulators tend to agree today that blockchains fall along this scale of centralization to decentralization. They, like the competing protocols, cannot agree on the exact degree to which a project achieves an exemption from security laws enforcement.



Regardless of where they settle, core Ethereum developers continue to make efforts and commitments to further decentralization. Since April 2022, Ethereum&#8217;s decentralization level has <a href="https://assets-global.website-files.com/5fd11235b3950c2c1a3b6df4/62af6c641a672b3329b9a480_Unintended_Centralities_in_Distributed_Ledgers.pdf" target="_blank" rel="noreferrer noopener">risen by 50%</a>.&nbsp;



<h3 class="wp-block-heading">Conclusion</h3>



As one of the most heated conversations in crypto, talk surrounding the true decentralization of digital assets will continue. It will come in many shapes and sizes — comparing the decentralization of proof-of-stake vs. proof-of-work, or talking about how decentralized Ethereum is becoming in general. While it’s challenging to provide an objective black-and-white answer, the increasing number of validator participation, unique Lido operators and depositors, and protocol upgrades paint a more decentralized network after the Merge.



This content is sponsored by <a href="https://www.figment.io/">Figment</a>. 



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Why Ethereum Is More Decentralized After the Merge

John Gilbert

<div id="highlights-block_631a70aa5d2d0" class="highlights">
 <ul>
 <li>When validators implement an upgraded version of Flashbots (MEV Boost) after the Merge, it could revolutionize a market that collected $730 million from MEV last year</li>
 <li>This upgrade will let validators use an open-source and democratic system to maximize revenue and share MEV with stakers</li>
 </ul>
 
</div>



Finding a traditional finance parallel for Flashbots is difficult. And it&#8217;s because they represent a radical departure from the culture and practice of finance on Wall Street. They aren’t the front-running whistleblowers and they aren’t the high frequency traders (HFT).



That cat and mouse chase was rigged behind a dark veil of technological innovation — where high frequency trading was always two steps ahead of the whistleblower and regulator.



The creators of Flashbots saw a similar pattern in how traders exploited Maximum Extractable Value (MEV). But instead of calling out individual actors, they turned on the light. It won’t necessarily stop the front-running ‘<a href="https://www.bloomberg.com/news/articles/2021-09-23/crypto-trading-how-flashbots-work-to-front-run-ether-and-other-coin-purchases" target="_blank" rel="noreferrer noopener">shenanigans</a>’ as its co-founder Phil Daian puts it, but it will help the community benefit from that trading activity.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



As a result of the MEV Boost upgrade, Figment, <a href="https://www.figment.io/staking" target="_blank" rel="noreferrer noopener">a leading institutional staking service provider</a>, estimates validator rewards will increase up to 50% post Merge. We sat down with Figment to learn more about this paradigmatic shift. But before we explain how this new model works, we need to understand where the old failed.



<h3 class="wp-block-heading">The old paradigm: A culture of secrecy</h3>



Robert Ellison, head of staking marketing at Figment, listed the Wall Street front-running of 2009 as a parallel example of some of the practices today. A close examination of the struggle between those front-runners and their whistleblowers illustrates why and how the traditional paradigm was flawed.&nbsp;



In 2009, Richard Gates leaked the front-running practice of HFT firms to the WSJ and then officially to the SEC in 2010. At the time, firms were placing servers next to exchanges and utilizing Spread Network’s strategically placed fiber optic cables to execute the fastest trades. This competitive advantage gave traders the ability to manipulate the market on a massive scale. Even though the practice was only used in 2% of firms, it accounted for 73% of stock order volume.



In 2010, Gates told the SEC that he was a victim of this practice. He claimed that Credit Suisse, the operator of a dark pool called Crossfinder, was intentionally providing unfair advantages to HFT traders over retail traders like himself. In his complaint, he shared rumors that Credit Suisse would market their pool to these traders by saying, “We have sheep in the pen. All you have to do is come and slaughter them.&#8221;



In 2015, Gates applied for a whistleblower reward that would grant him between 10% to 30% of an SEC settlement against Credit Suisse. And later that year, Credit Suisse agreed to pay $84.3 million in fines.&nbsp;



But by that time high frequency traders and exchanges had moved on to new strategies. For example, the <a href="https://www.businesswire.com/news/home/20180306006797/en/Hagens-Berman-Whistleblower-Client-Haim-Bodek-Again-Helps-Lead-SEC-to-Fine-a-Stock-Exchange-14-Million-This-Time-NYSE" target="_blank" rel="noreferrer noopener">NYSE was using secret order types</a> that let a handful or firms jump ahead of other traders. New whistleblowers like Haim Bodek emerged and complaints were filed.&nbsp;



And at the time of Gates&#8217; whistleblower reward application, his own company, Powhatan Energy was facing its own complaints — amounting to $26 million in penalties. They alleged that the company intentionally exploited a loophole in the <a href="https://www.gtlaw.com/en/insights/2015/6/may-2015-brings-a-crop-of-ferc-loophole-manipulation-civil-penalty-assessme" target="_blank" rel="noreferrer noopener">PJM Interconnection LLC&#8217;s markets</a>.&nbsp;



This example shows that SEC whistleblower incentives are too vulnerable to exploitation, and its bureaucracy too slow to make meaningful change. The system of extracting maximum value (MEV) from Ethereum transactions exposes the network to very similar types of front-running operations and like the traders on Wall Street, they are constantly developing new tactics. But as you will see, Flashbots offers a solution that is philosophically opposed to the old paradigm.



<h3 class="wp-block-heading">Front-running MEV explained</h3>



Unlike traditional exchanges, all trades in Ethereum, like normal transactions, have to settle on-chain instead of a clearing house. But before they are settled on-chain, almost all trades enter a mempool where in the proof-of-work (PoW) protocol miners prioritize higher gas fee transactions over lower fee ones. Validators will adopt this responsibility post merge.



According to Ethereum.org, “<a href="https://ethereum.org/en/developers/docs/mev/" target="_blank" rel="noreferrer noopener">maximal extractable value</a> (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block.”&nbsp;



Third parties called MEV searchers have developed algorithms that look for MEV opportunities in the pool of transactions. Miners who select their opportunities then share some of the profit in return. Front runners have developed their own algorithms that systematically use data in public order books and mempools to cut in line.&nbsp;



Jumping ahead of other trades in a decentralized exchange (DEX) like Uniswap gives the front-runner an advantage. In what is called a sandwich trade, the front-runner first calculates the resulting price action of the queued trade to determine profitability, executes a trade with a larger gas fee to jump ahead, and immediately sells after the previous trade is settled. They only collect a profit if the price movement is more than the gas fee they paid to jump ahead.&nbsp;



Generalized front-running is another popular approach. It looks for profitable transactions/trades in the mempool, copies them, and increases the gas fee to cut in line. Unlike sandwich trades, this approach profits from MEV instead of price action on a DEX.&nbsp;



But these tactics aren’t predictable or consistent.&nbsp;&nbsp;&nbsp;



“Folks have realized there are different ways to engage with Ethereum. Typical users may just want to transfer ETH. However, folks engaging in MEV exhibit more of a reaction to what is happening on the network. It&#8217;s iterative and reflexive. They are watching the pending transaction pool, watching what others are doing,” Clayton Menzel, Figment’s head of protocols and opportunities, said.&nbsp;&nbsp;



<h3 class="wp-block-heading">So what is Flashbots? A new paradigm</h3>



Flashbots is a research and development organization aimed at reducing the negative network effects of MEV.



They created an open source solution that enables miners on the POW protocol and validators on the POS protocol to more efficiently work with MEV searchers. It hosts a private auction separate from the mempool. This system doesn’t stop all front-running on Flashbots but it prevents the generalized approach by hiding queued transactions from public view.



In the new upgrade to MEV Boost, Flashbots will make this auction more efficient by introducing a third party called the builder. In this version validators would no longer work directly with MEV searchers in block production. Instead builders will work with MEV searchers to build and auction potential blocks to validators. Each party would earn a profit for their contribution. And it makes the process more efficient and fair because it takes the burden away from validators and allows more participants to benefit.&nbsp;



The brilliance of this new paradigm is that it aims to solve inefficiencies instead of punishing bad behavior. Front-running tactics on the Ethereum network will most likely always exist. But through the right incentives they can channel that behavior into a transparent and democratic system that allows more participation in the MEV market.&nbsp;&nbsp;



Instead of relying on slow bureaucratic officials to punish bad behavior, it restructures the incentives to reduce negative network effects and make MEV more decentralized. It&#8217;s not guaranteed that every validator will adopt Flashbots after the merge. But if it increases staking yields and decreases the negative network effects of MEV, validators will risk losing stakers if they don’t engage with Flashbots or an alternative MEV solution.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Figment recently announced that it will <a href="https://www.figment.io/resources/figments-mev-policy-supporting-neutral-secure-and-open-solutions" target="_blank" rel="noreferrer noopener">integrate MEV-Boost</a> into its Ethereum validators. So far, they have successfully tested MEV-Boost on Goerli, the final testnet that was conducted ahead of the Ethereum Merge. So far their studies have shown that the upgrade will significantly boost staking revenue. But it will also allow Figment’s ETH customers to participate in MEV.&nbsp;



<h3 class="wp-block-heading">Education is still needed&nbsp;</h3>



“Education is important. Flashbots makes research available, and creates open solutions where you can see MEV extraction. It helps you see what’s going on, offering a balanced view that recognizes both positives and negatives. Education and open discussion is also important,” said Ellison.&nbsp;



There is a lot of noise and not so much signal in this space. As ETH moves to PoS, people should be making better decisions on who to work with as far as infrastructure providers go. You can see the negative aspects of MEV, and now you can make your own choices as an ETH token holder. Figment is working hard to help people make informed staking decisions. They not only published their <a href="https://www.figment.io/resources/figments-mev-policy-supporting-neutral-secure-and-open-solutions" target="_blank" rel="noreferrer noopener">MEV policy ahead</a> of the Merge, they also hosted a <a href="https://twitter.com/Figment_io/status/1561726646239072257?s=20&amp;t=PKlQxEI3fetuycN8chW2lQ" target="_blank" rel="noreferrer noopener">Twitter space</a> to help their community better understand the changes.&nbsp;



Currently there is no pressure for miners to share MEV rewards. Validators, on the other hand, arguably face higher reputational risk. As a result, once validators take over for miners post merge, competition is more likely to result in MEV rewards being shared around more broadly than they are today.



This content is sponsored by Figment.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

New Flashbots Upgrade Could Revolutionize Crypto Markets After the Merge

<div id="highlights-block_62bcf8aff205e" class="highlights">
 <ul>
 <li>Enterprise-grade staking is a method of structuring servers, blockchain data and developers to provide scalability, security and flexibility</li>
 <li>Figment also believes that institutional staking will promote the faster adoption of cryptocurrency worldwide</li>
 </ul>
 
</div>



It&#8217;s no secret the market is ripe with fear over crypto lending yields. The meme, “If you don&#8217;t understand the source of yield, you are the yield” echoed across <a href="https://twitter.com/j0hnwang/status/1524934060954767360?s=20&amp;t=os6-ou-bPeuN_lAinxekAQ" target="_blank" rel="noreferrer noopener">Twitter</a> after the collapse of Terra/Luna and the Celsuis liquidity crisis. In response, many are exploring crypto staking as a durable alternative. But with a never-ending list of protocols, validators and industry-specific buzzwords, it is hard to navigate the technical risks and variables.&nbsp;&nbsp;&nbsp;



For example, there is no doubt the average investor&#8217;s eyes gloss over any time they read &#8220;enterprise-grade infrastructure.&#8221; This overlooked classification looks like technical jargon, but industry leaders see it as an essential puzzle piece to a reliable and competitive staking yield strategy. And, more importantly, as the bedrock to a secure and decentralized Web3. We sat down with <a href="https://www.figment.io/" target="_blank" rel="noreferrer noopener">Figment</a>, a leader in enterprise-grade staking, to gain a better understanding.



<h3 class="wp-block-heading">Enterprise-grade staking defined</h3>



In this context, Figment defines enterprise-grade staking as a method of structuring servers, blockchain data and developers to provide scalability, security and flexibility. It extends beyond a single team of engineers and carries layers of institutional support.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Many use it as a defensive tactic to protect validators from liabilities like natural disasters, DDoS attacks, hacks, and server downtime from internet outages. But to understand why many see enterprise-grade staking as a durable alternative to crypto-lending yields and running your node, we need first to explain its fundamental value as the bedrock to Web3.



<h3 class="wp-block-heading">Enterprise-grade staking as the bedrock to Web3</h3>



Web3 doesn&#8217;t exist without blockchain, but secure networks aren&#8217;t enough. Web3 needs secure networks that can grow — and grow fast. Figment provided this analogy: “Blockchains like Ethereum are like living, breathing organisms. It runs multiple clients in multiple languages, all requiring frequent updates at varying times.” And soon, that organism plans to multiply 64x.&nbsp;



Web3, at its current state, is at a bottleneck until its largest network, Ethereum, officially undergoes this metamorphosis and transitions to proof-of-stake. But this <a href="https://cms.blockworks.co/the-investors-guide-to-the-ethereum-merge/" target="_blank" rel="noreferrer noopener">proof-of-stake merge </a>doesn&#8217;t just need validators with liquidity. They need reliable, trustworthy participants that can scale vertically and horizontally. In other words, they need world-class players with a real stake in the game. Enterprise-grade staking meets that demand by integrating industry scaling standards that have been evolving since Web1. By using experts that have a stake in the entire industry, enterprise-grade staking institutions can help build Web3 from the ground up.&nbsp;&nbsp;



When you contrast the utility of enterprise-grade staking with alternative yield-bearing instruments such as lending protocols, you can see why many classify it as a durable yield generator. Although staking does contain risks, it does not expose investors to impermanent loss or smart contract and oracle risks.



<h3 class="wp-block-heading">How institutional staking can support decentralization&nbsp;&nbsp;</h3>



Institutional investment in staking is one of the most impactful methods large-scale businesses can use to support the decentralized ecosystem. By adding large quantities of liquidity that retail investors and smaller establishments cannot provide, institutions can help expand the networks of different blockchains immensely.&nbsp;



Figment also believes that institutional staking will promote the faster adoption of cryptocurrency worldwide through its staking. By joining a decentralized network, many of these large-scale businesses will be encouraged to promote the use of blockchains for people around the world.&nbsp;



In a commitment to support proof-of-stake’s founding principles. Figment stated: “Having a rock-solid infrastructure is important for stability, but it’s also important to have validator diversity, and to encourage more people to participate and stake over the long term.”



<h3 class="wp-block-heading">The liabilities of running your own node&nbsp;&nbsp;&nbsp;</h3>



Because the Ethereum network can be seen as a complex organism, it grows every time a new validator joins the network. As it expands, the symbiotic relationship between the network, clients, protocols and smart contracts reinforces and strengthens. However, this type of growth cannot be left unchecked.&nbsp;



The network requires a strong commitment from validators with protocol expertise. Enterprise grade staking isn’t just about the infrastructure, it is about the people behind the infrastructure. We talked with Figment to learn more about these demands. They explained that validators need to know how to apply an update and understand why it&#8217;s needed, often requiring a deep level of knowledge. Governance plays a crucial part in how decisions are made on proof-of-stake networks — it’s not just a case of being involved but actively proposing and helping guide the health of the networks over time.&nbsp;



Figment noted that scaling becomes increasingly difficult with demand, and validators need to keep security paramount, to protect from malicious attacks, including distributed denial-of-service (DDos) attacks, and maintain 100% uptime.



When a validator operates improperly or goes offline for extended periods of time, they risk being removed from the network altogether. Figment explained that during periods of downtime, a validator can not only miss rewards but can be penalized through slashing.&nbsp;



On top of all of this, validators need to track rewards, pay taxes and establish service-level agreements. Because of the lack of regulatory clarity, this is not an easy process.&nbsp;&nbsp;



Figment explained that its robust enterprise-grade infrastructure combats these risks using dedicated and organized experts managing each element. It recently announced that it will offer <a href="https://www.figment.io/resources/insuring-our-proof-of-stake-infrastructure" target="_blank" rel="noreferrer noopener">slashing insurance</a> to further guarantee this infrastructure.&nbsp;



In partnership with Coinbase Cloud, it also announced <a href="https://www.figment.io/resources/figment-and-coinbase-cloud-collaborate-to-support-founding-team-of-first-ever-institutional-liquid-staking-protocol" target="_blank" rel="noreferrer noopener">liquid staking with Alluvial</a>. It will allow users to stake their tokens and receive receipt tokens that prove ownership of the staked tokens. And it&#8217;s non-custodial — meaning that delegators retain ownership and responsibility for their keys.&nbsp;



<h3 class="wp-block-heading">A lesson in game theory</h3>



Ultimately, the consensus protocols behind staking are rooted in game theory. The protocols set the rules and reward the validators who best follow those rules. Over time, these rules can also change, requiring validators to stay up to date to prevent expulsion from the network. With the proper enterprise-grade infrastructure, validators can rapidly flex to meet the evolving demands of the ecosystem.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



This content is sponsored by <a href="https://www.figment.io/" target="_blank" rel="noreferrer noopener">Figment</a>.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Enterprise-grade Staking: A Move to Durable Yields and a Stronger Web3

Ben Strack

<div id="highlights-block_6283a172153fa" class="highlights">
 <ul>
 <li>Alluvial’s founding team includes former executives at Figment, Kiln and Index Cooperative</li>
 <li>New protocol will require contributors to enable embedded KYC and AML checks</li>
 </ul>
 
</div>



Crypto exchange Coinbase’s cloud division is working with Figment to support the founders and operators building what it calls the first enterprise-grade liquid staking protocol.&nbsp;



The news was revealed Tuesday during Blockworks’ <a href="https://cms.blockworks.co/events/permissionless/" target="_blank" rel="noreferrer noopener">Permissionless event</a> in West Palm Beach. Software development firm Alluvial is building the new protocol, which the company ultimately intends to be governed by a decentralized autonomous organization (DAO).&nbsp;



Liquid staking on Ethereum has grown from less than 1% market share in January 2021 to more than 30%, according to <a href="https://dune.com/hildobby/ETH2-Deposits" target="_blank" rel="noreferrer noopener">Dune Analytics data</a>.&nbsp;



“There has been growing demand amongst institutions and enterprises that want to access liquid staking but haven’t had a solution that meets compliance and security standards,” Coinbase Cloud Senior Manager Mara Schmiedt told Blockworks. “With Alluvial, we are enabling that access and are focused on unlocking the next wave of adoption and financial innovation in the space.&#8221;



Coinbase acquired blockchain infrastructure platform Bison Trails in January 2021 to become the foundational team and platform of <a href="https://www.coinbase.com/cloud" target="_blank" rel="noreferrer noopener">Coinbase Cloud</a>. The business offers Web3 application programming interfaces (APIs), services, and infrastructure for software builders.



<a href="https://www.figment.io/" target="_blank" rel="noreferrer noopener">Figment</a> is focused on offering staking and application layer solutions for token holders and developers building on Web3 technology. The firm <a href="https://cms.blockworks.co/figment-closes-funding-round-at-1-4b-valuation/" target="_blank" rel="noreferrer noopener">raised $110 million</a> in a Series C round in December, bringing its post-money valuation to $1.4 billion.



Alluvial is led by Matt Leisinger, former head of liquid staking products at Figment; Nicolas Maurice, the former chief technology officer of staking-as-a-service platform Kiln; and Mike Taormina, former head of institutional business at the Index Cooperative.



Liquidity is key to unlock the next chapter of financial innovation in Web3, the companies said.



The non-custodial protocol will allow users to stake their tokens and receive receipt tokens that prove ownership of the staked tokens. They can then use those receipt tokens to participate in the broader Web3 economy.&nbsp;&nbsp;



It will require all contributors to enable embedded know your customer (KYC) and anti-money laundering (AML) checks.



Coinbase Cloud and Figment plan to perform staking services on the network and run validators with clients across regions and cloud providers. Other security-focused validator operators will be added to the protocol over time.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Coinbase Cloud, Figment Back New Liquid Staking Protocol

<div id="highlights-block_61c0dd4068aa5" class="highlights">
 <ul>
 <li>The firm has about $7.5 billion in digital assets staked to its infrastructure</li>
 <li>“The new capital raised will expand Figment’s ability to support the adoption, growth and long-term success of the Web 3 ecosystem,” Figment Co-founder and CEO Lorien Gabel said.</li>
 </ul>
 
</div>



Crypto staking firm Figment has raised $110 million in its Series C round four months after its last fundraise of <a href="https://cms.blockworks.co/galaxy-digital-joins-50m-raise-for-crypto-staking-firm-figment/" target="_blank" rel="noreferrer noopener">$50 million</a>, the company announced on Monday.&nbsp;



The new capital brings <a href="https://www.figment.io/" target="_blank" rel="noreferrer noopener">the firm</a>&#8216;s post-money valuation to $1.4 billion, up 180% from its previous valuation of $500 million, Figment Co-founder and CEO Lorien Gabel told Blockworks. To date, Figment has raised $165 million.&nbsp;



“The new capital raised will expand Figment’s ability to support the adoption, growth and long-term success of the Web3 ecosystem, as well as significantly grow its headcount,” Gabel said.&nbsp;



Figment provides blockchain infrastructure, protocol staking and research for users to be able to build products and services on <a href="https://cms.blockworks.co/staking-is-an-18-billion-industry-says-staked/" target="_blank" rel="noreferrer noopener">Proof of Stake</a>, or PoS, blockchains.&nbsp;



The firm has roughly $7.5 billion in digital assets staked to its infrastructure, up from $7 billion staked that it reported in <a href="https://cms.blockworks.co/galaxy-digital-joins-50m-raise-for-crypto-staking-firm-figment/" target="_blank" rel="noreferrer noopener">August</a>. It also supports about 50 networks and 130 institutional clients, up from 31 clients in the previous year.&nbsp;



The latest round was led by software and technology-focused private equity firm Thoma Bravo, which had $91 billion assets under management as of Sept. 30.



Other participants in the round are Counterpoint Global, the active fundamental equity team of Morgan Stanley; Binance Labs; Mirae Asset; <a href="https://cms.blockworks.co/parafi-to-launch-200-million-growth-fund/" target="_blank" rel="noreferrer noopener">ParaFi Capital</a>; Avon Ventures, a venture capital fund affiliated with the parent company of Fidelity Investments; Bitstamp; CMS Holdings; Two Sigma; B Capital Group; Franklin Templeton; DTCP; and StarkWare.



Figment will focus on expanding its team and investment arm as well as developing its Data Hub 2.0, which will provide developers and entrepreneurs the ability to create blockchain-based solutions, Gabel said.&nbsp;



“In the long term, the majority of value and data will be stored, settled, and transferred via PoS protocols,” the CEO added. “Staking will become the foundation that secures a better, more inclusive, and user-owned internet.”



<hr class="wp-block-separator"/>



Get the day’s top crypto news and insights delivered to your inbox every evening.&nbsp;<a href="https://cms.blockworks.co/newsletter/?source=end" target="_blank" rel="noreferrer noopener">Subscribe to Blockworks’ free newsletter</a>&nbsp;now.



<hr class="wp-block-separator"/>

Figment Closes Funding Round at $1.4B Valuation

Jacquelyn Melinek

<div id="highlights-block_611ac531c9570" class="highlights">
 <ul>
 <li>“The people staking today are early initial investors but the characters are changing and one of our goals is to bring more people into staking &#8212; retail and larger companies &#8212; and increase participation and amount of people staking,” Figment Co-Founder and Chief Product Officer Andrew Cronk said</li>
 <li>Prior to the funding, the company said it experienced 20x quarter-over-quarter growth and hit over $7 billion in digital assets staked to its infrastructure across over 40 networks it supports</li>
 </ul>
 
</div>



Crypto staking firm Figment has raised $50 million in a new Series B funding round led by Senator Investment Group and Liberty City Ventures.&nbsp;



Notably, other participants include Mike Novogratz’s <a href="https://cms.blockworks.co/galaxy-shares-2q-loss-but-novogratz-bullish-on-defi-and-nfts/" target="_blank" rel="noreferrer noopener">Galaxy Digital</a>, Dan Tapiero’s 10T Holdings, Anchorage Digital, Declaration Partners, Bonfire Ventures, JPK Capital, 40 North, Finality Capital Partners, GSR, GFT VC and Hard Yaka.&nbsp;



Although Bloomberg reported Figment’s valuation at about $500 million, the company declined to comment on sharing a valuation, Andrew Cronk, co-founder and chief product officer at Figment, told Blockworks in an interview.&nbsp;



“When we started the company, the big bet was, you can launch a PoS [proof-of-stake] network. Our bet was that in the future there would be more blockchains and PoS and that has been proven true, a lot of blockchains have been launched in the last few years,” Cronk said.&nbsp;



For Figment, their next chapter is focusing on getting more people into staking, whether that be individuals or institutions, and bringing more developers into the space, he said. The funding will be used to grow the company’s headcount and diversify its services for the Web3 stack.



“The people staking today are early initial investors but the characters are changing and one of our goals is to bring more people into staking — retail and larger companies — and increase participation and amount of people staking,” Cronk said.&nbsp;&nbsp;



<h3 class="wp-block-heading">Moving toward Web3</h3>



The investment round further solidifies Figment’s role in building Web3 and accelerates its ability to assist the PoS industry with the development of back-end systems and infrastructure that provide yield on digital tokens and other assets, the company said.&nbsp;



“We think we can move toward Web3 by launching and experimenting,” Cronk said.&nbsp;



The capital raise also shows institutional investors’ support and demand for platforms that help create and support PoS assets that can produce a yield as well as appreciate in value like bitcoin, ether and other digital assets, Figment said.&nbsp;



“Proof-of-stake and the ability to earn yield will be an important catalyst in driving further institutional interest in the digital asset industry,” Mike Novogratz, CEO and founder of Galaxy Digital said.&nbsp;



“This funding round marks the start of a new chapter at Figment that aligns with the evolution of the industry. PoS has gone from proof-of-concept to mainstream, and is being adopted by investors and developers at a massive scale,” Figment CEO Lorien Gabel said in a statement. “Our 100+ institutional clients and billions in AUM is just the beginning for us. Our belief is that the majority of value and data will be exchanged, settled and stored on PoS blockchains,” Gabel added.&nbsp;



Prior to the funding, the company said it experienced 20x quarter-over-quarter growth and hit over $7 billion in digital assets staked to its infrastructure across over 40 networks it supports. The company has raised about $55 million to date.&nbsp;



When Figment runs validators, they earn tokens and keep almost all of it, he added. “So that means we have a direct incentive to increase the direct participation and value on the network. If we’re sitting and growing longer and longer on this network, we’re trying to grow this space. It’s all about incentives, we&#8217;re living it, we’re walking it, we’re trying to do everything we can,” Cronk said. 



<h3 class="wp-block-heading">Proof-of-stake explosion</h3>



The PoS industry has faced explosive growth this past year, through Ethereum 2.0 and other PoS layer 1 protocol launches like Polkadot, Solana and Terra, the company said. “The desire to earn a real positive yield from staking was one of the main factors for the expected growth of the industry,” it said.&nbsp;



A lot of staking opportunities have popped up within the crypto community. Analysts predict the staking industry will boom in the next several years.



Last week, the crypto wallet Ledger announced that it will now allow users to stake ether through Lido directly on Ledger Live’s interface, Blockworks <a href="https://cms.blockworks.co/crypto-wallet-ledger-seeks-to-make-ether-staking-more-accessible/" target="_blank" rel="noreferrer noopener">reported</a>. Separately, Kraken said it <a href="https://cms.blockworks.co/kraken-clients-earned-100-million-in-staking-rewards-in-first-half-of-2021/" target="_blank" rel="noreferrer noopener">paid out more than $100 million</a> in staking rewards to customers in the first half of 2021, Blockworks also reported.&nbsp;



Lastly, the Ethereum Foundation launched its staking campaign for <a href="https://ethereum.org/en/eth2/" target="_blank" rel="noreferrer noopener">Ethereum 2 (ETH 2)</a> last fall. For the next generation of Ethereum, staking is important as the network is going through a fundamental infrastructure change from proof-of-work (PoW) to PoS. PoW is determined by how much computing power users have at their <a href="https://cms.blockworks.co/institutions-staking-eth-2-want-internet-bonds/" target="_blank" rel="noreferrer noopener">disposal</a>.



On the other hand, with PoS, authority is measured on how many tokens you are holding. Thus, in order to bootstrap this network, a sizable amount of tokens are needed to be held by a large group of people for some time for it to pay off.&nbsp;



Want more investor-focused content on digital assets?&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a>&nbsp;September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.