Burnt Bridges

April 07, 2022

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Digital Banks

March 29, 2022

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digital daily: Sharing the Burden

Sharing the Burden: How do you generate security in the digital ecosystem? Scale. Scale gives you redundancy and overwhelms the incentives to cheat. But how does a new protocol get to scale? In the early days of blockchain, several protocols resorted to "merged mining," a process where smaller networks offered proof of work miners the opportunity to run another copy of their software on the same mining machine for a second network and collect token rewards. They borrowed scale. That was how Dogecoin built network stability – merged mining with Litecoin. In the Ethereum ecosystem, a new protocol called Eigenlayer presents a similar opportunity. Nascent protocols offer rewards on a marketplace to entice Ethereum validators to lend them security by 'restaking' their staked ETH – securing both networks simultaneously. The fledgling protocol avoids the capital expenses of community building and paying validators to bring a network to life from scratch. Re-staking through Eigenlayer also satisfies a market yearning for higher yield as ETH staking returns decrease with more validators. But it's not without risk. Validator problems on either protocol can now cause a loss of the same principal. Higher reward, higher risk. The final stage of the Eigenlayer's three-staged launch will come later this year. Will the Eigenlayer efficiently bootstrap the next generation of protocols? Or will it expose a new form of correlation risk in the digital ecosystem? TBD.