Structured Products for Block Space

Structured Products for Blockspace: Is this another form of unnecessary over-financialization in crypto?

In the blockspace market, miners are the producers, mining pools are the auctioneers, and users are the bidders. Validators, who are responsible for creating more blocks and securing the network, are rewarded with fees or subsidies, which tend to be volatile due to free-market forces. This volatility can be problematic for miners and stakers who have fixed costs related to energy use and equipment maintenance.

Enter structured blockspace products, which are designed to help miners and stakers hedge and monetize future rewards by constructing novel financial products. One protocol working on structured products for blockspace is Alkimiya. Alkimiya allows miners to hedge the volatility of block rewards by obtaining upfront payments in exchange for future rewards via the deployment of options and swaps.

Alkimiya consists of two components: Silica, the float-to-fixed swap issued by blockspace producers, and HashVault, the vault that packages Silica contracts and restructures the underlying cash flow into a variety of financial products. Sellers on the Alkimiya platform can lock in volatile future revenue for fixed upfront payments, allowing them to better manage risk in their staking and mining operations. Buyers, on the other hand, gain access to a sustainable source of yield directly from blockspace production.

This model can be compared to a farmer who uses futures contracts to lock in prices and ensure that his costs today are covered by a guaranteed amount. It is also similar to Pipe, a startup that converts recurring revenue into up-front capital for growth without dilution.

While structured blockspace products may be a useful tool for managing risk and accessing yield, it is important to consider whether they represent another form of unnecessary over-financialization in the crypto space. As most chains move from proof-of-work to proof-of-stake, it remains to be seen whether these products will remain relevant. Only time will tell.

Inner Workings of Blockchain Bridges

Blockchain technology has been making waves in the financial industry for a while now. One of its most promising features is the ability to reduce transaction costs and enable interoperability between different chains. Despite the numerous benefits, it’s important to be aware of the risks involved in using blockchain bridges. In this article, we’ll take a closer look at how blockchain bridges operate and their different types.

What is a Blockchain Bridge? A blockchain bridge is a protocol that connects two separate blockchains, allowing interactions between them. These protocols work much like physical bridges that link two islands, where each island represents a blockchain ecosystem.Why do we need Blockchain Bridges? Different blockchains have their own rules, tokens, protocols, and smart contracts, which can often lead to silos and isolated crypto ecosystems. Blockchain bridges help to break down these silos and bring these isolated ecosystems together.

What do Blockchain Bridges do? Currently, blockchain bridges do two things:Wrap Tokens: For example, for someone to use Bitcoin (BTC) on the Ethereum blockchain, the BTC needs to be wrapped and issued as an IOU on the Ethereum chain.Pool Liquidity: Liquidity providers (LPs) can create pools of cross-chain assets.

Types of Blockchain Bridges: There are three types of blockchain bridges currently in use: Custodial Bridges, Non-Custodial Bridges, Smart Contract Bridges (Light Client Bridges)

Custodial Bridges: In custodial bridges, external validators observe the origin blockchain for a signal that an asset has been locked. They then transfer this message to the destination blockchain using a smart contract call. Multi-signatures are used to prevent centralization. Examples of custodial bridges include WrappedBTC, Multichain.org, and Portal Bridge. It’s worth noting that three of the largest hacks in crypto history took place on custodial bridges.

Pros: Custodial bridges are cheap and easy to use, and can be scaled across multiple blockchains (EVM & non-EVM).

Cons: Multi-signatures are extremely insecure and vulnerable to hacks, usually through social engineering.

Non-Custodial Bridges: In non-custodial bridges, the underlying blockchain’s validators are used to verify transactions, instead of relying on third-party validators. There’s also a time window for any third party to submit a “fraud proof” if they notice a fraudulent or incorrect transaction. Examples of non-custodial bridges include Hop Protocol and Across Protocol.

Pros: Non-custodial bridges are more secure than custodial bridges.

Cons: Non-custodial bridges are more expensive, have lower throughput, and are less scalable.

Smart Contract Bridges: The third method is the creation of smart contracts on one chain that serve as light-client validators for another. The main advantage of this method is that there’s no need to trust third parties, as it’s enough to just trust the code.In conclusion, blockchain bridges play a crucial role in bringing isolated crypto ecosystems together and enabling interoperability between different chains.

Understanding the different types of bridges and their pros and cons is important to make informed decisions when using these protocols.

Sources:

https://research.paradigm.xyz/ethereum-blockspace