Table of Contents

1. Introduction: Earning Yield on Digital Assets

2. Understanding Lending Pools

3. Understanding Staking

4. Centralized Exchange Options

5. Ethereum Liquid Staking

6. Restaking & EigenLayer

7. Solana Staking Ecosystem

8. Bitcoin Staking with Babylon

9. Hyperliquid Ecosystem: Staking & Lending

10. Aave: The Premier DeFi Lending Protocol

11. Stablecoin Yields & Lending Strategies

12. Institutional Staking & Lending Providers

13. Individual vs Institutional: Key Differences

14. Risk Considerations

15. Multi-Asset Portfolio Yield Strategies

1. Introduction: Earning Yield on Digital Assets

With the CLARITY Act expected to pass in early 2026, proposed staking tax relief in the PARITY Act, and the SEC’s recent clarity on proof-of-stake activities, now is an opportune time to understand the landscape of crypto yield generation. The regulatory environment is becoming increasingly favorable for staking and DeFi participation, making it essential for both individual and institutional investors to understand these opportunities.

Over $80 billion is currently earning passive yield across staking and lending protocols. Whether you’re targeting conservative 3-5% returns or pushing for 15% with more aggressive strategies, this guide covers the full spectrum — with specific approaches for both individual investors and institutions across Ethereum, Solana, Bitcoin (through Babylon), and Hyperliquid.

What you’ll learn:

• How to earn 5.59% on stablecoins with no lockups (sGHO)

• Where to find 8-10% stablecoin yields on different platforms

• How institutions can access 15% yields through Liminal and Figment

• The difference between lending, staking, and delta-neutral strategies

• Ready-to-use portfolio allocations from conservative (4-6%) to aggressive (10-15%)

Let’s start with the two fundamental yield sources: lending and staking.

Lending vs Staking: Quick Comparison

Why Both Matter

Lending Pools are essential for:

• Earning yield on stablecoins (USDC, USDT, DAI)

• Generating returns without price exposure

• Providing liquidity to the DeFi ecosystem

• Accessing leverage through borrowing

Staking is essential for:

• Securing proof-of-stake blockchains

• Earning native token rewards

• Participating in governance

• Long-term accumulation strategies

2. Understanding Lending Pools

What Are Lending Pools?

Lending pools are smart contract-based systems that connect lenders (suppliers) with borrowers in a decentralized, permissionless manner. Unlike traditional bank loans, there’s no credit check—borrowers must provide collateral worth more than their loan (overcollateralization).

How Lending Pools Work

Key Lending Pool Concepts

How Interest Rates Are Determined

Lending pool interest rates are algorithmic—they automatically adjust based on supply and demand:

This mechanism ensures:

• When demand is high → rates increase → attracts more lenders

• When demand is low → rates decrease → attracts more borrowers

Major Lending Pool Protocols

Lending Pool Token Types

When you deposit into lending pools, you typically receive tokens representing your position:

Lending vs Savings Accounts

3. Understanding Staking

What Is Staking?

Staking is the process of locking cryptocurrency to help secure and validate transactions on proof-of-stake (PoS) blockchains. In return for this contribution, stakers receive rewards—typically a combination of newly minted tokens and transaction fees.

How Staking Works

Key Staking Concepts

Staking Methods Comparison

Staking Rewards by Network

Note: ETH base staking APY is ~2.45%; higher yields (5%+) require stacked strategies (restaking, LP, incentives).

4. Centralized Exchange Options

CEX platforms offer both staking and lending/earn products with minimal technical requirements.

Exchange Products Comparison

Note: Gemini Earn was suspended Nov 16, 2022; users have received 100% of assets owed. Commission rates vary by asset and account tier.

Staking vs Earn Products on Exchanges

5. Ethereum Liquid Staking

Liquid staking combines staking rewards with DeFi liquidity by issuing tradeable tokens representing staked positions.

Liquid Staking Protocols

Note: Higher yields (5-20%) typically come from stacked strategies (LP, incentives, leverage), not pure staking.

How Liquid Staking Tokens Work

LST DeFi Strategies

Note: Restaking yields are NOT a single APY—they vary by AVS selection and are often paid in AVS tokens.

6. Restaking & EigenLayer

Restaking allows staked assets to secure additional protocols (AVSs), earning multiple yield layers.

EigenLayer Overview

Note: Restaking yields vary by AVS selection and are not a single “APY” — evaluate each AVS’s economics separately.

Liquid Restaking Tokens (LRTs)

7. Solana Staking Ecosystem

Solana offers fast, low-cost staking with epoch-based rewards.

Solana Staking Options

Wallet-Based Staking (Phantom, Solflare, Backpack)

One of the simplest ways to stake SOL is directly through your wallet. Wallets like Phantom, Solflare, and Backpack offer built-in native staking with just a few clicks.

How Wallet Staking Works

1. Open your wallet and navigate to the staking section

2. Choose a validator from the curated list (or search for a specific one)

3. Enter the amount of SOL to stake

4. Confirm the transaction (minimal gas fee)

5. Start earning rewards after the current epoch ends (~2-3 days)

Wallet Staking Comparison

Advantages of Wallet Staking

When to Use Wallet Staking vs Liquid Staking

Phantom Staking Step-by-Step

1. Open Phantom → Click on your SOL balance

2. Select “Start earning SOL” or go to the staking tab

3. Choose a validator — Phantom shows commission rates and stake amounts

4. Enter amount — Leave some SOL unstaked for transaction fees (~0.05 SOL)

5. Confirm — Transaction costs ~0.000005 SOL

6. Wait one epoch (~2-3 days) for rewards to start accruing

7. Rewards auto-compound — No action needed; rewards are added to your stake

Tip: Choose validators with <10% commission, high uptime (>99%), and moderate stake to support decentralization.

8. Bitcoin Staking with Babylon

Babylon enables trustless Bitcoin staking without bridges or wrapping.

Babylon Metrics

Note: Babylon APR varies significantly by finality provider and network conditions.

9. Hyperliquid Ecosystem: Staking & Lending

Hyperliquid has emerged as a dominant decentralized exchange with a comprehensive ecosystem for both staking AND lending.

Hyperliquid Overview

HYPE Staking

HYPE staking on Hyperliquid is delegated proof-of-stake where stakers delegate to validators who produce blocks and receive rewards proportional to their total delegated stake.

HYPE Staking Mechanics

Top Validators by Performance

Key Consideration: Stakers only receive rewards when validators successfully participate in consensus. Always delegate to reputable validators with high uptime (100%).

Hyperbeat: Institutional-Grade Hyperliquid Infrastructure

Hyperbeat is a native protocol scaling the Hyperliquid ecosystem, offering staking, liquid staking, and smart vaults in partnership with P2P.org and Hypio.

Hyperbeat Products

Why Hyperbeat for Institutions

HyperLend: Hyperliquid’s Lending Protocol

HyperLend is the premier lending pool protocol on Hyperliquid EVM, built as the “Aave of Hyperliquid.”

HyperLend Current Rates (Snapshot)

Rates are point-in-time snapshots and fluctuate based on utilization.

HyperLend Pool Types

HyperLend Features

Felix Protocol: Stablecoin Yields

Felix is Hyperliquid’s native CDP protocol powering the feUSD stablecoin ecosystem.

Felix Current Rates (Snapshot)

Liminal: Institutional Delta-Neutral Yields

Liminal is the Native Yield Layer of Hyperliquid, turning funding rates into market-neutral yield. This is particularly attractive for institutions seeking stable returns without directional exposure. Even if you are an individual you can access their institutional product and gain all of the advantages with it.

How Liminal Works

Liminal Performance

Note: Funding rates can go negative in bear markets, which would reduce or eliminate yield.

Why Liminal for Institutions

Liminal Institutional vs Regular Mode

Liminal Tokenized Strategies (Coming Soon)

Liminal is launching xTokens (e.g., xHYPE, xETH) - tokenized delta-neutral strategies that can:

• Trade across HyperEVM and other EVM chains

• Be used as collateral on Aave, Morpho (subject to listings)

• Be yield-traded on Pendle-style venues

• Provide portable, composable yield exposure

Hyperliquid Ecosystem Summary

Best Options by Use Case

Snapshot rates as of Jan 20, 2026. Ranges reflect typical variability based on utilization and market conditions.

Hyperliquid Stablecoin Yields Comparison (Snapshot)

10. Aave: The Premier DeFi Lending Protocol

Aave is the largest and most trusted DeFi lending protocol, serving as the gold standard for decentralized lending pools.

Aave Overview

How Aave Lending Pools Work

Supply Side (Earning Yield)

Borrow Side (Accessing Liquidity)

Aave Stablecoin Markets (V3 Ethereum Snapshot)

USDC/USDT/DAI are Aave V3 Ethereum lending rates. sGHO (Savings GHO) is a separate savings product—deposit GHO to receive sGHO and earn 5.59% APY with no lockups and withdraw anytime.

Aave Yield Ranges by Market Conditions

Aave Interest Rate Model Explained

Aave uses a utilization-based interest rate curve:

Aave V3 Key Features

Aave GHO Stablecoin

Savings GHO (sGHO)

Deposit GHO into Savings GHO (sGHO) to earn yield. Simply deposit GHO, receive sGHO tokens representing your balance, and watch your savings grow earning claimable rewards from Merit.

Using Aave for Stablecoin Yields

Simple Supply Strategy:

1. Deposit USDC/USDT to Aave on your preferred chain

2. Receive aUSDC/aUSDT (yield-bearing tokens)

3. Watch balance grow automatically

4. Withdraw anytime to realize gains

Yield Optimization Strategy:

1. Deposit stablecoins to Aave

2. Use as collateral to borrow different stablecoin at lower rate

3. Deposit borrowed stablecoin to higher-yield opportunity

4. Net the spread between yields

Chain Comparison for Stablecoin Yields:

CoinDesk Aave Overnight Rates (CDOR)

Institutional benchmark rates derived from Aave lending pools:

• Daily overnight rates for USDC and USDT

• Transforms on-chain activity into conventional benchmarks

• Used by exchanges, market makers, and protocol treasuries

• Foundation for future interest rate derivatives

11. Stablecoin Yields & Lending Strategies

Complete Stablecoin Yield Comparison

Yield-Bearing Stablecoins

An alternative approach—stablecoins that earn yield when deposited into their savings wrappers:

Important: You must deposit/stake into the wrapper (sUSDS, sDAI, sGHO) to earn yield—simply holding USDS, DAI, or GHO does NOT automatically earn.

Stablecoin Strategy by Risk Tolerance

Individuals

Conservative (Target: 3-5% APY)

sGHO offers higher yield than other conservative options with no lockups and withdraw anytime.

Moderate (Target: 6-10% APY)

ether.fi‘s vault automates Aave leveraged looping — managed strategy with no manual rebalancing.

Aggressive (Target: 10-15% APY)

Note: sUSDe rates have compressed from prior highs; Liminal yields depend on funding rates.

Managed Vault Strategies

For users who want optimized yields without manual management, several protocols offer automated stablecoin vaults:

Managed vaults charge performance fees (typically 10-20%) but handle all rebalancing and optimization.

Institutional Stablecoin Strategies

For institutions requiring compliance, custody integration, and audit trails on stablecoin yield strategies.

Note: These strategies only include platforms with formal institutional access, compliance reporting, and enterprise support. Direct DeFi protocols (ether.fi, Morpho, HyperLend) are accessible to anyone but lack institutional wrappers — institutions comfortable with direct DeFi access can reference the Individual Stablecoin Strategies above.

Conservative Institutional (Target: 4-6% APY)

Best for: Treasuries, foundations, and risk-averse institutions prioritizing capital preservation.

Expected blended APY: ~4-5%

Why this works: 100% allocation through institutional providers (Kiln, Blockdaemon, Fireblocks) with compliance reporting, audit trails, and enterprise support. All exposure is to battle-tested Aave protocol.

Moderate Institutional (Target: 8-12% APY)

Best for: Institutions comfortable with delta-neutral strategies and established institutional providers.

Expected blended APY: ~8-10%

Why this works: Figment’s new OpenTrade product (launched Nov 2025) provides ~15% stablecoin yield with Crypto.com custody and legal protections. Core Aave allocation through Kiln and Blockdaemon for diversification.

Aggressive Institutional (Target: 12-15% APY)

Best for: Crypto-native funds with higher risk tolerance and compliance flexibility.

Expected blended APY: ~12-14% (varies with funding rates)

Why this works: Heavy allocation to delta-neutral strategies (Liminal, Figment/OpenTrade) which have formal institutional products. Aave allocation provides stable base and diversification.

Warning: Delta-neutral yields depend on funding rates which can compress or go negative in bear markets. Both Liminal and Figment/OpenTrade products are relatively new (2025).

What About Direct DeFi Access?

Some institutions (crypto-native funds, DAOs, protocol treasuries) are comfortable accessing DeFi directly without institutional wrappers. If your compliance allows:

These offer higher yields but require direct smart contract interaction without institutional compliance features.

12. Institutional Staking & Lending Providers

Provider Comparison Overview

Note: “Assets Secured” for Blockdaemon includes their full infrastructure stack (nodes, MPC wallets, vaults, APIs) beyond just staking. “Assets Under Stake” is the more comparable metric across pure staking providers.

P2P.org Deep Dive

Services:

• Staking-as-a-Business (SaaB) — White-label staking solutions for exchanges and platforms

• Enterprise Staking API — Programmatic staking integration for custodians and fintechs

• Non-Custodial Staking — Assets remain in client wallets

• Validator Operations — Institutional-grade validator infrastructure

• Hyperliquid Staking — HYPE staking via Hyperbeat partnership (2.21% APR)

Notable Clients & Partnerships:

• AlphaTON Capital (Nasdaq: ATON)

• 3iQ (Canadian ETF provider)

• BitGo integration

• Hyperbeat (Hyperliquid validator node)

• Hypio (Treasury operations)

• Northstake ETH Validator Marketplace

Figment Deep Dive

Services:

• Institutional Staking — Enterprise-grade validators across 40+ networks

• Staking API — Programmatic staking for exchanges, custodians, wallets

• Rewards Reporting — Automated tax and accounting reports

• Portfolio Tracking — Real-time dashboards and CSV exports

• Slashing Protection — 3 tiers of insurance coverage

• Data & Analytics — Network metrics via Rated Labs acquisition (Oct 2025)

• Stablecoin Yield — OpenTrade partnership (~15% APR on stablecoins)

Key Differentiators:

• Largest independent non-custodial ETH and SOL staking provider

• Genesis validator on both Ethereum and Solana

• OFAC-compliant relay usage since inception

• “Safety Over Liveness” philosophy — zero slashing incidents

• Prior experience supporting staking in ETPs across Canada, Europe, and Latin America

Notable Clients & Partnerships:

• Grayscale Investments (first U.S. ETH ETP staking, SOL Trust)

• Coinbase Prime ($2B+ staked assets through integration)

• Bit Digital ($532M+ ETH treasury)

• OpenTrade & Crypto.com (15% stablecoin yield product)

Investors:

• Galaxy Digital

• Morgan Stanley’s Counterpoint Global

• Franklin Templeton

• Fidelity’s Avon Ventures

• Thoma Bravo

Blockdaemon Deep Dive

Services:

• Earn Stack — Complete staking + DeFi integration platform (launched June 2025)

• No-Code Widget — Embed staking/DeFi in minutes with single integration

• Unified SDK & APIs — Low-latency APIs for deep customization

• Node Infrastructure — Enterprise blockchain nodes across 50+ protocols

• MPC Wallets & Vaults — Institutional-grade custody solutions

• DeFi Integration — Access to lending protocols, DEXs, AMMs

• White-Label Validators — KYC-compliant validator services

Key Differentiators:

• Only ISO 27001-certified independent staking provider

• Full-stack infrastructure: nodes, APIs, staking, wallets, vaults (hence “$110B+ secured”)

• Non-custodial by design — clients maintain full asset control

• 100% slashing protection with four layers of risk mitigation

• Acquired expand.network (March 2025) for enhanced API capabilities

Notable Clients & Partnerships:

• Fireblocks (official validator in staking marketplace, 2,000+ institutional clients)

• B2C2 (strategic liquidity partnership)

• Fenbushi Capital

• Hashkey Capital

• VerifiedX (consumer DeFi apps partnership)

• Major exchanges, custodians, and crypto platforms

Kiln Deep Dive

Services:

• Kiln DeFi — Institutional access to DeFi lending (Aave integration across all chains)

• Staking Infrastructure — Validators across 30+ networks

• Rewards Management — Automated tracking and distribution

• Commission Management — Platform revenue tools

• Compliance Reporting — Comprehensive audit trails

• Smart Contract Monitoring — Ongoing security oversight

Key Differentiators:

• Strong focus on DeFi integration for institutions (Kiln DeFi ~$500M+ TVL)

• European-headquartered with EU regulatory expertise

• Rapid growth: $18B+ staking milestone reached in 2025

Notable Clients & Partnerships:

• Major European financial institutions

• Crypto hedge funds

• Protocol treasuries

13. Individual vs Institutional: Key Differences

Overview Comparison

Lending Pool Access

Staking Access

Platform Recommendations

For Individuals:

For Institutions:

14. Risk Considerations

Risk Matrix

Key Risks by Strategy

Lending Pool Risks:

• Smart contract vulnerabilities

• Oracle manipulation

• Liquidation cascades

• Utilization spikes (can’t withdraw)

Staking Risks:

• Slashing (validator misbehavior)

• Unbonding periods (illiquidity)

• Centralization concerns

• Protocol changes

15. Multi-Asset Portfolio Yield Strategies

These portfolios are for investors and institutions allocating across multiple asset types (ETH, SOL, stablecoins, etc.) seeking diversified yield exposure. If you only want stablecoin yields with no crypto price exposure, see the “Stablecoin Strategy by Risk Tolerance” section above.

Individuals Multi-Asset Portfolios

Conservative Portfolio (Target: 4-6% Blended APY)

Best for: Long-term holders prioritizing capital preservation with established, battle-tested protocols.

Expected blended APY: ~4.5-5.5%

Why this works: Heavy allocation to established protocols (Aave, Lido) with proven security. Native SOL staking via wallet eliminates smart contract risk. Small allocation to higher-yield options (sGHO, Marinade) boosts returns without significant risk increase.

Moderate Portfolio (Target: 6-9% Blended APY)

Best for: Investors comfortable with newer protocols seeking higher yields with measured risk.

Expected blended APY: ~6.5-8.5%

Why this works: Diversified across 4 ecosystems (Ethereum, L2s, Solana, Hyperliquid). Mix of established (Aave, Jito) and emerging (HyperLend, ether.fi vaults) protocols. Restaking adds yield layer without excessive complexity.

Aggressive Portfolio (Target: 10-15% Blended APY)

Best for: Risk-tolerant investors comfortable with newer protocols, leverage, and funding rate exposure.

Expected blended APY: ~9-13% (varies significantly with market conditions)

Why this works: Liminal’s delta-neutral strategy provides outsized returns when funding rates are positive. Hyperliquid allocation captures high yields in emerging ecosystem. Jito provides stable base yield. Restaking adds upside. HYPE staking gives ecosystem exposure with instant unstaking.

Warning: Aggressive portfolios can underperform in bear markets. Liminal yields depend on funding rates (can go negative). Newer protocols carry higher smart contract risk. Only allocate capital you can afford to lose.

Institutional Multi-Asset Portfolios

Conservative Institutional (Target: 4-6% Blended APY)

Best for: Institutions requiring compliance, custody integration, and proven infrastructure.

Expected blended APY: ~4.5-6%

Why this works: 100% allocation through battle-tested institutional providers (Figment, P2P.org, Kiln) with SOC 2 certifications and zero slashing history. Coinbase Prime custody integration keeps assets secure while earning staking rewards. Diversified across ETH, SOL, and stablecoins for balanced risk. All providers offer enterprise APIs, compliance reporting, and audit trails required by traditional institutions.

Moderate Institutional (Target: 7-10% Blended APY)

Best for: Institutions seeking enhanced yields with emerging ecosystem exposure.

Expected blended APY: ~7-9%

Why this works: Liminal’s Institutional Mode provides the yield boost (targeting ~15%) while maintaining compliance and dedicated support. Core ETH/SOL staking through Figment and P2P.org provides stable, proven returns. Hyperliquid exposure via Hyperbeat (backed by P2P.org infrastructure) adds emerging ecosystem upside without sacrificing institutional standards. Provider diversification (Figment, P2P.org, Kiln, Blockdaemon) reduces single-provider risk.

Aggressive Institutional (Target: 10-14% Blended APY)

Best for: Crypto-native funds and institutions with higher risk tolerance seeking enhanced yields.

Expected blended APY: ~10-12% (varies with funding rates)

Why this works: Heavy allocation to delta-neutral strategies (Liminal, Figment/OpenTrade) drives higher yields while maintaining institutional compliance. Core ETH/SOL staking through proven providers adds stability. HYPE staking provides emerging ecosystem exposure through institutional-grade Hyperbeat infrastructure.

Warning: Delta-neutral yields depend on funding rates which can compress or go negative in bear markets. This portfolio has higher concentration in newer products (Liminal, OpenTrade launched 2025).

Due Diligence Checklist

• [ ] Verify smart contract audits

• [ ] Check provider track record (slashing history)

• [ ] Understand fee structures

• [ ] Know unbonding/withdrawal periods

• [ ] Review insurance/coverage

• [ ] Assess regulatory compliance

• [ ] Understand tax implications

Contact & Consultation

Ready to optimize your yield strategy?

Whether you’re an individual seeking to maximize returns across lending and staking, or an institution requiring solutions, guidance can help navigate this complex landscape.

Disclaimer: This guide is for educational purposes only and does not constitute financial advice. Cryptocurrency lending and staking involve significant risks including potential loss of principal. Always conduct your own research and consult with qualified professionals before making investment decisions.

Last Updated: January 20, 2026 (rates/TVL are point-in-time snapshots; verify current rates before acting).

Love,
CookieMonster

My Bitcoin journey started in 2010 when my Uncle introduced me to it at a family gathering. I was immediately captivated by its disruptive potential, but at the time, the complexity of the process held me back from buying it – a sentiment shared by many who discovered Bitcoin in its early days.

Fast forward to the end of 2016, I purchased my first Bitcoin and Ethereum. But it wasn’t until early 2017, during an injury that kept me homebound for three months, that I fully immersed myself in the world of Bitcoin. With time on my hands, I was determined to learn everything about Bitcoin and its far-reaching impact on the world. The more I delved into it, the more obsessed I became.

What fascinated me the most was the concept that part of Bitcoin's value is derived from energy - particularly the concept of Proof of Work (PoW) and the mining process. This aspect of Bitcoin is what truly sparked my obsession from the beginning. So, I built a few ASIC and GPU mining rigs to mine BTC, LTC, and Monero. At the time, watching the price rise was exciting, but it was the technology itself that truly captivated me. One pivotal moment during this time and one that I always refer back to was the Bitcoin Block Size Wars - witnessing how Satoshi crafted Bitcoin into a truly decentralized governed entity was truly remarkable. Another moment was when China banned all mining, and the world saw, in real-time, how quickly the hash power shifted and ramped up in the West, especially to America, quickly breaking all-time highs.

And so, my Bitcoin journey took flight - fueled by curiosity and evolving into an unwavering belief in the technology's boundless possibilities. In hindsight, that injury turned out to be a blessing in disguise, opening the door to high-yield investments, but most importantly, the chance to grasp a cutting-edge technology that could shape our lives in unexpected ways, humbling me with its teachings.

My insatiable curiosity drove me to explore various other technologies, leading me into the world of ‘shitcoins’. This period was a great opportunity to make money through ICOs, privacy coins, IDOs, DeFi, Ethereum alternatives, memes, gaming, NFT trends, and second-layer solutions. It also allowed exploration of new technologies that could potentially improve the Bitcoin ecosystem. One notable example is Bitcoin's interest of implementing validity rollups, a technology already tried and tested on Ethereum and Polygon. Also, Bitcoin successfully enabled SegWit, which was initially implemented on Litecoin first.

As I delved deeper into the world of cryptocurrencies, my belief in Bitcoin grew stronger. Some key moments during this exploration were:

1. Witnessing Ethereum (ETH) change its consensus mechanism to Proof of Stake (PoS).

2. Observing centralized exchanges and LUNA experience significant issues due to risky "shitcoin yield products."

3. My hands-on experience writing Ethereum smart contracts in Solidity further revealed the limitations of Ethereum. Its Turing completeness made it unreliable as a source of truth, making it impossible to ascertain the true state of the network.

Overall, I found that alternative cryptocurrencies lacked the same values that Bitcoin offered. While some may debate Bitcoin's Nakamoto coefficient or other decentralization measures in comparison to other cryptocurrencies, one thing is certain: Bitcoin's value comes from energy, through its robust Proof of Work (PoW) mechanism.

My mantra is "stay curious and stay grounded". In doing so I believe that energy is the first abstraction layer of value, and that Bitcoin sits one abstraction layer on top of energy. Bitcoin, by leveraging computational power (and inherently, energy), creates a sophisticated layer of value built upon this energy foundation. The core mechanics of Bitcoin mining and transaction processing transform energy into a digital value, forming a novel layer of abstraction on top of the base energy layer. An abstraction layer that is much closer to true value than our current fiat value system.

Driven by this understanding and fascinated by the potential it holds, I am committed to enriching the Bitcoin ecosystem and “orange pilling” as many as I can. This, in turn, allows me to align with the primal value of energy, fostering my intellectual curiosity while staying firmly grounded in reality.

Why Swan:

Swan offers several easy ways for people to get "orange-pilled." I want to be part of a firm that is integral in Bitcoin adoption for the world. It would have been really helpful to me to have Swan around in 2010 when I first heard about Bitcoin.

I have been observing Swan's growth since 2019, listened to most of the Swan Signals podcasts, and seen the release of new product developments. One such product is the Nakamoto Portfolio, which helps others realize that Bitcoin can build a healthier portfolio. Another approach I like that Swan takes is how they view Bitcoin as the best form of property. I appreciate how Swan stays true to Bitcoin's values while keeping an open mind to the diversity of thought. After all, one has to be curious to venture down the Bitcoin rabbit hole while staying grounded.

Lastly, Swans are known for forming extremely strong and long-lasting relationships with one another, just as everyone who learns and acquires some Bitcoin forms a bond with it and its underlying values. Moreover, a swan represents transformation, and I truly hope to contribute to transforming the world for the better through Bitcoin by encouraging its widespread adoption. Since my introduction to Bitcoin, I have gained a much better grasp on the world and its workings. As a Swan myself in this context, I aspire to be part of a company with a mission to help others also become Swans.

Love,

CookieMonster

There are two different types of rollups: sovereign rollups and smart contract rollups. The main difference is that a sovereign rollup is its own layer 1 sidechain, while a smart contract rollup is a layer 2 chain. Currently, sovereign rollups can be implemented on Bitcoin today, while smart contract rollups are still being developed.

A sovereign rollup is an independent layer one blockchain that stores its blocks inside the blocks of another parent blockchain such as Bitcoin or Ethereum. It is important to emphasize that it's a separate layer one blockchain. Sovereign rollups possess several features, including equal double spend resistance and data availability to the parent chain, as they store their blocks within the parent chain's blocks. Additionally, sovereign rollups can independently change their consensus rules, allowing for hard forks without affecting the parent chain. However, this independence means they lack a secure bridge to the parent chain. Some examples of current sovereign rollups on Bitcoin are Rootstock (RSK) and Liquid.

A smart contract rollup is a layer 2 or higher blockchain that stores its blocks inside of another parent blockchain, like a sovereign rollup. However, it also has a secure bridge to its parent blockchain, which is enforced by a smart contract on the parent blockchain. Similar to a sovereign rollup, a smart contract rollup can have a custom execution environment that differs from the parent chain's execution environment. There are two examples of smart contract rollups: optimistic rollups and validity rollups (ZK-rollups). Optimistic rollups rely on the assumption that all transactions are valid unless proven fraudulent. In contrast, validity rollups use zero-knowledge proofs to ensure transaction validity and privacy.

Currently, validity rollups (ZK-rollup) are the most promising solution for scaling Bitcoin. Why?

• Validity rollups complement other scaling protocols, such as Lightning or Validia chains, by creating more throughput for transactions on the layer one blockchain. With Lightning, on-chain transactions are required to open a channel, and additional on-chain transactions may be needed to rebalance or settle the channel, as well as close it. Validity rollups can support up to 250,000 transactions per block, allowing for more on-chain transactions to manage Lightning channels or other layer 2 protocols, like Validia chains.

• In terms of programmability, validity rollups give developers the ability to experiment with new smart contract languages and applications without changing Bitcoin layer one. For example, one could build new self-custody protocols using vaults or account abstraction on a validity rollup without making any changes to Bitcoin layer one. Similarly, new types of peer-to-peer financial transactions, such as pooled borrowing and lending, or new collective custody models, such as smart organizations, can be built on validity rollups.

• Because Validity rollups use zk-SNARKs, they are also more private without affecting the transparency and audibility of the layer one blockchain. A validity rollup that has opt-in end-to-end encryption for Bitcoin transactions would encrypt the sender address, recipient address, transaction assets, and amounts, keeping the details of the transaction private and shielded from public view.

• Validity rollups are the type of rollup that is most aligned with Bitcoin values. They are cryptographically secure, trustless, and could have mathematical security assumptions that are no different from the mathematical security assumptions used in Bitcoin, depending on the type of proofs used. This would enable more self-custodial Lightning users without having to increase the block size limit on layer one or make any other invasive layer one changes.

When implementing rollups, it's essential to weigh their benefits and risks. Fortunately, examining rollups on other blockchains can help us understand their workings and impact. While concerns exist that adding this layer may compromise Bitcoin's security and increase fees, studying rollups on Ethereum shows that these fears have not materialized. Compared to the Bitcoin Taproot upgrade, implementing rollups should be simpler since rollups are better understood, and we have real examples to assess their benefits and risks.

Overview of the benefits of rollups on Bitcoin:

1. Complementary to other scaling protocols: rollups can improve transaction throughput on the layer one blockchain, allowing for more on-chain transactions to manage Lightning channels or other layer 2 protocols like Validium chains and sidechains.

2. Programmability: Validity rollups provide developers with the opportunity to experiment with new smart contract languages and applications without changing Bitcoin layer one. This flexibility enables the creation of innovative self-custody protocols, peer-to-peer financial transactions, and collective custody models like decentralized autonomous organizations (DAOs).

3. Enhanced privacy: Transactions on Bitcoin can be made more private by employing advanced blockchain privacy technologies within validity rollups without affecting layer one transparency and audibility.

4. Scalability: Validity rollups can support up to 250,000 transactions per block, compared to the current maximum of around two to three thousand transactions per block, allowing for more self-custodial Lightning users without increasing the block size limit on layer one.

5. Security: Rollups maintain the same level of security and decentralization as the parent chain, while also offering additional security features such as equal double spend resistance and data availability to the parent chain.

6. Lower fees: By bundling multiple transactions into a single on-chain transaction, rollups can significantly reduce transaction fees for users.

7. Easier implementation: Implementing rollups is expected to be less complex and easier compared to other Bitcoin upgrades, such as the Taproot upgrade.

In summary, by bundling transactions and increasing throughput, rollups offer a way for Bitcoin to scale to gain adoption and more use cases. Validity rollups, in particular, are the most aligned with Bitcoin values. In the next Rollup article I will dive deeper into Validity rollups.

With Love, CookieMonster

To me, the most important concept about Account Abstraction is that it enables code and logic to be implemented at the contract layer, which is directly associated with identifying truth on chain. This means that the smart contract acts as the gatekeeper, validating transactions and ensuring that they are executed correctly. This is important because it allows for more flexibility in the execution of transactions and enables the development of more complex applications on the blockchain. By implementing code and logic at the contract layer, developers can introduce new features and improve security without having to make changes to the underlying blockchain protocol.

Where did AA come from?

The concept of account abstraction is not new. Vitalik Buterin proposed it in 2016, suggesting the abstraction of nouns and signature verification. Since then, we have seen EIP-86, EIP-2938, EIP-3074, and the latest, EIP-4337. The most recent EIP, ERC-4337, has garnered attention and has been implemented because it enables account abstraction without requiring changes to the Ethereum protocol.

What are the components?

ERC-4337 comprises three key components:

1. EntryPoint contract - coordinates transactions and validates them before they are executed. The EntryPoint Contract checks that the transactions are valid, and then sends them to the bundlers.

2. Paymasters - are entities that pay gas fees on behalf of users in the form of sponsored transactions. Paymasters may decide to cover transaction fees for various reasons, often due to the potential benefits for their business or platform.

3. Smart Contract Wallets - represent user identities on the blockchain and store their digital assets. Smart Contract Wallets enable users to interact with the blockchain and sign transactions without revealing their private keys.

In ERC-4337, users sign an intention that is sent to a mempool where a network of bundlers collect these operations to build a bundle. These bundles are then submitted as a transaction to Ethereum, orchestrated by a specific contract called the EntryPoint.

Bundlers compete to add transactions to blocks by offering fees. The fees for executing transactions on the fee market can differ from those on the mainnet, creating a spread. This difference presents an opportunity for MEV searchers to capture arbitrage, similar to how Flashbots captures MEV from transactions in the Ethereum mempool. Note: Even though this abstraction layer where the transaction gets ordered is another layer and another fee, the total fee paid by the user is either the same or less because the bundlers are able to condense many transactions creating a more efficient system.

New features that are coded at the contract layer

1. Multi-call - is a smart contract optimization technique that enables bundling of multiple Ethereum blockchain read-only calls into a single atomic transaction. This means that multiple read-only calls to smart contracts can be executed in one go, rather than having to execute them one-by-one, resulting in significant gas savings and reduced execution time. This will enable the user to experience a more seamless experience and not have to sign off on each step of a transaction.

2. Session keys - allows the use of multiple authorized keys to perform transactions for a specific time. This opens the door to build systems that allow for permission levels. It has already been implemented in Unchained games to build a more seamless frictionless playing experience.

3. Social recovery - is a security feature available in cryptocurrency wallets that enables users to regain access to their accounts in case they lose their private keys. By adding trusted friends, family, or organizations as Guardians to their accounts, users can protect their accounts from key loss or theft and control who can access the account and approve transactions. If a user loses their private key, they can contact their Guardians to initiate the recovery process. If a majority of the Guardians approve the transaction, the owner key is replaced with a new key, which the user can then use to regain access to their account. The benefits of using Guardians and social recovery include increased security, protection against key loss or theft, control over access, and flexibility in customizing the ratio of Guardians needed for approval.

4. Native value transfers - This compatibility broadens its potential use cases and addresses one of the limitations of ERC-3074. With native value transfers one can interact with older ERCs.

5. Pre-approvals - You can pre-approve transactions for a certain period of time, within a certain application. It’s like signing one transaction to last for a while and then being able to play or interact with the blockchain to your heart’s content.

6. Subscription models - have always been tricky on ETH, but ERC-4337 will allow for processing automated payments to be natively integrated in a streamlined fashion.

   These can come in the forms of:

   • Monthly subscription model: A user could subscribe to a monthly plan that provides access to a specific set of ERC-4337 tokens for a fixed fee. This would allow users to easily manage their token portfolio without having to worry about transaction fees or other complexities of the Ethereum blockchain.

   • Transaction-based subscription model: Another approach could be to offer a subscription model based on the number of transactions a user makes with their ERC-4337 tokens. For example, a user could purchase a certain number of transactions per month or quarter, with additional transactions available for purchase as needed.

   • Tiered subscription model: Offers different levels of access to ERC-4337 tokens, with each tier offering a different set of benefits and transaction limits. This would allow users to choose the level of access and transaction volume that best fits their needs and budget.

   • Hybrid subscription model: Combines elements of the above models, offering users a range of subscription options based on their needs and preferences. For example, a user could purchase a monthly subscription for a fixed number of transactions, with additional transactions available for purchase as needed.

7. Sponsored transactions - Paymasters are entities that agree to cover gas fees for user transactions, acting as sponsors. They may decide to cover transaction fees for various reasons, often due to the potential benefits for their business or platform.

   Reasons why companies would want to sponsor transactions:

   • Boost user engagement: Sponsoring transactions can encourage users to interact more with a platform, making it more enjoyable and accessible, and increasing adoption.

   • Attract new users: Covering gas fees can be a marketing tool for bringing in new users by lowering the entry barrier. It also takes away the pain of having the new user acquire ETH before using the product.

   • Improve user experience: By eliminating gas fee management, users can focus on the application's features, resulting in a smoother experience.

   • Support specific projects: Paymasters may sponsor transactions for a specific application, project, or use case that aligns with their interests, driving user adoption and visibility.

   • Alternative monetization: Paymasters can be compensated through other revenue streams, such as subscription fees, premium features, or token-based rewards.

   • Competitive advantage: Offering sponsored transactions can give a Paymaster an edge over competitors by providing a more cost-effective solution.

   • Encourage network growth: Sponsoring transactions contributes to the growth and development of the Ethereum ecosystem, benefiting all participants in the long run.

   ERC-4337 sponsored transactions can greatly improve user experience and boost the adoption of Ethereum-based apps.

   • Easier account management: Users don't need Ether for gas fees with ERC-4337, letting them focus on an app's main features and making it more attractive to both new and experienced users.

   • Lower entry barriers: New users don't need to buy Ether for gas fees, thanks to sponsored transactions, making it simpler to start using Ethereum apps.

   • Less transaction complexity: Users don't have to worry about gas fees or managing Ether balances, making Ethereum apps more accessible and user-friendly.

   • Encouraging exploration: Users can experiment with different Ethereum apps, leading to increased engagement and the discovery of new use cases.

   • Aiding emerging markets: Sponsored transactions allow users in regions where Ether costs are high to access Ethereum apps without being held back by expensive transaction fees.

   • Innovation: Makes it easier and more affordable for users to engage with Ethereum apps, encouraging developers to create new solutions that benefit from a larger user base.

   • Network effects: Sponsored transactions can attract more users and promote interaction, increasing the overall value of the Ethereum ecosystem.

For account abstraction to become widespread, wallet developers and tooling providers must collaborate on developing common standards. Library and SDK developers also play a crucial role in providing better tools to dApp developers, which can help facilitate the adoption of account abstraction and smart contract wallets.

There are three main categories of wallet solutions: Conventional Wallets, Smart Contract Wallets, and Multi-party Computation Protocols (MPC wallets).

Let's first cover all of the attributes that a wallet should have.

1. Recoverability - How easy it is to recover assets and access the funds.

2. Privacy - How easy it is to keep addresses linked to individuals or organizations private.

3. Security - The degree of protection against attacks.

4. Extensibility - How well the wallet can integrate new features and integrations.

5. UX - How easy and intuitive it is for the user to use the wallet.

6. Cost - How expensive it is to perform transactions, create accounts, and manage access.

Many wallets have been developed over the past years. Here is a list of some and what type they are:

Conventional Wallets

• Matamask

• Trust Wallet

• Coinbase Wallet

• Casa

• Ledger

• Trezor

• Rainbow

Smart Contract Wallets

• Argent

• Pillar

• Safe

• Linen

MPC Wallets

• Sepior

• Fireblocks

• Lit

• Coinbase

• ZenGo

• Qredo

Conventional Wallets use a seed phrase and a hierarchical deterministic (HD) structure to generate private keys, public keys, and addresses for users. They are the main entry point for self-custody of assets, but have a single point of failure. Users can lose all their assets if private keys are lost and have to manually keep track of multiple addresses and approvals. Even though this type of wallet has onboarded many users, many are still hesitant to dive into crypto as they do not want to run the risk of losing all of their assets due to forgotten keys. The users that use these wallets are mostly individuals and multisig signers. Multi-Party Computation (MPC) and smart contract wallets remove this single point of failure and have been adopted by institutions, individuals, and DAOs. Both types have their own trade-offs, but are fundamentally different in their technical approach. Conventional Wallets six attributes:

1. Recoverability - If a private key or seed is lost or compromised, there is NO recoverability.

2. Privacy - Users need to use multiple accounts and fund gas costs via another account, resulting in not-so-good privacy.

3. Security - Browser wallets run the risk of being compromised. Hardware wallets are safer.

4. Extensibility - Good to grow ecosystems within the wallet. Its dependent on the developers on the wallet.

5. UX - Easy onboarding with browser extensions, but cumbersome due to seed phrases.

6. Cost - Accounts are free to create. Fees are based on on-chain activity.

MPC Wallets allow multiple parties to jointly manage a public-private key pair without a single point of failure by splitting, encrypting, and distributing the private key among multiple parties. This allows a threshold of parties to generate a signature using their secret shares, making the signature indistinguishable. It also allows parties who do not trust each other to jointly run a function over their inputs while keeping their privacy. These types of wallets are currently used by institutions and their clients because it allows for both parties to have access and control while preserving access, safety, and privacy. There is also no single point of failure, unlike in conventional wallets, if the user loses their private key. These wallets also have cheaper gas fees because it is represented as a single address and the signatures can happen off-chain. MPC wallets can also be easily applied to different chains and also interact with https which connects them to Web2 platforms. However, lack of support from consumer hardware manufacturers like Ledger and Trezor has limited the adoption of MPC wallets by retail customers and it has primarily been used as an enterprise solution. Some downsides to MPC wallets are they are mostly siloed from developers, they are not compatible with hardware wallets, and because the signing authorizations is done off-chain they are a bit centralized. MPC Wallets six attributes:

1. Recoverability - Can recover keys either by multiple recovery schemes off-chain or private key rotation.

2. Privacy - Uses off-chain signing schemes which preserves privacy.

3. Security - Browser wallets run the risk of being compromised. Hardware wallets are safer.

4. Extensibility - Most libraries are closed source and incompatible with other wallets.

5. UX - Easy onboarding with browser extensions. But cumbersome due to seed phrases.

6. Cost - Accounts are free to create. Fees are based on on-chain activity.

Smart Contract Wallets are simply smart contracts that act like a wallet. This allows for logic and code to be implemented directly on the contract layer in relation to a user. Unfortunately, at the time of this writing smart contract wallets are dependent on the consensus layer they sit on, and those consensus layers or chains need to be redesigned and forked in order to incorporate smart contract wallets. What really hinders smart contract wallets right now is that they cannot operate on their own; they need an externally owned account (EOA), such as Metamask, to originate the transactions and pay the gas to trigger an action. One solution to this problem is called Account Abstraction (AA), which unifies the EOA and smart contract account while abstracting the user account from the execution of the transaction. This will overall help the usability of wallets. Note: this was written just before ERC-4337 is being voted on which enables account abstraction without requiring changes to the Ethereum protocol. Currently, a Metamask user has to sign three different transactions, which is cumbersome. With AA, this will only take one step. The advantages of a smart contract wallet include its open-source nature, signatures taking place on-chain, cost savings with transaction batching, the ability for the user to define parameters with programmable access control, easy key recovery through trusted guardians, and there is no single point of failure. The current drawback without AA is that it is not universally supported currently, recovery is expensive, and it comes with higher fees due to the verification of multiple signatures. Smart Contract Wallets six attributes:

1. Recoverability - They can be recovered through deadman switches, collaboration with custodians, or through social means.

2. Privacy - They use on-chain signing schemes, which make audits more straightforward.

3. Security - They are very secure with no single point of failure.

4. Extensibility - They are open and encourage an ecosystem to extend wallet features.

5. UX - They can be greatly customized and will be simplified with AA.

6. Cost - They may have higher costs than others, but this could be reduced with transaction batching.

As the goal is to continue on-boarding as many people to blockchain, I believe that currently, decentralized multiparty computation (MPC) wallets are the best options. They may not offer the highest level of security and flexibility, but they are versatile and can be applied to multiple platforms and even non-blockchain systems. They also eliminate the worry about individuals losing their keys and assets. However, I hope that in the near future we can move to smart contract wallets with account abstraction, which will offer the most secure, efficient, and user-friendly experience for self-custody on the blockchain. Conventional wallets were a good start, but it is time to move on. I will cover MPC wallets and account abstraction smart contract wallets further in future posts. I am extremely excited about this area and believe it will be a pillar of the future of blockchain.

With Love, CookieMonster

This can occur through a variety of mechanisms, including frontrunning, transaction ordering, and arbitrage.

Frontrunning refers to the practice of executing trades based on knowledge of forthcoming transactions. For example, a trader might observe that a large transaction is about to be executed on a blockchain, and then quickly place a trade ahead of the larger transaction in order to profit from the price movement that is likely to occur.

Transaction ordering refers to the practice of manipulating the order in which transactions are processed on a blockchain. By prioritizing certain transactions over others, traders can potentially profit from price differences between different exchanges or markets. This also can build a healthier system for example the chain can agree to liquidate accounts before executing specific trades which helps add liquidity to the overall market.

Arbitrage refers to the practice of profiting from price differences between different exchanges or markets. In the context of blockchain, arbitrage opportunities can arise when prices for the same asset vary significantly between different exchanges or marketplaces. This is a healthy form of MEV.

It is worth noting that MEV is not inherently nefarious, and can be generated through legitimate means such as market making or liquidity provision. However, the potential for profit through manipulation has raised concerns about the potential for abuse and market manipulation in the blockchain ecosystem. We will go in depth in later posts specifically around MEV on the Cosmos ecosystem.

With Love, CookieMonster