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Staking, Lending, and MEV: One Model to Rule Them All

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Mar 24, 2023
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Kshitij Kulkarni

Proof of Stake systems find validators competing for sources of return. These sources are divided between those that increase the underlying security of the chain, and those that are parasitic. I will present a survey of work along these lines on analyzing how the choice between these sources (including MEV) can be modeled by considering a portfolio optimization problem for the validators. This framework gives us many related insights: 1) Staking and lending yields compete 2) Derivatives can be unsafe 3) MEV redistribution can help improve the underlying security of the chain and 4) Reward inflation requirements can be reduced with redistribution. Along the way, we will consider MEV redistribution as a broader class of incentive mechanisms to secure blockchains.