The Magic of Flash Loans (Part 2): The Next Octave
Constraints, episode 11
A wall taken down at one layer has a way of reappearing at the next. It is less a wall than a note: silence it in one octave, and it returns in another, altered in pitch but unchanged in character.
Part one ended with a simple claim. Flash loans removed one constraint, capital, and what fills the space that opens up is decided by us. You no longer need to own a fortune to act on Ethereum; you can borrow millions for the length of a single transaction, as long as you can write the code that pays it back. The contest moved from wealth to engineering.
This episode is about what is filling that space. The short version: the opportunity is going private.
When I was building my small liquidation scraper, everything I needed was public. Positions sat on-chain for anyone to read. Pending transactions waited in a public waiting room, the mempool, where anyone could watch them before they were confirmed. That openness was the quiet assumption behind the whole promise of flash loans. Capital could be borrowed, and the opportunity could be seen. A person with a laptop and a good idea could, at least in principle, compete.
That second half is quietly changing. A growing share of transactions never enters the public waiting room at all. Wallets and apps send them straight to a small number of specialised companies called builders, the ones who assemble the blocks that make up the ledger. Some wallets sell the right to see their users’ transactions first, in private auctions, and hand part of the proceeds back to the user. Builders who receive the most exclusive flow can assemble the most profitable blocks, win more of them, and attract even more exclusive flow. It is a flywheel, and left alone it spins toward fewer hands. It has not closed the market: builders still compete, and some private routes are built to share flow with many of them. But the pull runs in one direction.
The consequence is simple to state. A flash loan can lend you the capital for a trade. No loan can lend you the view, or the place in line that turns what you see into something you can act on. If the opportunity is sold before it ever becomes visible, let alone actionable, it does not matter how good your code is: you never get to see it, and even if you did, someone else has already been given the right to move first. Capital stopped being the moat; access is becoming the new one.
It would be easy to make the private channels the villain of this story, and that would be dishonest. The same curtain protects ordinary users from the sandwich described in part one, the person in the queue who sees your hamburger order, cuts in front of you and sells it back at a higher price. A transaction sent through a protected route cannot be spotted by those bots, a protection that already covers a good part of everyday trading, and some users even get paid a share of the value their transaction creates. So the private channel is two things at once. It shields the individual from predators. And it changes who the opportunity belongs to. In the open waiting room, the chance to profit from a transaction went to whoever spotted it and built the best response. Behind the curtain, that same chance becomes something a wallet or a builder can hold, price and sell, and it goes only to whoever has the right agreement. The opportunity does not disappear. It gets an owner. The honest position is to hold both sides at the same time, not to collapse them into a slogan.
And the flywheel does not stop at the builders.
By 2026, what sits on top of Ethereum is no longer only a price. It is a yield. Ethereum is secured by people who lock up their ETH as a guarantee of good behaviour, a practice called staking, and who are paid for keeping the network running. Today you do not have to do any of that yourself. You can buy an ETF, a fund traded on the stock exchange like any share, that holds ETH, stakes it, and passes the income on to you. The fund does not run the machines itself. It hands the ETH to specialised companies that keep it safe and operate the infrastructure, while the people who own the fund never touch it. The ETF is a straw into the network, and a great many people drink through it without once seeing the machinery underneath.
It is tempting to call this a threat to decentralization and stop there, but the word is too blunt to be useful. It helps to separate three different jobs. The first is confirming blocks: this is done by validators, backed by the staked ETH. The second is deciding what goes into each block: in practice this is done by the builders. The third is the waiting room, where transactions sit before anyone picks them up, in plain view or behind a curtain. Staking ETFs concentrate the first job. Private flow concentrates the second and the third. Neither automatically causes the other. The danger is in what happens when they meet.
A validator on its own has a mostly economic power: it takes part in confirming blocks and gets paid for it. Economic power is loud and tends to limit itself. The power that matters is quieter. When a large share of the stake relies on the same few builders, and those builders rely on the same private flow, the question stops being how much you are willing to pay to get your transaction through. It becomes whether your transaction gets through at all, and who decided. That is not a market. It is a gate.
Here is the part I keep returning to. What matters about this stake is not simply its size, but its temperament. Ethereum’s ability to resist censorship, to refuse to block a transaction because someone powerful wants it blocked, was never guaranteed by code alone. It also depended on the people running validators being many, scattered, and free to say no. The stake piling up behind ETFs changes who is in a position to say no. The investor owns a share of a fund. The fund’s ETH sits with a custodian. The machines are run by regulated companies. The person who owns the ETF has no say in how any of it behaves.
If that stake ends up concentrated in the hands of a few operators, and those operators lean on a few builders with exclusive flow, the network’s ability to resist pressure depends less on the wishes of millions of owners than on the decisions of a handful of institutions.
This is a risk to watch, not a behaviour already on display: large operators still tend to work with many builders. That does not make censorship inevitable. It changes where the ability to resist censorship lives.
In a previous episode I argued that the danger of a powerful tool is not its power but its opacity. Here the danger is not the power of the stake either. It is the distance between the person who owns it and the machinery that uses it.
None of this is settled, and Ethereum is not standing still. It has answered this kind of drift before, more than once. Two defences are being built against exactly this problem, and the shape they take is worth noticing.
The first is inclusion lists. Under a proposal called FOCIL, a rotating group of validators publishes lists of valid waiting transactions, and a block that leaves them out is rejected. FOCIL has been locked in as a headline feature of Ethereum’s next major upgrade, Hegotá. It takes away the power to leave things out.
The second is encrypted waiting rooms. Proposals such as LUCID and Shutter keep the content of a transaction sealed until its place in the block is already fixed. Nobody can discriminate against a transaction whose content they cannot read, and nobody can sell a first look at something no one can see. It takes away the power to see what to leave out, and with it, part of the reason to make the opportunity private in the first place.
Read together, the logic is plain. Censorship needs two powers: the power to see what you want to block, and the power to leave it out. FOCIL attacks the second. Encryption attacks the first.
They act on the constraints, not on the actors.
Whether they arrive fast enough, and whether they hold once this much regulated capital and this much private flow are inside the system, is the open question. I do not think it is decided.
Which returns us to where part one left off. Flash loans were a lesson in how quickly a constraint everyone believed in can turn out to be optional. This is the other half of the lesson. A constraint that falls does not vanish. It relocates, and it tends to relocate somewhere less visible than where it started.
Flash loans opened the opportunity to anyone who could write the transaction. The next octave decides whether anyone can still see it.
Capital stopped being the constraint on acting and returned, an octave away, as the constraint on being seen and being included.
Freedom on this network was never really about who can afford to act. It was about whether the network can still refuse to be told what to leave out, and who gets to look first.
That is the constraint worth watching now, and it is the one no clever wallet can route around.