#56: Mo Money Mo Adoption
State of liquid staking, interoperability, network ecosystem funds, Solana outage, as well as Mainnet 2021 commentary.
Welcome to a - long overdue - Staking Economy issue! Recent weeks with increasing activity in the Proof-of-Stake world have unfortunately led us to neglect the newsletter in favor of our companies’ endeavors. We will for the foreseeable future switch to a monthly cadence and focus more on broader ecosystem observations.
On another note - we are organizing a Staking Economy lunch meeting at the Lisbon for the Solana Breakpoint conference, so if you are a reader that will be around and is interested to join, feel free to join the Telegram channel we will use to plan.
EIP-1559, an improvement proposal for a fundamental change to Ethereum’s fee model went live on Ethereum on August 5. EIP-1559 aims to improve the UX around gas prices in Ethereum and most importantly creates a sink for ETH by burning the so-called base fee (more details e.g. here). Since the activation of EIP-1559, there has been 358,507 ETH burned (~USD $1bn) and the average ETH issuance per year has reduced by 53.14%. Extrapolating the ETH burned per year at the current average of issuance, we would reach about 2.6-2.7m ETH being burned per year.
A simulator has been created that predicts the future ETH inflation/deflation before and after the ‘merge’ (Ethereum transition from Proof-of-Work to Proof-of-Stake). As it stands in Eth PoW, there is about 5.4m new ETH issued and 2.6m existing ETH burned (net 2.8m ETH issued per year) and there is ~117m ETH circulating, resulting in about 2% inflation per year. After the merge, ETH issued is expected to reduce to 400m a year and if the current EIP-1559 burn rate remains the same (2.6m burned per year), the net issuance of ETH will be -2.2m per year (or -1.9% deflation). There is an interesting tweet thread here that explains the history and reasoning behind the dramatic decrease in ETH annual issuance (from 2.8m down to 400m) after the merge.
Deep Dive Podcasts on Staking Networks
Felix and Xavier relaunched the Chorus One Podcast and had a variety of guests working on interesting protocols in the multichain Proof-of-Stake ecosystem, including e.g. Derek Yoo (Moonbeam), Scott Sigel (Helium), and Sunny Aggarwal (Osmosis). Check it out on YouTube, Spotify, Apple Podcasts, or elsewhere and please leave a review/like/subscribe if you enjoy it!
State of Liquid Staking
As the DeFi ecosystems on Proof-of-Stake chains expand, liquid staking is becoming a mainstream topic and liquid staking assets like Lido’s stETH are bound to become one of the core collateral type in DeFi applications. Since we last released an issue, there has been a lot of activity in this space, and we wanted to highlight a few key developments:
Lido officially expanded to Solana through the Lido for Solana protocol built by the Chorus One team. On Ethereum, Lido accounts for over 15% of all staked ETH, which led to an increasing focus on decentralizing the protocol - including an expansion of the node operator set, and a first draft of how stake distribution might work out in the future.
The Solana ecosystem, which recently became the largest network by staked value, saw a large uptick in liquid staking solutions, partially kickstarted by the Solana Foundation’s effort to promote “stake pools” by releasing code that simplifies deploying a liquid staking protocol and supporting a variety of teams working on these efforts. The most notable solutions on Solana include Marinade Finance, Lido, Socean, as well as Party Parrot, which arguably makes Solana the most competitive market in liquid staking.
In addition, other liquid staking protocols have launched or raised funding in recent weeks:
pStake, a protocol built by the Persistence team, became the first mover on Cosmos liquid staking and announced the $PSTAKE token and its distribution. Finally, Claystack, which is seeking to build a cross-chain liquid staking solution, raised $5.2m from funds including CoinFund and ParaFi. It’s interesting to see this space heating up and going forward we expect a lot of innovation to happen at the intersection of staking and DeFi.
Interoperability has been a major theme over the past quarter, as L1s and L2s compete with Ethereum for liquidity whilst Ethereum gas prices remain high. There is a dashboard on Dune Analytics by Elias Simos that displays the networks that Ethereum users are bridging to. To-date, there has been $11bn in TVL bridged from Ethereum. Polygon received the biggest TVL bridged from Ethereum (~$4.4bn) and accounts for 41.4% of all bridged TVL from Ethereum. Arbitrum is second, having ~$3bn bridged over (28.3% market share). Other networks could take significant market share when their incentive programs go-live too, such as Avalanche.
Ethereum isn’t the only ecosystem that has been busy on the interoperability front. Cosmos’ vision for the internet of blockchains is being realised as every day more and more zones connect to IBC. There are now 12 zones connected to IBC and 47 active channels to pass messages through between IBC-connected blockchains. There have been ~31,000 IBC transfers to-date (mainly through Cosmos and Osmosis). Terra is upgrading to Columbus-5 in a few days and will be IBC-compatible after that upgrade. It can be expected IBC-transfers will continue their upwards trend in upcoming months as more networks connect.
Wormhole, a generic protocol that delivers a pathway for any kind of information—funds, votes, programs and more—from any blockchain supported by the protocol to any other, launched version 2 of their protocol in September. 19 node operators act as “guardians” on Wormhole routing messages through the supported networks (initially Ethereum, Solana, Terra and BSC) via a threshold signature scheme. Tokens and NFTs can already be seamlessly bridged across Ethereum and Solana. Chorus One released a podcast featuring Jump Crypto’s Hendrik Hofstadt that takes an in-depth look into the intricacies of the network.
Mo Money Mo Adoption
In the past years, L1s, L2s as well as crypto-native projects regularly outcompeted each other in terms of money they raised. Now we can see many networks establishing ecosystem funds with dizzying sums. In a recent private sale, Avalanche was able to raise $230 million from notable investors such as Three Arrow Capital through the sale of AVAX tokens. A portion of the proceeds will be used for the establishment of their own ecosystem fund to drive the adoption of the protocol.
Similar actions are taken by Terra, which recently announced a $150 million fund to drive the development of dApps, tooling for the Cosmos SDK software stack, as well as a cross-chain DeFi ecosystem. Last, but definitely not least on our list is Jump Tradings 7th (!) venture fund with a ‘large focus on crypto’. The fund can boast a capital commitment of $350 million, the venture firm's biggest fund, which - together with the announcement of the Jump Crypto division - highlight Jump’s ambition in the crypto space.
Chris attended Messari Mainnet 2021 in NYC. The crowd felt dominated by legacy financial institutions and the centralized crypto service providers who wanted their business. This was definitely a finance-first, rather than builder/developer-first kind of conference. If anything, it demonstrated to me that institutional crypto interest is very strong, for better or for worse.
Having advertised a Proof of Stake track, I expected more discussion on the topic. Overall the PoS discussion was light, as DeFi and to some part NFTs, were the primary focus of discussion. One highlight was the Validators and Stakers: Evolution of a Chain panel, moderated by Daniel Hwang from Stakefish. Daniel didn’t shy away from the hard decentralization questions and cited my Rise of the Activist Validator post.
⛓️ Network Updates
On September 14th, the Solana network suffered from a denial of service attack, which resulted in the network being offline for 17 hours - please note that no funds were lost during the outage. Numerous bots tried to participate in Grape protocols’ IDO and flooded the network with transactions, which caused a memory overflow and ultimately led to many validators crashing. Therefore, the validators could not come to agreement on the current state of the network and hence, no new blocks were able to be confirmed.
The global validator community closely worked together with Solanas’ engineering team to facilitate an upgrade and restart of the network, which required 80% of active stake to form consensus. Given the decentralized nature of the network and the fact that there are roughly 1,000 validator nodes on Mainnet beta now, this process took around 14 hours (as well as a lot of blood, sweat, and tears by many node operators around the globe). The network was back to full functionality in less than 18 hours after the attack. For more details about the incident, you can refer to this blog post by Solana. Big shout out to everybody who was involved in resolving this.
Smart Contracts On Cardano
September 12th marked a big day for Cardano as the long anticipated Alonzo hard fork introduced smart contract functionality to the Cardano mainnet. Just ten days prior to the upgrade, on September 2nd, the functionality was released on Cardanos testnet resulting in bullish sentiment by the market. According to Cardano founder and CEO of Input Output HK, Charles Hoskinson, the network is now set to capture the ‘second wave of DeFi’.