Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
Binance.Us faces opposition from finance regulators on its $1.02 billion deal to purchase assets of defunct crypto lender Voyager. The agencies said that the fillings could prove discriminatory and unlawful. Meanwhile, lawyers from Voyager say the planned sale is on track, as a deadline to object to the plan closed Wednesday. Meanwhile, the New York State Attorney General’s office sued CoinEx, a crypto exchange that allegedly operated without securities or commodity broker-dealer under state law. In other news, a federal judge said Wednesday Dapper Labs’ NBA-branded “Top Shot” non-fungible tokens might be securities. The ruling comes a year and half later after a class-action lawsuit was filed against Dapper Labs and its CEO, Roham Gharegozlu, over unlicensed securities offerings. Finally, founders of Forsage have been indicted for allegedly operating a $340 million Ponzi scheme portraying itself as a DeFi platform.
Gaining Adoption
Spotify is testing its new “token-enabled playlists” allowing NFT holders to listen to curated music. A pilot is available for Android users in the U.S., U.K., Germany, Australia and New Zealand. Meanwhile, BlackRock is all set to offer exchange-traded funds (ETFs) focused on tech companies exposed to the metaverse. In other news, Germany’s second-largest bank, DZ, has tapped crypto custody giant Metco for its digital asset custody service. This deal is Metco’s fourth major financial institution partnership in the past eight months. On Wednesday, a research report from Coinbase stated Solana’s “fundamental value proposition” remains despite the inordinate impact of FTX’s collapse.
Out of Sync
Several Polygon nodes fell out of sync Wednesday and knocked popular blockchain explorer PolygonScan offline. The interruption sowed confusion among users of the Ethereum scaling platform, though did not cause transactions to fail. Meanwhile, Binance USD, the Paxos-issued stablecoin under regulatory scrutiny, dropped 20 cents against the decentralized DAI stablecoin after a trader put in a single $647,000 market sell order. It quickly regained its $1 peg, once liquidity returned to Binance. Finally, XPR Ledger and RippleX proposed a new standard for cross-chain bridges between Ripple and other networks.
Sound Bites
“What we’ve seen is that trading interest remains really strong both for proof-of-work networks as well as proof-of-stake networks.”
– Kraken’s Head of OTC Options Trading Juthica Chou, on CoinDesk TV’s “First Mover”
The Takeaway: Coinbase, Considered
Coinbase has big plans for its newly announced Ethereum scaling product. The project, Base, built in collaboration with layer 2 network Optimism on Optimism’s Massachusetts Institute of Technology-licensed OP Stack, aims to reduce ETH transaction fees to 1 cent, integrate with other blockchains like Solana, Avalanche and Polygon, and serve as a springboard for the company’s “Master Plan” to bring 1 billion people into crypto by “buying, building or investing” projects in the “open financial system.”
The announcement comes at a pivotal time for the largest U.S. crypto exchange. Coinbase’s most recent quarterly report showed a company in transition, with its core revenue stream of transaction volumes drying up amid the crypto winter. At the same time, it’s also seeing growth in other potentially profitable business lines like staking and with other service fees. Base, a protocol Coinbase intends to “decentralize” over time, could become a moneymaker for the company that has long looked to diversify its balance sheet.
According to TechCrunch, Base will initially charge fees in the 10- to 50-cent range – comparable with leading Ethereum layer 2 networks such as Arbitrum and Optimism. And, although still just a testnet, it doesn’t seem like Base will want for early adopters: Established projects including Chainlink, Etherscan, Aave, Animoca Brands, Dune, Nansen, Magic Eden and Wormhole, among others, have signaled support. This is big news considering “Coinbase has no plans to issue a new network token,” as CoinDesk’s Shaurya Malwa put it bluntly.
Coinbase has long taken a strategy of contributing technology and guidance to crypto, including targeting 10% of its cash holdings for venture opportunities. Not all of those experiments have fared well. For example, its non-fungible market (NFT) platform has struggled to gain market share since it launched last year, despite the company’s brand. Base will be released into an increasingly competitive and complex market of Ethereum scaling tools. On Tuesday, Arbitrum, a dominant layer 2 network, surpassed Ethereum in daily transactions.
Meanwhile, several rival projects are working on Ethereum-compatible “zero-knowledge rollups,” aka zkEVMs, promising to shake up the layer 2 landscape. Polygon and ConsenSys are just two of major firms working on breakthrough ZK technologies, which differ from existing “optimistic” products like Arbitrum and Optimism by authenticating transactions instantaneously through “validity proofs.” (Arbitrum and Optimism assume transactions are valid during a weeklong dispute window before “rolling” a block onto the Ethereum mainchain – a system that could be abused.)
Base, which is intended to be integrated across Coinbase’s exchange, wallet and developer products, is a way to help guide existing users “to places they can go that aren’t controlled by Coi[n]base,” the project’s lead developer Jesse Pollak told TechCrunch. This is significant. Earlier this week Consensus Magazine published an op-ed by Łukasz Anwajler about the need for more secure “user journeys” across the crypto ecosystem. People need to stay in control of their funds from “on-chain to off-chain,” he said.
Indeed, there is a clear need for scaling products and further experimentation. Ethereum co-founder Vitalik Buterin’s “road map” for Ethereum looks more like a guide to the U.S. highway system, with forking and intertwining and paths, rather than Mapquest directions to a known location. But there is still a concern about how to incentivize lasting use of protocols. Other layer 2s have had the benefit of issuing tokens or implicitly promising a future airdrop to bring transactions on-chain – a path likely foreclosed to Coinbase, an exchange somewhat notable for not having a “native token,” amid the current regulatory regime.
That, coupled with the growing awareness of the risks centralized entities bring into decentralized finance (DeFi), may play against Base’s growth. It’s now unknown how long Base was being planned or under development (Coinbase was the first exchange to launch a layer 2 network), but its introduction comes as Coinbase scales back. In recent months, Coinbase pulled out of India and other markets, and laid off hundreds of employees. If Base is a core area of growth, it is not clear Coinbase will have all the resources necessary to fully develop it.
Apparently, the ultimate vision is for Coinbase to become a “contributor” to the network, and hand off governance decisions to the community. That process has strong precedence in the crypto industry. But, without details, that message reads a bit like “if we build it, they will come” – something that rings hollow in an industry still looking for a use case.
Tokenization Picks Up Steam With On-Chain Tesla and Apple Shares (The Defiant)
Congressional Crypto Defenders Accidentally Sparked an SEC Crackdown (The Prospect)
Over the past few months, CoinDesk has been developing a reward system fo Consensus 2023 attendees to bring long-term value. We’ve partnered with Art Blocks Engine, TokenProof and Passage Protocol to launch the Consensus Multi-Year, Multi-Tiered NFT Ticket, coming on March 2. Learn more.
