Plus, let us know what you think of Valid Points’ new look! |
April 26, 2023
Exploring the tech behind crypto
one block at a time
Was this newsletter forwarded to you?Sign up here.
Welcome to The Protocol, a weekly newsletter dedicated to bringing you CoinDesk’s best reporting on crypto tech and blockchain protocols. I’m Bradley Keoun, managing editor of Tech & Protocols at CoinDesk, and our goal is to give you a smart and concise read with lots of insight, news and links to inform your journey as a blockchain developer or investor – or just someone who’s interested in what we believe could be the cutting edge of the world’s hottest technology.
In our first issue, we chronicle the news of Helium’s move to the Solana blockchain, the venture capital firm Andreesen Horowitz’s new “blazing fast” Magi software client for Optimism and nearly $100 million of fundraising announcements for crypto protocols.
For this week’s feature, our Sam Kessler has a smart news analysis handicapping the winners and losers in the race for market share among the Ethereum blockchain’s “layer 2” scaling solutions – and highlighting just how severely the usage data is skewed by traders chasing after “airdrops” and other token rewards.
By the way: Please let us know what you think about the look of today’s new rendition of Valid Points by replying to this email. Also, to ensure The Protocol makes it into your inbox every day, please add theprotocol@coindesk.com to your address book, trusted sender list or company white list.
Arbitrum Is Winning Ethereum’s Layer 2 Race – For Now
Arbitrum, the layer 2 “rollup” network for the Ethereum blockchain, has become the clear frontrunner in a crowded race among networks competing to offer lower fees and higher speeds to users.
The competition to help scale Ethereum is developing at a rapid pace – viewed as an attractive and potentially lucrative arena for entrepreneurs, venture capitalists and technologists looking to attract the next wave of crypto-users, by offering them easy access to the second-biggest blockchain by market capitalization. In the past two months alone, the venture capital giant Andreessen Horowitz (a16z) and exchange behemoth Coinbase have both said they were building Ethereum layer 2s, which is the term used to describe these blockchain scaling systems.
What can sometimes be hard to tease out, however, is how much of any given project’s success is due to its technological superiority, or merely due to users trying to capture a slice of funnel-down marketing dollars in the form of rewards tokens or other freebies. The layer 2 race has highlighted how the crypto industry’s proclivity for “airdrops” and other handouts – new tokens that get printed out of thin air and distributed to project users – remains a driving force in shaping the sector.
Arbitrum has long been a leader in Ethereum’s scaling race, but it saw a surge of growth last month when it released ARB – a new token that was “airdropped” to people based on how much they’d used the network in the past. The potential for more surprise paydays is shaping the layer 2 landscape beyond Arbitrum as well, sending users to projects like zkSync that have yet to launch tokens, and away from projects like Polygon zkEVM that already have.
Airdrops, and the prospect of them, have proven a compelling customer acquisition strategy for up-and-coming chains. Whether this familiar formula for attracting users and capital is sustainable, however, remains uncertain.
A key takeaway is that the money-grabs may obscure the early data signals on which technological platforms work the best.
Helium, the token-powered hotspot and mobile network operator, kicked off its migration to the Solana blockchain, following through on a plan hatched in September. The developers behind Helium proposed the move back then so they could “focus our efforts on scaling the network as opposed to managing the blockchain itself.” Despite Solana’s own history of occasional outages, it is far more reliable and stable than Helium’s, according to Helium blog posts. Landing Helium as a new ecosystem partner is a coup for Solana, which suffered last year from its association with former FTX CEO Sam Bankman-Fried, who was a big proponent of the network.
Early signs show that Ethereum’s seamless Shanghai upgrade has spurred institutional investors’ interest in staking. Top institutional-grade ether (ETH) staking service providers have already recorded about three times larger inflows in April compared to all of last month, Michiel Milanovic, analyst of Ethereum blockchain developer firm ConsenSys, told CoinDesk. Some 80% of the inflows happened after the Shanghai upgrade went live on April 12, he added. What’s becoming crystal clear is just how backed up the queue can get for withdrawing staked ETH from the blockchain – lengthening to a 17-day wait last week from 14 days the prior week. Investors would certainly have to factor in the likelihood of a wait – imagine the race to exit following a market crash – when choosing whether or how to try to capture Ethereum staking yields.
Andreesen Horowitz, the closely watched venture capital firm known as a16z, gave a vote of confidence to the Ethereum rollup Optimism when it revealed a plan to create a new “blazing fast” client software called Magi for the network. Magi is still in development and months away from being a production-ready offering, according to an announcement posted by crypto engineer Noah Citron. Client software is used to feed new data blocks to the chain. CoinDesk’s Brandy Betz writes that the system is written using the Rust programming language and is meant to serve as a faster alternative to “op-node,” currently the only existing client software for Optimism. A16z’s thesis is that more systems make for more robust decentralization for Optimism, and the addition of one based on Rust will attract more developers. Citron managed to touch off a mini speculative frenzy ahead of the a16z announcement by tweeting out an orange dot with “coming soon.”
P2P.org, staking service provider, raises $23M. (Jump Crypto, Bybit, Sygnum.)
Berachain, layer 1 blockchain, raises $42M in Series A round, at valuation of $420.69M. (Polychain, Hack VC, dao5, Tribe Capital, Shima Capital, CitizenX and Robot Ventures, as well as several undisclosed centralized crypto exchanges.)
Deals and grants
Cronos Labs will support Web 3 startups with AWS Activate; selected projects to get 12-week acceleration program, seed funding of $30,000 and up to $300,000 in additional seed funding from Cronos, partners.
Google cloud is looking to help Web 3 builders fast-track projects. Eligible projects from pre-seed to Series A; program includes up to $200,000 in Google Cloud credits over two years, as well as technical support.
The current crypto winter apparently isn’t so chilly in terms of project valuations and fundraisings, three authors from the tech-focused investment-banking boutique Drake Star wrote in an op-ed for CoinDesk.
According to their analysis, blockchain companies’ enterprise value is currently about 3.5 times that of the Nasdaq Composite Index. Crypto mining companies share a similar valuation. “The mining group especially has seen a massive rebound” this year, according to the piece.
Separately, the chart below from FundStrat shows that infrastructure firms are dominating recent fundraising efforts, far outpacing decentralized finance (DeFi), centralized finance (CeFi), Web3 and non-fungible tokens (NFT), and metaverse and gaming:
Data Corner
The blockchain analysis firm Coin Metrics published a review of the Ethereum blockchain’s Shanghai upgrade (or “Shapella,” as the pros call it). The big picture, according to the analysts, is that “things went off without issue.” But they did note a “short-lived rise in the number of missed block proposals from a normal rate of about 1[%]-2% to around 10%,” according to the review.
The increase “suggests a subset of validators failed to upgrade their clients in time for Shapella and thus fell out of sync with the rest of the network.” What’s fascinating is that – thanks, blockchain – this can be pretty easily viewed in the colorful chart below. The time progresses as you read down the chart, and you can see the increasing prevalence of missed proposals in red.
Calendar
April 26-28: CoinDesk Consensus 2023, Austin, Texas.
July 31: Radix Public Network upgrade to Babylon from Olympia
With the Virtual pass, you can tune into Consensus 2023 from anywhere in the world to hear industry leaders explore all aspects of crypto, blockchain, Web3 and the metaverse. Learn more and register.
