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Hi, Bradley Keoun here, editor of The Protocol.  

Rewind to earlier this year, and staking on the Ethereum blockchain was all the rage. At the heart of it all was Lido Finance, a decentralized protocol that allowed traders to both earn rewards from Ethereum staking but also to get a liquid proxy token “stETH” they could trade in the meantime. Lido quickly surged to the top rank among decentralized finance or DeFi projects. But lately, Lido is experiencing growing pains – along with suspicion and resentment. We pull it all together in Network News.  

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Network News

PEAK LIDO? As Ethereum transitioned over the past year to a fully functional proof-of-stake blockchain, market observers chronicled the staggering rise of Lido Finance, which effectively allows investors to stake their ether (ETH) – and thus earn rewards, yield –  while also getting a token, stETH, that they can trade in the meantime. For many, that combination proved more attractive than the technically cumbersome job of setting up a validator and locking up ETH into the main blockchain. The problem now is that Lido has become too popular – bumping up against the 33% threshold of total ETH staked where the project could theoretically threaten the 67% supermajority needed to finalize transactions. Now, there are signs of pushback from the crypto community – as well as growing pains for Lido in managing such a sprawling operation. Late last week, voting closed among members of the Arbitrum network community on how to allocate an incentive program of 50 million ARB tokens (worth about $40 million), and Lido was denied in its application for 4 million ARB – seen as an expression of protest. “The Ethereum immune system is waking up,” Evan Van Ness, publisher of Week in Ethereum News, posted on X. Defenders of Lido are quick to point out that the protocol has merely made the most of blockchain incentives and innovation, and that the real threat still comes from more centralized players, such as big crypto exchanges. “The fact of the matter is Lido has, and is, heavily incentivized (as revealed in their growth) to act responsibly, and its presence elevates Ethereum decentralization, not contaminates,” according to a Messari report. But there are also operational issues. Lido had to explain in a post-mortem analysis last week why 20 of its Ethereum validators recently got “slashed,” or penalized: “The root cause of the slashing boiled down to executing non-optimal fallback procedures during datacenter connectivity issues.” Got that? There was also the news that Lido has decided to sunset a separate staking service on the Solana blockchain; it was just too costly, with a $700,000 investment over the 2022-2023 budget and only $220,000 of revenue. “It was deemed a necessity for the success of the broader Lido protocol ecosystem," the project’s developers wrote in a post. Resorting to the tourniquet might be a rare sign of weakness from the single most successful project in all of DeFi. 

MAWR JOB CUTS. For the third straight week, reports of job cuts have filled the blockchain news headlines, offering further evidence of the economic toll of crypto winter. CoinDesk broke the news last week that CertiK, the blockchain code auditor, had made a “strategic workforce adjustment” impacting 30-40 people, or about 15% of the company’s workforce. The recent cuts were made “in response to evolving market dynamics,” according to the team. It was a harsh comedown, since the company CertiK raised nearly $150 million of fresh capital just last year. The Block reported last week that Parity Technologies, a primary developer of the Polkadot blockchain, would be “sunsetting some of its existing go-to-market functions,” and “impacting staffing” as a result. Transactions are down across the blockchain industry, and the crypto firm Galaxy noted in a research report that the “VC fundraising environment remains extremely challenging,” and that “a lack of significant new venture dollars will continue to pressure founders.” 

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Protocol Village

A message from Hilco Streambank

Hilco Streambank is seeking offers to acquire the intellectual property rights in and to the works of Richard Hambleton. Hambleton was a pioneer of the New York City street art movement of the 1970s and 1980s whose works have been featured internationally in galleries, museums, auctions, a documentary, and books.

Bids are due on November 13, 2023 at 10 am ET and an auction will be held on November 16, 2023 at 10 am ET.

Stellar, Early Blockchain Built for Payments, Adds Smart Contracts to Take on Ethereum

The Stellar Development Foundation’s Tomer Weller, who is leading the blockchain’s “Soroban” project to add smart contracts. (Stellar)

A new entrant is coming into the already-competitive arena for Ethereum and other of smart-contracts blockchains like Ethereum, and it has a familiar name.

Stellar, a nine-year-old payments-focused project that comes with its own developer community, is backed by a well-heeled foundation and boasts a standing relationship with the cash-transfer giant MoneyGram. But it was built in an era when blockchains were designed for moving value from A to B and not much more.

A “smart-contracts” project is one where strings of programming code can be stored on a blockchain, similar to a computer – allowing developers to build applications for decentralized finance (DeFi) or other uses. Ethereum, born a year after Stellar, is by far the dominant smart-contracts platform, especially with its growing associated ecosystem of so-called layer-2 networks like Arbitrum, Polygon and Optimism. But there’s a host of competing smart-contracts platforms, including Solana, Aptos, Sui, Algorand and several projects in the Cosmos ecosystem.

Now comes Stellar and “Soroban,” the blockchain’s project to add smart contracts. The Soroban integration, expected later this year, could mark one of the network’s biggest upgrades since it was created in 2014 by founders including Jed McCaleb, who had been a key player at rival Ripple but departed the prior year due to internal conflicts.

“We see decentralized finance as a big part of the future, and we want to enable that for the users of Stellar,” Tomer Weller, a vice president of product at Stellar Development Foundation who is overseeing Soroban, said in an interview.

Money Center

Ethereum Validator Backlog Clears Out, as Staking Demand Weakens

The number of validators waiting to get onto the Ethereum blockchain has nearly cleared out. (Validatorqueue.com) 

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