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At stake
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Today’s special edition of Blockchain Bites is covering all the news you need to know from invest, as well as the Top Shelf (down below) crypto news from elsewhere in the cryptoverse.
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Now, what you need to know from invest: ethereum economy.
Invest news
Power users In the face of Ethereum’s recent rocketing transaction fees, Vitalik Buterin called for users to move over to scaling solutions that are “already here for many classes of applications.” Speaking at the opening keynote of invest: ethereum economy virtual conference, Buterin reiterated his enthusiasm for so-called layer-2 scaling solutions such as “rollups,” which essentially keep transaction data on-chain while pushing the computational load off the chain. “If you’re listening to this and you are an exchange or you are a wallet or you are a mining pool or you are a major user – even just a regular – then you should be aware of what rollups are and what they do,” said Buterin. “Basically, what your strategy is, in terms of moving over to them.”
Staking solution Blox, a non-custodial Ethereum 2.0 staking platform, is developing a solution that will allow users to pool their ether (ETH ) cryptocurrency to get past the threshold required for staking when the upgraded network goes live. Staking on the much anticipated Eth 2.0 upgrade requires a minimum of 32 ETH in order to participate and is expected to see an estimated 4.6%-10.3% rate of return on a user's initial stake. Blox’s solution, built alongside the Ethereum Foundation, utilized "secret shared validator" nodes to allow users to aggregate their ETH and reach the required 32 ETH to stake on the network. "Allowing ETH stakers to join the network and generate rewards with any amount of ETH is pivotal for making Eth 2.0 accessible for everyone," said Blox's CEO Alon Muroch.
Composability questions Will composability work as well on Ethereum 2.0 as it does now on the original version of the world computer? The ease of composability is running up against the reality of Ethereum’s throughput capacity, CoinDesk’s Brady Dale reports. To rectify that, some projects are moving to sidechains, but many look forward to Eth 2.0 providing massively more room for transactions to go through. The core of the new throughput capacity will come from a new architecture called “sharding.” Effectively, there will be multiple blockchains that check-in with each other via a beacon chain. Though there are still hard questions to answer. Dale digs in.
Rolling out rollups Ethereum’s top dapps are increasingly turning to rollups to solve scaling impediments, CoinDesk’s Will Foxley reports. A rollup is an off-chain aggregation of transactions inside an Ethereum smart contract. Ethereum users can transact inside the contract with security guarantees their transactions won’t be misused and they will settle to the mainchain. The main advantages of transaction aggregation for dapps were witnessed this summer as the average Ethereum transaction fee broke historical records numerous times. Though these methods – typically Zero knowledge proof rollups (ZKR), relying on math, and Optimistic rollups (OR), relying on financial incentives – come with their own drawbacks.
Ethereum update In the run up to our invest: ethereum economy event Oct. 14, get up to speed on recent developments in the Ethereum ecosystem. CoinDesk Research's recent note covers ETH's performance, the impact of decentralized finance and stablecoins, and an update on the launch of Ethereum 2.0.
Tim Ogilvie is the CEO of Staked, which runs staking infrastructure for institutional investors, exchanges, custodians, and wallets. In this excerpted essay, he argues once Ethereum 2.0 rolls out, ETH holders will be incentivized to stake their bags, rather than hold or trade it, because the rewards are higher.
High stakes
Tokenized staked ETH is going to replace ETH itself.
Ethereum is finally set to shift from a proof-of-work infrastructure to proof-of-stake. The end result of this upgrade will effectively take ETH out of circulation, replaced by a tokenized version of itself.
In almost every instance that you can imagine people wanting to hold ETH, it will be preferable to hold a staked version rather than the original real asset. This tokenized version of ETH will perform all the same functions of ETH, but it will also be more valuable, because it will earn staking rewards and can simultaneously do other things.
Rather than remain on its own, separate island, staked ETH will inevitably be tokenized and form the bridge that will bring Ethereum 2.0 across to its killer app.
Compelling returns Ethereum 2.0 is a big deal. A blockchain with the size and value of Ethereum has never transitioned users and assets to a completely new network while the previous version continues running. The notion, therefore, of replacing ETH may sound foreboding.
But, in fact, it is positive in three key ways: Now users will be able to secure the Ethereum network by staking, earn yield for doing so, and have the ability to use that ETH as yield-generating collateral elsewhere.
Ethereum advocates may chafe at the idea due to a preference for users only to stake. But the outcome is the proverbial win-win. The security ramifications are significant for Ethereum because staked ETH creates additional incentives to stake ETH and simultaneously participate in DeFi activity. That’s a good thing. In the end, securing a network is what proof-of-stake is all about.
There has been a proliferation of PoS networks, such as Polkadot, Cosmos, and Tezos, among others, but none come close to the significance of Ethereum. It is no wonder there is increasing attention on the approaching day Ethereum 2.0 goes live. Although there have been delays and progress hasn’t always gone smoothly, the testing has now been robust and the results raise the confidence that the new network will be ready within only a few weeks.
At Staked, we run 25 other proof-of-stake networks. But the size and complexity of running Ethereum 2.0 staking infrastructure is like none other. That said, every indication is Ethereum 2.0, phase 0, is now ready for prime time, starting with the deposit contract. Once testing for Ethereum 2.0 is complete, a validator deposit contract will be created on ethereum.
This deposit contract is where all users interested in being a validator for phase 0 can lock in their ETH.
Many in the space will be attracted to the staking rewards. Ethereum 2.0 uses a sliding scale for staking rewards. We estimate yields will be between 8%-15% annually. That’s not as eye-popping as YOLO-ing into the latest DeFi craze, but offers lower risks and predictable returns that will appeal to larger institutions.
In it for the long haul So, faced with compelling rewards, a word of caution is required. Staking, at least initially, may not be for everyone. Ethereum 2.0 requires many servers (one for every 32 ETH you stake), significant technical resources to ensure all those servers are always available and secure, and funds that will not be liquid until Ethereum 2.0 reaches phase 1, which could be years away.
It is a simple but important fact: once ETH is transferred to the Ethereum 2.0 network, it cannot be transferred back to the original Ethereum blockchain. This one-way trip means your funds are not liquid, so the only direct activity available is to participate in staking.
This is why we should expect tokenized staked ETH. Staked ETH indeed does have to remain locked away until further Ethereum 2.0 developments. But the world of DeFi won’t wait. Staked ETH will be tokenized and will replace ETH. It is not a case of if, but when.
DeFi on Ethereum has taken the crypto world by storm this summer and set the stage for the long anticipated ETH 2.0 transition, expected to begin in late 2020.
Let's face it: These protocols can be rather clunky and difficult to use, and that's a big turnoff for new entrants into the ecosystem. At #investeth Unlocked, you’ll leave with a high-level understanding of where the Ethereum and DeFi ecosystems are heading and how you can utilize these tools on their own. Before you register for invest: ethereum economy, here's a primer on the journey to Ethereum 2.0.
Top shelf
Crypto allocation? Fidelity Digital Assets said bitcoin’s market cap has plenty of room to grow in a Tuesday report on the benchmark cryptocurrency’s uncorrelated nature. Director of Research Ria Bhutoria wrote that the crypto’s current market capitalization “is a drop in the bucket compared with markets bitcoin could disrupt,” arguing further that crypto is “fundamentally less exposed” to the “economic headwinds” that other assets will likely face. Bitcoin is therefore a “potentially useful” asset for uncorrelated return-seeking investors. “In a world where benchmark interest rates globally are near, at, or below zero, the opportunity cost of not allocating to bitcoin is higher," the report said.
Grayscale results Digital asset manager Grayscale Investments has posted its best quarterly results to date, having brought in just over $1 billion in investment across all of its cryptocurrency products. In its financial report for Q3 2020, the company – which is owned by CoinDesk's parent firm Digital Currency Group – said it had seen inflows of $1.05 billion across all products. For the year so far, the figure stands at $2.4 billion, which Grayscale said is more than twice the total amount raised for the years 2013-2019. Its most popular product, the Grayscale Bitcoin Trust, saw inflows of $719.3 million in the third quarter, while bitcoin assets under management (AUM) have grown 147% in 2020.
Retail interest Square’s recently announced $50 million investment in bitcoin (BTC) is a “strong vote of confidence for the future of bitcoin” and a signal the payments company sees “a lot of potential” for the cryptocurrency as an asset, JPMorgan analysts said in a report dated Tuesday. JPMorgan's global market strategists wrote that Square is likely to make more purchases, with other payment firms following in this direction to avoid being shut out of a growing market. While noting that options contracts to BTC have risen, due to institutional interest, the JPMorgan strategists said retail traffic is likely driving the surge in options.
Major investor Venture capitalist Tim Draper’s investment office Draper Goren Holm is sinking larger investments in virtual currency-only startups. Draper Goren Holm, a cryptocurrency investment firm in Los Angeles, said that it raised $25 million for its first venture capital fund to buffer its startup accelerator and back blockchain companies at higher investment valuations. The venture fund, announced last week, is planning to invest $250,000 to $500,000 in seed, Series A and a few later investment rounds, the firm said, whereas the accelerator funds pre-seed rounds for between $10,000 and $50,000 and 4% to 10% ownership stakes in startups.
Banking blockchain After the latest addition of 42 banks, about 100 Italian banks are officially operating on the country’s banking blockchain network, Spunta, built on R3’s Corda, the Italian Banking Association (ABI) announced Tuesday. Banks first joined the blockchain project designed to improve interbank data transfer and settlement speeds back in March 2020 and by May, 55 banks had joined the network. According to ABI’s announcement, since March 204 million transactions were processed on Spunta’s infrastructure, and the association predicts this number will exceed 350 million by the end of the year.
Quarterly review The latest quarterly review from CoinDesk Research is out! In this 24-chart report, we look at major developments in crypto markets over the third quarter, focusing on growth in stablecoin liquidity, surging interest in decentralized finance applications, and the notable uptick in crypto derivatives volumes.
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