Exploring the tech behind crypto

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Hi, Bradley Keoun here, editor of The Protocol.  

It’s hard to cover blockchain tech without considering the impact of crypto winter. In this week’s issue of The Protocol, we highlight layoffs hitting key firms, and how blockchain projects are competing for new mandates – specifically big Ethereum layer-2 developers like OP Labs, Polygon and Matter Labs vying to provide the technology for the Celo blockchain’s new network; there’s only so many customers to go around. 

This week’s feature by Camomile Shumba looks at how the crypto firms Chainlink Labs and Ripple are finding comfort in the idea that the future of finance might end up as a hybrid of crypto and traditional finance, rather than total disruption or winner-takes-all.

Crypto vs. Banks? It’s Not Either-Or for Chainlink, Ripple

Chainlink co-founder Sergey Nazarov speaks at the project's SmartCon conference this week in Barcelona. (Chainlink)

The 2008 Bitcoin whitepaper introduced the world to the idea of decentralized blockchains - and the “inherent weaknesses” in payments systems relying “almost exclusively on financial institutions serving as trusted third parties,” as author Satoshi Nakomoto put it.

That’s partly why it’s notable that two of the biggest blockchain firms, Ripple and Chainlink, are now working hand-in-glove with banks and other traditional payments companies to develop what might could become the financial infrastructure of the future.

The possibility of a hybrid model might challenge the prevailing paradigm where crypto operates in a parallel universe, often detached from the practical world. The reality is that the lines are far more blurred, with not just Chainlink and Ripple but also companies including Fireblocks, R3, Fnality and Zodia Markets explicitly embracing strategies of working cohesively with financial institutions.

“Some people are very anti-establishment in the crypto community and will question on many different levels why there's any point in dealing with the old guard,” said James Butterfill, head of research at the digital-asset management firm CoinShares.

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Network News

At Celo’s “salon” last year in Paris, a community space mainly focused on DAO discussions, NFTs and ReFi. (Lyllah Ledesma)

BLOCKCHAIN BAKE-OFF! In July, when the smart-contracts blockchain Celo proposed to ditch its independent “layer-1” status in favor of becoming a layer 2 network atop Ethereum, the people behind the project may have had little inkling of just how popular they would become. Now there’s suddenly a burst of competition among veteran layer-2 teams to supply the technology for Celo’s new system. The migration initially was supposed to rely on Optimism’s OP Stack software kit, which served as the template not only for Coinbase’s new Base blockchain but also the Binance-incubated BNB Chain’s new opBNB network. Then last month, Polygon injected itself into the mix, offering up its Polygon Chain Development Kit, known as Polygon CDK, as an alternative. As of last week, there’s yet another suitor to host Celo: Matter Labs, the creators of another rollup, zkSync, as well as the ZK Stack open-source software, which can be used to create new “hyperchains” on Ethereum. “The modular and open-sourced ZK Stack is the optimal L2 stack for Celo’s transition to Ethereum,” according to the Matter Labs proposal. “We hope to trigger an honest, open discussion amongst the Celo and zkSync communities regarding the tradeoffs between the ZK Stack, the OP Stack, Polygon CDK and other options.” Coming in the depths of crypto winter, the episode offers a reminder of the intensity of the consolidation trend, with the various networks scrambling to find fresh business.   

PROOF-OF-PROOF. The crypto developer OP Labs rolled out software a year ago making it easy for companies to spin up their own distributed networks atop the Ethereum blockchain. The option quickly became so popular that it attracted the likes of the big U.S. crypto exchange Coinbase, which used the platform to build its new blockchain, Base. As these things go, success leads to greater scrutiny, and in recent months, technical experts homed in on a crucial deficiency of the setup: Networks based on the OP Labs software were missing an element known as “fault proofs” that theoretically sit at the very core of their inherent “optimistic rollup” design; the lack of the security feature was likened to driving a fast car without airbags. OP Labs officials got the message, and recently had insisted that getting fault proofs into operation was a top priority – so much so that the project even had its own name, “Cannon.” On Tuesday, OP Labs finally delivered – or at least took its first step toward addressing the concerns, launching fault proofs on a test network known as OP Goerli Testnet. Such progress might keep critics at bay, at least for a while.    

COLD CRYPTO: Transaction volumes across the crypto industry have slowed dramatically, and the signs of retrenchment are ubiquitous. Chia Network, founded by BitTorrent inventor Bram Cohen, laid off 26 employees, a third of its staff, and might now consider selling off some of 2.6 million unencumbered XCH tokens ($70 million worth) to raise funds. Chainalysis, the blockchain analytics firm, cut 15% of staff, out of an employee base said to be around 900. On Wednesday, the DeFi lending project Yield Protocol announced plans to wind down by the end of the year, “because there is currently not sustainable demand for fixed-rate borrowing.” 

BAD BLOOD IN BSV: Christen Ager-Hanssen, the former CEO of nChain, which is focused on the Bitcoin SV (BSV) blockchain,posted on X that he had departed, adding that he was “convinced that Dr. Craig Wright is NOT Satoshi” and is “persuaded he will lose all his legal battles.” Calvin Ayre, a patron of the BSV ecosystem, wrote on X that “Christen is a grifter… He had no real plans for nChain other than stealing the silverware.” Wright posted: “Sorry to disappoint my anti-fans. I haven’t gone anywhere.”

TO ENSHRINE OR NOT TO ENSHRINE? Ethereum co-founder Vitalik Buterin was once an advocate for the proliferation of layer-2 networks, under a “minimal-enshrinement philosophy” – essentially keeping the main blockchain network as a “simple, beautiful protocol that tried to do as little as possible.” Now, however, he writes that “enshrining certain features in the protocol might be worth considering.”

Also:

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.

Money Center

Serum’s SRM token plunged in digital-asset markets after the FTX bankruptcy. (CoinDesk)

Yet Another FTX Spectacle – Not in Court, but On-Chain

Calendar

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