Top Stories of the Week - 5/3
This week in the newsletter, we write about Coinbase's Lightning Network integration, EigenLayer's recent foundation and token announcement, and Aave's 2030 plan.
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Coinbase Integrates the Lightning Network
Coinbase, the largest U.S crypto exchange by trading volume, launched support for Bitcoin’s Lightning Network. For background, the Lightning Network, released on mainnet in 2018, is the largest bitcoin layer 2. The Lightning Network enables transaction finality in seconds through computing transactions off-chain and settling them on the base layer at a later date. Coinbase users can now utilize the Lightning Network to send, receive, or make payments with bitcoin directly from their Coinbase account, all at a significantly reduced cost compared to Bitcoin transactions on the base layer. Coinbase will be taking a 0.1% processing fee from users sending bitcoin through the Lightning Network on Coinbase.
Coinbase collaborated with Lightspark as part of their efforts to integrate the Lightning Network. Lightspark, led by former president of PayPal and co-creator of Facebook's Diem cryptocurrency project, David Marcus, with Lightning Network whitepaper author Tadge Dryja and prominent academic Christian Catalini as staffers, calls itself the first "enterprise-grade entry point" to the Lightning Network. To read more about Lightspark, read our previous newsletter on the subject.
OUR TAKE:
Coinbase originally announced their plans to integrate the Lightning Network in September 2023 and they have successfully shipped the integration 5 months later. The committed execution from Coinbase's protocol specialist team, led by Viktor Bunin, solidifies that crypto exchanges will be one of the largest players on the Lightning Network. Although the Lightning Network is struggling to capture market share from the payments industry, and can be difficult to operate in a non-custodial manner (though it is possible), Lightning has become increasingly useful for crypto exchanges who have the technical capabilities to implement it and for users who demand it. The top 3 exchanges by trading volume for bitcoin (Binance, OKX, Coinbase) all support the Lightning Network.
Coinbase's adoption of the Lightning Network marks a significant milestone for the Lightning Network community. Just as Coinbase's incorporation of their Base Ethereum Layer 2 into their wallet app simplified the onboarding process for millions of users to Base, their integration of Lightning will streamline onboarding to Lightning for their 98m users globally.
The Lightning Network currently boasts a channel capacity of $274.7m, entailing that that the network can facilitate this level of volume daily. As more Coinbase users adopt Lightning for bitcoin transfers, the network’s channel capacity is poised increase. The recent transaction fee spike on Bitcoin after the fourth halving underscores the importance of the Lightning Network. With the emergence of Runes and increased adoption of Ordinals, Bitcoin's transaction fee spikes will occur more frequently than previous years. As a result, Coinbase enabling users to have cheaper alternatives to send bitcoin will be extremely beneficial for the user experience of retail users. - Gabe Parker
EigenLayer Unveils New Foundation and Token
On Monday, April 29, the Eigen Labs team announced the launch of a new organization called the Eigen Foundation. They also announced the Eigen Foundation will be facilitating the distribution of a new EigenLayer token called $EIGEN that will initially be non-transferable and airdropped to users that have deposited funds into the EigenLayer protocol. The first round of $EIGEN tokens will be distributed to user addresses between May 10, 2024 – September 7, 2024. The snapshot for eligible airdrop claims was taken on March 15, 2024. The Eigen Foundation has encouraged users to visit their official website to check their eligibility for the first season of the $EIGEN tokens airdrop. Users with US-based IP addresses are barred from claiming $EIGEN tokens.
About the broader supply and tokenomics of the $EIGEN token, the Foundation shared that the initial supply of the token created at genesis will be 1,673,646,668.28466 tokens. The blog post states that this number is the result of encoding the phrase “Open Innovation” onto a classic telephone keypad. 25.5% of this supply will go to early EigenLayer contributors. 29.5% of this supply will go to Eigen Labs investors. 15% of this supply will go to seasonal airdrops to users. Another 15% of this supply will be distributed by the Eigen Foundation for R&D, grants, operational expenses, and ecosystem growth. Finally, the last remaining 15% of the supply plus additional supply through native issuance will be reserved for “future community initiatives.”
It is not clear on what chain $EIGEN tokens will be issued but based on the EIGEN whitepaper it appears the $EIGEN token will be an ERC-20 token issued on Ethereum that can be staked into EigenLayer smart contracts.
OUR TAKE:
One key feature is that the $EIGEN token will not be transferable immediately when distributed to EigenLayer users. Users will likely be able to restake it to EigenDA, even though at present EigenDA is not yet operational and does not offer users restaking rewards.
The whitepaper also does not explicitly mention points. Since EigenLayer’s mainnet launch, users have been accruing points for asset deposits directly into the EigenLayer protocol and via third-party liquid restaking (LRT) protocols such as Etherfi. The criteria for claiming $EIGEN do include the same criteria for earning Eigen points, which suggests that users that have Eigen points will be able to claim some amount of the $EIGEN token, though the conversion rate from points to tokens (if there will be one) has not yet been announced.
The $EIGEN token is designed to be a universal staking token through which subjective claims about the validator node operators can be verified and rewarded on-chain. This “intersubjective work” token is a new model that will allow the Eigen team to innovate on the utility of their coin and ecosystem beyond the types of governance and gas tokens we’ve seen with prior launches. The Eigen Foundation has revealed that EigenDA will rely on staked deposits of both $ETH and $EIGEN. At this stage, it is not clear how the risk and rewards for staking $EIGEN will be structured and how widely used the token will be for securing other Actively Validated Services (AVS’) on EigenLayer.
Therefore, it will be important to continue watching for future announcements by Eigen Labs and the Eigen Foundation. There’s more information to come, but for now the token and foundation announcements mark a major milestone for one of the biggest applications on Ethereum responsible for one of the most interesting and potentially important developments in proof of stake blockchain: restaking and modularity. - Christine Kim
Aave Publishes 2030 Proposal, Introduces v4 of Protocol
Avara, through Aave Labs, published a temperature check on the 2030 proposal in the Aave governance forum. Notably, the proposal outlines the construction of Aave v4 which iterates on the current version of the protocol (v3) and introduces the Aave Network.
The scope of Aave v4 is to improve the capital efficiency, risk management, and user experience (UX) of Aave products. The formation of a Unified Liquidity Layer via the Aave Network is the cornerstone of the goal, expanding on the functionality of Portals across chains and building a more cohesive Aave lending product. The Aave Network will serve as the hub unifying liquidity across supported chains, with the Cross-Chain Liquidity Layer (CCLL) – being powered by Chainlink’s Cross-Chain Interoperability Protocol (CCIP) – serving as a bridging layer moving assets between supported chains by way of the Aave network. Additional changes to the protocol’s functionality include automated adjustments to its interest rate curve (optimize yields for liquidity providers), dynamic interest rate premiums for riskier assets and an updated liquidation engine (improved risk management), and smart accounts and vaults allowing users to separate their borrowing activities (improved UX).
Another major initiative of the proposal includes the use of real world assets (RWAs) as GHO, Aave’s protocol issued stablecoin, collateral. Aave has been experimenting with RWAs, using stagnant DAO treasury funds to get exposure to U.S. Treasury yields. Implementing a GHO real world asset facilitator is an extension of this initiative.
The proposal details total first year funding of $15m worth of GHO stablecoin and 25,000 stkAAVE ($2.225m at $89/ stkAAVE). All in, the proposal estimates it will take three years to complete the 2030 plan.
OUR TAKE:
Aave’s 2030 plan aims at retrofitting the Aave protocol with the most up-to-date technologies and positioning it for the “2030” world, or one that is multi-chain yet unified. With this in mind, the lending titan is working towards two key initiatives through this proposal:
Solving the fragmentation problem faced by DeFi at large and the ensuing UX degradation that comes with it and,
building towards one of its original goals of being a chain agnostic liquidity protocol.
The idea of special purpose networks, in conjunction with some cross-chain communication protocol, solving the UX shortfalls of the current DeFi landscape has been a key topic of discussion. Aave’s 2030 plan takes this idea and attempts to make it reality. The Aave Network resembles a special purpose app chain with a primary purpose of extending liquidity across Portals on Aave supported chains. While the Aave application will not become its own special purpose blockchain in itself (i.e. users will not have to bridge to Aave chain in order to provide or draw on protocol liquidity), outsourcing one of its primary functionalities as a special purpose chain achieves a similar outcome on fragmentation and app flexibility. It also allows Aave to introduce UX benefits that aren’t possible without the Aave Network, like paying fees in the GHO stablecoin, and build a unified product.
The upgrade is progressive and helps Aave maintain its reputation as an economic and technological leader in DeFi. However, the 2030 plan is slated to take up to three years. This is a long time by crypto standards, and a lot can change between now and 2027/2028. As a result, the team should be considerate of the moving target it is attempting to hit and remain flexible with how the overarching idea of the 2030 plan is technologically implemented. - Zack Pokorny
Charts of the Week
Restaking is one of the most widely discussed topics in crypto today. With the roll out of EigenLayer Actively Validated Services (AVSs) nearing, many have questions about the expected yield of restakers. The Cosmos ecosystem has an EigenLayer equivalent called Replicated Security, allowing users to restake their ATOM to consumer chains. While there are many differences between EigenLayer and Cosmos Replicated Security, we can observe how ATOM restakers generate revenue from consumer chains and how much additional revenue they earn.
ATOM restakers earn restaking revenue from four sources: consumer chain transaction fees, consumer chain app revenue, consumer chain token inflation, and consumer chain maximum extractable value (MEV). The chart below shows the historical trend of total ATOM restaking revenue by type excluding MEV. For reference, there is around $2.07b of ATOM staked.
While the Dollar revenue produced by consumer chains for ATOM restakers isn’t indicative of what can be expected from EigenLayer AVSs, the revenue composition might be. Of the observed categories consumer chain token inflation is the highest revenue generator for ATOM restakers, averaging 57% of total restaking revenue since August 2023. Transaction fees have historically been the lowest revenue generator, averaging 14.8% of restaking revenue over the same time.
Other News
MicroStrategy Is Building ‘Decentralized ID’ on Bitcoin Using Ordinals-Like Inscriptions
Tether Sees Record Net Profit of Over $4.5 Billion in First Quarter of 2024
US Justice Department Charges Roger Ver With Tax Fraud
Jack Dorsey’s Block Faces Scrutiny From Federal Authorities Over Non-Compliant Crypto Services
MoonPay Integrates PayPal to Allow US Users Easier Access to Crypto Purchases and Sales
BlackRock Leads $47 Million Strategic Funding Round in Tokenization Firm Securitize
Binance Founder Changpeng Zhao Sentenced to Four Months in Prison
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