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Top Stories of the Week - 5/12

Weekly Top Stories 051223

This week, we write about bitcoin fees and Binance temporarily halting withdrawals, an exciting DAO governance saga at aragon, and the launch of lido v2. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.

Bitcoin Transaction Fee Spike Shocks Binance

Binance, the largest crypto exchange in the world, temporarily halted bitcoin withdrawals twice in 24hrs. Binance stated that the backlog of pending transactions resulted from the platform’s transaction fee estimator engine failing to anticipate the recent surge in bitcoin transaction fees driven by BRC-20 and Ordinals activity. (Last week, we wrote about the emergence of BRC-20’s and their impact on bitcoin transaction fees.) Binance cleared the backlog hours later by replacing the original feerates associated with pending transactions with a new higher feerate to increase the chances of being picked up in the mempool. Prior to this adjustment, at the time Binance halted withdrawals the second time, there were roughly 485k pending transactions in the mempool. At the time of writing, there are now roughly 300k pending transaction in the mempool.

To mitigate future bitcoin withdraw backlogs in high feerate environments, Binance announced they would begin supporting the Lightning Network, the most widely used bitcoin layer 2 scaling solution, which will allow transfers at fractions of the cost for at least small balances.

Our take

While it was obvious to most that Binance was struggling with a bitcoin fee environment not seen in 2 years, still the largest exchange in the world halting withdraws for the largest asset in crypto was an alarming event, epecially considering Binance’s competitors such as OKX and Coinbase experienced no outages. For background, bitcoin users can attach a fee to their transaction to entice miners to include it in the chain more quickly, resulting in a pay-your-bid auction in which space in a block (blockspace) is the commodity for sale. When demand for blockspace increases, competition among users tends to drive up the fees needed to transact in a timely fashion. Exchanges themselves are, of course, major users of the bitcoin blockchain, and given their scale, mistakes in fee calculation can cost the exchange or its users a lot of money. And if the exchange is habitually underpaying fees, then its users’ withdrawal transactions will never confirm. It appears that Binance either had no fee estimation at all, or their tools simply were not capable of tracking the large spike in fees.

In their first tweet, Binance tried to imply that the issue was because th bitcoin network was not “stabilized,” but of course the bitcoin network was operating perfectly and as designed. The exchange is apparently fixing the issue, and now also adding support for Lightning, which are positives. But this is not a small matter—given all that has happened in this market over the last 12 months, halting withdrawals is serious business. Binance should have been better prepared, but it looks like they will be going forward. -AT

Governance tooling DAO sets questionable governance practices

Aragon Association acts to unilaterally repurpose Aragon DAO against perceived activist threat. Formed by the Swiss nonprofit Aragon Association in 2017, Aragon is a DAO tooling system that lets users create and manage DAOs. In June 2022, a proposal was approved to transfer the centrally controlled Aragon Treasury to an Aragon DAO governed by delegated ANT tokens by the end of February 2023—listed as the "soft" implementation deadline.

As of May 2023, Aragon Association had not finished moving the Treasury to the DAO. After noticing ANT was trading at a large discount to the Aragon Treasury value ($123m vs. $192m as of 5/3/23), a group of investors had taken interest in the project and raised questions in the Discord about the Treasury migration delays. The Discord users were subsequently banned by the mod after they were discovered to have previously been involved in the treasury takeover and dissolution of another DAO - RookDAO.

On May 9, the Aragon Association team then published a blog post announcing that in response to a "51% attack" by a coordinated group of activist investors, it would be acting on its "fiduciary duty" to secure the Treasury and would be repurposing the existing Aragon DAO to exclusively fund builders via a new grants program. The Association reasoned that ANT is registered with a Swiss financial regulator as a "utility token" and the actions taken by the profit-seeking activists would pose risks to the project's social mission, including legal risks to the looking to use the token solely for profit would be against the project's social mission and pose legal risks to the DAO and the ANT governance token.

Arca responded to the Association’s claims in an open letter, claiming it had every right to ask questions about the Treasury migration delay and that the Discord bans hindered their ability as token holders to participate in governance. Arca further clarified that it was planning on working with other token holders to propose a buyback to return ANT to book value rather than advocating for a dissolution as feared by the Association. Arca concluded the letter with: "We will continue to pursue our buyback proposal, advocate for increased transparency, and seek resolution for the treasury transfer. We hope to do this constructively by working with the Aragon team to find solutions."

As a resolution, a governance proposal was then submitted Aragon co-founder Luis Cuende, now part of the Aragon Association committee, to buyback $30m of ANT tokens and to gradually transfer the Treasury to the Aragon DAO over a 5-year period. On May 11, the Aragon blog post on repurposing the DAO was taken down as the Association issued an apology for its actions and vowing to improve on its communications.

Our Take

The Aragon Association failed to adhere to many of the governance best practices that it preaches on its website and through its app. The Association is at fault for several reasons. The vote to migrate the Treasury to the DAO was approved well before any so-called "RFV Raiders" were engaged and the Association had failed to migrate the treasury on the proposed target date. Even if it was specified as a "soft implementation date", the Association should have been transparent about the treasury transfers and the delayed schedule. Instead, the Association even took it a step further by banning and blocking users for asking questions through DAO communication channels including on Discord, governance forum, and Twitter, and then unilaterally deciding to repurpose the DAO.

It's interesting that the Association proactively took these "defensive" measures before any governance action from the activists were taken, especially as Aragon itself provides DAOs with safeguards against potential malicious governance attacks such as two-phase voting and timelocks that provide token holders a reasonable amount of time to react to governance decisions. There are also admin privileges that can pause or veto governance attacks. In addition, the Association reasoned that banning users from the communication channels and the repurposing of the DAO was done in fear of dissolution, when Arca actually claims it was only intending to advocate for ANT buybacks (which the Association has previously done). By acting the way it did, the Association prevented any productive conversations from happening.

After meaningful blowback from the community, the Association backtracked on repurposing the DAO. This latest governance episode once again highlights the importance of transparent communications and the importance of checks and balances in DAO governance - just as project teams require safeguards against malicious attacks, they also need to be held accountable by the community. After helping to launch and manage over 5,000 DAOs, we hope that the Association can learn from its mistakes, set better standards for DAOs, and realign themselves with the original mission of Aragon. -CY

Lido V2 Proposal Enters Final Voting Round

On Friday, May 12, Lido developers will initiate a final on-chain vote for the Lido V2 upgrade. Unveiled back in February, Lido V2 enables stETH to ETH redemptions and implements the early beginnings of a new staking router architecture for permissionless staking. Since the unveiling, Lido developers have tested the upgrade on public Ethereum testnets and completed multiple third-party audits on the code. This weekend, Lido V2 will be put to a final vote through the Aragon DAO platform. For the vote to be successful, more than 50% of LDO governance tokens used to vote must signal their approval for the proposal and at least 5% of total LDO governance token supply must signal an affirmative vote. The vote will last 3 days and conclude on Monday, May 15. If successful, Lido V2 will then activate the same day (May 15). As Ethereum’s largest staking pool, Lido controls more than 30% of total ETH staked. Since the activation of Shanghai last month, the total amount of ETH staked through Lido has grown by 9%. At the same time, the total amount of ETH staked through Rocketpool, a competitor to Lido, that activated staked ETH withdrawals earlier, a few days after Shanghai, has grown double digits by 23% over the past month.

Our Take

Appetite for staking on Ethereum has grown substantially since Shanghai. As of Sunday, May 7, the total amount of ETH newly staked since April 12 has surpassed the amount of ETH withdrawn from partial and full withdrawals. This indicates that Shanghai was widely viewed by Ethereum stakeholders as a de-risking event for staking activity. As of Thursday, May 11, the number of validators in the queue for activation is greater than 40,000, while the queue for exiting validators is zero. Because Lido has not yet enabled staked ETH withdrawals, Lido has been at a disadvantage to its decentralized and centralized staking pool competitors such as Rocketpool, Frax Finance, and Binance over the past month. While the total amount of ETH staked by most Lido competitors has grown double digits over the past month, Lido’s has grown by 9%.

Still, Lido continues to dominate as Ethereum’s most popular staking platform and, with the likely activation of staked ETH withdrawals on May 15, the protocol will soon be able to facilitate redemptions of stETH for ETH even faster on occasion than staked ETH withdrawals directly through the Ethereum protocol. Based on the withdrawals and deposit activity post-Shanghai, the activation of staked ETH withdrawals on Lido should be largely viewed as a de-risking event that encourages more staking activity through Lido rather than less. In addition, the secondary feature of Lido V2, that is the new staking router architecture, is also expected to increase Lido’s competitiveness by introducing the early steps forward for enabling permissionless staking. Given the ongoing regulatory scrutiny of decentralized finance and staking protocols, especially in the US but also globally, it is imperative for the longevity and resiliency of the Lido protocol to move towards greater levels of decentralization and immutability. The less reliant Lido is on on-chain forms of governance and off-chain intervention, the more secure and resilient against regulatory capture Lido’s massive stake under management can become. -CK

Other News

  • Maker launches Spark Lend, a DAI-focused lending marketplace

  • Arbitrum releases details on how protocol surplus transaction fee revenue funds the DAO

  • Stakeholders file Comment Letters to improve SEC’s proposed rulemaking on custody

  • Bittrex files for US bankruptcy

  • IRS files claims of $44bn against FTX

  • Binance briefly paused BTC withdrawals during network congestion

  • Worldcoin introduces World App, commits to launching on Optimism Mainnet