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Top Stories of the Week - 9/15

Weekly Top Stories 9/15/23 - Galaxy Research

This week in the newsletter, we write about Coinbase’s adoption of Bitcoin’s Lightning Network, important changes coming to Ethereum, and MetaMask opening to third-party developers.

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Coinbase Integrating the Lightning Network.

Coinbase, the second largest crypto exchange in the world by volume, announced that they will begin integrating the Lightning Network. The Lightning Network is Bitcoin's largest layer 2 protocol used to scale payments by moving computation off-chain. In the announcement, Coinbase CEO Brian Armstrong noted that "Bitcoin is the most important asset in crypto and we're excited to do our part to enable faster/cheaper Bitcoin transactions." This sentiment was echoed by Cathie Wood, CEO of ARK Invest, who applauded Coinbase's strategic decision to harness native Bitcoin scaling solutions to "give its 100 million users an on-ramp to faster and cheaper bitcoin transactions." In spearheading this pivotal integration, Coinbase has entrusted Viktor Bunin, a seasoned protocol specialist formerly with Coinbase Cloud (previously Bison Trails), with the role of project manager.

While the specifics regarding user access to the Lightning Network via Coinbase are unknown, from observing how other prominent exchanges like Binance and Kraken use Lightning, Coinbase will most likely use Lightning for retail deposits and withdrawals. This will allow Coinbase users to send or receive bitcoin from third-party Bitcoin Lightning wallets quickly and cheaply. Although a precise timeline for the completion of this integration has not been stated, Coinbase encourages its customer base to await further updates patiently.


Coinbase's Lightning integration will streamline cheap and fast Bitcoin transactions to millions of users while on-boarding newcomers into the Lightning ecosystem. Coinbase is somewhat late to the Lightning game. BitFinex was the first exchange to offer Lightning services in 2019, and River Financial became the first U.S-based Bitcoin exchange to integrate Lightning in 2020. Since then, Kraken, OKX, and more recently Binance all integrated the Lightning Network into their exchanges. The Lightning Network is appealing for large retail exchanges as it provides users with cheaper and faster transactions 24/7. This benefit of Lightning is extremely useful during periods of high fees and network congestion at the base layer.

In May 2023, we witnessed the benefit of exchanges integrating Lightning when Bitcoin transaction fees spiked to a 2-year high (an average of $20/tx). Specifically, exchanges supporting Lightning during the fee spike were able to off-load withdrawals requests to the Lightning network, allowing users to pay a fraction of the high transaction fee. However, Binance, who didn't support Lightning at the time, halted withdrawals as the abrupt fee spike backed up orders and crashed their fee estimation engine. 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 dramatically impact the entire network and cost the exchange or its users a lot of money. As seen with Binance in May 2023, if exchanges are underpaying fees, then its users’ withdrawal transactions will never confirm.

As a result, Binance decided to integrate Lightning to help mitigate similar situations in the future. Binance officially integrated Lightning in July 2023, approximately one month after their announcement. Given Binance's quick Lightning integration, as well as significant tooling offered now for institutional Lightning adoption (such as from Voltage and Lightspark), we expect Coinbase will also succeed in integrating Lightning relatively quickly.

As prominent crypto exchanges adopt the Lightning Network, it signals that Bitcoin's largest payment layer has attained some product-market fit. Our view is that exchanges will play a crucial role in Lightning’s adoption as they add liquidity to the network. As it stands, the Lightning network boasts a liquidity of 4,700 BTC, a substantial 20% of which is contributed by exchanges. Exchanges supporting Lightning are also positioned to generate revenue from routing fees. These fees are paid by other Lightning services routing transactions through the exchange's Lightning nodes. Overall, this is an exciting time for the Lightning ecosystem and with the support of every major exchange, Lightning is poised to enhance its vital role in Bitcoin's adoption story. - Gabe Parker

MetaMask Opens Wallet to Third-Party Developers with Snaps

MetaMask, the most widely used crypto wallet, has introduced a new feature called “Snaps” that allows users to install third-party developed applications directly into their wallet. In a blog post accompanying the launch, MetaMask summarized Snaps as enabling “anyone to extend the functionality of the wallet, at runtime, without our permission.”

Snaps essentially creates an application store for MetaMask, providing third-party developers with access to MetaMask’s 100 million plus users. It is initially focused on enhancing the user experience across three different categories - Interoperability, Transaction Insights, and Notifications - in order to “create a universal web3 interface.” All Snaps are installed through a trustless execution environment running inside of MetaMask and have zero permissions granted by default.

Snaps launched with 34 integrations from across the L1 landscape, including other wallet providers and products on Bitcoin, Algorand, Aptos, Cosmos, Hedera, Solana, Sui, Tezos and many others. All 34 Snaps currently available were audited by ConsenSys (the company behind MetaMask). Over time, however, ConsenSys plans to “open up the auditing process to create a fully permissionless platform.”

Snaps was previously teased this year during ETH Denver and Eth CC. The product is now in open beta with additional features and functionality to be rolled out over the coming months. In addition to Snaps, developers can currently build on MetaMask using its Dapp API and SDK (also in beta).


Beyond everyday users, MetaMask and non-EVM chains are the biggest beneficiaries of Snaps. If successful, it should further strengthen MetaMask’s dominance in the wallet space and give it an edge in cross-chain integrations.

Snaps opens up the design space for any team on any chain to integrate with MetaMask without being reliant on the MetaMask team. This will turn MetaMask into a much more customizable wallet, providing users the ability to design their own wallet experience specific to their preferences, similar to Chrome Extensions for Google’s Chrome browser. Given MetaMask’s large user base, this is likely to incentivize many developers to add Snaps integrations for their product. The 34 Snaps already available are evidence of this, with teams from a diverse set of chains and product types partaking.

From a cross-chain perspective, Snaps opens up the possibility for users to consolidate their cross-chain activity onto one wallet once a Snaps for that chain is made available. While this may sound trivial, a web 2 analogy would be Single Sign On (SSO), which gives users the ability to use a single login across a variety of platforms and applications (eg. using Google login for Facebook and Twitter). This significantly reduces cross-chain frictions and simplifies the user experience for onboarding to non-EVM chains.

MetaMask is facing growing competition from alternative offerings like Coinbase Wallet, which often have additional functionality like built in bridges available with a more user friendly UX/UI. While Snaps should make it easier for developers to quickly deploy competitors’ features to MetaMask, it also opens up users to attacks from malicious third-party developers. MetaMask will be challenged to devise a secure and safe way to onboard new Snaps without exposing MetaMask users to unnecessary risks. Relying on a single entity to audit all new Snaps is not a scalable process. - Lucas Tcheyan

2 New EIPs Added to Ethereum Cancun/Deneb Upgrade

On Thursday, September 14, Ethereum protocol developers expanded the scope of the Cancun/Deneb (Dencun) upgrade to include two new code changes. The first is Ethereum Improvement Proposal (EIP) 7514, which will effectively limit validator churn to 8 validator entries per epoch. As background, the churn rate determines the maximum number of Ethereum validators that can exit or enter the network every epoch (every 6.4 minutes). As of September 14, 2023, the churn rate is 12. This number increases by one every 65, 536 new validators that join Ethereum.

To reduce the growth rate of the Ethereum validator set, developers have decided to activate EIP 7514 in the forthcoming Dencun upgrade and thereby cap the maximum number of validator entries per epoch to 8. The churn rate for validator exits will remain unbounded, meaning that the maximum number of validator exits permitted per epoch will continue to grow as the Ethereum validator set size grows.

The two main reasons for slowing the growth of the validator set size are reducing unnecessary bloat on the peer-to-peer layer from high volumes of messages from validators and improving the ease of implementation for future roadmap upgrades such as single-slot-finality (SSF). To learn more about these reasons, read Galaxy Research’s latest report, “Paths Toward Reducing Validator Set Size Growth.”

The second EIP that was added to the Dencun upgrade during yesterday’s All Core Developers (ACD) call was EIP 7516. This code change is similar in design and motivation to EIP 3198, BASEFEE opcode, which was activated during Ethereum’s London upgrade. As background, the London upgrade on August 5, 2021 introduced major changes to how transactions on Ethereum are priced. Namely, it introduced an algorithmically priced “base fee” for all transactions that dictates which transactions are eligible for inclusion in the next block and which are not. The upgrade also introduced a fee burning mechanism that has burned over 3.6mn ETH since activation. For more information on the Ethereum London upgrade and its impacts, read this Galaxy Research Report.

EIP 3198 is an opcode that returns the value of the base fee of a current block. It is used within smart contract applications to access real-time information about the cost of transactions on the network. EIP 7516 would perform a similar function by helping Layer-2 rollups access real-time information about the base fee or cost for blob transactions. Blobs are a new transaction type that will be introduced through the Dencun upgrade designed to reduce the cost of posting data from rollups to Ethereum. Blobs will be priced according to a separate fee market, which is why EIP 7516 calls for the creation of a new opcode that can accurately return the value of the blob base fee of the current block.

A developer by the screen name “Protolambda” who works for OP Labs, the development company behind Layer-2 rollup Optimism, said on ACDE #170 that EIP 7516 was not “strictly necessary” for Layer-2 rollups but would be “a nice to have.” To learn more about blobs, read this Galaxy Research report.


The addition of EIP 7514 and 7516 was a surprising development given how late into the Dencun upgrade testing cycle they were introduced. The EIPs for Dencun were finalized back in June 2023. Since June, developers have primarily focused on testing one part of the Dencun upgrade, that is EIP 4844, blob transactions. Only recently, as of August 2023, have developers been able to widen their focus and formally test the full scope of the Dencun upgrade on a multi-client testnet known as Devnet-8. The launch of Devnet-8 motivated developers to start recording and collaborating on a “Dencun testing overview” document that contains active and ongoing test coverage needs for the upgrade. Given the large areas testing still needed for Dencun, it was doubly surprising that developers came to consensus on ACDE #170 to further expand the upgrade’s scope to include two new EIPs.

Broad consensus among developers on yesterday’s call to include EIP 7514 in Dencun illustrated the urgency of Ethereum’s growing validator set size issue. When developers started to discuss solutions to the issue of rapid growth in the number of active validators back in June 2023, there was little appetite from developers to implement a solution in the near-term and certainly not in the Dencun upgrade. Even as early as last Thursday, on ACDC #117, developers were not aligned on the need to cap the growth of Ethereum’s validator set posthaste. However, sentiments shared by developers on this week’s call highlighted growing fears that without immediate intervention, developers would be taking a gamble on the health of the network and potentially find themselves in a desperate situation needing to make drastic moves to slow the growth in the number of active validators.

In light of the new Dencun scope, one major question we should raise is how the addition of these two EIPs will impact upgrade activation timeline. It is in developers’ favor to activate EIP 7514 as soon as possible. However, the addition of EIP 7514 and 7516 creates more work on Ethereum client and testing teams to prepare these two code changes, along with 7 other EIPs, for Dencun. Already, the launch of Devnet-9 has been delayed a week to give client teams proper time to add EIP 7514 and 7516 to their implementations. As of September 14, developers plan on launching Devnet-9 by the end of this month. Then, developers may launch one or two additional Devnets thereafter. However, assuming the results of Devnet-9 are outstanding, developers may then feel comfortable moving forward with activating Dencun on the following public testnets in the following order: Holesky, Goerli, then Sepolia. The results from every Dencun activation starting with Devnet-9 all the way to Sepolia will be crucial to firming up a date for mainnet activation. Based on the large amount of testing still needed for Dencun, initial expectations estimating the upgrade to be ready for mainnet activation by Q4 2023 appear increasingly unlikely. -Chistine Kim

Charts of the Week

Ethereum Validator Overview and Churn Limit - chart

The maximum number of validators have been activated every day since April 14 (2 days after Shapella went live). Over this period, the activation queue expanded from 1,439 validators to a maximum of 96.6k before dropping to the current level. Assuming no new validators enter the pending queue, Ethereum will be able to activate the maximum number of validators each day through August 26.

Ethereum Validators Added and Removed Against Churn Limit - chart

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