Weekly Top Stories - 1/31
This week in the newsletter, we discuss Tether's return to Bitcoin, Pudgy Penguins' launch of its own blockchain, and Ethereum developers' plans for the next upgrade.
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Tether to Issue USDT on Bitcoin
Tether, the largest stablecoin with a $140bn supply, is expanding to Bitcoin through the Taproot Assets Protocol (TAP). Developed by Lightning Labs in 2023, TAP uses Tapscript—an enhanced version of Bitcoin Script introduced in the Taproot upgrade—to enable native asset issuance on Bitcoin. Tapscript enables native asset issuance through TAP by combining TAPTweak and Sparse Merkle trees, allowing issuers to verifiably attach data to transactions while keeping that data off-chain. Tether will issue USDT on Bitcoin by embedding token metadata, including supply and account balances, into the transaction witness field, the same mechanism Ordinals uses for creating digital art.
While Bitcoin's network only recognizes BTC as a native asset, applications running a Taproot Asset client can track TAP assets within standard Bitcoin transactions. This allows users to purchase and transfer USDT directly on Bitcoin's base layer. Additionally, TAP-based USDT tokens can be sent to the Lightning Network, Bitcoin's primary layer 2 payment solution with over $533m in transaction capacity. This integration enables USDT-denominated payment channels on Lightning, advancing beyond the current system where payments are only denominated in satoshis (the smallest unit of bitcoin).
It should be noted that Tether's first venture into Bitcoin was in 2014 when they issued native USDT on the Omni network, a metaprotocol functioning as an L2 on Bitcoin. Due to a lack of adoption and supporting infrastructure, Tether left Bitcoin in August 2023.
OUR TAKE:
Tether’s return to Bitcoin underscores the continued paradigm shift happening in that Bitcoin is not just digital gold, but a robust platform. Tether's decision to issue USDT on Bitcoin speaks to the growth in Bitcoin development over the past couple of years. Bitcoin's ecosystem is now rapidly expanding through layer 2 solutions that aim to bring new cases to BTC such as DeFi, web3 applications, payments, RWAs, staking, and more. Although Tether is only natively issued on Bitcoin's base layer and Lightning, the mere fact that USDT liquidity is available on Bitcoin means that the BTC DeFi and payment design space is going to exponentially expand. For BTC DeFi, BTC backed lending is the largest market, however, the majority of the BTC backed stablecoin loans are on Ethereum. Additionally, Coinbase's new BTC backed USDC loans are completely centralized and off-chain. Now with USDT on Bitcoin, lending protocols that integrate with Bitcoin can unlock the +$2tn in BTC liquidity while offering the borrowing of the largest stablecoin without leaving the bitcoin ecosystem.
Overall, USDT via TAP positions the Lightning Network extremely well for the future of payment applications on Bitcoin. Although Lightning has fallen behind in the L2 race, it's still the most decentralized and trustless layer 2 solution in crypto. Additionally, the Lightning Network already has existing infrastructure to support payment integrations for consumers and merchants to start accepting USDT. The biggest advantage of USDT payments over Lightning versus USDT payments on Solana, Tron, or Base, is that Lightning transactions occur off-chain and only settle on Bitcoin's base layer when necessary. While competing with Solana and Tron for stablecoin payments won't be an easy battle, USDT on Bitcoin is the beginning of a new era for Bitcoin evolving into a robust platform. - Gabe Parker
Abstract: Building the 'Consumer Chain'
Abstract launches on mainnet with its consumer-focused blockchain. From Igloo Inc., the parent company of Pudgy Penguins, Abstract is an Ethereum L2 for consumer crypto applications. Abstract aims to bring crypto to the masses through an integrated platform that simplifies crypto/web3 concepts through abstraction techniques to ease onboarding of new users. For example, the native Abstract Global Wallet enables users to sign up using only their emails without requiring storing secret recovery phrases. "For too long, the industry has prioritized technology over user experience, creating barriers to mainstream adoption," said Luca Netz, Abstract Co-Inventor. "The launch of Abstract is more than just a technical milestone—it's a shift in how everyday users – and not just crypto natives – experience blockchain."
Abstract has over 100 ecosystem apps and projects live at launch and more than 400 in development. Some of the consumer applications span gaming, trading, social, and NFTs. Users can discover applications through the Abstract Portal and earn points and badges for their participation through the Abstract Incentives program, which aims to reward builders, users, and creators on Abstract Live: Abstract's native streaming platform. In the 4 days since mainnet launch, Abstract streamers have already earned $3.5m in tips (per Dune data).
OUR TAKE:
Despite all the technical progress the crypto industry has achieved in recent years to reduce user frictions for consumer-facing applications, mainstream adoption remains somewhat elusive. The Abstract team takes a unique approach to drive mass adoption of crypto through a thoughtful rollout plan while offering users a Web2-like onboarding experience (via integrated smart wallets and paymaster systems for gasless transactions). At first, Abstract is targeting leisure and entertainment applications (e.g., gaming, social, streaming) as the easiest 0-1 onboarding flow because these applications are an easier sell for consumers and more prone to virality. Hyper-focusing on curating "fun" apps that align developer and consumer interests during this initial stage (rather than attempting to serve every use case simultaneously) is essential for building a loyal user base and establishing Abstract's brand. The usual crypto primitives that are prevalent across other general-purpose blockchains (e.g., DeFi, credit, and tokenization) can then come later.
Abstract has also forged partnerships with some of the most influential NFT brands to promote shared community engagement alongside Pudgy Penguins, which granted NFT holders a multiplier for farming XP in the Incentives Program. The project teams have clearly given a lot of thought to every aspect of Abstract's rollout, yet, not everyone is happy with the approach - some Pudgy NFT holders expressed frustration over the lack of a token at mainnet launch. Sellers have pushed the Pudgy floor price to 11 ETH (down 30% since Monday's launch and down 50%+ over the past two weeks). However, Abstract is not looking to build its community around these short-sighted speculative opportunists, but rather for those who do care about the tech and believe in the cultural revolution. - Charles Yu
Ethereum Developers Issue Emergency Fix for Geth Client
On Thursday, January 30, the development team behind Geth, Ethereum’s most widely used software client, issued an emergency fix for their software after discovering a critical security vulnerability. While the exact details of the bug are still undisclosed to prevent any bad actors from exploiting it, Geth developer Marius van der Wijden said on Thursday during the weekly Ethereum developer call that the issue was “pretty bad” and in a “worst case scenario” could result in a malicious actor forcibly shutting down Geth nodes. Roughly 43% of Ethereum node operators are estimated to run Geth software. Another Geth developer on the call by the screen name “Felix” summarized the bug as a “P2P DoS issue”. The bug Van Der Wijden said affects all Ethereum node operators, as well as many Layer-2 rollups built off of Geth. Van der Wijden reported that his team has contacted major rollups to notify them about the issue and the need to upgrade their infrastructure. The teams behind Optimism and Binance Smart Chain have both since issued new updates to their respective tech stacks.
The last time the Geth team had to release a hot fix for their client was back in May 2024. More recently, in December 2024, various Ethereum protocol researchers and developers authored a post to warn Ethereum node operators about little-known security implications of a doubling to the block gas limit. Due to constraints on the consensus layer of Ethereum, a doubling to the block gas limit, which is a parameter controlled by Ethereum node operators, can enable malicious actors to DoS Ethereum by forcing nodes to handle amounts of data beyond their capacity. Node operators have since taken heed and paused their efforts to double the block gas limit until developers work out a solution to lift constraints on the consensus layer.
OUR TAKE:
On one hand, events like these where a security vulnerability is disclosed in Ethereum’s most popular client, Geth, highlight the importance of client diversity. Ethereum more than any other public blockchain has made headway in diversifying its suite of production-ready client software. There are more than 10 actively maintained Ethereum clients, at least five for the consensus layer and at least five for the execution layer of Ethereum. Because of this diversity, a bug in Geth only impacts roughly 40% of node operators, which is still significant but less so than if the vast majority of the network relied on Geth.
On the other hand, the bug in Geth is not the only hot fix that Ethereum developers have been issuing as of late. In December, Ethereum researchers and developers had to disclose little-known security implications of doubling the block gas limit to the community. Also, the debugging work for Pectra has not lightened the closer developers have gotten to finalizing the upgrade. On the same call where Van der Wijden disclosed the latest Geth bug, Prysm developer Terence Tsao called out the myriads of issues developers have been catching on Pectra Devnet 5, the latest one impacting network consensus. “They’re quite serious,” Tsao said.
These incidents highlight the complexity of Ethereum’s codebase and high surface area for attack, with three primary pieces of software, consensus layer, execution layer, and Engine API, as well as a diversity of clients for the first two. It may also highlight the need for Ethereum developers to slow their pace of development. This, however, during a time when the staunchest Ethereum supporters are questioning or outright condemning Ethereum for not moving aggressively enough to match the pace of development displayed by competitors like Solana and Celestia sounds like a death sentence for Ethereum. At the same time, speed at the expense of security also spells doom for Ethereum. For now, developers are moving full steam ahead to hit a mainnet activation date for Pectra in mid-March. Based on how Pectra Devnet 5 has gone, mid-March is an ambitious target. While the consequences for failing to meet this target appear especially high due to negative sentiment for ETH, it’s important to keep in mind that the consequences are equally high, if not higher, for an upgrade on Ethereum that goes poorly (i.e. contains unexpected security vulnerabilities and bugs). Ethereum’s success depends on the extent to which Ethereum developers can walk this tightrope and balance priorities successfully. - Christine Kim
Charts of the Week
As of Jan 30, the BTC balance on exchanges sits at 2.74m, tracking towards its 6th consecutive monthly decline. BTC balance on exchanges has fallen below the COVID lows in November 2020 to points not seen since December 2018. Over the last three months, 270,000 BTC has left exchanges; over the last six months, 338,500 BTC has left exchanges.
The short-term holder (STH) balance has expanded by 1.3 BTC as coins have been fleeing exchanges over the last three months. STH supply is the total amount of BTC that was last transacted in the trailing 155-day period. This is the largest three-month change in STH supply since February 2021. The juxtaposition of fleeting exchange balances and rising STH supply is a sign of accumulation and differentiates it from the February 2021 expansion in STH supply when exchanges were seeing multi-year high exchange inflows.
Other News
Paradigm, EFF rally behind Tornado Cash’s Roman Storm amid legal battle
Tesla revalues bitcoin holdings under new accounting rules, reports $600M gain in Q4
Cipher Mining secures $50 million investment from Stargate AI backer SoftBank
Arkansas Senate rejects bill to ban crypto mining near military facilities
US SEC approves Bitwise's combined Bitcoin and Ethereum ETF
Crypto PAC Fairshake raises $116 million for 2026 midterms
Cardano plans transition to 'full decentralized governance' after Wednesday's Plomin hard fork
Czech Central Bank to consider $7 billion bitcoin reserve
Crypto.com says the exchange will delist Tether’s USDT in the EU
Elon Musk's DOGE exploring blockchain for government efficiency
DeFi network Thorchain faces $200 million in toxic debt
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