The Weekly Wrap - 19 March 2021
Mar 19, 2021 - 4 min read
1. Grayscale Investments adds five new cryptocurrency investment trusts
- In December 2020 a Grayscale Investments filed trusts in Delaware for BAT, LINK, MANA and LPT. A similar trust for FIL was filed earlier in October 2020.
- Grayscale has now launched five new investment trusts that will hold these specific cryptocurrencies. Investors into these trusts will gain exposure to the respective tokens.
- These are the first new trusts since 2019. Grayscale now offers 13 single cryptocurrency investment trusts.
Why it’s important:
- Grayscale appears to have met a need in the market from institutions and investors who want to have exposure to those cryptocurrencies but are unable to buy directly. Livepeer (LPT) price increased by 92.4% and FIL by 16.6% in the first 24h after the launch of the trusts.
- Grayscale can be viewed as a leader in cryptocurrency trust offerings. This may influence institutional investment going forward. It should be noted that they have filed new trusts for other cryptocurrencies such as: Aave, Cosmos, Polkadot, Monero and Cardano.
- Institutions appear to also be interested to gaining exposure to the DeFi ecosystem through similar investment mechanisms. CoinShares’ DeFi Index Token and Bitwise’s DeFi Crypto Index Fund were also recently released.
2. Date for ETH2 merge may be sooner than planned
- Vitalik Buterin published a document describing a mechanism that enables a ‘quick merge via fork choice change’ that allows the Ethereum chain to move from PoW to PoS on a faster time frame than initially proposed.
- Buterin claims that a minimal merge could be a better and easier way forward. Leading Ethereum researchers and community members also support the removal of PoW as soon as possible.
- Scheduled for July, EIP-1559 will be included in the London hard fork. Some miners oppose the change and are coordinating responses. One proposal is to collectively move 51% of the hashrate to Ethermine on April 1st for 51 hours. A second, EIP-3368, proposes an increase in ETH PoW block reward from 2 ETH to 3 ETH.
Why it’s important:
- The proposed faster merge could be viewed as a response to the potential action from miners that may impact the network. However, community support for a faster merge suggest there are other benefits. Advances in L2 scaling solutions, such as optimistic rollups and zkRollups, will allow for scalability up to a factor of 100x soon. This should be enough to meet scaling demand over the next 1 to 2 years.
- By prioritizing the merge now, the benefits of PoS and L2 scaling are immediately available. The merge is less technically complex than sharding. This means researchers would have more time to focus on solving the complexities of data sharding. Importantly, is also means that PoS stakers may have access to liquidity much earlier than scheduled, since a post-merge hard fork could add support for staking withdrawals.
Digital assets are exponential trends driven by network effects. These are powerful long-term secular shifts that are very different in nature to linear trends.
3. PancakeSwap and Cream Finance suffer DNS exploit
- On Monday, 15 March, DeFi platforms PancakeSwap (decentralized exchange) and Cream Finance (borrowing and lending platform), announced that they were experiencing a DNS hijack.
- Typically, a DNS hijacking allows an attacker to serve up a counterfeit copy of a website, with the goal of fraudulently collecting personal information. In this case, the attacker attempted to lure users to enter their private keys with the intention of stealing their funds.
- Both projects quickly announced the attack on Twitter and warned users to be vigilant and not to enter their private keys. They both later announced that they had regained access to their respective DNS.
Why it’s important:
- DNS hijacks are a common occurrence, and cyber security firms regularly issue warnings of such attacks. In this case, the DNS attack was serious because it directly intended to steal users’ funds. Although some users lost funds, the swift action to alert users may have further avoided some material loss.
- DeFi protocols are constantly under scrutiny by people searching for weaknesses. These include technical vulnerabilities at the smart contract level, as well as oracle exploits, price manipulation and other protocol flaws. The more these exploits occur, however, the more robust the protocols become. Long-term this is good for security.
- DeFi is still high-risk, much of the software is still not fully tested or is still in beta stage. This means that users should remain vigilant when using the protocols. It is also worth stressing that users should never enter private keys on any public website or by email.
4. More projects commit to Optimism L2 scaling solution for Ethereum
- Optimistic rollups from Optimism is a layer 2 scaling solution that is gaining acceptance in the Ethereum community as a practical scalability solution for ETH 1 and ETH 2. Optimism utilizes the optimistic virtual machine (OVM), which is a an EVM compatible execution environment. This means L1 applications, smart contracts and Ethereum tooling can be reused and migrated onto Optimism.
- Optimism was first introduced in June, 2019. On February 24, 2021, a16z announced they were leading USD 25 million Series A investment round into Optimism. The project is due to launch on mainnet later this month, with large scale production to follow.
- MakerDAO will launch an Optimism DAI bridge by Q3/Q4, 2021. A Synthetix Optimism demo achieved a decrease of 143x in gas costs and 0.3 second transaction confirmation time. In a similar demo, Uniswap was able to cut costs up to 100x and lowered the confirmation time to 0.17 seconds.
Why it’s important:
- Besides optimistic rollups, many other scaling solutions have been proposed, such as zkRollups, Plasma, payment channels, or side chains. One of the key strengths of the DeFi ecosystem on L1 is the composability or easy interworking of multiple protocols. If DeFi protocols choose different scaling solutions, there is a risk that composability might be compromised which breaks network effects of the so-called “DeFi money legos”.
- Rollups move computation off-chain but keep some transaction data on-chain, and hence enable finality and security which are regarded as critical attributes. DeFi projects that prioritize such attributes may choose rollups over other solutions which make untested assumptions on security and decentralization.
- zkRollups, an alternative to optimistic rollups, are already deployed to mainnet and are used by Diversifi, Loopring and zkSync. A key trade-off is that zkRollups are much harder to implement for general-purpose EVM execution than optimistic rollups. zkRollups benefit from faster withdrawal times and lower on-chain gas costs. As the technology evolves and the complexity trade-offs are solved, zkRollups may win out in the long-term.
Number of the Week
settled in transactions on Ethereum over the past 12 months, via Messari
5. US accredited investor crypto survey shows growing interest in DeFi
- Xangle surveyed 379 accredited investors on their views and sentiment towards cryptocurrencies, including Bitcoin, Ethereum and DeFi, to more fully understand their outlook and opinions.
- The results show that 70% have invested in Bitcoin and retain a bullish outlook. 72% believe recent Bitcoin price increases are creating a bubble that will soon pop. 67% knew about DeFi, while 72% of that group stated they were very likely to expand their crypto portfolios to include DeFi in the future.
- The question of why new investors may be deterred from investing in crypto include: fraud and scams (26.1%), lack of awareness/education (24.3%), lack of regulation (17.4%), and lack of transparency (13.5%).
Why it’s important:
- DeFi has grown approximately 44x in one year in terms of total value locked (TVL), from USD 1 billion to USD 44 billion. The respondents are a rather skewed investor demographic (71.5% under 45 years old). Nevertheless, this seems to be a group that are actively seeking crypto investments that fully embrace the growth opportunity of DeFi.
- Reinforcing the optimistic outlook for Bitcoin, when respondents were asked which investment class was likely to deliver the greatest returns by 2025, 31.7% chose Bitcoin, while 29% chose blue chip stocks.
- While DeFi and other cryptocurrencies are clearly of growing interest, it is still early. Only 3.2% would choose to invest in other cryptocurrencies only.