0xResearch - Dencun Will Ignite Layer-2 Ecosystems - Revelo Intel

0xResearch – Dencun Will Ignite Layer-2 Ecosystems

In this episode of 0xResearch which took place on February 14, 2024, Sam, Ren, Pibblez, Dan and Vishal join to discuss Arbitrum STIPs, Solana fee market, $BTC mining, and $ETH ETFs. Read our notes below to learn more.

Background

Effectiveness of Arbitrum STIPs

  • Ren says that the Arbitrum STIP program resulted in a $400 million TV increase with $54 incentives spent per new address.
  • He adds that LTV:CAC ratio of 0.5 indicates spending more than earning from customers, aiming for a 3x ratio.

Solana Fee Market Designs

  • Ren says that writing transactions on Solana requires specifying touched accounts, similar to Ethereum‘s state interaction. Currently, writing lock accounts is free, allowing potential spamming by sending infinite transactions. Proposal SD 110 suggests an exponential fee increase for right-lock accounts to deter spamming. The proposal tracks each account’s compute unit utilization per block to adjust fees accordingly.
  • He adds that ongoing debates highlight the broken nature of Solana markets and the necessity for optimal solutions. Increased user activity may lead to system breakdown if solutions are not implemented promptly. He draws comparisons between current Solana congestion issues and past Ethereum transaction drops pre-EIP 1559 implementation.

Bitcoin Layer-2s & VM Nuance

  • Matt quotes Eric Wall who argues that any system launching on BitCOİN VM is not a true layer-2 due to its optimistic bridge lacking permissionless features. Permissionless validator sets are crucial for true layer-2 networks like Arbitrum, which allows exits from the system despite limitations.
  • He adds that cryptocurrency terminology can be confusing for those not deeply involved in the field. Difficulties exist in grasping trust assumptions, especially prevalent in Ethereum rollups. There are concerns over potential catastrophic events due to complexities in bridge contracts.
  • Sam says that Babylon integration enables delegating $BTC to a validator on a consumer chain. Consumer chain can determine the percentage of security backed by $ATOM versus $BTC.
  • Ren says that the dual staking model allows partial security by restake and partially by its own token. Potential benefits include avoiding the concentration of value from inflation solely into one asset.
  • Sam says that Vertex hints at an upcoming order book DEX called Blitz on Blast.

dYdX Segment: Stride

  • Vishal says that users stake $dYdX, receiving $stdYdX tokens. Over time, 1 $stdYdX may be worth more than 1 $dYdX due to real yield.
  • He adds that the adoption of $stdYdX has been positive with $3 million in TVL and $1 million in liquidity. They are expecting good traction with integrations into stablecoin markets and custodial solutions. Liquid staking offers benefits like high economic security but faces limitations in defi usage due to high staking yields.
  • Vishal says that Cosmos chains balance staking yield with DeFi usage; liquid staking provides access to yield without compromising participation. Higher liquid staking usage in Cosmos due to high staking yields compared to other ecosystems. Liquid staking abstracts away complexities for users, focusing on protocol belief rather than validator politics. Holding $stdYdX allows users to benefit from $USDC yield without actively managing funds daily.
  • He adds that holding LST tokens may have long-term capital gains advantages over short-term income treatment in some jurisdictions. Liquidity is crucial for large users; current liquidity levels are suitable for retail but may need improvement for larger transactions.

Bitcoin Mining Profitability 

  • Matt says that cryptocurrency interest is not at a craze level yet, similar to when $BTC first exceeded $20K. The rest of the world is not paying much attention to cryptocurrency developments currently. The mindset of a crypto native changes significantly when entering the Mania phase.
  • Ren says that CleanSpark‘s Q4 2023 earnings announcement led to a 100% increase in stock value. Quarterly revenue increased by 165%, with net income turning positive. Notable growth in adjusted EIT and strategic investments in mining infrastructure was observed.
  • Matt says that $BTC miners are now earning more from transaction fees than block rewards, ensuring sustainable security for $BTC. Ordinal activity contributes significantly to miners’ revenue growth. 
  • Sam says that Riot’s strategy of selling excess energy back to the grid showcases innovative revenue diversification methods.
  • Ren says that $BTC miners benefit from ecosystem activities, developer mindshare, and additional transaction fees.

Ethereum ETF Applications

  • Matt says that ARK 21Shares may offer staking rewards if approved, providing exposure to $ETH. Institutional involvement in staking is increasing, indicating a growing interest in crypto assets.
  • Pibblez says that there are speculations on which staking provider ARK may choose and its implications for the market.
  • Ren says that if ARK allows staking, the share prices might act like an off-chain LST with an on-chain staking component. He considers the challenges institutions face, such as stringent requirements like OFAC compliance. He mentions Coinbase as a safe option due to being a qualified custodian despite its 25% fee revenue.

Ethereum Dencun Upgrade & EIP 4788

  • Pibblez says that Dencun is set to go live on the Ethereum mainnet on March 13th, significant for the Ethereum community. EIP 4788 aims to replace custom oracles for liquid staking solutions, reducing complexity and risks. EIP 4844 introduces data blobs laying the foundation for sharding in the future, benefiting layer-2 tokens.
  • Matt says that there have been conversations about making small changes at the validator and node client levels to enhance block space. Justin Drake and Vitalik support the idea, indicating a good foundation for success. Uniswap has the potential to catch up with the DeFi narrative. 

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Show Information

  • Medium: YouTube (Video)
  • Show: 0xResearch 
  • Show Title: Why the Next Ethereum Upgrade Will Ignite Layer 2 Ecosystems | Analyst Round Table
  • Show Date: February 14, 2024