Ethereum’s Shanghai upgrade is live

April 13, 2023 Stan

Happy Shapella day! Ethereum’s latest update (Shanghai) was completed successfully. It enables withdrawals for some people who have been staking Ethereum for years. Remember that people are withdrawing in a queue system, and it’s not all unlocked at once.

The best part? Ethereum prices have remained steady at ~$1988 (8am est). Some were predicting a hard crash, and things look great for now.

Here’s what we got today:

The Major LSD players. A refresher on the major players in the LSD wars.
Inside SushiSwap hack. Coverage of this week’s disaster.
ETH Withdrawals. How to track the withdrawals.
A New Stablecoin in the scene. $DINERO from [Redacted] Cartel.

Reading time: ~10 minutes

Here’s your Edge 🗡️!

📉 THE MARKETS

Sources: Coingecko, DeFiLlama, Fear & Greed Index.

If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring. – George Soros

The State of Liquid Staking Derivatives

Ethereum’s transition to PoS was finalized yesterday.

The final step was to enable the withdrawal of staked Ether. It happened with yesterday’s Shapella upgrade. With withdrawals now enabled, one DeFi sector will be revolutionized: Liquid Staking Derivatives (LSDs).

What are Liquid Staking Derivatives? Liquid Staking means depositing ETH with a third party in return for an “IOU” version of the same, like stETH. Stakers can then use their stETH to play around in the DeFi universe while earning staked returns.

Basically, it makes more sense for people to switch their ETH over to stETH for additional yield.

Let’s look at the major players in the sector:

Source: DefiLlama

1) stETH from Lido Finance

Lido Finance is the undisputed king of the LSD world.

The market cap of stETH is at $11.23B.
Lido controls 73.98% of all staked Ether.
In the last 30 days, they generated $4.70M in revenue.

This dominance is unlikely to last. It was somewhat artificial. Until now, once staked through Lido, there wasn’t an option to move to another service. But now shifts are allowed. So, Lido’s dominance is expected to reduce quite a bit.

2) cbETH from Coinbase

Coinbase is the second largest LSD provider.

The MC of cbETH is at $2.29B.
This makes up 14.86% of staked Ether.

Coinbase is uniquely positioned in this sector. While the primary users of other protocols are crypto natives, normies and institutions are the primary users of Coinbase.

Allowing withdrawals constitutes a gigantic derisking event for institutions that will want those sweet Ethereum staking rewards. Coinbase has a pole position in capturing this demand.

However, it is still a centralized service. They do face the potential risks of a hostile US regulatory regime.

3) rETH from RocketPool

This is the most decentralized LSD. Anybody can run a RocketPool node with over 2,000 nodes already live. Therefore, it remains a favorite among DeFi natives who value Ethereum decentralization.

Their Atlas upgrade will go live on April 18th. This upgrade will enable:

$ETH withdrawals
Gas optimizations and higher node rewards
And, most importantly, the ability to create mini-pools with only eight ETH.

With minipool, anybody can become an Ethereum validator with only eight $ETH. Without RocketPool, it still takes 32 $ETH to become the same. With this upgrade, we will likely witness a big growth in $rETH.

4) sfrxETH from Frax Finance

While Lido and RocketPool are pure LSD protocols, Frax isn’t. Frax’s staking service is part of a broader strategy. And therefore, much higher staking yields are offered. They provide a 5.6% yield, while competitors only provide around 4%. Thus, they are a frontrunner among degens who want to maximize yield.

They are also the fastest growing LSD:

The TVL growth rate in the past 90 days is 229.1%.
They’ve gone from 0 to $246MM within only seven months.

Others

Manifold Finance is creating its own LSD, mevETH. This will be an omnichain token utilizing LayerZero tech. MEV opportunities will be used to generate high staking yields.

Stakewise is the fifth largest LSD protocol with $163.7MM in Total Value Locked. They are also creating an open marketplace of node operators for stakers to choose from.

StaderLabs is creating an LSD called $ETHx. What sets them apart is that anyone can run a node with just four $ETH.

What’s next?

Liquid Staking is already one of the largest DeFi sectors. Many teams are trying to build products, and we can expect many more to develop innovative LSD products.

Lido’s current monopoly is going to go away. In its place, we’ll likely see an oligopoly: A few protocols dominating and a long tail of LSD products from many different teams.

TOGETHER WITH METRONOME

Metronome Smart Farming Pre-Announcement

We’ve been talking about Metronome for a few months now. In this edition, we have a special pre-announcement – Smart Farming!

Smart Farming is DeFi’s first yield-looping engine that multiplies users’ yield by up to 10x.

Before we explain Smart Farming, let’s recap Metronome:

Metronome is building a next-gen DeFi ecosystem, beginning with their first synthetic protocol Synth.
They’ve already amassed over $3.65M in collateral TVL since their beta launch on January 10th. And they’ve secured integrations with FRAX and Vesper Finance.

Now back to Smart Farming. How is this 10x yield possible? 🤔

Through a combination of Vesper’s Pool Strategies and Metronome’s Synthetic Engine.

Before Smart Farming: Assets are usually deposited into Vesper’s Pools to earn yield.

After Smart Farming: Your Vesper Pool position can be used as collateral to mint Synthetic assets on Metronome. These minted Synthetic assets can then be swapped on a DEX and used to boost the original position.

What’s even better – this process can be looped automatically in just a single click! 🔥

What’s next: Stay tuned for double-digit APYs on-chain through Metronome Smart Farming! 👀

Thank you to Metronome for sponsoring this newsletter.

Inside the SushiSwap Exploit

Another week, another crypto disaster. At this rate, we’ll become immune to nuclear attacks.

What happened? On April 9th, a smart contract bug in SushiSwap led to a loss of over $3M. The bug was in their “Route Processor 2” contract. People who approved that smart contract became victims of the hack. More information on the mechanics of the hack can be found read.

Most of the funds lost centered around one user – Sifu, the former CFO of Frog Nation.

The response. Since approving the smart contract was the problem, the solution is to revoke said approval. Users have to do this themselves. DeFi Llama’s @0xngmi published a list of problematic smart contracts on all chains. And SushiSwap has provided a tool to check if any of your addresses have this problem.

What is SushiSwap going to do? They have vowed to reimburse users affected by the hack.

There are two types of victims: Those who lost funds to blackhat hackers and those whose funds were rescued by whitehat security teams.

Funds currently with Whitehats will be claimable shortly. For victims of blackhats, the Sushi team will establish a claims process. Those claims will be managed on a case-by-case basis, and reclaiming any assets will take longer.

This is just a string of bad news for the SushiSwap protocol. If you recall, Sushiswap was subpoenaed by the SEC last month.

The New Stablecoin from [Redacted]: $DINERO

Last week, the [Redacted] Cartel introduced a new dollar-pegged stablecoin, $DINERO.

What is [Redacted] Cartel? They started as an OHM-fork, generating more than $100MM in treasury. Now, they are an ecosystem of revenue-generating products.

Hidden Hand is a marketplace for governance incentives, commonly called “bribes.”
Pirex enables the creation of liquid wrappers with special features such as auto-compounding.
$DINERO is their upcoming stablecoin.

What is the mechanism behind $DINERO? The mechanisms seem very familiar: Collateralized Debt Position (CDP) and Peg Stability Module (PSM).

You can deposit $ETH or $pxETH (their LSD) to take out loans in $DINERO, aka CDP. With PSM, the protocol will always sell or buy $DINERO for $1. Arbitrageurs will maintain the peg. But the decision to use $USDC within the PSM has caused some negative reactions.

Here’s 0xSami’s response.

What makes it special? Relayers are essentially tools that take users’ transactions directly to the blockchain. Redacted Cartel is building its own relayer with two features:

It’ll protect users from MEV.
It’ll accept $DINERO as gas payment instead of $ETH.

This creates a unique defi-native use case for $DINERO. People can use it as a gas token for transactions protected from Maximal Extractible Value (MEV). (MEV refers to the profit a builder can make by inserting, censoring, and reordering transactions.)

Dinero Protocol Validators can eventually validate these relayers. And this is where their Liquid Staking Derivatives strategy comes in. You can deposit $ETH into Pirex to create $pxETH. The deposited $ETH will then be used to create Dinero Protocol Validators.

The Redacted Cartel also holds huge governance power. This will be used to boost liquidity for $DINERO.

While $DINERO doesn’t have the lindiness of OG stablecoins, they have enough of a competitive advantage compared with newer stablecoins such as $GHO and $crvUSD.

Go Deeper: You can read more about it in its litepaper.

📊 Tracking Ethereum Withdrawals

Source: Nansen

The above chart tracks three data points

$ETH deposit to the staking contract.
$ETH withdrawals from staking contract.
The total number of $ETH staked at any point.

On April 13, we can see a sudden emergence of withdrawals. That is because of the Shapella / Shanghai upgrade mentioned earlier.

Many people projected a huge market dump of unstaked Ether and a subsequent crash in price. However, we’re seeing a slight uptick in price. There might be several reasons for that.

1) This was a major upgrade that went successfully. It has de-risked Ethereum staking for normies and institutions.

2) Contrary to what some people projected, people aren’t rushing to dump their staked Ether. Only 31.4% of the exit queue capacity is used. If people were rushing to unstake, it’ll be close to 90%.

Source: rated Network Explorer

Looking at who is withdrawing is also insightful.

Source: Nansen

Huobi is withdrawing the most, with 27%. Another exchange Kraken is coming close with 14.9%. Kraken is withdrawing staked Ether due to regulatory pressure from US authorities.

3) The withdrawal list is also missing major players. We can’t see Liquid Staking Protocols like Lido or centralized exchanges like Binance and Coinbase. This is because they haven’t enabled withdrawals yet. We’ll probably see more withdrawals once they enable it.

This is a developing story, and you might want to track it yourself. Here are three dashboards that we’ve found useful:

🌎 What’s Happening?

📰 Industry News

Thailand’s Opposition Party Head promises $300 Crypto Airdrop if elected prime minister. Some claim it’s the most efficient way to distribute economic stimulus, while others call this move a “marketing gimmick.”

Banks, especially the ones in Germany, are looking to carve out B2B payments as their segment for bank deposit tokens. The plan is to mint commercial bank money tokens directly into blockchains.

Coinbase’s CEO, Brian Armstrong, said the crypto exchange would integrate the Bitcoin Lightning Network. The community reacted positively to his statement.

FTX Bankruptcy team released their first interim report on the failures of control at FTX and related businesses. Lack of recordkeeping and controls was once again highlighted.

GDac, a South Korean crypto exchange, was hacked for nearly $13MM. They have notified the authorities and are working to recover the funds.

🍿 DeFi Bites

Yearn Finance was exploited for over $11 million. Aave was used to swap tokens to conduct the exploit. Rest assured, Aave itself is unaffected.

CamelotDEX launched their V2. It includes a new contracted liquidity AMM, built on top of Uni v3 and aimed at making trading more efficient.

EigenLayer released the testnet for the first stage of EigenLayer protocol. The current testnet is built on Ethereum Goerli and supports native restaking.

Euler Finance has started distributing the recovered funds to the victims of the plan. Euler’s recovery of stolen funds was one of the biggest recoveries in crypto history.

Stackr Labs introduced the Stackr SDK. It can be used to build micro-rollups in web2 programming languages. This will scale blockchain to more developers.

Avalanche introduced Avalanche Evergreen Subnets. It is a product focused on institutions that promise to deliver the scale of public blockchains with the security and control of private blockchains.

BNB Greenfield testnet is live. It offers features like decentralized data storage, native cross-chain solution, etc. And it is powered by $BNB.

dYdX is winding down services in Canada. The move seems to be motivated by regulatory concerns. It also created criticisms of the project being just a decentralization theater.

🧠 Twitter Alpha

Understanding narratives is the key to Crypto success.

But it’s NOT just about being early.

You need to understand “thesis/protocol” fit.

Here’s a breakdown (with examples): pic.twitter.com/jte8K3FeLX

— Edgy – The DeFi Edge 🗡️ (@thedefiedge) April 10, 2023

Today, we’re excited to share the 2023 State of Crypto Report and introduce the State of Crypto Index. https://t.co/nS2XjJoG1j

— a16z crypto (@a16zcrypto) April 11, 2023

1/16

few realize it yet, but shared sequencers are one of the few genuinely great business opportunities in crypto right now.

here’s why: pic.twitter.com/digAHNjqCk

— david phelps 🐮🏰🃏 (@divine_economy) April 6, 2023

GHO update 👻

– Code public ✅
– Audits ✅
– Formal Verification ✅
– Goerli release ✅
– On-going Bug Bounty ✅

Explore more the craft https://t.co/ZT4woBlCQ4

— Stani.lens (🌿,👻) (@StaniKulechov) April 6, 2023

1/ 📚 RWA Directory Update #2!

We just added the 2nd cohort of companies building in the real-world asset sector!

The updated list is now live — let’s dive into 3 example companies below: 👇 pic.twitter.com/d0haWoRg9l

— RWA.xyz (@rwa_xyz) April 11, 2023