Weekly Top Stories - 2/14

This week in the newsletter, we write about Arbitrum enabling BoLD and permissionless validation, the launch of Unichain, and Lido's announcement of the third version of its protocol.

Arbitrum’s BoLD Commitment to Decentralization

Arbitrum enables permissionless validation to achieve new decentralization milestone. Arbitrum implemented a new fraud-proof dispute protocol called 'BoLD' (Bounded Liquidity Delay), which enables any validator on the L2 to submit a fraud-proof (previously this was only available to a select list of whitelisted validators due to the risk of delay attacks).

For background, Arbitrum is an optimistic rollup that leverages fraud proofs to prove the correctness of state root assertions in the event that a state transition is challenged by another validator. However, the current dispute resolution process (which can take as long as one week) subjects Arbitrum to DoS or delay attacks by malicious validators aiming to repeatedly delay withdrawals (thus the ability to submit fraud proofs had to be permissioned to a select set of trusted parties).

The newly implemented BoLD upgrade innovates on the current dispute protocol by enabling parallel and time-bounded execution, which ensures state confirmations happen within a guaranteed timeframe to mitigate the risk of delay attacks (dispute resolution only requires two challenge periods or ~12 days for Arbitrum ecosystem chains). BoLD also creates a strong economic incentive against malicious behavior as potential attackers must spend significant financial resources (see docs for further details on BoLD).

OUR TAKE:

L2s have commonly been criticized by Alt L1 teams for their centralized setups (i.e., distinct functions such as sequencing, batch posting, proposing, and verifying are typically handled by a single operator). The Arbitrum team has worked tirelessly on behalf of the Ethereum community to address these centralization concerns through its pioneering efforts to improve rollup security which include: (i) implementing fraud proofs, (ii) expanding the set of validators to verify the chain, (iii) removing admin privileges & distributing control of the rollup through governance, and now with BoLD, (iv) enabling permissionless validation for anyone to verify the state of the chain.

Arbitrum now checks off the 'State Validation' wedge in L2Beat's risk analysis framework and is now closer than ever to achieving the final coveted 'Stage 2' rollup maturity status (according to Vitalik, Stage 2 is when a rollup is fully managed by smart contracts with admin controls removed for centralized operators). Few crypto projects embody the essence of decentralization and trustlessness like Arbitrum. At this point, it's fair to say that Arbitrum has lived up to its name (which comes from the word ‘arbitration’ or the process of settling disputes). – Charles Yu

Unichain Goes Live on Mainnet

On Tuesday, February 11, Uniswap’s Ethereum Layer 2, Unichain, went live on miannet four months after its initial announcement in October 2024. Unichain is a general-purpose OP Stack chain that is optimized for cross-chain DeFi and asset swaps. It builds off of the intents-based token standard ERC-7683, and, eventually, single slot finality (SSF) across networks in the OP Superchain collective to support its cross-chain focus. SSF functionality across OP chains is anticipated to go live later in the year.

Unichain is the first for several initiatives in the Ethereum L2 realm, including its interoperability-first approach to building onchain DeFi. Most notable of its firsts, however, is the chain achieving Stage 1 decentralization upon launch per L2Beat’s decentralization scorecard. Unichain launching of a fraud-proof upgrade, which allows any observer to dispute the accuracy of the chain’s state, allowed it to achieve this title on day one. Ink, Kraken’s Ethereum L2, OP Mainnet, and Arbitrum are the only other general-purpose L2s to achieve Stage 1 decentralization. To achieve Stage 2, Unichain will have to implement an exit window, which allows users to exit the chain in an event and upgrade if one of its instantly upgradable contracts doesn't meet their demands.

OUR TAKE:

While the introduction of Unichain has put a spotlight on the future of cross-chain DeFi and the possible implications of it pending the chain’s success, few are discussing the possible consequences of Unichain for Ethereum Layer 1. Uniswap is a major driver of activity and economics on Ethereum, accounting for as much as 50% of the chain’s daily fees paid and 45% of base fees burned daily; the app also occupies 6.6% of Ethereum total value locked (TVL) and is consistently the top app by LP (liquidity provider) fee revenue (which underscores the value of dex activity for chains and users). If Unichain is successful in its mission of being a fast, cheap, and universal liquidity hub for cross-chain DeFi we are likely to see a substantial portion of Uniswap liquidity on Ethereum, and in turn activity, vacate. The downstream consequences of this happening can result in inflationary pressure on ETH the asset, as less activity results in less supply burned, and dwindling profitability of staking on the network. Maximum extractable value (MEV), of which dex activity is a major driver, also contributes to the overall profitability of staking. Any decline in MEV will have negative implications for staking profitability.

Other general-purpose L2s and chains, primarily those that are built on the EVM and/ or in the Superchain, face similar headwinds in the event Unichain succeeds in its mission. However, Ethereum has the most to lose in this scenario, boasting a large TVL and economic supply chain and serving as the primary home of Uniswap. Dex activity is a strong economic driver for chains across the Ethereum L2 landscape, including Base and OP Mainnet. In the event Unichain captures significant liquidity and can sufficiently serve users on these networks, there is a possibility that swap activity on these networks declines. – Zack Pokorny

Introducing Lido V3

On Tuesday, February 11, the Lido DAO announced “V3” of their protocol, which the DAO expects to go live on Ethereum this summer. As background, Lido is Ethereum’s largest staking pool managing close to one-third of the total ETH staked. At the core of Lido V3’s design are customizable staking vaults, called stVaults, that will enable stakers to have complete control over the validator set, MEV management, and liquidity access. The core motivation for launching stVaults is to expand Lido’s customer base to institutional clients. Lido’s blog post announcing their V3 design states, “Institutional stakers can access stETH through fully tailored setups that help fulfill internal compliance requirements while providing the operational control they need.”

There are currently dozens of applications to list new crypto exchange-traded products in the U.S. On Wednesday, February 12, the Cboe BZX Exchange submitted a new request to the U.S. Securities and Exchange Commission (SEC) to enable staking for the 21 Shares Ethereum exchange-traded fund (ETF). The influx of new applications and requests to expand the offering of crypto exchange-traded products is in large part due to the new Trump administration and expectations that the Securities & Exchange Commission in particular will create a favorable regulatory regime for the crypto industry to flourish.

Assisting in these efforts is SEC Commissioner Hester Pierce who has been charged by the SEC’s Acting Chairman Mark Uyeda to lead the SEC’s new Crypto Task Force. In a recent statement from Pierce, she said, “The Task Force will also assist the staff and the Commission in considering requests to modify certain features of existing exchange-traded products, including to allow for staking and in-kind creations and redemptions.” (Read this Galaxy Research Brief for insights on Pierce’s most recent statement on the SEC’s approach to crypto and watch this week’s episode of Galaxy Brains featuring Commissioner Peirce.)

OUR TAKE:

The odds of seeing approval for new crypto ETPs and modifications to existing ETPs in the U.S. this year are high. Recent statements from Pierce suggest that modifications to existing Ethereum ETPs to allow for staking specifically is an area of focus for her Task Force and the Commission. Knowing this, the Lido DAO has almost certainly designed its V3 product to help position the Lido protocol as an institutional-grade staking service that can compete with the likes of Coinbase, Galaxy, Kraken, and other centralized entities. Anticipating an influx in demand for staking ETH through the approval of staking ETPs in the U.S., the Lido DAO is creating customizable staking vaults that can cater to the compliance and security needs of deep-pocketed financial institutions and institutional investors.

However, the regulatory status of DAOs in general remains a big question in the U.S. Only a handful of states, Wyoming and Utah, have passed legislation to formally recognize DAOs as legal entities. Though the regulatory environment for crypto in the U.S. appears favorable, creating a comprehensive regulatory framework for the industry will take time to develop. Approvals for new crypto ETPs and modifications to existing ones may happen faster than the passing of DAO-specific laws formalizing the legal status of DAOs and their limits of liability. Thus, a regulatory overhang exists for the Lido DAO and therefore the Lido protocol, though much more favorable this year than in previous years, may put Lido at a disadvantage for competing with regulated entities like Coinbase for institutional staking clients even despite the launch of Lido V3 this summer – Christine Kim

Other News

• New York Senator pushes for crypto task force as state revisits digital asset regulation

• Brazilian regulator denies Worldcoin appeal to lift ban

• Tether chooses Ethereum L2 Arbitrum for cross-chain USDT infrastructure

• Fed Chair Jerome Powell says no US CBDC under his watch

• Binance and SEC file joint motion to pause lawsuit for 60 days

• President of Central African Republic posts meme coin - it surged to $900M before crashing

Charts of the Week

Unichain, Uniswap’s Ethereum Layer 2 (L2), went live on mainnet on Tuesday February 11. Since the mainnet launch, the network has generated $12,790 (4.85 ETH) in revenue with $10,258 (80.2%) coming from priority fees. A substantial share of the network’s total revenue generated so far has come from user bidding for the top positions in each block; 3.73 ETH (76.91%) of the total 4.85 ETH worth of revenue have come from priority fees of transactions in the first three slots of each block. The share of fees coming from priority fees of the top end of blocks is higher than that of other OP Stack L2s. OP Mainnet and Base, for example, have averaged 67% and 53% of daily fees coming from priority fees paid by transactions in the top three slots of each block respectively over the last week. While Uniswap is a general-purpose chain in that any app can launch on it, it is designed for swapping assets onchain – activity users are typically willing to pay higher fees for. The delta in the share of priority fees coming from the top end of the blocks highlights this and suggests Unichain is likely to see relatively outsized economic benefits from users bidding for the top of blocks as a result.

Transaction fees on the network have remained low, with the median daily fee sitting between $0.00101 and $0.00172. The median fees paid per transaction is on par with that of other OP Stack L2s, including Base and OP Mainnet.