April 13, 2023

The biggest crypto news and ideas of the day

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Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:

In the news: Ether outshines bitcoin after the Shanghai upgrade. Dogecoin surges after eToro and Twitter partner. And DeFi protocol Yearn Finance impacted in a $11 million exploit.
The takeaway: A mass sell off ETH did not follow Ethereum's Shanghai upgrade, as many predicted, boding well for the future of the network and new-fangled "liquid staking derivatives," D.K. writes.

Shapella Finalized

Ethereum’s Shanghai upgrade (aka Shapella) was finalized on Wednesday, enabling the withdrawal of locked up staked ether on the blockchain. Following the upgrade, ether rose above $2,000 for the first time in eight months, gaining some 3% in overnight trading hours. The much-anticipated upgrade is expected to change the landscape for ether token holders and could help establish something like a “risk free rate” for crypto, based on the reliability of Ethereum’s token rewards, according to Zhuling Chen, CEO of blockchain services company RockX. Further, bucking analysts’ predictions, comparatively very little ETH appears to have been withdrawn, according to data from Nansen.

What A Pack

Investing platform eToro will soon provide crypto trading services for users of social media giant Twitter, according to an announcement on Thursday. So called $Cashtags, or searchable asset tickers, will provide real-time prices for cryptocurrencies, stocks and other assets. Dogecoin, which has been touted as Twitter CEO Elon Musk’s favorite cryptocurrency, rose 5.89% following the announcement. Meanwhile, developers of the dog-themed Bonk Inu protocol released a native decentralized exchange (DEX) named BonkSwap, which utilizes Solana smart contracts to allow users to swap solana, bonk inu and stablecoins.

Crypto Exploit

DeFi protocol Yearn Finance lost $11.6 million Thursday following an exploit of an older version of its contracts. Security firm PeckShield said the exploiters were able to mint over 1.2 quadrillion yUSDT, a yield-paying version of the USDT stablecoin, in early Asian hours using a $10,000 initial deposit, and then tricked the protocol to cash out millions in stablecoins. Decentralized lender Aave was previously thought to be affected, though the malicious transactions were only routed through an out-of-date version of the platform.

Polkadot is coming to Consensus 2023! Don’t miss out on this opportunity to meet the largest multichain ecosystem in Web3. Between April 26th - 28th, booth 641 at the Austin Convention Center will host 15+ teams from the Polkadot ecosystem. Drop by to talk to the people behind the tech, learn from their experiences, and find out how they leverage Polkadot to pioneer new Web3 use cases. Learn more.

Sound Bites

"AI is going to impact in a very meaningful way the metaverse ... by accelerating and empowering even more creators."

– The Sandbox co-founder Sebastien Borget, CoinDesk TV's "First Mover"

The Takeaway: Easy ETH

Going by the numbers, it seems like many ether (ETH) stakers have decided to hold onto their coins. Although several analysts predicted the just-completed Ethereum Shanghai hard fork (along with the separate Capella upgrade, together known as “Shapella”) would be a “sell-the-news” moment, ETH has actually climbed to eight-month highs. The second-largest crypto by market capitalization was trading above $2,000 for the first time since last summer, after gaining ~3% during trading hours in Asia.

What this says about the viability of Ethereum, and the outlook for the price of ETH, is an open question. Shanghai, the backwards-compatible hard fork, unlocked the ability for Ethereum stakers to withdraw tokens they pledged to the Ethereum deposit contract used to validate the proof-of-stake network as well as the token payments they received for doing so. Many stakers initially pledged 32 ETH to become validators in 2020, and haven’t really had access to their coins since.

So the 18 million-plus ETH currently staked (worth about $33 billion) has not led to a torrent of sales. Loyal CoinDesk readers likely knew the “selling pressure” on ETH was overstated. As Amphibian Capital CEO James Hodges wrote on Monday, the vast majority of ETH validators were in the red leading up to the event, making it unlikely they’d cash out at a loss. Now that crypto prices are rising, led in particular by bitcoin, which broke the important $30,000 psychological threshold this week, fortunes may reverse.

What’s most interesting for many is not how ETH tokens trade, but their synthetic counterparts known as “liquid staking derivatives.” These LSDs, as they’re often called (not to be confused with the entheogen) are essentially bearer instruments for staked ETH that allow users to trade an ETH proxy while still earning staking rewards. The biggest offerings from Lido, Rocket Pool, Frax and Stakewise all hit the market relatively recently. The question post-Shanghai is what role these assets will play.

LSDs still have tremendous value by allowing users to essentially double their holdings, for a fee. Put up ETH in a non-custodial platform and it’s still yours, along with a shiny new stETH or rETH or Coinbase’s cbETH. This makes these assets critical for creating and maintaining ETH liquidity (as well as part of the validation process). However, actual ETH has generally traded above the price of particular LSDs, in a similar way that you often see price discrepancy between a managed investment trust and its underlying assets (due to increased risk and fees).

The Shanghai update shows that Ethereum developers are continuing to successfully build out a network in real-time. Basic infrastructure is still being built on the main network, leaving opportunities for free-market alternatives to spring up in the wake. Initially allowing ETH stakers to participate in decentralized finance (DeFi), the total value locked in LSDs actually surpassed decentralized lending last month. The whole pie seems to be growing, which is good news.

– D.K.

[email protected]

@danielgkuhn

Off-Chain Signals

LimeWire Will Pay You Crypto For 'Downloading' Pirated Music (Blockworks)
Bitcoin is one year away from a major technical event. History suggests the start of another bull run (CNBC)
Crypto’s money mule Reggie Fowler asks court for no time behind bars (Protos)
Exploring Liquid Staking Derivatives: Introduction, Benefits, and Strategies (Hacker Noon)
Binance, Circle Flock to France on Macron's Crypto Policies (Bloomberg – paywalled)
The U.S. Cracked a $3.4 Billion Crypto Heist—and Bitcoin’s Anonymity (WSJ – paywalled)

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Elon's New Lesson

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