#30 The Context: The Merge is (nearly) upon us
Will Ethereum’s big moment cast off the winter chill?
Hi there, hope you’ve had a good week. This week the newsletter looks at the upcoming Ethereum Merge, some recent DAO events in the broader context of how well decentralised organisations have fared during the ongoing bear market, and might fare ahead; we also take stock of the crypto winter.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Roslyn Tear, Sam O’Donohoe, Ruby Wu, Becky Corbel and Joey Woo for contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Ethereum’s proof of stake is expected to go live next month; will it, and what will it mean?
Decentralised autonomous organisations, or DAOs, may not be as dead as some would have you believe
For some crypto is still searching for that compelling use case. That’s how it should be, they say
[Ethereum’s upcoming Merge: the return of optimism?]
Enthusiasm for Ethereum is growing ahead of the Merge, where it shifts from energy-hogging proof of work to proof of stake, expected to happen (after many delays) in September. A final dry run is scheduled between 6-12 August. Hopes are high that this will enable Ethereum to scale by growing capacity from 10-20 total transactions per second to 100,000 (eventually).
This interest has led to Ether flipping Bitcoin in the options market for the first time — meaning that the dollar value of ether options contracts on the main exchange Deribit was 32% more than those locked in Bitcoin options trades.
Bitcoin is the original crypto, and always the gorilla in the room, but the moment when it is eclipsed by Ethereum doesn't feel far off.
This moment has a name: the 'flippening,' and Ethereum devotees think it might be close, according to Vildana Hajric and Olga Kharif of Fortune.
But Ethereum cofounder Vitalik Buterin last week told the Ethereum Community Conference (EthCC) that the Merge upgrade was still “not priced-in” according to Billy Bambrough of Forbes. He made clear that he wasn’t just talking in financial or market terms, but "even just kind of like psychological and narrative terms."
[Despite the doomsayers, DAOs aren’t dead]
Whither or wither decentralised autonomous organisations, or DAOs? Only a few months ago the Harvard Business Review was exploring how DAOs could change the way we work. But by mid July TechCrunch was telling us to get ready for a lot of dead DAOs.
No question there have been problems. SpiceDAO, which bought a copy of the Dune script bible in January for $3 million, is apparently being converted to a private company and selling the bible.
The recent back and forth in the Aave DAO's response to a proposal to launch a stablecoin has illustrated how DAOs can work (overwhelmingly supporting the move, even as some mocked the decision on twitter).
But approval of proposals cannot be taken for granted: The DAO of Lido Finance (a YAP Global client) voted no to the sale of 1% of its tokens to VC fund Dragonfly Capital, according to Chayanika Deka of CryptoPotato. (Dragonfly’s CEO Dmitri Lapidus told Kerman Kohli in late July that DAOs need to stop trying to reinvent the wheel and instead think of themselves as ‘on-chain startups.’)
In both cases the governance process is not over: Aave will hold two further governance votes on design and roadmaps, according to The Defiant's Samuel Haig. Lido has said the proposal would be “revisited based on the discussion on the research forum and a fresh vote that accommodates that feedback will be moved asap.”
DAOs rise and fall on the way they are run, or ‘governed’. That is a technological, financial, political and social issue. Which makes it complicated, but does mean that past practices might offer some ideas for how to go about refining how a DAO is built and run?
For VCs Andreessen Horowitz it’s Lightspeed Democracy, where DAOs can combine the “commitment power" of blockchains with the tools of democracy to deliver on “the promise that property rights and the system around them will persist into the future, in code." (Indeed, VCs themselves might find they're innovated out of the picture via DAO-governed crypto VC platforms.)
At Not Boring David Phelps and Luca Prosperi believe 'Lightspeed Democracy’ doesn't go far enough, that DAO governance models should be like a biological process, arguing that “they should be both different from and superior to offline ones because of the speed, scale, granularity, programmability, composability, and unboundedness of the internet, and the blockchain."
Both pieces are worth a read. (See also section below)
[Crypto is still searching for a compelling use case ]
It’s hard for a journalist to see, let alone sell an editor on, any positives when winter kicks in, especially when at least some of that winter was caused by lax management and hacks. But amidst the snow there are some interesting stories to be told, especially for those who dig a little deeper. Here are some of the pieces that help place what’s happening in a broader context (both space- and time-wise):
NFTs: Non-fungible tokens may seem to have been the frothiest part of DeFi, (here's Bloomberg on how celebrity crypto endorsements, many of them for NFTs, have been disastrous for fans). But that picture might be misleading:
Margaux MacColl of The Information looks at Magic Eden and explores how an NFT marketplace soared in the midst of a crypto crash.
And CryptoPunks' trading volume surged 1,847% after Tiffany & Co. launched an exclusive NFT collection, according to Zhiyuan Sun of Cointelegraph. Here's more detail on the sale, from Daniel Van Boom of CNET.
In fact crypto users spent $2.7B minting NFTs in the first half of 2022 according to a report by Nansen, a research company, as reported by Zhiyuan Sun of Cointelegraph.
Textbook publisher Pearson sees an opportunity to make money on used book sales via NFTs, according to Thomas Seal of Bloomberg.
China may be cracking down on crypto, but some prominent Chinese tech investors see gold in them there mountains, pouring $90 million into a crypto hedge fund betting that crypto prices will recover, according to Shai Oster of The Information. (Paywall)
Things aren’t great in crypto at the moment, but they’re not great in other areas of financial innovation, either. Neobanks in particular are feeling the squeeze from VCs turning off the spigot. But it's also in part regulatory scrutiny, in the case of LendUp, which has been ordered by U.S. regulators to stop lending. Neobanks' claim that they're providing a cheaper, more egalitarian alternative to traditional banks doesn't seem to be impressing regulators, according to Protocol's Source Code team, led by Nat Rubio-Licht.
The most interesting pieces are those which point out that crypto is still struggling to find a compelling use case — and that this process itself is part of any great innovation.
Does Crypto Have Any Good Use Cases?, by Nat Eliason, for example compares what's going on in crypto to how the internet and mobile telephone both created quite different use cases to how they were perceived initially. His conclusion: “At root, humans are simple creatures. We like entertainment, mating, status, and desperately scrambling to find meaning before we die. Every new tool gets purposed towards seeking those ends in some new way that may or may not be better than the old ones. I see no reason to assume that won’t happen again, especially since there’s money to be made. But we’re still very early. Many of the uses are silly, and many of the people evangelizing it are cringey. It’s a very simple, core innovation: perpetual decentralized applications.”
Jon Crabb of Advanced Blockchain AG has a similarly optimistic take: in Web3 is turning out just fine, thank you, he sees the present as a process of natural selection.
[Tidbits]
Hacks are still going on, unfortunately. A 'chaotic hack' drained Nomad of more than $190 million by copy-pasting a script.
And charges have been filed over a $300m 'textbook Ponzi scheme’: The Register's Jessica Lyons Hardcastle reports that US securities watchdog the SEC has accused Forsage of being a Ponzi scheme using the Ethereum, Binance and Tron blockchains to steal more than $300 million.
Chainalysis, who look at this kind of thing, reckon that vulnerabilities in cross-chain bridge protocols have led to the theft of $2 billion so far this year.
Regulators: The UK is following Singapore's lead in imposing stronger ad restrictions — with crypto rules set to follow. Singapore was one of the first to impose advertising restrictions on advertising to retail customers, although it took a follow-up meeting for the regulator to clarify how the rules applied.
Metaverse: Facebook’s metaverse will ‘misfire,’ says Vitalik Buterin. Of course he would say that, but he has a point: like web3, the term ‘metaverse’ puts the cart before the horse. “My critique is deeper than "Metaverse Wikipedia will beat Metaverse Encyclopedia Britannica". It's that we don't really know the definition of "the metaverse" yet, it's far too early to know what people actually want. So anything Facebook creates now will misfire," he told Twitter.
Self-proclaimed Bitcoin founder Craig S. Wright has been awarded £1 damages in his libel action against Peter McCormack. The judge said Wright had presented "a deliberately false case,” according to Chris Williams of Crypto Briefing.
[Reading]
Remote viewing: Tim Smith of Sifted walks us through the 'psychic' cryptovoyants selling bitcoin info to thousands. This centres on something called 'remote viewing' where individuals claim to be able to see things — events, places, people — remotely, either physically or in time. It's a good, fair piece, though some commenters have mistakenly suggested that “it can’t be a coincidence that it found a home in crypto rather than any other asset class," which isn't the case. There has been at least one academic paper on its (successful) application to stock market investments.
Moneyness: How profitable is the world's largest stablecoin? JP Koning explores whether Tether is making any money. His conclusion: yes, but stablecoins are a “tough business”, and 0%-yielding stablecoins are going to face competition from those who do pay interest.
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: Smart Contracts by Leila Stein
Smart contracts are the foundation of much of the crypto world. From NFTs to DeFi, smart contracts execute transactions and identify ownership as we build a decentralized, trustless world.
Smart contracts are computer programmes on certain blockchains. These are embedded with lines of code that dictate the conditions under which the contract will automatically be executed. These programmes allow actions on the blockchain to be anonymous, transparent and irreversible. They do not require users submit personal information or have middlemen to ensure the transaction is approved and takes place.
The most cited explanation of Smart Contracts is Nick Szabo’s vending machine analogy. Rather than dealing with a merchant, using a vending machine only requires you to input certain codes and some money for a specific product. Smart Contracts work similarly as once the codified conditions are met (inserting money in the case of the vending machine) they unlock a predetermined outcome (receiving your can of coke).
While a useful tool, smart contracts are not without risks and flaws. This is because smart contracts are coded by humans and so can be written with vulnerabilities or flaws that can be exploited as witnessed with the most recent Nomad bridge hack.
More reading:
CMC Alexandria: Smart Contract
Duke University: Decentralized Finance and the Power of Smart Contracts
Ethereum Org: Introduction to Smart Contracts