Hi, everyone. You might notice a slight difference in this week’s newsletter — Jeff Benson, formerly an editor with Decrypt and Future, has come aboard as a consulting editor. The news stops for no one, however. This week: Arbitrum, Elon, and LayerZero.
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. 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).
[tl;dr]
Arbitrum rethinks governance proposal after newly formed DAO rejects it
Elon Musk fights $258 billion Dogecoin lawsuit with DOGE memes
LayerZero Labs on cloud 9 as it secures $120 million in Series B funding
[Arbitrum Power Transfer ⚡]
After Arbitrum, one of the biggest Layer-2 Ethereum blockchains, airdropped ARB tokens to users in late March ✈️, creator Offchain Labs was supposed to transfer governance to a DAO (read: rule by token-holders). The first proposal related to setting up Arbitrum Foundation to support the DAO.
Trouble emerged as community members discovered that Arbitrum Foundation had already started implementing parts of the proposal, which allocated 7.5% of the token supply (≈$1 billion) for a Foundation-administered grant program. It had cashed out 10 million ARB tokens (≈$12.5 million) and loaned 40 million (≈$50 million) to market maker Wintermute. The community wasn’t mute, however. It showed its displeasure by voting down the proposal. Arbitrum has since decided to split up the proposal and ask token-holders to vote on parts individually.
Why It Matters: Many crypto projects that distribute tokens feel pressure to decentralize as a way of maintaining compliance with US securities law. In many instances, a foundation or other business entity remains closely involved, with the DAO delegating work and/or overseeing its function. The Arbitrum power transfer sheds light on web3’s balancing act.
What Arbitrum Foundation Said: Arbitrum Foundation’s Patrick McCorry said it should have made it clearer beforehand that the proposal was a “ratification” of the steps it had already taken. He pointed to a “chicken and an egg problem” when decentralizing.
What Reporters Said 💬: The Defiant’s Aleksander Gilbert noted: “Ecosystem funds, like the one the Arbitrum Foundation would manage, are common among companies and DAOs that compete with Arbitrum.” CoinDesk’s Danny Nelson referred to the grant allocation as a “proposed backdoor” for Arbitrum Foundation control over some areas.
What Columnists Said 🗞️: “The DAO is a shining example of ‘decentralization theater,’ more of a fig leaf for the newly created, Cayman Islands-registered Arbitrum Foundation, which would continue to direct protocol development,” wrote Daniel Kuhn of CoinDesk.
What We Say 🗣️: Competing rollup Optimism decentralized in April 2022, with its governance approach earning an approving nod from Ethereum creator Vitalik Buterin. And Polygon rolled into the rollup space last month, riding positive publicity from its partnerships with Mastercard, Starbucks, and Reddit. Miscommunication can prove costly in this competitive environment.
[Doge-y Dealings 🐶]
On March 31, Elon Musk asked a U.S. judge to dismiss a $258 billion lawsuit accusing him and Tesla of running a pyramid scheme to support Dogecoin. Three days later, Musk-owned Twitter replaced its logo with the Dogecoin Shiba Inu mascot. As if on cue, Dogecoin’s price climbed to its highest level this year 📈.
What Investors Said 🤑: “Defendants were aware since 2019 that Dogecoin had no value yet [promoted it] to profit from its trading,” said plaintiff Keith Johnson. “Musk used his pedestal as world’s richest man to operate and manipulate the Dogecoin Pyramid Scheme for profit, exposure and amusement.”
What Musk’s Lawyers Said ⚖️: “There is nothing unlawful about tweeting words of support for, or funny pictures about, a legitimate cryptocurrency that continues to hold a market cap of nearly $10 billion.”
What Columnists Said 🗞️: Amanda Silberling of TechCrunch wrote, “If Musk is trying to prove that his (not even funny) memes don’t impact the prices of cryptocurrencies, he’s not doing a great job.”
What the SEC Said 💼: Nothing yet, but the regulatory agency has fined Musk for market-moving tweets in the past.
[LayerZero in 9-Zero Club 0️⃣]
LayerZero Labs secured a $120 million Series B, tripling its valuation to $3 billion 💰. LayerZero, a protocol for blockchains to connect and transact ⛓️, took funds from a16z, Christie’s auction house, Sequoia, and 30 other investors.
It’s the second crypto company with a sizable fundraise in the past two weeks; hardware wallet-maker Ledger raised $108 million at a $1.4 billion valuation last week.
What LayerZero Said: “We wanted to make a push into gaming and the APAC market, and all of this [capital] is largely to grow the company there,” CEO Bryan Pellegrino told TechCrunch. “If we want to be that layer that connects everything, gaming plays a huge role in that.”
What Reporters Said 💬: Decrypt’s Liam Kelly pointed out that blockchain games are slow and expensive when running on-chain; sidechains are faster but need to be connected back to other chains. “And voilà,” he wrote. “LayerZero’s newest market emerges: Moving assets between various gaming networks.” While explaining that infrastructure projects such as LayerZero “have proven the most resilient,” CoinDesk VC reporter Brandy Betz noted: “The funding round is a rare nine-figure deal during a crypto bear market that has seen investments in the industry slow to a glacial pace.”
What the Industry Said ⚙️: Blockworks reporter Ben Strack surveyed industry members and ran the numbers. Architect Partners Steve Payne told Strack: “We aren’t seeing many $100 million-plus capital raises. But this one makes sense — it’s building out infrastructure for web3 developers, not focused on trading [or] speculative use cases.”
[Tidbits]
Su Zhu and Kyle Davies, the founders of bankrupt crypto trading firm Three Arrows Capital (3AC), officially launched crypto exchange OPNX alongside Mark and Leslie Lamb. The platform is a rebrand of derivatives exchange CoinFLEX, founded by Mark Lamb. 3AC had invested millions in the TerraUSD stablecoin, now worth nearly $0, and was taken down by subsequent market contagion. Story by The Block’s Frank Chaparro.
Over three weeks after stealing $197 million in crypto from Euler Finance, the hacker has returned all “recoverable funds,” according to the decentralized lending platform. The hacker had already apologized and returned the bulk of the funds in the weeks since the flash loan attack. Story by Decrypt’s Andrew Asmakov.
Paxful, a peer-to-peer Bitcoin trading platform, said it was shutting down, citing staffing and regulatory issues. Story by CoinDesk’s Stephen Alpher and Helene Braun.
Seattle-based crypto exchange Bittrex announced it will cease US operations. Bittrex Global will remain open. Story by Bloomberg’s Yueqi Yang.
As US-based crypto companies face an uncertain regulatory climate and web3-friendly banks shutter, Hong Kong is making a push to attract firms back to the city. Story by The Wall Street Journal’s Elaine Yu.
[Tweet of the week]
[Events]
The Literary Web3 Conference | April 7th 2023 | Online
Antalpha hacker House #ZKP | April 8th - 29th 2023 | Chaing Mai, Thailand
NFT.NYC | April 12th - 14th 2023 | New York, NY, USA
Metafest 2023 | April 13th - 16th 2023 | Crans-Montana, Switzerland
DAO Tokyo | April 13th 2023 | Tokyo, Japan
ETH Global Pragma Tokyo | April 13th 2023 | Tokyo, Japan
Sustainable Blockchain Summit | April 13th 2023 | Boston, MA, USA
ETH Global Tokyo Hackathon | April 14th - 16th 2023 | Tokyo, Japan
EthereumZurich | April 14th - 16th 2023 | Zurich, Switzerland
LionHack | April 14th - 16th 2023 | New York, NY, USA
Sui Builder House | April 14th - 16th 2023 | Hong Kong, SAR
EthCapeTown | April 19th - 23rd 2023 | Cape Town, South Africa
[DeFi Definitions]
A new occasional segment exploring one particular aspect of DeFi.
This week “MEV” by Saad Qureshi.
MEV stands for “maximal extractable value” (formerly “miner extractable value”) and refers to the practice of network validators earning ETH by including, excluding and/or changing the order of transactions in a block. It functions as something of an “invisible tax” on network users.
Today, MEV is one of Ethereum’s most significant issues, with Flashbots, a research and development organisation formed to mitigate the negative externalities posed by MEV, estimating that more than $720m of value was captured by MEV activities on Ethereum in 2021.
The most common methods of MEV include:
Front running: when an exploiter inserts their transactions before the victims’ transactions, thus creating a price shift
Sandwich attacks: when an MEV searcher can see an incoming trade and then buys/sells orders before and after they occur to profit from the resulting price movement
DEX arbitrage: when prices for a token differ across two different AMMs, a trader can buy the token on one exchange and sell it on the other for a profit
Some MEV extraction methods like front-running and sandwich attacks can be harmful and cause network congestion and high gas prices for other users of the blockchain. On the other hand, DEX arbitrage can result in users getting the fairest prices across exchanges and accurately reflecting market-wide demand.
The team: founder Samantha Yap and consulting editor Jeff Benson, Sam O'Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
This newsletter is prepared by YAP Global, an international P.R. Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.