A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

• Crypto morality

• Ethena and USDe

• Hut 8 diversifying its revenue streams

• Degen chain

• Paradigm seeks to raise for new fund

• Blast L2 exploit

The Latest

A question of morals

Preposterous yield dept.

Ethena takes stablecoins by storm

Ethena is a stablecoin backed by delta-neutral collateral. What does that mean? Popular stablecoins such as USDC/USDT are backed by US dollars, or more accurately, short-term US Treasuries. These are inherently stable and pegged to the US dollar. As a result, 1 USDC/USDT is equal to 1 USD. The nature of the collateral determines the soundness of a stablecoin, mainly, the ability to always be able to redeem a stablecoin for 1 USD.

Just like blockchains have a trilemma, stablecoins have a similar trilemma, stating that only two of the following three are attainable, price stability, capital efficiency, and decentralization. For example, USDC and USDT have outstanding price stability and capital efficiency but are not decentralized at all as Circle and Tether can censor minting and redemption at any moment. On the other hand, stablecoins such as DAI are decentralized and have relatively good price stability, but are not capital efficient as DAI itself is often vastly overcollateralized.

Enter Ethena, crypto’s newest shiny stablecoin. The stablecoin, USDe, is backed by ETH, but instead of a decentralized stablecoin which is often backed by ETH, Ethena takes the ETH collateral, and then opens a corresponding short position, such that the collateral is fully delta neutral. If you want some numbers: if you deposit 1 ETH, Ethena opens a 1 ETH perpetual short derivatives contract and then mints you 1 ETH = $3,300 worth of stablecoins. The beauty in this is that it is relatively price stable (with a bunch of assumptions), pretty capital efficient, and relatively decentralized given that most of it is non-custodial.

Here’s the kicker. In addition to receiving the staking yield from ETH, which currently stands at ~3.5%, Ethena also receives the funding payments from its short ETH position, which in a bull market, can amount to a significant sum. For example, in recent weeks, the stablecoin has been yielding between 30%-70% yield given elevated funding rates. In the short span of 6 weeks, Ethena has become one of crypto’s most profitable protocols.  — Joseph Cooper, Decential Media

Quick Bits

Hut 8 diversifying its revenue streams

• Hut 8, a large Bitcoin miner, is set to deploy a large stack of its Bitcoin holdings heading into the halving, especially across its managed services business, as well as within the high-performance computing and AI segments.

• The miner is set to use its Bitcoin reserves to take advantage of growth opportunities, including various M&A opportunities such as buying sites and properties, along with machine purchases.

DEGEN chain

• DEGEN is a token launched in January 2024 that is primarily used to tip creators in the popular crypto social app, Farcaster. It’s a simple system where you comment below a cast (tweet) with how much you want to tip in DEGEN, and everything else is handled for you.

• Currently, the token trades at a $1.66B FDV, being up significantly in recent weeks. Notably, Degen has recently launched an L3 built on top of Base, utilizing the Arbitrum Orbit stack. Building an entire blockchain on the back of a “memecoin” is certainly an interesting move.

Paradigm seeks to raise for new fund

• At the top of last cycle, Paradigm’s AUM rose to a staggering $13.2B. But in this bull market, they’re hungry for more. They are currently in talks to raise over $750M for a new fund, which would be the largest crypto fund since 2022.

• Large numbers are nothing new for Paradigm, and their investment and name on a cap table have historically been held in high regard. Will they be able to continue their outperformance? Hopefully, after they invested $278M in FTX.

And last but not least

Blast L2

Last week, Blast L2 suffered a $62.5M exploit. Well, not exactly the L2 itself. More so an NFT game called Munchables. What exactly is Munchables? Truth be told, I haven’t quite figured it out yet. From what I can tell, it seems something like on-chain Tamagotchi, but that’s not important at all to this story. This hack was apparently an inside job, where the protocol hired a malicious dev, who then proceeded to refer three other devs that in reality, were probably the same guy. Together, these “developers” worked some malicious code into the contracts and the rest is history. Initial speculation pointed fingers to North Korea’s infamous Lazurus Group, however, the hacker eventually returned the funds, which is something North Korea would not do. It’s more likely that the exploiter was a single malicious individual, and that the protocol or other third-party security researchers managed to identify him/her, and pressured him/her into returning the funds so they wouldn’t face legal repercussions.

However, that wasn’t the most interesting conversation following the exploit. Immediately after the exploit became public, there was significant discussion on Twitter about whether Blast should “roll back the chain”. (The same debate was had in 2016 when The DAO was exploited for $55 million worth of Ether. Hijinks ensued. — ed) A roll back would involve a highly technical set of actions, which would result in the state of the chain being rolled back to that of before the hack. If that sounds too technical, imagine if we had the ability to roll back time, that’s exactly what could’ve happened. Now, the ability to do that more often than not suggests that there is a highly centralized component to the chain. In Blast’s case, that would be the multisig that controls the bridge contract.

It doesn’t feel like anybody should be able to roll back the blockchain to their liking whenever they want, but it is certainly possible in some cases. Now, users who were affected by the exploit certainly wanted the chain rolled back so that they wouldn’t lose their funds. However, doing so would have likely wreaked havoc on many other components of the chain. For example, DEX prices would be completely off, fast bridges would have lost liquidity provider funds as users would be able to bridge out twice, and many other protocol states would also be rolled back. One could argue that if you were bridging to Blast early on, you clearly knew the risks you were taking. They weren’t exactly shy with the “decentralized casino” marketing. However, from the other perspective, you could also say that Blast being able to roll back the chain is incredibly bullish as it means that no protocol could ever be exploited and your money will never end up in Lazurus Group’s wallets. Pick your poison. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.