Not a Security | Alt L1 moves to Ethereum

UniswapX | Lens V2 | Solana Resurgence

Author

Decential Media
July 21, 2023

Decential Media
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:

  • Celo is moving back to Etheruem

  • UniswapX

  • Lens V2

  • CCIP

  • Solana Resurgence

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The Latest

We are so back. Have you heard that crypto tokens aren’t securities anymore? Did you know that apparently, XRP is going to solve global warming? Both of these, especially the latter, aren’t true.

Last week, a judge ruled that XRP is not a security. However, that doesn’t suddenly mean that all crypto tokens are not a security. Ripple’s institutional sale of XRP was still considered an unregistered securities offering, mainly due to the institutional buyers expecting to derive profits from Ripple’s efforts. That’s the third prong of the Howey test, whether buyers have “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The court found they did.

That’s where the bad news ends. XRP itself is just a token, like any other crypto token. It is just a thing that lives on a blockchain. It is more so about how you sell it that suddenly transforms it into a security. This is precisely why the court ruled that programmatic sales are not a security. The core argument here is that if you bought XRP on a venue such as a centralized exchange (CEX), you have no clue whether Ripple, some market maker, the exchange, or even a random trader is receiving your money.

We all know that being classified as a security is a big no-no for many protocols. It means that you have to file a million different things, and there are hundreds of laws you have to abide by. Even if you wanted to file for some exemptions, that’s a whole pile of paperwork a protocol doesn’t want to deal with. With this judge's ruling, there are a few clear winners, the first obvious one being protocols. Devs finally get a little regulatory clarity on what counts as a security or not when launching or selling tokens. This means that if you are a protocol selling to US investors, your token becomes a security. But hey, at least we got clarity.

There’s a bright side to everything. If protocols can’t sell to investors that easily, this means that users may be the next winner here. Protocols may choose to sell or distribute more of its token supply to users through airdrops, or, for example, we may be able to participate in earlier-stage investments that traditionally have been reserved for VCs. Lastly, CEXs are a huge winner. With programmatic sales being deemed not a security, it’s likely that many protocols will want to choose this route, and CEXs such as Coinbase or Binance are best positioned to facilitate that with their large base of verified users.

What does this bode for protocols such as Sushi and BarnBridge, which are in the SEC’s crosshairs? We’re not sure, as the ongoing cases could be about a protocol’s tokens, but it could also be about some investment product offered. All in all, there’s good and evil in this decision. Clarity is much needed; if not we’d always feel like that confused high school kid that did not know whether a girl really liked you or not. This is regulatory catalyst number one for the next bull market. Next, we wait for the spot ETF decision. — Joseph Cooper, Decential Media

It’s coming home dept.

Alt L1 moves to ETH L2

Celo, you’ve probably never heard of this blockchain before. It’s a relatively small one, with only $94M in TVL and a little over $1B at its peak. It makes a whopping $400 a day in fees and experiences $330K in DEX volume daily. None of that really matters. What matters is that it is an independent alt-L1, one of the hundreds that were meant to topple Ethereum. That hasn’t happened yet, and probably never will for 99.9% of the alt-L1s out there. There’s a famous saying if you can’t beat them, join them. And that is exactly what Celo is doing.

In a governance proposal, Celo proposed the idea of “returning home to Ethereum” by transitioning from an EVM-compatible L1 to an Ethereum L2. If voted on successfully, this could be the first example of an L1 blockchain transitioning to an Ethereum L2, and would be a historically significant moment.

Alt L1s have a whole host of problems that they have to deal with. Where do they bootstrap their security from, how do they maintain it, will their token become lindy, and can they sufficiently build up their ecosystem? There are benefits to building your own blockchain; you get to maintain “sovereignty” over many things, including the assets on your blockchain, consensus rules, how you want to secure your blockchain and more. But with sovereignty also comes significant constraints. It isn’t always the easiest to maintain a blockchain’s security if there is no demand for block space. Building an ecosystem takes resources and a bit of luck, and you have to generate your own network effects.

By rejoining Ethereum as an L2, Celo is able to use existing solutions such as EigenDA as a data availability layer and align itself much better with Ethereum. It is undeniable that Ethereum has network effects, with over 50% of crypto’s TVL and the largest active user base, and existing security that you can “use.” These are strong benefits for an early-stage blockchain. As a comparison, you wouldn’t try to build your startup by launching your app outside the iOS or Google app store, finding a way to collect payments without Stripe, not using AWS’ infrastructure, or deciding to find a way to do distribution natively rather than use social media platforms. That would be outright handicapping your growth or total addressable market.

Having said that, once you attain a certain size, it might make sense for you to go build your own phone, your own payment system, your own app store and regain some sovereignty so that you are not as reliant on others and are able to capture much more value. However, not every startup is able to reach that stage, and the same thing applies to blockchains. It makes much more sense to launch somewhere with the capital, the users, the activity, and then one day move to your own rollup/appchain once you have built up a sustainable competitive advantage. This should be the playbook unless you want sovereignty for very specific reasons from day one. Until then, long live network effects. — JC

Crypto charting

Here's a deeper look into the economics and mechanics of web3 and crypto courtesy of charts by Pyth Data Association. To see more Pyth research click here.

SDNY Court makes a significant ruling partially in favor of Ripple. $XRP

The biggest news this week was the district court judgement on the SEC vs Ripple lawsuit. The judge came out partially in favor of the SEC but also handed a partial victory to Ripple. The split decision has been debated and discussed on many forums and the debate will continue, with most seeking legal counsel to better understand the implications. $XRP rallied hard after the news, with the Pyth aggregate trading as high as $0.84 from only $0.47 before. While the rest of crypto continues to form a new base, tokens like $SOL and $MATIC were outperforming after the judgement.

Check out the rest of Pyth’s Twitter content and follow them here.

Quick Bits

UniswapX

  • On Monday, Uniswap announced UniswapX, a permissionless, auction-based protocol. Users will be able to execute their trades through an open network of fillers who should be able to provide better prices.

  • UniswapX is essentially a love child between 1Inch and CowSwap, and is the protocol’s foray into the space of intents. Interestingly, this protocol is open source, unlike Uniswap V4 which is under a business source license.

Lens V2

  • Lens V2 is the next upgrade to Lens protocol. Its main feature is open actions that allow any web3 experience to be bought directly into the Lens app. 

  •  This opens up an entirely new social experience, where users can participate in the wider web3 ecosystem through a social app. Users can mint NFTs, buy/sell tokens, and join a DAO, all within Lens.

CCIP

  • Chainlink’s Cross-Chain Interoperability Protocol (CCIP) went live on Avalanche, Ethereum, Optimism, and Polygon. It allows developers to send arbitrary messages and tokens across any supported chain.

  •  Two large DeFi protocols have already started utilizing CCIP, Aave and Synthetix. CCIP is enabled by multiple sets of decentralized oracle networks that work together to transfer the data or tokens cross-chain securely.

And last but not least

Solana Resurgence

Points, not airdrops. If you are a protocol that may not be launching a token soon but still wants to generate the user activity an airdrop would, how do you do that? Simple, you use points. Everyone will naturally expect that these points will be used in an airdrop calculation, and thus everyone will farm points like they farm an airdrop. Ingenious really. That’s exactly what is happening on Solana, starting with MarginFi, one of the quickest growing lending protocols on Solana. In two weeks, MarginFi’s TVL has nearly quadrupled using its point program. The program tracks how much a user lends and borrows. Borrows are worth 4x the points compared to lending, which makes sense, given that a lending protocol is pretty useless if no one is borrowing, and you get more points the longer you are lending/borrowing.

Other protocols such as Cypher and Zeta have caught on with similar points programs. Perhaps this is the beginning of a Solana DeFi summer. Solana had its largest amount of MEV in a day in quite some time, Jito (Solana’s Flashbots) has been grinding hard on MEV infrastructure, Helius has been quietly shipping a boatload of dev tooling to improve the developer experience, and Neon just launched, bringing the Ethereum Virtual Machine to Solana. It genuinely feels like there is a slowly but surely growing narrative surrounding Solana and points programs could be the catalyst it needed to bring in new users and capital in what was once a relatively dead ecosystem. — JC

Out of the Ether: Special NFT Edition

Have you read the definitive history of Ethereum? No? Well then get your special edition of Out of the Ether while you can. There are only 1,000 that were printed and each copy is an NFT that can be registered on the Lukso blockchain’s Universal Profile protocol.