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Ethereum 2.0 underway and more trouble in the DeFi sector

Posted by
Ilya Abugov

Week in Review | Week #49, 2020

December is here and many are getting excited for the end of 2020 and the start of 2021. Between Ethereum 2.0 launching and governance NFTs, the week has been full of action. Both Bitcoin and Ethereum have seen some violent swings in both directions over the past weeks, and have recently been hovering around the $19,000 and $600 levels respectively. 

With different upgrades and mergers coming, it looks like competition may be heating up. Alliances are forming, and the industry’s community feel may be starting to gravitate towards a Game of Thrones atmosphere. 

Phase 0 is underway

The Beacon Chain has launched, and a major step in the Ethereum 2.0 effort has been made. The major network upgrade is only the first step in a multi-phased approach to getting Ethereum to become a PoS network. The development effort was followed with much doubt, so it was encouraging to see a successful launch.

Source: beaconcha.in

The next major release may come in 9-12 months, according to Joseph Lubin, so it will be interesting if Ethereum 2.0 can maintain the same level of excitement in the community. The project cannot alleviate any of the Network’s pressing issues in the immediate future, and so still leaves the projects running on Ethereum 1.X with the need to deal with scalability limitations and high transaction costs.

The closing window of opportunity

Phase 0 is also a major warning bell for Ethereum’s competitors. Since scalability improvements have often been one of the primary advantages listed by rival blockchains, Ethereum 2.0 threatens to make them unnecessary. Competing blockchains will need to find meaningful traction before Ethereum 2.0 can host dapps. Otherwise, their chances of achieving market adoption may disappear.

In the meantime, dapp projects continue to make their products available on networks outside Ethereum. This week it was Ampleforth, the project that popularized rebasing, that made the news. 

It plans to launch on NEAR Protocol, Tron, and Acala (Polkadot). The cross-chain approach is slowly becoming more popular. It will be interesting to see if and how the launches will impact the user and capital numbers, to see if cross-chain dapps stimulate tangible activity outside Ethereum.

The reverse use case, of projects on rival networks launching on Ethereum, may also prove interesting. As an example, the Neutrino protocol has seen significant growth since branching out from Waves. The project has seen significant growth in terms of both volume and active user wallets. So far there have been a number of layer 1 protocols that have entered the Ethereum DeFi ecosystem in the form of wrapped tokens. Neutrino has found a blueprint for using the Ethereum ecosystem to boost dapp activity.

A number of layer 1 protocols made appeared in the news with anticipated upgrades or launches. IOHK is working on an upgrade that will introduce token locking to Cordano as the network gears up for smart contracts becoming available. Cordano is a top 10 project by market cap according to CoinGecko and has been considered one of the main competitors to Ethereum. Once smart contracts become available on the network, it will be interesting to see how many dapp appear on Cordano.

Tezos announced that it will be implementing Zcash’s Sapling protocol with the Edo upgrade. It appears the privacy transaction theme is making a comeback after fading into the background a bit over the past 1-2 years.

Also, Flow launched Flow Port, taking another step towards its mainnet. Given the difficulty faced by the games category on Ethereum this year, and the brand strength of Dapper Labs, Flow could become a viable competitor to Ethereum in the gaming sector.

Ethereum 2.0

More trouble in the DeFi sector

Another dapp exploit occurred, this time involving Compounder Finance, amounting to around $10.8M stolen. The issue here is that there is suspicion that the attack was executed by the protocol’s developers. This highlights the problem of pseudo-anonymous teams, as there is less reputational capital at risk and unclear options for recourse for users and investors. This is also something for issuance protocols to think about, as they may want to try to avoid incentivizing malicious activity from developers looking to profit from insurance.

Compound also appeared in the headlines for an unfortunate reason. One of the better-known projects in the sector saw a massive liquidation event due to a price jump of Dai on Coinbase Pro, whose oracle was being used by Compound. It appears that the event may have been triggered maliciously and underscores the growing importance of oracles in the industry. With flash-loans readily available, oracles have become a sector-wide vulnerability. Innovation in this area may be key to continued healthy growth for DeFi.

Mergers and Acquisitions

The Yearn.Finance ecosystem appears to be on a merger spree, with 5 protocols (SushiSwap, Pickle Fiance, C.R.E.A.M. Finance, Cover, and Akropolis) already coming into the fold. Every project appears to have a particular specialty, but each one has had a difficult time against the competition. A number of these suffered from recent protocol exploits.

The merger action looks like a developer acquisition strategy, with Yearn picking up development teams that may have fallen on some hard times. Yearn gets to absorb liquidity, get testing grounds for its new projects, and also quickly grow its engineering force.

While this strategy is not uncommon in the traditional markets, this may be the first time it has been executed in the decentralized segment, at least to this scale. It will be interesting to see if the increased activity from Yearn agitates other market actors and other “camps” start to form to counteract the emerging network effects for Yearn.

The gaming and collectibles sector continues to develop

Sorare is looking to separate itself from the pack when it comes to digital sports collectibles. The project has now brought over Inter Milan into its game, expanding the list of high profile teams on its roster. Furthermore, a Sorare Kylian Mbappé card has sold 116.15 ETH or over $64K making it one of the biggest recent collectibles sales. Sports cards can be extremely valuable in the traditional world, with some, like the T206 Honus Wagner ($3.25M) or the 2009 Bowman Chrome Draft Mike Trout Superfractor autograph ($3.936M), selling for millions. If Sorare can tap into this market it may be able to find significant adoption and volume.

Coming with a bit of innovation, the game The Six Dragons is looking to introduce governance tokens in the form of NFTs. It has been developed on top of the Enjin blockchain and will utilize the ERC-1155 standard for its governance tokens. It is unclear what utility the non-fungible aspect of the tokens will bring into the governance process. It may be just a novelty experiment or another step forward for the industry.

The information provided here is for informational purposes only. This is not investment advice and should not be treated as such. Strategic Round Capital has invested in the Umbrella Network. Strategic Round Capital and/or the author of this report holds a position in BTC, ETH, YFI.

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