EIC01

EIC01 ▪ Winter ’24 Published by: ETH Investors Club, February 2024 Innovative Print Solutions, LLC. Long Beach, CA Minting Address (Base and Mainnet): 0xb15E97EB6028A412a34a7796bBE99b77F524c31c Donations: eic.eth

EIC01 ETH INVESTORS CLUB ▪ WINTER 24

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Letter from the Editors

W

elcome to the first issue of ETH Investors Club Quarterly. Thank you for embarking on this journey with us. EIC01 traverses the expansive worlds of Ethereum, chronicling the re-imagination of two critical societal pillars:

Peter Vecchiarelli Editor-in-Chief

Vivian Van-Vecchiarelli Creative Director

The internet & property In this issue, contributors from all of Ethereum’s corners and layers guide us on a trip through the onchain landscape.

We examine the roles of Ethereum and ETH: One, a groundbreaking distributed computing platform that resembles a nation state—another, a vital asset within the former’s burgeoning economy.

ETH Investors Club isn’t just a movement about financial investment. It’s about the countless believers investing their time, attention, talent, resources, and effort into Ethereum. They are redefining our notions of money, property, and data sovereignty—serving as the backbone for a more free and prosperous future.

Anthony Sassano Executive Producer

Art Partners Cover: Illustrated with Tilix (E-Boy) on Phi AI Models: DALL-E, Adobe Firefly All layouts designed in house for EIC01

Technology Partners NFC Chip: IYK Mint Contracts: Manifold Storage: Arweave To contact the editor, email: peter@ethinvestorsclub.com

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ET H I N V E S TO RS CLU B

contributors

Ryan Berckmans

Soubhik Deb

Ben Giove

Kirk Hutchison

Founder, 3cities.xyz

Head of Protocol Research, EigenLayer

Creator, WASD

ryanberckmans

soubhik_deb

BenGiove

Founder, Ethereum Credit Guild OneTrueKirk

Jessy

Other World

William Peaster

Sid Powell

Ecosystems Lead, EigenLayer

Artist

Senior Writer, Bankless

CEO & Founder, Maple Finance

WPeaster

syrupsid

13yearoldvc

otherworld_xx

Abhishek Punia

Joey Santoro

Jack Stewart

Spreek

Founder, Lombard Protocol

Founder, Fei Protocol Author, ERC-4626 joeysantoro_eth

Founder, Pine Analytics

DeFi Veteran and Onchain Investigator spreekaway

puniaviision

jackthepine

Data

Mike Taormina

Arella Trustman

Hildobby

Partner, Switchpoint Strategies Cofounder, CommonBond & Alluvial

Copywriter, VeeFriends arella_eth

Data, Dragonfly hildobby

MikeTaormina

and many more...

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WINT ER 24

contents APPLICATION NATION

STAKING AND SCALING

CULTURE CORNER

SCALING ETHEREUM

The Infinite Story Machine

09

Phi Land

15

Navigating the Waves of Onchain Music

16

From SuperRare to Sotheby’s

20

The Rise of Composable Worlds

28

Culture Corner Insights

35

Scaling Ethereum Insights

92

STAKEONOMICS The EigenLayer Universe

97

Stakeonomics Insights

109

INVESTING IN ETH

FUTURE OF FINANCE

VALUATION THEORY:

A Blueprint for Real-World Asset Adoption

38

Scaling ERC-4626 Tokenized Vaults

48

The Future of Global Payments

53

The Rise of DeFi in Real-World Lending

60

Counterpoint: Institutional Dialect

73

The Stablecoin Revolution

77

Incredible Neutrality

84

Future of Finance Insights

89

Valuation Theory Insights

114

STRATEGIES Managing the Risk of Onchain Interactions

118

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E R U T L U C R E N R CO

W I NT ER 24

The Infinite STORY MACHINE William Peaster Senior Writer, Bankless

Storytelling is fundamental to human culture.

Stories are how we pass down our beliefs and values. They’re how we teach lessons and form communities, how we express our desires and entertain ourselves.

I have another more expansive conception of the word stories, though. It might be more accurately called “storymaking,” which I see as the universal becoming of things into reality and then into history, on and on.

I think it’s useful to consider Ethereum as a novel type of medium for both these senses of stories. This framing offers a new complement to traditional methods of valuing the network.

Of course, Ethereum has its own history, which Camila Russo did an amazing job chronicling the early days of in her book The Infinite Machine.

I really love that title. And when I think about Ethereum philosophically today, my slight remix would be: Ethereum is an Infinite Story Machine.

This metaphor operates on multiple levels. Firstly, Ethereum, fundamentally a ledger technology, is increasingly becoming like a new giant Book 9

ET H I N V E S TORS CLU B of Everything. The passing of its blocks are the filling and turning of its pages. Who did what and when. It’s like Borges’s Library of Babel begun in the real world.

The network’s far from encompassing all things yet, and navigating its early happenings can be labyrinthine, but no book’s organized instantly.

And DeFi and NFT pioneers have already pointed toward a future where going onchain becomes much more common, so many more pages are certainly coming.

Furthermore, consider how Ethereum has become an open foundation for supporting external story machines—think L2 scaling solutions like Arbitrum and Optimism, which can in turn support their own L3 rollups, so on and so forth—while also being home to an evergrowing number of little story machines, i.e. app smart contracts.

For example, at the app layer one of my favorite projects is Zora. Zora actually calls its NFT creator suite, which is underpinned

by Ethereum contracts, the Magic Machine.

Beyond it’s technical architecture, it’s become a creative nexus of imagination and desire; put your art or memes or music or videos or writings in, i.e. your personal stories, to record and offer them up for ETH and for posterity.

In fact, Zora is also a hyperstructure, a crypto protocol that “can run for free and forever, without maintenance,” making it a great example of what I called a little story machine earlier. Its smart contracts will continue facilitating stories and storymaking atop Ethereum indefinitely, always having the potential for energies and dreams to flow through it and out of it in basically all directions.

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Here, I’ll clarify that a set of contracts doesn’t have to be directly linked to creative efforts or NFT projects to be involved with storymaking.

The ongoing facilitation and recording of DeFi protocol transactions and things like DeFi DAO votes are 100% storymaking, too, in that philosophical sense. It’s happenings made into history, on and on, onchain. Zora’s just a potent example since people directly use its smart contracts to create and share new cultural assets, i.e. stories.

All that said, Ethereum as the Infinite Story Machine with its ceaselessly churning landscape of smart contracts is ripe for fostering hypercultures, which ecosystem analyst LGHT has defined as a “crypto culture that can grow freely and forever [...] once it has entered the collective mind.” LGHT’s also asserted that “every creative entity that can put it’s context onchain has the opportunity to birth a hyperculture,” which I agree with, wholeheartedly.

Think about it: Ethereum metaphorically provides the pages that bind protocols like Zora together, Zora then helps birth hypercultures, and then hypercultures birth more content and protocols, for example Zora’s Noun Builder, and this eventually leads to more new cultures and more new content

and new protocols, ‘round and ‘round. A single creative act on the right smart contract can ripple out very far—that’s the cultural power of the Infinite Story Machine.

Zooming back out some to the level of people and groups, I’ll also note that Ethereum has literally become a hub for novel storytelling experiments, ranging from art to games and everything in between. Some have already come and gone, like the Cellarius worldbuilding project, or Chainspace, which was originally envisioned as a “cinematic wrapper” for the Ethereum ecosystem.

Yet some of these storytelling experiments are alive and well and poised to be around for a long time. I’m reminded here of the mesmerizing onchain virtual world project Terraforms, which is an example of runtime art. This means the world itself is generated entirely at the level of its code + the Ethereum Virtual Machine (EVM), and so it will live for as long as Ethereum lives.

That art is interactive, as its code beckons collectors to participate in the world’s story.

They have the ability to shift their parcel NFTs into “Daydreaming” mode, which can slow or altogether stop the project’s hardcoded 11

E T H I N V E S TORS C LU B obliteration. As Terraforms specialist Astrostl has previously explained:

“The smart contract code is set to begin a decay and eventual destruction of the castle unless ‘enough’ parcels are Daydreaming [...] Each Daydreamer forestalls this event by 10 years. If or when there are 500 dreamers, the collapse is forever prevented. Yay! At the time of this writing there are already 481, so this is delayed by 4,810 years and only needs 19 more to be safe for as long as the Ethereum blockchain exists.”

Another great but very different example would be Nouns DAO, which is creating a CC0 brand from the ground up. They’re forging their brand’s story by funding and deploying other stories, e.g. art, books, games, music, videos, etc. and they use Ethereum as their base of operations.

The Nouns are arguably the foremost collective storytelling experiment on Ethereum today, not to mention how their open, CC0 style has led to countless aesthetic and technical spinoff experiments at this point. The storytellers beget new stories, and those new stories beget new storytellers, and those new storytellers beget new stories, onward and outward evermore.

And with the world always evolving around us, the ways that Ethereum facilitates stories will evolve, too. As more people onboard to metaverse spaces in the decades ahead, Ethereum will underpin much of the associated cultural and economic activities therein. As AI agents become more commonplace, more onchain storymaking will come via virtual agents interacting with smart contracts, other AI, and humans. And validity proofs and coprocessors will likely see 1,000s of chains bloom atop Ethereum over time, the becoming of an ultimate machine of story machines.

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Why is this conception of Ethereum as a new technological medium for stories and collective storymaking worthwhile, then? Because it hones in on and takes into account Ethereum’s immense creative, qi-like power in a way that other traditional framings—think “Ethereum as an alternative financial layer” or “Ethereum as a new internet of value”—haven’t.

Additionally, this understanding leads to two new ways to see Ethereum as valuable, one economic in nature and the other political. With regard to the former, stories and storymaking are like oxygen to people. We’re all weaving our own stories constantly or watching others do the same. This is a fundamental aspect of the human experience.

That said, recall the old sales axiom, “sell aspirin, not vitamins,” as people always need aspirin but only periodically buy vitamins. Ethereum’s aspirin, then, is storymaking. Its blockspace sells because of the need for storymaking, which is basically all-encompassing and will never go away as long as humans exist. We do, and we’re going to do more and more onchain. So ETH can gain in value if Ethereum can continue to widen as a gravity well of storymaking in the world. In my opinion, that blackhole’s already been opened.

As for the political dimension, consider how traditional institutions—from cable TV to the U.S. Treasury department—colonize our desires, they colonize the ways we can experience stories. In other words, they constantly hail us into their status quos and call on us to experience the world on their terms.

Fair enough, but Ethereum in contrast is neutral, opt-in, and like a giant “choose your own adventure” computer, constantly churning,

WIN T ER 24

As such, Ethereum as an Infinite Story Machine is fundamentally a liberational technology. It offers us flights of escape from top-down, heavilymanaged mainstream storymaking to bottomup, liberated storymaking, whether personal or collective. It’s a juke out of the constant interpellation by corporate and state actors, which are fine in most cases but nightmarish in the worst, into new territories of freedom.

And here on the other side, here in open Ethereum, things are more untamed and experimental and remixable. As ClubNFT’s Artnome recently put it, “When you allow everyone to [create] whenever they like and as frequently as they like, without curation or censorship, you encounter all kinds of fascinating and unpredictable art.”

Accordingly, unpredictable media leads to multiplicitous cultures, and multiplicitous cultures lead to more storymaking proliferating out atop Ethereum in all directions, and on and on and on the new Book of Everything expands along.

In this way, yes, I see Ethereum as an Infinite Story Machine, and I see this machine as like a rising rhizomatic structure, akin to the roots it metaphorically resembles. Each of its points of connection have the potential to branch off and proliferate into new directions. Instead of a centralized hierarchy, it instead presents a vast, interconnected web of narratives that grow organically and intertwine. Each transaction, each smart contract is a node in this sprawling structure, ceaselessly leading to new collaborations and unexpected offshoots.

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CULTURE CORNER

constantly open. It’s a Shakespearean foil to domineering institutions.

ET H I N V E S TO RS C LU B

“

BEYOND THAT, I BELIEVE THE CEILING IS INFINITY.

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”

Here we become nomads, wandering the living machine, living our lives. Another major wrinkle of intrigue here is the ownership potential—what Chris Dixon calls the new Read Write Own paradigm— for us nomads along these infinite pathways of storymaking and interaction.

Everything from collecting an Art Blocks NFT to aping into the GROK memecoin occurs along these ways, and while there may be onchain dangers here and there, the machine offers us that awesome freedom to try.

In the meta sense, this movement to build out something different in Ethereum, this kind of technology as a story of stories, is something I find noble. It’s the good fight, and advances the interests of people everywhere. And this conceptual framing helps me better see Ethereum for what it is, a titanic, productive engine of financial and cultural creation.

Ultimately, then, Ethereum will be a success so long as many people are storymaking on it. Like with Terraforms, a minimum number of folks dreaming here will prevent Ethereum’s collapse forever.

Beyond that, I believe the ceiling is infinity.

PHI LAND tldr; Phi turns your onchain history into the building blocks for a Sims City-style social gaming experience.

Phi is an onchain world where users craft their metaverse plot, called Phi Land, with objects that are earned from their past wallet activity or by completing new actions. Built on Polygon, Phi combines the onchain history you already have with an engaging isometric pixel world to gamify the process of building your onchain identity.

Phi’s Pixel art designers—a group of pixel artists and developers known as E-Boy—created Phi’s modular pixel art system, Tilix. E-Boy are also cofounders of Nouns Dao. Get started with Phi by connecting your wallet (requirement: ENS Name). Objects are the components—branded structures and buildings—used to build on your Phi Land. You are eligible for objects based on your wallet activity. You can even connect web2 accounts like Instagram to earn new objects and build a full stack depiction of your identity. If you wanted

to delve further into building your plot, you can complete new quests and adventures from 3rdparty developers. Earn new objects to customize your Phi Land and illustrate who you are onchain— your activity, your achievements, taste, and more.

A marketplace for projects to tap in to Phi has also emerged. These projects can use the platform to generate engaging campaigns— quests and custom object art—for growing and retaining their user bases. Earning and flexing luxury and rare objects becomes the incentive for users to complete quests and adventures from 3rd party developers within the Phi platform.

Phi is pioneering an innovative approach to showcasing credentials and onchain identity.

Give it a try for yourself!

Story by EIC editorial staff.

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NAVIGATING THE WAVES OF ONCHAIN MUSIC ET H I N V E S TO RS C LU B

Arella Trustman Copywriter, VeeFriends

WIN T ER 24 Late 2021 and early 2022 saw the onchain music scene thrive, buoyed by the NFT summer bull run’s momentum. During this period, music artists who had never made a dime off their music were finally seeing monetary recognition for their craft, with some making significant profits. As with any evolving market, dynamics have shifted, and the financial landscape for musicians has changed. However, the barrier to entry into this emerging industry has lowered, making onchain music an enticing frontier for artists of all backgrounds.

The Rise of Music NFTs

The abrupt crash of $LUNA, coupled with the FTX meltdown mere months later, dealt a severe blow to the market. In this tumultuous period, NFTs also earned an unfavorable reputation, rendering most collections obsolete. These events marked a significant turning point in the sentiment surrounding onchain music. Artists faced unprecedented challenges as music NFTs struggled to find buyers, resulting in a substantial decline in income. Despite these adversities, the onchain music space exhibited remarkable resilience. With a strategic rebrand to “onchain music” with “digital collectibles,” and the introduction of innovative platforms for minting and streaming, the space not only survived but laid the foundation for a creative resurgence, poised to flourish in the next bullish market.

The setback prompted a necessary reevaluation of strategies within the community. The onchain music ecosystem became more than a market; it evolved into a collective effort to weather the storm and emerge stronger on the other side.

Building Back Stronger Admittedly, some musicians chose to step back from the onchain music wave, causing the space to contract. However, this contraction facilitated the formation of a more intimate and tightly-knit community. Those who remained forged robust bonds, resulting in dedicated

CULTURE CORNER

Music NFTs didn’t materialize out of thin air; visionary musicians and music enthusiasts, all tech-savvy and forward-thinking, seized the opportunity presented by the PFP NFT wave.

Early adopters such as RAC, Daniel Allen, Verite, and even Snoop Dogg paved the way. The onchain music space gained traction, reaching a new pinnacle with the launch of Sound.xyz in early 2022. Artists on this platform were not just creating music; they were making history, enjoying the thrill of a booming market that forever etched its mark.

The Bear Market Challenge

ET H I N V E S TO RS C LU B communities of super fans and creatives alike.

Recognizing the imperative to make onchain activities more accessible, platforms like Sound. xyz took proactive measures. Opening their doors to the public in July 2023, they have consistently implemented crucial improvements.

These enhancements include the integration of Optimism to alleviate gas fees, the provision of custodial wallets, and the facilitation of credit card payments, catering to both artists and fans less inclined to navigate the complexities of crypto. In a recent stride, they introduced gasless uploads, further dismantling entry barriers and fostering a more inclusive onchain music ecosystem.

The contraction of the space was not merely a consequence of market dynamics; it was an opportunity to redefine the onchain music community. Artists and enthusiasts, united by a common passion for this evolving form of artistic expression, built a support system that transcended traditional market fluctuations. In this more intimate environment, the essence of onchain music flourished, unencumbered

by external pressures. To this day, the space continues to be highly active with new artists seeing success daily.

Navigating the Path Forward for Onchain Music In stark contrast to conventional streaming platforms, onchain music ecosystems thrive on community-driven curation, relying on factors such as volume, mints, and playlist inclusion to spotlight the finest releases. Embracing the fundamental tenet of decentralization in blockchain technology, this shift towards exclusive community curation places the reins firmly in the hands of music enthusiasts. It marks a significant departure from the norms of traditional streaming services, rendering onchain music an even more captivating frontier.

For music aficionados this paradigm shift offers a golden opportunity to shape the trajectory of emerging musical trends. The allure lies in the power vested in fans to influence the next big

WIN T ER 24 wave of popular music. This compelling prospect should be a pivotal reason for fans to engage proactively. Presently, the landscape invites enthusiasts to delve into the expansive onchain music catalog, actively contributing to an artist’s growth not just through digital collectible purchases but also by curating playlists and establishing themselves as influencers of “good music.” While this is a very exciting feature of the onchain music space, it has largely not caught on to the greater music scene.

~~~ As we stand at the intersection of past challenges and future possibilities, the onchain music community has the opportunity to redefine its narrative. The journey, marked by highs and lows, has been a testament to the resilience and creativity inherent in this space. The path forward is one of collaboration, innovation, and a shared commitment to propelling onchain music into a new era of artistic exploration. The waves of onchain music continue to surge, and with each rise and fall, the community charts its course towards a future where the possibilities are as boundless as the digital realm itself.

CULTURE CORNER

Additionally, with the barrier to entry significantly lowered, one might expect onchain music to be on the rise, and fast! However, a significant hurdle remains—attracting fans. Wallet fatigue has set in amongst existing paying participants, evident in the overall volume and reduced pricing of onchain music. While this price drop may not align with artists’ wishes, it creates favorable conditions, along with aforementioned opportunity, for fans to enter the space. At this point, improving the technology will only drive incremental success. In order for onchain music to revolutionize the industry, the more necessary

work is on awareness. It’s not just about making music; it’s about making a cultural shift that requires collective public facing efforts.

From SuperRare to Sotheby's Other World has earned a seat at the table as one of the most prolific artists distributing their work onchain. Since beginning in 2020, he’s created works culminating in over $1m raised, exhibits at Art Basel (2022), and having his NFTs auctioned through Christie’s (2023) and Sotheby’s (2024). Other World’s signature style is a collage of psychedelic, digitally-enabled color spectrums depicting scenes pouring with human condition—often using iconic works as a base layer. In this interview, we spoke about the state of Other World in early 2024.

Other World, it’s a pleasure to speak with you. I guess I’ll just start by asking about your upbringing and background as an artist.

I’ve always enjoyed creating art. I did it as just a hobby for most of my life. I didn’t ever think of it as a realistic career choice. I remember there was a time when I wanted to be a cartoonist as a kid, but other than that I pursued science.

Both my parents are artistic, but my mother was the one who was more involved in art when I was growing up. A major life moment for me was moving out for college and then later being accepted into the PhD program I am in today. It really felt like I solidified my career trajectory up until I found my way back into art. During the Covid lockdown, I found myself with some more free time and decided to pick up digital art. I initially created using a quick collage approach with minimal illustrating. This was very fun as I could make a piece every day or two and used music as big inspiration during this time. Over time, I wanted to create art that I can see being displayed in galleries and museums one day, so I started adding more details and illustrating

more. Naturally, the art progressed to where it is today, and continues to grow and change.

You’ve now sold dozens of works onchain across platforms from SuperRare to Sotheby’s–How did you discover the ability to distribute your art onchain?

I came across crypto art and onchain distribution through Twitter. Minting and distributing art is an amazing thing in the digital world. It seems like life is getting more and more digitized and being able to own and trade art (and other digital goods) freely onchain is the next logical step.

SuperRare was the first place where I heard of NFTs. Back in the second half of 2020, SuperRare was the place to be for most artists and being accepted was difficult. Before applying, I gave myself some time to create 5 worthy artworks for the application. Only 1/5 of these artworks have been minted. The one minted is my genesis and it was sold to Zack from SuperRare (who has been a great mentor in this field).

OTHER WORLD

Till Death Do Us Part: April 5, 2022 | JPEG, 6000x7200 px | SuperRare | Last Sold: 30Ξ Description: I Hope It Does... Based on Boreas Abducting Oreithyia by Francesco Solimena

The Fall: December 6, 2022 | JPEG, 6000x7200 px | SuperRare | Last Sold: 66Ξ Description: Play your hand... Based on art by Vincenzo Camuccini and Jan Van Eyck

That’s a legendary arc. You are one of a handful of artists who simultaneously have made a relatively high onchain artwork value (>$1m) but a low quantity of pieces.

How do you think about saturation with releases vs. maximizing a moment?

I think that my quantity of art being lower than most artists has been due to my approach. In the beginning, I primarily focused on 1/1 art. I tried to experiment and advance my skills with each creation and focused on quality over quantity. Apart from this, I was also (and still am) limited in the time I can put into art because of school.

These two things together naturally resulted in my art being released at a slower pace. The market determines the demand of art and the main thing I try to focus on is the art itself. If the art is improving and in demand, then the market will show that. I think art is subjective in terms of what types of art some people may like vs others, but I believe good art in each genre and medium is objective in nature.

There’s a science behind what makes good art and what is widely accepted by humans as good art.

Your works feature classic paintings as a base layer, but you make them distinctly original, inflecting vibrant, psychedelic colors and emotionally stirring characters. In some ways your collage style feels reminiscent of music sampling and remixing, is that a conscious inspiration?

Music sampling itself is similar in idea to how I do my collage style, but its not an inspiration itself.

However, music itself is a huge inspiration for my art.

I listen to music most of the time while making art

and it greatly impacts my workflow and direction in art. Sometimes I try to capture the feeling of a song and other times a single lyric will inspire a piece.

Which classical artists or paintings influenced your style the most? How do you decide which artworks to remix?

I’ve made works based on artworks from JacquesLouis David, Caravaggio, Vincenzo Camuccini, Ilya Repin, and many others. I always include this information in the description when I mint. I don’t have a specific way of how I decide on which artwork to remix. It’s simply just what I see would make a good scene and just comes naturally.

Looking at an artwork, I try to imagine if I could do something special with and honor that piece with my own rendition and creation of a new artwork with a different meaning that is personal to me.

Can you walk us through your process, tools and techniques?

I don’t use many fancy tools for my collaging approach. Just the features in Procreate on the iPad. I cut out pieces I want to use, refine them, illustrate on top and combine with other parts of different paintings to create a new scene and setting.

How did you hone your style?

It’s always a balance to keep the works related to each other while still experimenting and advancing the art. Throughout my artworks, I tried to draw the fiends slightly differently for some pieces, or to zoom out and create larger artworks. I’ve also added more detail to the fiends in more recent works compared to my earlier pieces. These

The Last Passage | January 15, 2021 | JPEG, 5191x2747 px | SuperRare | Last Sold: 13.500Ξ Description: What’s going on here? (Based on The Last Supper by Leonardo da Vinci)

The Last Prayer: February 17, 2021 | JPEG, 3200x4000 px Christie’s | Last Sold: 23Ξ Description: Based on the painting “Sermon on the Mount”

by Carl Bloch

The Dancers: March 22, 2021 | JPEG, 3200x4000 px

SuperRare | Last Sold: 7Ξ Description: Just passing the time... Based on “The Calling of Saint Matthew” by Caravaggio and “A Perspective View of the Courtyard of a House” by Samuel Dirksz van Hoogstraten

changes have kept the familiar themes of my art while showing an improved outcome aesthetically, especially in the detail.

Fiends are one of your more recognizable signatures—What do they represent?

Fiends represent the darker side of humans.

They are mischievous, violent, and not trustworthy. This being said, they are just as natural as the “good” side of humans.

I like for the viewers to come up with their own interpretations as well.

You are also doing your PhD in biomedical engineering, what’s the story there?

Science has always interested me since I was a kid. Figuring out how the world around us works and using this knowledge to advance man-kind. The combination of engineering and biology piqued my interest and I decided to pursue a PhD in this field. This being said, most science and papers that come out are boring to me, but the area of research I am in currently is very “sci-fi” which is why I’ve enjoyed my program even though the day to day process of being a scientist is very tiresome and demanding. Novel experiments in the lab take multiple days to set up and fail 4/5 times through the development stage. This has taught me a lot about time management, patience, and planning. This has undoubtedly helped my art career.

That’s pretty incredible. So getting close to the end here, has the scale of the success surprised you? You’ve now done Sotheby’s and Christie’s auctions, Art Basel exhibitions, etc.

The success was great to see of course and a bit surprising, but I always try to keep a level head through it. I know nothing is guaranteed and that I have to continue to advance and work on my art in order to achieve the goals I have set for myself. I’m still at the very beginning of my art career and have a long way to go before I feel like I’ve made my mark.

What has been the most interesting or unexpected reaction to your work?

I always love to hear how my art has inspired others. It never gets old and is a very big perk of being an artist. Hearing sincere words from others of how my art has changed their life in small or big way is very special.

What’s next for Other World?

Bigger art projects in areas and mediums that I have yet to explore.

Interview by EIC editorial staff.

Edited for clarity and brevity.

The Garden | November 30, 2021 | JPEG, 9600 x 5400 px | Sotheby’s | Last Sold: $50,800 USD Description: A plentiful harvest...based on The Last Day of Pompeii by Karl Bryullov

THE rise of composable worlds

Ben Giove Creator, WASD

Today I want to explain why I think composable worlds are one of the most interesting, exciting, and powerful niches within the fastgrowing onchain gaming space.

We’ll dive into: • • •

The affordances composable worlds provide to developers In-production examples of them The implications of their creation

By the end, you’ll be as composable world pilled as I am.

Now…let’s get to it!

Note: This article expands and builds upon many of the concepts outlined in Baz’s Piece. It’s a great read; I’d highly recommend you check it out here.

AFFORDANCES OF COMPOSABLE WORLDS Before diving into the projects building them, let’s take a moment to understand the affordances composable worlds provide to developers.

As they live entirely on a blockchain, composable worlds inherit all of the attributes of standalone onchain games like transparency, persistence, hardness, and (of course) composability.

However, by acting as a shared base layer, composable worlds provide additional benefits, including: Standardization Similar to (or in tandem with) engines like MUD and Dojo, developers building on top of a composable world are doing so an existing set of standards. This streamlines the development process, as they won’t need to architect underlying infrastructure themselves.

Supercharged Composability and Interoperability As previously mentioned, all onchain games can leverage composability.

Games in composable worlds, however, offer greater interoperability with other in-world creations, enhancing integration and interaction.

Network Effects Projects within composable worlds can benefit from strong network effects, as they tap into its existing users, developers, and infrastructure.

Incentive Alignment The inhabitants of a composable world have naturally aligned incentives because they reap the rewards of its growth.

Autonomy Because their logic lives on onchain, projects built in a composable world have reduced platform risk, as (at maturity) they will not be beholden to the whims of a centralized authority.

COMPOSABLE WORLDS IN PROD Now that we understand the theoretical opportunities of composable worlds, let’s look at how they fare in practice.

To do so, we’ll explore three of them: Downstream, Briq, and PixelLAW.

DOWNSTREAM

🦫

The TLDR: Downstream is an onchain MMO (massively multiplayer online game) built by Playmint. Developed using their own custom engine, Downstream is set in Hexwood, a 3D universe filled with (surprise, surprise) hexagons.

Hexwood is ruled by an AGI known as MORTON, who aims to develop his domain by using woodland creatures known as units. You’ll become one of these unit when you play Downstream, where you’ll be able to explore, battle, build, complete quests, and more.

Downstream has placed a heavy emphasis on composability. For instance, players can design and deploy structures in Hexwood through an in-game UI. This is code-free – Meaning that anyone can do so with ease.

Downstream is still in development, though players can sign up for their waitlist via email.

Examples of Composability: Downstream’s composability extends not just to creating user-generated structures, but entire games and experiences.

A Look at Hexwood

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Ducks Everywhere PFP collection on Briq

A prime example of this is Tonk Attack, a game built in Downstream by the aforementioned Tonk team. Tonk Attack is similar to an onchain version of Among Us. In it, players will aim to overthrow MORTON by forming an alliance (known as the Tonk Alliance) to corrupt the AGI’s training data.

entering a structure within Hexwood known as the Botnet Tower and then crafting a “Tonk Item.”

However, MORTON is no pushover.

BRIQ

They’ll attempt to counter this coup by brainwashing one player’s unit, causing them to go rogue and look to kill members of the Alliance.

Like Among Us, players will have to identify and defeat this brainwashed unit. Tonk Attack is set to begin playtesting soon.

Despite limited public footage, the game’s GitHub provides clues as to how it will leverage Downstream’s composability. For instance, players can access the game by 32

I’m excited to try out Tonk Attack, and think it’s a very intriguing use of Downstream’s composability.

🧱

The TDLR: Briq is a Starknet-based onchain construction protocol that (as of last week) is built in Dojo.In Briq, users can create objects, games, or experiences within a 3D voxel world using blocks known as (you guessed it) briqs. Anyone can access Briq and begin creating without a wallet.

However, users can mint their design as an NFT, with the cost to do so based on the number of briqs used. Briq is often compared to “onchain legos,” and for good reason. This is because, aside from its simple UX, each design can be assembled,

WI NT ER disassembled, and re-assembled. Furthermore, creators can add instruction manuals that show users how to put designs together after they buy them.

All in all, this architecture enables Briq to be highly composable, customizable, and interoperable.

Examples of Composability: Briq has begun to power an assortment of different applications.

There are also several games built using a

While these games are simplistic, they demonstrate Briq’s capabilities and potential to be a design primitive for all sorts of assets, games, and experiences.

PixelLAW

🟦

The TLDR: PixelLAW is a primitive built in Dojo on Starknet.

Conceived during the ETHGlobal Paris Hackathon in July 2023, PixelLAW consists of a shared grid of pixels. Each pixel in the grid has coordinates, and six properties (app, color, owner, text, alert, and timestamp).

The PixelLAW UI

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CULTURE CORNER

For instance, the protocol has been used to create PFP collections like Ducks Everywhere, a set of 265 different ducks. It’s been used for other art projects as well, such as to create portraits and host a design competition for the Realms community.

combination of Briq and Unity, including ones in which you traverse through a recreation of London, fly in a spaceship, and race cars.

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PixelLAW is highly programmable, as developers can tweak said properties in all sorts of ways to create novel games and experiences.

Furthermore, given that they exist in the same, shared grid, these games can interoperate with one another.

Examples of Composability: There have already been several games developed within PixelLAW. This includes Paint, a game where players can color in pixels, Snake, where players attempt to complete a maze, and Rock Paper Scissors, an onchain version of the meatspace game.

However, the most interesting creation I’ve seen so far is TicTacToe. Developed last month during the ETHGlobal Istanbul hackathon, TicTacToe is a PixeLAW’d version of the namesake game that utilizes a machine learning (ML) agent to allow players to play against, what’s in essence, an onchain CPU. The team that built PixelLAW (which includes its co-founder JK), won the $3000 first-place prize from Starknet during the event.

I think TicTacToe is incredibly cool, and illustrates that PixelLAW can serve as a sandbox for experimentation and creation with not just onchain games, but all sorts of emerging technologies.

The New Worlds Are Rising As you can see, composable worlds have a ton of potential, providing builders with affordances like standardization, heightened composability, network effects, autonomy, and more.

Furthermore, these benefits are being put to use today with games, art, PFPs, and more being built in worlds like Downstream, Briq, and PixelLAW. We’re just getting started, as we’ll likely see many novel experiences be created, and interproject relationships form, as these worlds develop and grow over the coming years.

All in all, I’m incredibly excited to track the progress of composable worlds.

To (kind of) of quote Tony Montana:

“The *composable* world is yours.”

What will you build in it?

Hop in our WASD Collector Telegram Chat and follow us on X to stay current on all things WASD. This essay was originally published by WASD.

Inisights up next

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EIC ETH INVESTORS CLUB

Top NFT Collections NFTs are digital onchain assets that represent ownership or proof of authenticity of a unique item or piece of content. Some of the most popular NFT brands are released as collections under a category called ‘PFPs’, where owners may display an asset as their profile picture on a social network to acquire or retain social status. A collection’s floor price is the cost to obtain its lowest-priced asset.

CoinGecko.

NFT Marketplaces NFT Marketplaces are suites of smart contracts that facilitate peer-to-peer exchange of NFT assets. Both USD volumes and trader counts have been in a downtrend since the last bull market peak. Notably, over two years OpenSea has relinquished their dominance of important marketplace metrics to the upstart Blur.

Powered by: @hildobby on

Marketplace

Dune.

Powered by: @hildobby on

USD Volume / Share

CULTURE CORNER

Powered by

Dune.

Marketplace

Traders

Blur

$108.7m / 74.7%

OpenSea

32,783

OpenSea

$29.8m / 20.5%

Blur

22,132

CryptoPunks

$3.7m / 2.5%

X2Y2

1,430

FOR INFORMATIONAL PURPOSES ONLY, EIC01 WINTER 24. ALL DATA AS OF FEBRUARY, 14 2024.

35

CULTURE CORNER 36

FOR INFORMATIONAL PURPOSES ONLY, EIC01 WINTER 24. ALL DATA AS OF FEBRUARY 14, 2024.

FUTURE OF FINANCE

E T H I N V E S TORS C LU B

Mike Taormina Partner, Switchpoint Strategies Co-Founder, CommonBond & Alluvial

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A BLUEPRINT FOR REAL-WORLD ASSET ADOPTION

Many within crypto have a personal eureka story — the moment when they truly grasped the potential of blockchain technology. For me, it was when a good friend from graduate school was getting married in Asia. I couldn’t make the wedding but wanted to send a gift. I could have used the traditional banking system, but doing so would have incurred foreign exchange fees, wire fees, processing delays, etc. I didn’t take this path.

Instead, I sent USDC straight to his Ethereum wallet.

The funds arrived nearly instantaneously. My friend could easily swap the USDC and offramp the funds using his local exchange. I then imagined a not-too-distant future where enough merchants offered the ability to pay for goods

and services in crypto that users wouldn’t want or need to off-ramp funds.

At that moment, I saw blockchain technology’s potential for revolutionizing finance. And it wasn’t through bitcoin, a Bored Ape NFT, or the millionth fork of some Ponzi such as OHM — but rather with a simple real-world asset — a digitized dollar, traveling on more efficient blockchain rails. From then on, I saw tokenization powered by blockchains as finance’s future.

Real-world Assets Real-world assets — or RWAs — are traditional financial assets (e.g., currency, private credit, art, real estate, stocks, bonds, etc.) represented (or tokenized) on a blockchain. Tokenization has 39

ET H I N V E S TORS CLU B

existed since the earliest days of crypto as a concept but has been a growing trend over the last two years. The typical arguments for tokenization are improved access, transparency, liquidity, and widespread efficiency — a wholesale revolution of financial markets.

Many can imagine that end state and how that world would be a step function change better than today’s status quo. To that end, reputable firms such as BCG, BlackRock, and S&P have estimated that trillions of dollars of value will be tokenized in the coming years.

However, there are a slew of obstacles that must be overcome on the road to that future. As a result, while there has been some early traction, the figures still pale in comparison to traditional global financial markets. As such, people working on RWA initiatives today talk about adoption over decades, not months or years.

Is there any way to accelerate this change?

In Switchpoint’s view, the pathway to meaningful RWA adoption necessarily involves compromise to realize the promise of tokenization. The purpose of this post is to outline the various issues holding back adoption and lay out a common-sense approach for RWA experimentation to overcome these roadblocks and ultimately unlock a wave of participation.

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LET’S DIG IN. Traction to Date First, let’s review the current state of play. RWA traction to date has been a mixed bag.

Stablecoins — typically the 1-for-1 tokenization of a U.S. dollar — represent one of the most powerful innovations in crypto. The 3rd and 8th largest digital assets by market value are stablecoins USDT and USDC, which hold over $125bn in value, the vast majority of the $140bn stablecoin market.¹ Stablecoins allow for easy, fast payments, are ideal for cross-border activity, and unlock borrowing and savings opportunities in DeFi. Arguably, DeFi owes its existence today to these critical RWAs. Stablecoins have been a colossal success.

Outside of stablecoins, however, the adoption is still relatively nascent.

U.S. Treasuries. Once risk-free U.S. government rates surged higher than stablecoin rates in DeFi, a wave of tokenized U.S. Treasury offerings flooded the market from players such as Ondo, Matrixdock, Backed, Maple, and Open Eden, as well as traditional financial institutions such as Franklin Templeton and WisdomTree. The aggregate tokenized Treasury market is just shy of $700mm as of this writing.²

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Tokenized U.S. Treasury offerings with at least $1mm of TVL. Source: RWA.xyz as of February 22, 2024.

Tokenized Treasuries allow holders to earn a yield they wouldn’t otherwise passively via popular stablecoins such as USDC (where yield is purposefully not passed along to tokenholders). DeFi platform Flux Finance allows Ondo $OUSG tokenholders to leverage their Treasury position to earn even more yield.

These offerings often involve a KYC/AML check and incorporate traditional legal agreements and structures, such as special purpose vehicles. Only certain investors can participate; it is therefore permissioned, not permissionless.

In the wake of early traction with tokenized Treasuries, other tokenized fixed incomeofferings are coming to the market, offering exposure to

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money market funds and short-duration bond instruments.

Private Credit. The third largest RWA bucket includes various lending protocols such as Maple, Credix, Centrifuge, and Goldfinch.

These platforms vary in target borrower (institutional vs. retail) and lender segments (corporate, emerging market, etc.), as well as capital stack structuring. The common themes across these platforms are 1) harnessing smart contacts to create lending pool infrastructure and ABS-like tranches to slice risk and return more efficiently and 2) crowdsourcing capital from users via a blockchain. There have been over $4.5bn of originations to date, but active

WIN T ER 24 loans only total around $615mm,² due in part to adverse selection issues and the de-levering of the crypto economy since 2021.

Other Assets. Proponents of tokenization —

including BCG in its 2022 report — often point to more illiquid or esoteric assets like real estate, art, royalties, funds, etc., as targets for tokenization.

The truth is that not much has taken place in this bucket outside of a few one-off experiments. We don’t expect that to change anytime soon. Making an illiquid asset slightly less illiquid doesn’t remove its illiquidity risk.

Roadblocks to RWA Adoption Many of these issues facing greater RWA adoption fall under the umbrella of switching costs. Imagine that we could create and agree upon the most perfect replacement for the

Meaningful cost considerations, barriers, and risks include, but are not limited to: Lack of Regulatory Clarity. This is the greatest impediment to adoption. Blockchains like Ethereum may have established a technological standard, but to unlock meaningful institutional adoption, we will also need to see more consensus around a complementary regulatory standard to provide firms with the clarity that they are not risking major legal liability through experimentation. Europe’s MiCA regulation and Switzerland’s DLT Act offer the beginnings of a regulatory framework. By contrast, the United States has taken an antagonistic stance, and

Private credit protocols with at least $1mm of TVL. Source: RWA.xyz as of February 22, 2024.

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No one is buying a fractionalized apartment, even if a blockchain provides a technical avenue to do so. In 2024, this type of tokenization activity is still a pipe dream.

traditional financial system. Even then, it would still take an incredible effort to convince the current financial system to move en masse to this “perfect” alternative, not to mention training front-line workers who are used to legacy systems on our new perfect alternative. Now consider the practical reality that the state of blockchain technology today is far from perfect.

The switching costs are only magnified because there is greater risk.

ET H I N V E S TORS C LU B

sadly, that weighs heavily on the minds of institutions interested in RWA innovation.

In addition, without a defining legal standard, it’s unclear how tokenized representations of ownership will be honored by various jurisdictions when issues inevitably arise.

Liquidity Risk. It sounds innovative to take an illiquid asset like art, real estate, and apparently, even uranium — and tokenize 44

it to potentially increase access and liquidity. However, the level of liquidity to get most institutional buyers comfortable is far greater than the liquidity we see in these secondary markets today.

Education Gap. “Going down the rabbit hole” to learn about crypto and blockchain is not an evenly distributed experience.

The crypto rabbit hole is deep, and many — particularly institutions — don’t get

WINT ER 24

far enough down it to feel comfortable enough with new considerations like wallet security and smart contract risk.

User Experience. Blockchain technology today makes some things better but also introduces novel risks and is still clunky to use. A popular startup tenet is that a new product needs to be 10x better than the existing solutions to overcome switching costs. Well, if we’re being honest with ourselves, crypto today is better in some ways, but while it holds the promise to be vastly better in the future, it is not a 10x better experience today. Institutions must shoulder new operational issues (wallet & key management, smart contract risks, extra reporting, disaster recovery, etc.) that they do not have in TradFi. We’re still (too) early on this front.

Ideological Rigidity. Too many people in crypto espouse a religious zeal for

Public Narrative. 2020–2022 was something to behold. We witnessed Ponzi schemes, mismanagement, and outright fraud from the likes of FTX, 3AC, Terra, etc.

Those in the space rightfully saw those events as the same centralization-goneamok that has plagued traditional finance forever. Unfortunately, the industry did not win the PR war, and too many outside of crypto today associate decentralized technology with these centralized frauds.

This may tragically be Sam BankmanFried’s enduring gift to the space, and it will take a long time to regain trust, particularly among institutions.

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Adverse Selection. The earliest RWA experiments have been prone to adverse selection. As Switchpoint wrote here, the Goldfinch platform has notably suffered from recent borrower defaults. This was unsurprising, at least to anyone who has worked in credit. There are enough risks with utilizing a new technology. Adding meaningful credit risk only complicates matters, and the ecosystem hasn’t earned the trust that it knows how to assess these financial risks to the standard that institutions demand.

certain deeply held tenets, attimes mocking anything resembling compromise.

Purity tests are not helpful for attracting mainstream adoption and can appear outof-touch to anyone outside crypto. It’s not just the laser-eyed Bitcoiners but highly credible people in the DeFi ecosystem.

Purely decentralized, crypto-native apps and solutions can co-exist with tokenized real-world assets. Experimentation, even when the experiment doesn’t perfectly conform to ecosystem ideals, should be encouraged.

An Emerging Blueprint That’s a lot of issues to work through.

The good news is that the recent wave of tokenization has increasingly pursued Circle’s USDC playbook to create constructs

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ET H I N V E S TO RS C LU B that help to mitigate these concerns and spark greater RWA adoption by embracing: Simplicity. The more complex an RWA offering, the greater the switching costs involved because of the heightened due diligence burden. It shouldn’t be surprising that 1:1 USD stablecoins have meaningful traction or that Treasury-based offerings have seen the second-most traction.

They’re simpler to understand for participants relative to, say, a multi-tranche emerging market loan securitization. RWA projects should deliberately tokenize simple, plain vanilla assets and achieve product-market fit there before focusing on more complex offerings that are less likely to gain traction today.

constraints to successfully target an institutional segment.

Low-risk Assets. This is similar to simplicity. This industry will only get to the point of tokenizing illiquid, higher-risk assets if RWA models are first proven with the most liquid, well-understood markets in traditional finance. Institutions are professional risk managers. Asking them to take a technology risk (alone) is a much lower bar than asking them to participate in a construct that also includes substantive liquidity and/or credit risk.

Earn the right to move into riskier, more illiquid asset classes by first getting tokenization right where burdensome liquidity and credit premia aren’t a holdup for participating.

to Greater RWA Adoption

Compliance. Permissioned chains and compliant apps/solutions are not the end of decentralization.

At Switchpoint, we believe institutional participation in any type of blockchain (private, permissioned, or public) is a rising tide that lifts all boats.

Given the uncertain regulatory environment, a concerted effort to create a compliant structure (i.e., by incorporating KYC/AML) is a foundational requirement for institutional participation and not a sign our “hearts are not in it” (see following reference). These are regulated entities, and protocols need to be mindful of such user 46

Compromise: The Ultimate Key Ultimately, the key unlock for greater RWA adoption is to make pragmatic trade-offs to gain traction and realize the promise of blockchain technology. RWA adoption will increase with more solutions that compromise where zealous fanatics will not: Not fully decentralized. Successful RWA efforts will carry some degree of centralization. For instance, today’s tokenized Treasury solutions set up special purpose vehicles — limited liability entities incorporated in a particular jurisdiction like the State of Delaware — that hold real-world assets like U.S. Treasuries in a bankruptcy remote fashion. This is a due diligence requirement for most institutions and, therefore, essential for onboarding more institutions.

Not fully permissionless. This is where compliance comes in. As noted above, KYC/AML is table stakes for institutional adoption in many jurisdictions. By definition, this means there must be some degree of permissioning and (limited) privacy give-up.

WIN T ER 24 Recognition that TradFi isn’t always the enemy.

There has been a sticky good vs. evil narrative in Crypto Twitter when it comes to TradFi. We should view TradFi not as a villain to eradicate but rather as potential partners and customers.

That’s the mainstream market if we actually care about achieving product-market fit.

The irony of making compromises to enable ring-fenced, permissioned RWA offerings is that subsequent adoption will inevitably lift activity that reflects the deeply held tenets of the crypto community and gives blockchain its best chance to realize the promise of a better financial system.

Acknowledgement that regulation isn’t (all) evil. You could be forgiven thinking that all governments are on a mission to eradicate blockchain-based activity, given the United States’ posture. At Switchpoint, we view the U.S. stance as a form of Innovator’s Dilemma — protecting a system that most benefits the incumbent (in this case, the U.S. and its financial sector). The Innovator’s Dilemma framing anticipates competitors coming to take a shot at the market leader by being more open to crypto, and that’s exactly what we’re fortunately seeing from others like Europe with its MiCA.

¹ DeFi Llama ² RWA.xyz This essay was originally published by Switchpoint in Q4 2023. Figures have been updated as of February 2024.

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I can feel the hardliners’ heads exploding. This is short-sighted. If they’re right about opensource, permissionless transacting producing a better financial system, they shouldn’t fear institutions trying a different way to get their feet wet. Many with this concern aren’t truly afraid that institutions will co-opt a movement. Rather, they’re afraid that they’re wrong that these values are a necessity for an improved financial system.

As noted above, we believe more RWA adoption on permissioned chains/apps will bring more adoption across crypto, including on permissionless, fully decentralized finance.

We’ve already seen this in practice with Circle and Tether, the centralized entities behind the RWAs largely powering decentralized finance.

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THE ROAD TO $10 BILLION:

SCALING ERC-4626 TOKENIZED VAULTS Joey Santoro

Author, ERC-4626; Founder, Fei

D

eFi is the financial layer of the internet. DeFi protocols interact with tokens to provide financial utility— liquidity for exchanging between tokens, borrowing a token against another collateral token, lending for yield, and more. These protocols can only exist because they support token standards such as ERC-20 (fungible tokens) and ERC-721 (NFTs).

Without standards, these protocols would need to be constantly rewritten or upgraded to handle each new token. The complexity and friction caused by the absence of token standards would make DeFi itself impossible.

Many protocols enhance their base-layer utility by making the deposit receipt itself a token (i.e., Compound cTokens). This practice has allowed for superfluid collateral and rehypothecation of all types. However, for the early history of DeFi, there was no standard at all for interacting with these types of deposit receipts. This led DeFi protocols higher in the stack to develop custom connections between different yield sources.

These custom integrations increased complexity, development time and hack risks.

Enter ERC-4626.

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ET H I N V E S TO RS C LU B security properties of a Vault can be enumerated and tested for in a systematic way, such as with the existing security tooling suites. For example, the $130m CREAM hack exploited the share price of a non-standardized vault to inflate the value and borrow without sufficient real collateral backing.

ERC-4626 standardizes the exchange rate oracle of a vault and provides out of the box testing to ensure that this scenario is not exploitable in the future. Tokenized Vaults are essential to the safety and composability of DeFi, and will play a part in the institutional and global scale adoption of DeFi.

Why Are ERC-4626 Tokenized Vaults So Important?

Note: I will refer to ERC-4626 and Tokenized Vaults or just Vaults relatively interchangeably, with the former emphasizing the standard and the latter emphasizing its usage and utility.

The ERC-4626 standard was born out of a need to standardize the common situation of issuing a deposit receipt for some tokenized yield opportunity.

First Class Usage

ERC-4626 functions as a containerization standard for DeFi. A Tokenized Vault literally acts like a container for your tokens when deposited into another protocol. While your tokens are in the Vault providing financial utility, you maintain a liquid representation of that deposit which you can then use as collateral in DeFi, increasing capital efficiency and composability.

ERC-4626 has already surpassed $2.6 billion in TVL as of publication. It has been less than two years since ERC-4626 was created. Reaching multi-billion dollar scale within two years is a comparable adoption curve to other great token standards such as ERC-20 (fungible tokens) and ERC-721 (NFTs).

Because ERC-4626 defines a standard interface, new protocols and UIs can rely on the standard to have safer integrations, tooling, and automations.

The safety comes from the fact that all of the ideal

Tokenized Vaults are quickly being adopted by the largest DeFi protocols across a wide variety of use cases including lending, protocol native

“

Tokenized Vaults are essential to the safety and composability of DeFi, and will play a part in the institutional and global scale adoption of DeFi.

50

”

WIN T ER 24 yield, and LP rehypothecation. Some protocols using the standard are:

ERC-7535: Native Asset Tokenized Vaults standardize vaults where the underlying asset is Ether instead of an ERC-20. This is critical because Ether is not in fact an ERC-20 token even though it behaves like a “token”. It is useful for Liquid Staking Tokens and upgrading Wrapped Ether.

ERC-7540: Async Tokenized Vaults standardize vaults which require a 2-step deposit OR withdrawal process. These are common when there is some backend processing which may not be fully liquid, or an element of the mechanism design which requires a delay to deposit or withdraw. It is useful for Real World Assets (RWAs), Liquid Staking Tokens, and Fixed Term or Undercollateralized Lending.

This article is highlighting the current and future developments in the ERC-4626 ecosystem which will help bring ERC-4626 from the current ~$2.6bn in TVL to $10bn and beyond.

Extending the Standard: ERC-7535 ETH Vaults and ERC-7540 Async Vaults Now that ERC-4626 has been battle tested extensively with billions of dollars, there is an opportunity to further standardize the most common use cases for token vaults. I coauthored the first two of these (ERC-7535 and ERC-7540), which are currently published for review and are making their way through the ERC process.

Liquid (Re-)Staking as a Driver for TVL Liquid staking has quickly become a major component of DeFi due to the increased liquidity and yield on ETH it provides. It is an multi billion dollar market with no signs of slowing growth.

As a category, it suffers from the same issues with ERC-20 yield opportunities that Tokenized Vaults aims to solve. The various Liquid Staking Tokens (LSTs) do not have any kind of standard interface for depositing or withdrawing ETH, or accruing yield and determining the exchange rate between the LST and ETH. Together, ERC-7535 and ERC-7540 create a liquid staking standard. ERC-7535 handles the deposit, withdrawal and conversion functionality with ETH as the underlying asset. ERC-7540 handles the

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ERC-4626 is an ideal candidate to standardize the deposit and withdrawal of an ERC-20 token into an underlying yield strategy for any protocol, as highlighted by the diverse examples above.

Adoption of these new extensions will further the already exponential adoption of ERC-4626, especially in the Liquid Staking and Re-staking use case which is highlighted below.

delay on depositing and withdrawing to handle any queueing at the Ethereum protocol level.

Having standardization at this level makes integrations even easier for higher level protocols such as liquid staking aggregators and re-staking protocols such as Eigenlayer. Standardization will improve security and composability for existing tokens, and reduce friction for the market to support a more robust variety of LSTs.

Pushing ERC-4626 Forward There are so many ways in which ERC-4626 and its extensions are changing the DeFi experience for the better: • • • •

Several security tooling suites Extension development for specific use cases (more to come) Data around adoption of existing vaults A growing community of ERC-4626 developers via the 4626 Alliance

Tokenized Vaults increase the security and composability of protocols, all with a reduction in development and integration effort. As the ecosystem matures, the TVL in Tokenized Vaults will continue to reflexively grow with DeFi itself.

If you want to keep up with or help improve the ERC4626 ecosystem, join the 4626 Alliance telegram and follow us on twitter.

Thank you to Campbell Harvey, Jesse Walden, Storm Slivkoff and Caleb Ditchfield for contributing their insights and feedback to enrich this piece.

EIC02 ETH INVESTORS CLUB ▪ SPRING 24

Call for Contributors: EIC01 is a proof of concept for something much bigger.

EIC can one day realize itself as an autonomous onchain entity crafting immersive, captivating multimedia stories that celebrate Ethereum.

We need you

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Authors ▪ Editors ▪ Data Wizards ▪ Developers ▪ Designers Get involved below:

Farcaster /eic Alternatively email your portfolio or best work samples to: peter@ethinvestorsclub.com

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Ryan Berckmans Founder, 3cities.xyz

THE FUTURE OF

F GLOBAL PAYMENTS

ET H I N V E S TO RS C LU B In the evolving landscape of financial transactions, the future of payments is rapidly shifting towards a model defined by zero fees and pure softwarebased systems.

This shift is primarily driven by the advent of public blockchains, which offer the potential to replicate and enhance the high-level user experience of platforms like Stripe and PayPal, without the constraints of centralized gatekeepers and the burden of fees.

This essay explores the trajectory of this evolution, illustrating how a decentralized, open-source approach to payment processing could revolutionize the way we handle financial transactions.

The Stripe Revolution The journey towards this new paradigm can be traced back to the emergence of Stripe in 2010.

At its inception, Stripe distinguished itself by offering an online credit card payment API that was not only well-designed and well-documented but also reliable and user-friendly. This revolutionized digital payments in tradfi, setting a new standard for what businesses and customers could expect from payment processing services.

Interestingly, Stripe initially perceived its service as catering to niche companies, and did not anticipate widespread adoption by major corporations. However, this perception was proven wrong when giants like Amazon started using Stripe in 2017, highlighting the scalability and broad appeal of well-constructed payment platforms.

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The Emergence of Wallet-to-Wallet Payment Software Similar to Stripe’s impact in tradfi, wallet-to-wallet payment software in the blockchain space initially seemed esoteric and niche.

Today, most of the focus in crypto payments is on integrations with tradfi, such as embedded onramps and the ability to choose between paying with crypto or by credit card.

However, as the global adoption of wallets increases and the advantages of cryptocurrency become more pronounced, a parallel shift is occurring.

The increasing convenience and diminishing drawbacks of crypto pave the way for an open, decentralized, zero-fee wallet-to-wallet payment protocol. Such a system is poised to capture a significant share of global payments, emulating and one day surpassing the growth trajectory of platforms like Stripe.

The Open-Source Advantage The transformative potential of open-source software in payment processing cannot be overstated.

Open-source systems offer transparency, freedom (as in speech), and extensibility, allowing anyone to contribute and enhance the software. This model is well suited to the payment industry given its complexity and continual evolution.

By investing in a shared codebase, a community of users and developers can collaboratively improve and adapt the payment technology, each benefiting from the contributions of the others.

WIN T ER 24 This phenomenon, seen in other successful open-source projects like Linux and Wikipedia, improves the tradeoff frontier by enabling maximal extensibility, quality, and cost efficiency.

Why Decentralized Payments?

The move towards decentralized payments is driven by both intuition and economics.

Decentralization eliminates intermediary rentseekers and, by being pure software solutions without the cost and risk of corporate service relationships, offers unprecedented scalability and embeddability in various contexts.

This makes open-source decentralized payments not just an alternative, but arguably the best form of payment processing in the world.

The Inevitability of a Zero-Fee Payment Stack The current global payment revenue, estimated at $2.2 trillion in 2022 (McKinsey), represents a significant cost burden just for moving money.

Public blockchains introduce a paradigm shift, offering a payment stack where every component incurs zero or effectively zero fees. This makes traditional fee-charging models increasingly obsolete.

While traditional benefits such as rewards and chargebacks are perceived as valuable, they are

Ethereum: A Platform for Unified, Programmable Payments Blockchain is not just a new payment method; it represents a fundamental change in how payment systems are conceived and implemented. Its programmability and general-purpose nature enable the creation of a single unified payment stack that can be adapted to a multitude of use cases, including payments, deposits, and transfers.

Envisioning the Future Payment Stack The future payment stack, as envisioned, consists of three core components:

(1) A single, open-source payments core tech

stack serving the global population

(2) Zero transaction fees, and (3) Adaptable packaging of this payments core tech stack for various use cases.

This unified approach of using a single tech stack to power a myriad of use cases consolidates disparate industries and technologies in traditional finance. This enables greater extensibility, quality, 57

FUTURE OF F INANCE

Being both open-source and decentralized is required to maximize a payment system’s credible neutrality, and in doing so, minimize adoption risk and friction.

often compensations for a high-fee environment.

A zero-fee payment stack could potentially eliminate the need for such compensations, offering direct cost savings to consumers. This is especially relevant in developing countries where the traditional perks of credit card transactions are less prevalent.

ET H I N V E S TORS C LU B cost efficiency, and adaptability to an increasingly broader and deeper set of use cases.

is vital for maximizing conversion rates and welcoming crypto newcomers and, consequently, economic value.

The Promise of 3cities in the Future of Payments I’m slightly biased but, I could see a world where 3cities.xyz emerges as a decentralized payment protocol exemplifying the transition towards more efficient, user-friendly, and inclusive payment systems. 3cities is designed around the three core components above and specializes in three areas: (1) Payment Intents: Payments, deposits, and transfers are specified using high-level intents, which are then matched with sender and receiver preferences, and solved into one or more concrete transactions.

For example, instead of requesting a payment of 5 USDC on OP Mainnet, a 3cities user simply requests $5.

The higher-level request of $5 is bundled with sender and receiver preferences, including accepted chains and tokens, that may or may not include USDC and OP Mainnet.

Then, the 3cities protocol analyzes the payment intent, the sender’s latest multichain wallet balances, prevailing exchange rates, and more, and determines that USDC on OP Mainnet is the current optimal solution.

The 3cities request intent link builder is available in beta.

(2) Payment UI/UX: By focusing on creating a seamless and engaging 1-Click payment experience, 3cities addresses one of the most significant barriers to adoption – usability. This 58

Here’s an example 3cities payment request for $12.32. In decentralized fashion, the request details are stored only in the link, with no servers. The web app is pure client-side software loaded from a CDN or IPFS, and uses only commodity ethereum node data and open price feeds. When paying, 3cities automatically scans the sender’s wallet to find the best token and chain to complete the given payment.

(3) E-commerce Solutions: 3cities has been designed to accomodate a wide variety of commercial contexts. This flexibility is essential for widespread adoption and maximizing development efficiency and usefulness of the payments core tech stack.

3cities will gradually bring to market solutions in the areas of ecommerce checkout, in-person point-of-sale, interpersonal payments, donations/ tipping, paywalls, microtransactions, and deposits

WIN T ER 24 and transfers for CEXes, defi protocols, and embedded wallets.

The Rise of Onchain Payment Preferences During the ongoing Cambrian explosion of currencies, tokens, and chains, the concept of onchain payment preferences is poised to gain significant traction.

Fragmentation of Preferences Payment preferences in the crypto world are inherently fragmented due to the diverse nature of blockchain technology and its users. These preferences are influenced by factors like geographic location, regulatory environment, the kind of user or merchant, and the scenarios involved in payment. For instance: An individual might accept stablecoins like USDC and DAI across various Layer 2 solutions, valuing the speed and lower transaction fees.

A merchant may prefer receiving payments in a broader range of stablecoins and ETH but restrict transactions to Layer 1 or a single L2 for security reasons.

Non-US users might lean towards yield-bearing stablecoins not accessible to US persons, such as USDM, to maximize their financial returns.

Empowering Users to Publish Preferences To navigate this complexity, there is a growing need for mechanisms that allow users to easily publish their payment preferences onchain.

This could include specifying preferred currencies, tokens, and chains, as well as more nuanced conditions like preferred transaction speeds or fee thresholds.

By making these preferences secure, global, transparent, and easily accessible, users can frictionlessly engage in transactions that align with their unique requirements and constraints.

Enabling Frictionless Payments On the other side, it is equally important for merchants, wallets, consumer apps, and other facilitators to have the tools to effortlessly consume these published preferences when initiating payments. This ensures that transactions are not only delightful and successful but also align with the expectations and needs of the recipient.

Such an ecosystem of published and consumed payment preferences fosters a more intuitive and frictionless payment experience, making the core payment tech stack more useful and valuable.

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Publishing one’s payment preferences onchain helps solve fragmentation and acknowledges that preferences for accepting payments vary greatly among users and contexts. Understanding and accommodating these preferences is key to the continued growth and user-friendliness of decentralized payment systems.

Users of multisig wallets like Gnosis Safe may have preferences narrowed to the specific chain on which their wallet operates, but accepting a wide mix of stablecoins, ETH, or LSTs.

ET H I N V E S TO RS C LU B

The Virtuous Cycle of Payment

Revolutionizing Global Payments:

Preference Integration

The Shift to Decentralized,

As payment preferences are published onchain, these preferences help improve payment UX anywhere the protocol is used, and a virtuous cycle is created.

This cycle can be visualized as follows:

Zero-Fee Systems The evolution of global payments, as illustrated by platforms like 3cities and the broader adoption of blockchain technologies, is more than just a technological shift; it represents a fundamental change in economic interaction.

This transition to decentralized, zero-fee, pure software-based payment systems is not an

The virtuous cycle for an open-source, decentralized payment protocol

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As individuals and businesses around the world increasingly assert their preferences for specific tokens, chains, and transaction conditions, the global financial landscape is being reshaped to accommodate these diverse needs.

The integration of onchain payment preferences is a crucial step in this transformation. By enabling users to publish and consume payment preferences seamlessly, we are not just facilitating transactions; we are fostering a more connected and responsive economic ecosystem.

As this new paradigm continues to gain traction, it challenges and gradually supplants traditional financial models. Centralized payment systems, with their associated fees and limitations, are increasingly viewed as relics of a bygone era. In their place, open-source decentralized payment systems offer a promise of empowerment and flexibility previously unattainable.

As this new pardigm continues to gain traction, it challenges and gradually supplants traditional financial models. Centralized payment systems, with their associated fees and limitations, are increasingly viewed as relics of a bygone era.

In their place, open-source decentralized payment systems offer a promise of empowerment and flexibility previously unattainable.

The focus for 3cities this year is on merchant payments and open-sourcing the world’s first decentralized payment processor.

Driving this focus is our collaboration with the Ethereum Foundation’s Devcon Team to adapt our product for use with Devcon 7 ticket payments.

We’ll be open-sourcing our decentralized payment processor stack as part of the Devcon deliverable.

We look forward to helping the Devcon Team accept ticket payments in ETH or a variety of stablecoins across a dozen Ethereum Layer-2s.

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isolated trend but a reflection of a larger movement towards greater financial inclusivity and efficiency.

This transition is not just a theoretical possibility but an ongoing reality.

Sid Powell CEO & Co-Founder, Maple Finance

RUN ON THE BA The Rise of DeFi in Real World Lending Examining the Transition from Traditional Banking to Blockchain-Based Lending

ANK:

Act 1: Tracing the Arc of a Revolution in Finance In the evolving narrative of modern finance, a quiet revolution brews, heralding a paradigm shift from the cumbersome gears of traditional banking to the streamlined dynamics of Decentralized Finance (DeFi) lending. This story begins not in the boardrooms of Wall Street, but through a personal encounter that epitomizes the chasm between two worlds.

Picture a modest house, a symbol of familial aspirations and shared dreams. Here, my brother and I faced the task of refinancing. This process, seemingly mundane, took us through the labyrinth of traditional finance.It was a journey marked by a relentless flurry of calls, an avalanche of paperwork, and timelines stretching into disheartening horizons. Each step, shrouded in bureaucratic obscurity, transformed what should have been a straightforward financial maneuver into an ordeal spanning several agonizing months. On settlement day, we found ourselves ensnared in financial limbo, our fate hanging in the balance over a seemingly endless weekend.

ET H I N V E S TO RS C LU B Now, contrast this with the emergence of

cryptocurrency like ETH as collateral, and in

DeFi lending – a world where financial

return, receive a stablecoin loan. If a borrower

transactions dance to the rhythm of efficiency

defaulted, they forfeited their collateral. Yet, the

and transparency. In stark juxtaposition to our

true allure lay in its permissionless nature. Anyone

refinancing saga, the DeFi landscape presented

with a wallet and cryptocurrency could access

a realm where loans were processed in mere

these services instantly, without onboarding

minutes. Here, every step was transparent,

hassles or delays.

every transaction accountable, completed with the effortless precision of a single click.

By 2020, amid a monetary and fiscal stimulusfueled surge in growth and risk assets, the DeFi

Yet this story is more than a tale of convenience

landscape blossomed. It was a golden era, where

or a testament to technological innovation. It

platforms like Maker, AAVE, and Compound saw

signals a shift in how we engage with the financial

exponential growth, scaling to billions in loans

institutions that underpin our society. Skeptics may

and collateral. This rapid expansion piqued the

dismiss this as the overzealous visions of techno-

interest of traditional financial institutions, though

optimists. But pause for a moment and consider:

skepticism about the sector’s practical value

which world resonates more with the essence

persisted. However, the enthusiasm waned as

of what we seek in our financial engagements?

2022’s bull market peaked and subsequently

A world entangled in the archaic red tape of

unwound, leading many traditional financiers to

tradition, or one that pulsates with the efficiency

dismiss DeFi as ephemeral.

and potential of blockchain technology?

Despite this, DeFi remained a magnet for talent,

DeFi’s Evolution: From Niche to Mainstream

with professionals leaving stable, lucrative careers to join startups, undeterred by recent downturns and buoyed by the sector’s potential.

DeFi’s journey, a narrative of transformation and

Addressing the needs of institutional participants

growth, warrants a brief look at its origins. In

marked a significant pivot for DeFi. Traditional

2019, during the tail end of a bear market that

financial institutions required more structured

had persisted since 2018, DeFi was relatively

and secure frameworks to engage with these new

obscure. Its landscape was shaped by early

technologies. This evolution birthed the sector of

pioneers like Maker, Compound, and AAVE, each

Real World Asset (RWA) lending.

offering overcollateralized lending. The essence of their service was straightforward: deposit 64

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Source: rwa.xyz

low-risk interest on their deposits, all the while retaining the flexibility to withdraw funds swiftly,

In 2023, the realm of RWA lending found its

typically within two to three days. The market’s

pivotal application: the tokenization of Treasury

response was immediate and unequivocal. By

Bills. This innovation arose in response to a

November 2023, just eleven months into the year,

complex financial landscape, marked by the

the volume of tokenized TBills had ballooned to

Federal Reserve’s Fed Funding Rate soaring above

an impressive $780 million. This rapid growth not

5% at the end of 2022. Concurrently, the US

only highlighted the product’s market fit but also

Government’s Operation Chokepoint 2.0

underscored the resilience and adaptability of the

aimed to constrain the crypto industry by limiting

capitalist system, ever responsive to emerging

access to banking services. This regulatory

customer needs and regulatory shifts.

pressure created a vacuum in the market, a need for novel financial solutions.

The Innovator’s Dilemma and Upstarts

Enter tokenized TBills and Cash Management products. These offerings emerged as a lifeline

The tale of disruption in the financial sector is

for startups and businesses suddenly cut off from

aptly encapsulated in Clayton Christensen’s ‘The

basic banking facilities. With these tools, entities

Innovator’s Dilemma’. This concept probes into

could stay anchored in stablecoins, earning

the enigma of why established, resource-rich 65

F UTURE OF F INANCE

The Emergence of RWA Lending

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incumbents often trail behind in the race

Act 2: DeFi Challenges the

of technological evolution. We wonder,

Status Quo in Private Credit

why didn’t Polaroid commercialize digital photography, or Nokia dominate the smartphone revolution? The financial world, often perceived as different due to

Permissioned Protocols and Security

regulatory complexities, seems impervious

In the early chapters of DeFi lending,

to such disruptive undercurrents. However,

platforms like Maker, Compound, and

the reality might be less static.

AAVE ventured into the financial wilderness with a permissionless ethos. They stood as pioneers in a realm where access was open,

between 2010 and 2019, the emergence

boundaries were blurred, and traditional

of new banks was an exception rather

checks were absent. This approach carved

than a norm (averaging less than two new

out a niche, but also invited scrutiny and

approvals per year), signifying a significant

skepticism, especially from institutional

stagnation and consolidation within the

circles.

industry. JPMorgan Chase, for instance, now commands a mammoth 16% of US bank

As an alternative option, addressing the call

deposits – a concentration that, in most

for more structured and secure systems,

industries, would trigger antitrust alarms.

a new generation of DeFi lending and tokenization protocols emerged. They

Yet, in the world of RWA, we foresee a

introduced permissioned protocols and

different unfolding of events. This nascent

stringent Know Your Customer (KYC)

field, vibrant with innovation and untethered

processes, a strategic pivot aimed at

by the legacies that shackle traditional

attracting institutional customers and

finance, is ripe for a revolution.

high-net-worth investors. Platforms such as Maple, Centrifuge, Ondo, and Backed

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F UTURE OF F INANCE

Consider the American banking scene:

ET H I N V E S TO RS C LU B all have permissioned minting and redemptions

Finance (DeFi) is making a definitive move towards

vetting new depositors.

the private credit market which is a monumental $1.5 trillion in size. Banks, once the stalwarts

This transition to permissioned protocols is more

of corporate and middle-market lending, are

than a mere procedural shift; it’s a fundamental

gradually retreating, paving the way for credit

realignment with the requirements of institutional

funds and Non-Banking Financial Institutions

allocators. Yet, this evolution carries an inherent

(NBFIs) like Apollo Global, Ares Capital, and

contradiction. The very ethos of permissionless

Blackstone to innovate and fill the gap with

DeFi platforms seems at odds with the concept

dynamic, efficient lending solutions.

of trusted, permissioned actors in RWA lending.

It’s a delicate balance between the wild spirit

The burgeoning influence of private credit,

of DeFi’s early days and the disciplined rigor

amplified in 2022, underscores its strategic

required by the institutional world. Remarkably,

importance in the banking sector’s ongoing

no RWA lending platforms have succumbed to

narrative of unbundling since the Global Financial

hacks, a testament to the robustness of these

Crisis. However, this growth has also exposed

added safeguards.

the sector to the winds of disruptive innovation.

Traditional private credit, while effective in credit

Furthermore, these protocols are fortified by legal

structuring and capital formation, has been

frameworks that extend beyond the digital realm.

shackled by the inefficiencies of conventional

Borrowers face tangible legal consequences

banking—slow customer onboarding, manual

in cases of default, a stark reminder of the

operations, and heavy reliance on external

seriousness and legitimacy these platforms have

transactional banking and loan management

embraced. The tokenization of Treasury Bills, a

services.

cornerstone in this new world of RWA lending, stands as a shining example of what’s possible

Blockchain technology emerges as a beacon

when KYC dovetails with the intricate web of

of transformation in this context. Its capacity

custodians, brokers, and other intermediaries in

for rapid, transparent, and secure transactions

the financial ecosystem.

offers an ideal antidote to the sluggish and costly processes endemic to traditional private credit.

Tokenization and the Revolution in Private Credit

At the vanguard of this revolution are not the established banking giants but agile DeFi startups like Maple, Centrifuge, and Goldfinch. These

As the financial world stands at a crossroads, Real World Asset (RWA) lending in Decentralized 68

platforms herald a new phase where tokenization

WIN T ER 24 and integrated transactional banking coalesce

Act 3: Future Prospects and

into a seamless experience.

Real-World Applications

Taking a step further, DeFi platforms are venturing into realms traditionally reserved for credit funds and NBFIs. Initiatives like Maple Direct, launched

Innovations in Real World Asset Lending

in August 2023, in which in-house credit experts In the dynamic realm of RWA lending, the year

demonstrating that DeFi technology can indeed

2023 marked a significant shift, particularly in

provide a substantial edge in the economics of

the utilization of Treasury Bills, Money Market

running a lending business. This vertical integration

Funds, and Reverse Repo as collateral. Central to

is reshaping the landscape, with automated, real-

this transformation are platforms such as Maker,

time loan and portfolio management, minimal

Ondo, and Maple, each introducing unique

human intervention.

structures to the marketplace. For instance, Maker collaborates with Arrangers, which purchase TBills

Viewed through the prism of the Innovator’s

and similar assets, subsequently transferring the

Dilemma, DeFi protocols that undertake their own

yield back to the Maker protocol. This yield is

credit underwriting are poised to emerge as the

then distributed to users staking DAI, Maker’s

new disruptors of credit funds and NBFIs. They

asset-backed stablecoin.

leverage cutting-edge, cost-effective technology to streamline the lending process. Initially

Ondo’s OUSY product stands as a notable offering,

targeting markets plagued by adverse selection,

structured as a senior secured loan underpinned

these platforms are gradually evolving to attract a

by TBills and other debt securities held in an SPV.

wider array of borrowers and lenders, integrating

Similarly, Maple’s Cash Management product,

user-friendly fiat off-ramps and simplifying the

serving as a senior secured loan to an SPV,

overall user experience.

pledges TBills, Money Market Funds, and Reverse Repo as collateral, ensuring 1:1 security against the

Traditional banks and credit funds, burdened

loan and enabling 24-hour redemption notices.

by their slower and costlier methodologies, are now at a pivotal juncture. The future they face

These products have collectively amassed over

is one where DeFi’s edge in efficiency, speed,

$780 million in outstanding value by November

and cost-effectiveness may undercut them in the

2023. They have become particularly popular

world of lending.

among startups and DAOs managing their treasuries in stablecoins, especially those impacted 69

F UTURE OF F INANCE

take the helm of credit underwriting themselves,

ET H I N V E S TO RS C LU B

by Operation Chokepoint 2.0. These entities now

by banks in favor of residential mortgages.

have access to a secure, well-collateralized yield

These traditional lending methods, protected

source with the flexibility of quick redemptions.

by direct payment of invoices by major clients instead of relying on loan repayment from a small

Tokenizing Private Credit

business, are now being seamlessly integrated into the decentralized financial landscape. This

In the realm of private credit, tokenization of debt

transformation harnesses blockchain’s advantages

represents a significant leap forward. Areas such

in efficient loan processing and offers attractive

as Accounts Receivable finance, trade finance,

yields and short durations.

and discount factoring offer lucrative yields, accelerated repayment cycles, and face minimal competition from traditional financial institutions.

The Practical Edge of BlockchainBased Lending

Key players in this space include Maple, Polytrade, Centrifuge, and Goldfinch.

In the emerging landscape of financial technology, blockchain-based lending stands out as a

Take, for example, Maple’s AQRU Receivables

groundbreaking advancement, offering distinct

Financing pool, managed by AQRU Plc. It provides

benefits that reshape the traditional lending

wholesale loans to Intero Capital, which specializes

paradigm. Unlike typical crypto ventures, these

in tax rebate factoring for U.S. small businesses.

lending platforms are non-correlated with the

This process involves purchasing a claim on a

broader crypto market and introduce novel forms

tax refund from the U.S. Treasury, providing the

of collateral beyond traditional crypto confines.

small business owner with an advance for critical

This expansion of lending avenues is particularly

business needs. Despite the high yields commonly

beneficial for businesses constrained by limited

associated with small business lending, the risk

access to bank loans or burdened by steep rates

is mitigated by the fact that the U.S. Treasury

and stringent terms.

directly pays the rebate, irrespective of the small business’s financial status. Launched in January

Maple’s experience is telling: post-FTX, we’ve

2023, this pool grew organically to $26 million by

witnessed a surge of interest from NBFIs and

November, with HNW individuals as the primary

both regional and community banks in various

adopters due to their focus on yield maximization.

G20 nations. These entities, traditionally reliant on lines of credit from large commercial banks,

In a remarkable revival of 19th-century banking

are now actively seeking to diversify their funding

techniques, DeFi is reinvigorating the world of

sources. Their interest in DeFi isn’t just a quest

factoring and bill discounting, long overlooked

for alternatives; it’s a strategic move to avoid

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FUTURE OF F INANCE

overreliance on any single banking institution.

gain can manifest as either more competitive

Interestingly, this shift occurs amidst the backdrop

interest rates for borrowers or enhanced returns

of regulatory skepticism, hinting at the shadow

for institutional investors. For NBFIs, blockchain-

banking sector’s traditionally tense relationship

based lending isn’t merely an alternative; it’s an

with prudential regulators, often more aligned

expansion of the capital markets they already

with commercial banking interests.

navigate. The prospect of engaging retail investors through tokenized debt or similar structures is

From an operational standpoint, blockchain-based

appealing, promising to lower capital costs and

lending significantly reduces costs. This efficiency

widen funding avenues. This evolution could lead 71

ET H I N V E S TO RS C LU B to more affordable home mortgages and auto

asset growth to a balanced pursuit of stable yield.

loans, benefiting end customers.

This evolution stems from their inherent comfort with digital assets and emerging technologies,

Credit funds, poised to originate RWA loans on-

a stark contrast to the hesitancy often seen in

chain, find allure in the promise of streamlined

traditional asset managers.

operations and global reach. The elimination of time-intensive, manual processes in Excel,

In parallel, decentralized autonomous

replaced by automated back-office functions,

organizations (DAOs) and startups are increasingly

translates to substantial cost savings. Furthermore,

drawn to the DeFi sphere, particularly to cash

the ability to transact across borders with minimal

management and money market fund (MMF)

friction – a loan in Europe as effortlessly executed

style products. This trend highlights their allure

as one in the US – enhances the competitive edge

to the operational efficiency and groundbreaking

in the increasingly crowded private credit space.

innovations DeFi platforms offer, using blockchain

In this evolving landscape, even marginal cost

to refine their financial strategies and activities.

savings could be the deciding factor in securing substantial commitments from pension funds.

Conversely, foundations and other conservative

The future of finance, as seen through the lens of

investment entities, with their cautious approach

blockchain-based lending, is one of adaptability,

to investing, are cautiously stepping into the DeFi

responsiveness, and global interconnectedness.

realm. These entities, typically managed by asset managers, are leaning towards overcollateralized

Adoption and Long-Term Impact

loans, aiming for modest returns that slightly edge out traditional Treasury yields, around 3-4%. This

In the dynamic world of DeFi lending, a profound

cautious stance reflects a reluctance to engage

transformation is underway. Spearheading this

deeply in the more speculative, higher-yield

change are High Net Worth (HNW) individuals,

sectors of private credit.

who are emerging as early pioneers in the lender space. Characterized by their nimbleness and

The ripple of DeFi adoption is not just limited to

receptivity to novel ideas, they are venturing

HNW individuals and progressive entities but is

where traditional asset managers tread cautiously.

steadily flowing through diverse sectors of the

They’re channeling substantial funds, typically

financial market. As DeFi matures, expanding

in the $1-5 million range, into on-chain credit

and solidifying its lending framework, it beckons

opportunities like the AQRU Receivables pool on

a wider array of investors and borrowers. This

Maple. What distinguishes these HNW individuals

evolution is poised to fundamentally reshape

is their strategic shift from a sole focus on digital

the financial landscape, offering more inclusive,

72

diverse, and robust investment opportunities and redefining the conventional norms of credit access and management.

Daunting Challenges and Bright Future As we stand at the brink of a new era in decentralized finance (DeFi), the path forward is lined with both unparalleled opportunities and formidable challenges. The journey of this revolutionary form of lending is not a straightforward one. It grapples with complexities F UTURE OF F INANCE

that range from the practical to the existential, each demanding a nuanced understanding and innovative solutions.

One of the most pressing issues is the fluid conversion of stablecoins to fiat currency, commonly referred to as on and off-ramping. This process is pivotal in bridging the gap between the traditional financial world and the burgeoning realm of blockchain finance. The absence of a streamlined, universally accepted framework for this conversion process creates a hurdle for broader adoption and integration of DeFi lending practices into mainstream finance.

Another critical hurdle is the nascent regulatory landscape for on-chain assets. The lack of comprehensive, clear, and consistent regulatory guidelines creates a climate of uncertainty and apprehension. Traditional institutions tread cautiously, wary of potential legal and financial ramifications in an uncharted regulatory 10

ET H I N V E S TO RS C LU B environment. This uncertainty is compounded

and the need for seamless integration between

by the recent instability in traditional banking

digital and traditional currencies. The path

institutions, particularly those that faltered

forward is lined with opportunities for

under the weight of poor interest rate risk

transformative change, beckoning a wider array

management.

of allocators and reshaping the conventions of credit access and management.

Moreover, the current scarcity of capital is not just a concern for individual platforms or investors but a macroeconomic phenomenon that permeates the entire crypto sector.

This capital drought has its roots in broader economic trends. However, there’s an undercurrent of optimism that this will change.

The anticipation is that the next bull market will usher in a fresh influx of capital into blockchain technologies, catalyzing growth and innovation in DeFi lending.

In the dynamic narrative of finance, the emergence of Real World Asset lending marks a watershed moment, signaling a pivotal shift from traditional banking’s rigid structures to the agile, transparent realm of blockchain technology.

This movement, championed by platforms like Maple, Centrifuge, and Goldfinch, will reshape private credit, an industry historically anchored in the conventional practices of major financial institutions. DeFi’s ascent is characterized by its ability to offer efficient, secure, and streamlined lending processes, starkly contrasting the cumbersome and opaque systems of traditional banking. The RWA landscape is shaped by both its revolutionary potential and formidable challenges, including regulatory uncertainties 74

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COUNTERPOINT:

INSTITUTIONAL Abhishek Punia Founder, Lombard Protocol

S

ince the beginning of time in DeFi land, there has been a prophecy of the institution-messiah that will adopt crypto, out-compete its rivals with its new technological advantages, and start an arms race in financial services to adopt the emerging tech. The “institutions are coming” meme that has never quite panned out.

Sometimes it’s JP Morgan—others, Fidelity.

Each time it happens new hopes are raised and market rallies bought into. But eventually, projects abandoned, and profits dashed.

In the current cycle we are going through, the same trend is emerging with the rebranded narrative of Real World Assets [RWA]. For those unfamiliar, it is an industry term used to represent the tokenized assets that utilize the advantages

of the blockchain to create superior markets than the ones that currently service the asset.

RWA protocols like Ondo, Maker, Goldfinch, Maple, and a whole assortment of others bloom into relevance, grow fast, stall, pay for a risk they previously ignored, decline, and pivot. Maker’s founder Rune changed his tune on RWAs and marked transitioning out of RWAs as a goal in his endgame strategies. Goldfinch this year suffered a default on over 10% of its loan book.

And yet, the most widely adopted, non-speculative use case of crypto continues to be USDT on Tron.

A stablecoin and blockchain not known for their transparency.

On the one hand, the RWA/institution apologists correctly understand that for DeFi to have a meaningful future in the world, it needs to go 75

F UTURE OF F INANCE

DIALECT

ET H I N V E S TO RS C LU B beyond funding on-chain Ponzi schemes to financing actual economic activity that currently mostly happens off-chain. On the other hand, the critics see that nearly every point of progress in crypto has come from naiive retail, playing in the regulatory grey space, and never catering to institutions.

“How do we synthesize this Hegelian dialogue and think about the future?”

We can start by looking at where crypto is succeeding. From there, we can deduce the core reasons why certain markets adopt crypto, and create a thesis for the future of the industry.

Bitcoin, trading shitcoins (tokens), and stablecoins are collectively the three largest and most successful usecases of blockchain technology. Bitcoin is the strongest case of money being decoupled from the state in a meaningful way. Much more so than gold. Its the best understood thing in crypto and so we will spend the least amount of time on it. Suffice it to say, that it is inherently anti-institution by virtue of it being a check on profligate policy by central banks around the world.

Shitcoins, unfortunately to some, are the second largest use case of crypto. They are the purest simulacrum of the absurdity of modern finance where derivative markets are larger than spot, investing is done on vibes, and memes make markets. Simply, they are a permissionless casino.

Most of DeFi is made to service them! Through Uniswap, you can trade them, with Compound you can borrow against them, and with vaults you can earn a yield on them. Naturally, each of these protocols have a token [coin] themselves, thus 76

creating a recursive market that has tantalized traders since 2017. Unlike traditional regulated markets, the only rule is that there are no rules.

Stablecoins, finally, are the third largest use case of crypto, and the largest when considered from a non-speculative sense. The indomitable rise of stablecoins from near nothing to settling almost as much as Visa, $11T, in 7 years is the most interesting story in all of crypto. Stablecoins have enabled the dollarization of global markets in jurisdictions where there are no institutions to trust. Stories abound demonstrating its value from Venezuela of people buying condos with USDT, from Africa of the unbanked being banked with Binance, and from Turkey with people eschewing the Lira in favor of the mighty crypto-dollar.

These usecases are totally alien to anyone living in the Western world with developed financial ecosystems. When Brevvan Howard dropped their report on stablecoins, most people were blown away with the deep penetration stablecoins have had! We can take for granted [relatively] trustworthy banks, easy mobile payment systems, sound monetary institution, and deep financial markets. But many cannot.

Those that cannot have turned to the dollarized crypto markets for their financial needs.

The success of each category has not required any institutional adoption. Bitcoin reached almost $30k with barely any banking support, and, while supported by institutions, is hardly recommended or leveraged by them.

Similarly with shitcoins and stablecoins - the latter succeeding because of the absence of institutions.

From here, we can deduce the core value proposition of blockchains as a piece of

technology: they reduce the cost to deploy markets. Blockchains made it possible to create the first unregulated store of value, the first global, permissionless casino, and the first reliable financial infrastructure in developing markets. It is able to enter areas where it is hard to create financial markets, be it due to institutions that are antagonistic, apathetic, or absent, and create them.

This is the story of financial innovation! Central banking started with a group of ambitious business men in England looking to make a profit by lending to the crown at an 8% interest rate. 300 years later, the interest rates don’t look much different, but many more people can now access financing due to the decreased overhead costs of providing it. Blockchains are simply the next chapter in this story. It will find new markets to serve.

In the West, we, for the most part, have functional financial institutions. While our system is not perfect, we benefit from deep credit and equity markets, a stable currency, digital payments and law-abiding banks. We, frankly, have no need for crypto. Least of all do our institutions!

So no, institutions are not coming to save crypto.

Better regulations won’t help and Goldman Sachs is not going to jump in and move its entire backend onto the blockchain. They’ve barely adopted the cloud! This especially is not going to happen in the West. Finance is working well and outside of super niche markets like NFT art or PFPs, there are no new markets to create outside the purview of these financial goliaths.

Outside of the West, however, opportunity abounds. There are two critical trends here: the expansion of cryptodollar markets and the emergence of autonomous agents.

ET H I N V E S TO RS C LU B In developing economies, where state capabilities are low, financial markets immature, and currencies volatile, there is huge incentive for players to bootstrap financial systems by leveraging DeFi protocols. Botswana need not adopt fiber optic cables, data centers, custodial houses, and all the associated infrastructure in running the NYSE, it can start using Uniswap tomorrow. Argentina, as it is doing, need not create a better central bank, it can dollarize. Northern Cyprus need not create robust banking, USDST and Compound do the job just as well. In this sense, DeFi is really just fintech/SaaS for global dollar-denominated finance.

As more dollars come online, more dollar denominated assets will follow to eat up the liquidity. Tokenized treasuries as we are seeing, and perhaps soon tokenized money market funds, repo markets, stocks, REITs, and other financial products. With on-chain dollars and on-chain dollar assets, cashflows will continue to come on-chain and stay on-chain. This means the opportunity to bootstrap undercollateralized lending protocols through revenue-based financing, obviating the need for state level enforcement! This becomes both incredibly useful and quite exciting.

More speculatively, in the digital world, the potential for autonomous agents is tantalizing.

As autonomous agents develop and play more significant roles in our economy, they will need legal and financial services. How would two autonomous agents adjudicate a dispute? How would an autonomous agent purchase ad space on a website, or pay for compute on AWS? Fundamentally, our legal and financial systems have some assumptions on personhood that autonomous agents don’t match. Smart contract blockchains, however, are not only agnostic 78

as to whether you are a human or a bot, but are actually way better adapted to machines!

Machines don’t find public addresses to be hard to read. Machines don’t make fat-fingered mistakes when sending transactions. Machines love the deterministic transactions and finality.

Autonomous agents, however, are not yet autonomous, and it is to be seen if they will ever get there.

In summary, blockchains are the next iteration in the long march to decrease the costs of deploying market infrastructure. They’ve found their non-speculative fit in globalizing dollar denominated finance. Both institutions and individuals in the mature markets of the west have little need for them, but massive opportunities exist outside of them. Namely, in the continued expansion of dollar-denominated finance in emerging economies and the emerging digital world of autonomous AI agents. A fascinating and valuable future.

WIN T ER 24

THE STABLECOIN REVOLUTION

Jack Stewart Founder, Pine Analytics

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ET H I N V E S TO RS C LU B tablecoins, digital currencies pegged to stable assets like fiat or gold, have carved a niche in the volatile cryptocurrency market.

Ethereum, with its advanced smart contract capabilities, has emerged as a critical platform for these stablecoins. This article aims to dissect the complex stablecoin landscape within the Ethereum ecosystem, tracing the evolution, market dominance, and demographic shifts of various stablecoins.

Our journey will explore the stablecoin supply on Ethereum, analyzing how different tokens have fluctuated in popularity and market share over time. We will delve into the demographics of stablecoin holders, categorizing them by the volume of holdings and observing the evolution of this landscape. Additionally, the article will scrutinize transaction activities and user behaviors, offering a window into the real-world utilization of these digital assets.

A key focus will be on Ethereum’s layer 2 solutions, which promise enhanced scalability and efficiency. We will investigate their impact on stablecoin usage, contrasting the activity on Ethereum’s mainnet with that on its layer 2 networks. This exploration aims to provide a comprehensive view of the current and future state of stablecoins on Ethereum, offering insights valuable to investors, users, and the broader blockchain community.

Stablecoin Supply on Ethereum Between the end of 2019 and the first month of 2022, the stablecoin supply on Ethereum witnessed a remarkable surge, marking a significant period of growth in the cryptocurrency sector. This phase began with less than $3 80

billion in total stablecoin supply and escalated dramatically, reaching a peak of over $100 billion.

This exponential rise reflected a burgeoning interest in stablecoins, fueled by the broader adoption of Ethereum’s blockchain technology and its increasing relevance in the decentralized finance (DeFi) space.

However, this trend underwent a notable reversal in the first quarter of 2022. The stablecoin supply, which had soared past the $100 billion mark, began to decline, indicating a shift in the market dynamics. This reduction saw the total value of stablecoins on Ethereum drop to approximately $70 billion. Various factors, including market volatility, regulatory developments, and shifts in investor sentiment, may have contributed to this downturn.

Interestingly, since August of the same year, the rate of decline in stablecoin supply started to decelerate. The downward trend not only slowed but, in recent weeks, reversed into a gradual increase. From a low of $67 billion in November, the stablecoin supply has modestly climbed back to around $69 billion. This change, albeit at a slower pace compared to the previous decline, suggests a renewed, albeit cautious, interest in Ethereum-based stablecoins.

Shifting Dominance of Stablecoins The landscape of stablecoins on Ethereum has been predominantly shaped by two major tokens: USDC and USDT. USDC, a fiat-backed stablecoin minted by Circle, and USDT, another fiat-backed stablecoin produced by iFinex, have emerged as the dominant forces in terms of supply on the Ethereum blockchain. These two tokens have not only led the market but have

WIN T ER 24 also influenced the dynamics of stablecoin distribution.

Evolution of Stablecoin Holder Demographics The period from the end of 2019 to the start of 2022 marked a phase of rapid growth in stablecoins on Ethereum, paralleled by a consistent uptrend in the number of stablecoin holders across all balance groups. This

Weekly Ethereum Stablecoin Supply by Token

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Apart from USDC and USDT, the Ethereum stablecoin market features other notable players.

Another significant component is DAI, a smart contract stablecoin system, initially backed solely by Ethereum but now supported by a mix of assets including USDC and government treasuries. Similarly, FRAX and MIM, both backed by various Ethereum token collateral, contribute to the diversity of the stablecoin ecosystem on Ethereum. During the phase of rapid growth in stablecoin supply on Ethereum, USDC and various algorithmic stablecoins, which maintain their pegs by being collateralized, like DAI and FRAX, gained significant market share against USDT. At one point, USDC alone accounted for about 50% of Ethereum’s stablecoin supply, while these algorithmic stablecoins combined for roughly 20%.

However, since the beginning of 2022, the market dynamics have shifted. Algorithmic stablecoins have seen a decrease in their share of the total stablecoin market on Ethereum, dropping to about 7%. Starting in February 2023, an interesting trend emerged: Tether (USDT) began rapidly regaining market share from USDC. From holding about 40% of the total stablecoin market on Ethereum, USDT’s share swelled to approximately 60%. Remarkably, this 20% market share differential was primarily at the expense of USDC.

ET H I N V E S TO RS C LU B

Daily Ethereum Stablecoin Holders by Balance from Jan 2020 to Nov 2023

trend highlighted an increasing interest and participation in the Ethereum stablecoin market.

However, beginning in early 2021, a notable shift occurred in the holder demographics.

The number of small holders of Ethereum stablecoins, those holding smaller amounts, began to plateau, indicating a saturation point or a change in market dynamics for this group.

In contrast, the number of large holders, those with substantial stablecoin holdings, continued to grow until the start of 2022. At this point, even the large holder group began to show signs of plateauing. This shift might be indicative of market stabilization or changes in investor strategies, particularly among those with significant investments in stablecoins.

Yet, since July 2023, there has been a resurgence in the growth of new stablecoin holders across all wallet sizes on Ethereum. This recent development signals a renewed interest and confidence in Ethereum stablecoins, suggesting a potential shift in the market or broader economic factors influencing investor behavior. What is particularly noteworthy is the consistent increase in the number of ‘mega large’ holders - Ethereum wallets holding over 82

$10 million worth of stablecoins. This group has shown a continuous upward trend without reaching a plateau at any point since the start of 2020. Their sustained and growing presence in the market underscores the significance of high-value investors in the stablecoin domain on Ethereum.

Rise of Layer 2 Solutions Layer 2 solutions on Ethereum, designed to enhance scalability and efficiency, started gaining significant user traction at the beginning of 2022. This period marked a crucial shift in the stablecoin ecosystem, with an increasing number of users interacting with stablecoins not only on Ethereum’s mainnet but across various layer 2 platforms as well. The adoption of these layer 2 solutions represents a pivotal change in the Ethereum landscape, reflecting a move towards more efficient and scalable blockchain interactions.

From the start of 2022 to the present, there has been a remarkable shift in the user base of stablecoins towards layer 2 platforms. Initially,

WIN T ER 24 only about 5% of Ethereum’s stablecoin users utilized layer 2 solutions, but this figure has since soared to 50%. This significant migration of users to layer 2 platforms highlights the growing preference for their enhanced capabilities, such as lower transaction fees and faster processing times, which are particularly appealing for stablecoin transactions.

Conclusion The exploration of stablecoins on the Ethereum blockchain reveals a dynamic and evolving landscape. From the dramatic surge in stablecoin supply between 2019 and 2022 to the nuanced

Weekly Stablecoin Supply Monthly Change

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The number of active weekly wallets interacting with stablecoins on Ethereum’s mainnet has seen a modest increase, growing from around 300,000 to 350,000. However, the most substantial growth has been observed in layer 2 platforms, where the number of weekly users has expanded from about 10,000 to almost matching the active users on Ethereum’s mainnet. This surge in layer 2 usage signals a broader trend towards these more efficient solutions.

Despite the shift in user numbers, the majority of stablecoin transaction volume still resides on Ethereum’s layer 1. Currently, Ethereum’s mainnet accounts for about 85% of the total stablecoin volume, compared to layer 2 solutions. However, there has been significant growth in the volume of stablecoin transactions on layer 2 platforms since the start of 2022, increasing from less than 1% to about 15% of the total volume. This trend, coupled with a downtrend in stablecoin volume on Ethereum’s mainnet during the same period, points to a gradual but steady redistribution of stablecoin activity across Ethereum’s evolving network infrastructure.

ET H I N V E S TO RS C LU B

Weekly Eth/L2 Active Stablecoin Users

shifts in market dominance among key players like USDC and USDT, the stablecoin ecosystem on Ethereum has shown both robust growth and complex fluctuations. The rise of USDC, the gradual re-emergence of USDT, and the varied performance of algorithmic stablecoins like DAI and FRAX illustrate a market that is both competitive and responsive to broader economic and technological changes.

The changing demographics of stablecoin holders on Ethereum, from small to ‘mega large’ investors, reflect a diversifying investor base with evolving strategies and preferences.

The consistent increase in large-scale holders highlights a deepening engagement with Ethereum’s stablecoin offerings.

Additionally, the resurgence in the growth of new stablecoin holders across all wallet sizes since mid-2023 indicates a renewed interest and confidence in the market.

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Moreover, the rise of layer 2 solutions on Ethereum marks a significant shift towards more efficient and scalable blockchain interactions. The increasing preference for layer 2 platforms, as evidenced by the growing number of users and transaction volumes on these networks, signifies an important evolution in how stablecoins are used within the Ethereum ecosystem. While the majority of stablecoin volume remains on Ethereum’s mainnet, the significant growth in layer 2 transaction volume points to a gradual but steady redistribution of activity and a promising future for these innovative solutions.

In summary, the state of stablecoins on Ethereum is marked by growth, diversity, and adaptation. As the blockchain ecosystem continues to evolve, so too will the role and impact of stablecoins, shaping and being shaped by the changing contours of the digital economy.

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ET H I N V E S TORS C LU B Kirk Hutchison Founder, Ethereum Credit Guild

I had the opportunity while my colleague is on holiday to view the recording of censorship.wtf, a multicity event with talks covering privacy, network resilience, and compliance on Ethereum and other networks. While the dominance of censoring block builders is likely a familiar issue for readers, learning about the threat of attacks on the peer to peer layer was sobering. Some talks were profoundly uplifting. Please have a listen when you have the time.

model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non- reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using

INCREDIBLE Privacy and censorship resistance are essential components to create a true digital cash, a dream that did not begin with BTC and won’t end with USDC. This article considers where the ingredients are close at hand, and where there is cause for concern, with emphasis on the importance of privacy and network resilience as scaling technology takes center stage. Potentially interesting resources are linked throughout.

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based 86

physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

- Bitcoin whitepaper, Introduction

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What are we doing here, anyway?

Satoshi proposed a revolutionary system to ensure that coins on an electronic ledger cannot be double-spent, without relying on a trusted third party, a property that was previously limited to physical cash or coins. At time of writing it has been 5,500 days since the whitepaper was published. While we’ve seen global enthusiasm for cryptocurrencies, it should also be clear that no matter their popularity as investment assets, neither BTC nor any competitor asset has the stability to be used as money. Certainly not for the denomination of debts, and payments

exchanges or by users directly, with use in DeFi still a minority. They have similar weaknesses to bank deposits – at its discretion or at the demand of the government, a stablecoin issuer can freeze a user’s balance at any time.

Digital cash must be private Privacy is security¹. Privacy and strong self custody rights go hand in hand. Even if an asset can be transferred, without privacy censorship is trivial, so purism about crypto-native vs “real world” assets is unwarranted. Like the historical effort to legalize cryptographic privacy tools for

adoption has also been negligible compared to stablecoins.

Ethereum and other Turing-complete ledgers enabled the rise of independently issued tokens, most notably stablecoins which have found product-market fit as the first mainstream, consumer crypto application. Stablecoins are increasingly popular in jurisdictions where access to dollars is limited or costly, along with their natural usage among crypto traders and DeFi users. So far, programmability is less important than the fact that a stablecoin can by default be freely transferred to anyone, even to someone without a bank account. The majority of all stablecoins are held on centralized

civilian communications use, private-by-default digital cash will require advocacy, legislation or government rulemaking, and legal battles.

TornadoCash contributors Roman Storm and Alex Pertsev are fighting for their freedom at this very moment (consider donating to support their legal defense). It heartens me that organizations like the Blockchain Association have rallied to the cause. We all have skin in this game and should take the fight for strong cryptographic property rights and financial privacy very seriously.

There is an unfortunate atmosphere of fear around private payments following the persecution of TornadoCash. The privacy pools proposed by Vitalik and implemented by 87

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WINTER 24 Ameen present one path forward. In this case, individuals could prove nonassociation with a set of known bad actors, without revealing any unnecessary information about themselves.

While there has been some controversy over this proposal, ensuring “freedom of dissociation” could help bolster the case that Ethereum validators, rollup node operators, stablecoin issuers, and so on, should not be legally obligated to freeze or censor funds onchain, as each jurisdiction can enforce the compliance checks it prefers on offramps without compromising user privacy or imposing censorship globally.

unfortunate that those who act in the interests of freedom and network security are effectively penalized. MEV burn as proposed by Justin Drake would do much to address this.

Embarrassingly, right now both Lido and Rocketpool perform more censorship than Coinbase-operated validators. One might think that a liquid staking DAO would be well positioned to insist on node operators respecting network values, especially one like Lido with discretion over the node operator set. I encourage the reader to advocate where they can in this regard.

Rollup maximalism

of censorship As competing for MEV becomes increasingly important for validator relative performance, reliance on a small number of builders has increased. At time of writing, five of the top six builders are censoring, which is an unacceptable situation for the Ethereum transaction pipeline.

Enshrined proposer builder separation is not a solved problem, but there’s sufficient reason to be hopeful about this issue being resolved. In the meantime, independent node operators are the best line of defense to ensure a censored transaction can eventually go through. It’s

It’s not easy for a rollup to bootstrap a strongly decentralized, non censoring node set (ideally an open set, as in a based rollup). Even based rollups will have smaller proposer sets than Ethereum, especially as the state grows, and so be more vulnerable to downtime or censorship.

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MEV has opened a pandora’s box

While it is probably impossible to transition Ethereum to private-by-default, rollups are the natural nexus for payments anyway, and so are the best home for digital cash. While today’s rollups have centralized proposers/sequencers, meaning their privacy and censorship resistance properties are weak, there is good reason to believe that the dominant rollups Optimism and Arbitrum will robustly decentralize in the coming years. The same is sadly not true for privacy on those networks, and I have concerns about whether they will be able to resist pressures to censor transactions in the future. The security guarantees provided by the base layer do not remove the need to have a geographically diverse set of rollup nodes running different client implementations.

ET H I N V E S TO RS C LU B

This issue is shared between optimistic and zk rollups. Any rollup or rollapp which hopes to become a dominant global payment channel should prioritize developing a robust distributed validator set, including with grants for node operators, client teams, and educators. Aztec clearly recognizes the importance of robust decentralization from launch given the danger of centralized operation of private systems.

I commend them for their public request for proposers for decentralized proposer models and interesting results. Collaboration between networks could be valuable given those who possess the specialized hardware to run high performance nodes for one rollup are well positioned to act as sequencers in other rollups.

This does not necessarily imply a shared sequencer, as individual operators could act as nodes for three rollups, but only be the proposer for one of them in a given block.

The closer a piece of the stack is to the end user, the more discretion its operators have in making privacy or security decisions on that user’s behalf. Wallets sit at the top of the MEV pipeline, taking default control over which RPC a user sends their transactions over. Wallets can by default send transactions to non-censoring builders, without inconvenience to their users or many of them even being aware. Many already encourage users to perform proper backup of their seed phrase. With finalization and adoption of ERC-4337, wallets can support account abstraction by default regardless of operation on L1 or L2 and enable more nuanced custody rules as well as removing the UX friction of a separate gas token.

The wallet opportunity

• • •

“Any censorship resistance strategy, to be practical, needs to have a good UI” - Vitalik We’ve seen that rollups are both a cause for concern and a place of opportunity for privacy and censorship resistance. The same goes for wallets. Many features that are not readily intelligible to a new user (RPC decentralization, transaction privacy, light node operation) can be implemented to their benefit by wallet operators.

A light node in every wallet is the holy grail, since a user can ensure that the information they are receiving from an RPC provider is genuine even without being “always online” with a full node, which is impractical for most users.

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Conclusion True digital cash demands: legal recognition of digital bearer assets strong privacy technology Resilient yet highly scaled payment networks

From applications to wallets to rollups to end users, we all have a part to play in enshrining privacy and strong censorship resistance into Ethereum and its child networks. Please do what you can to support this effort in your personal sphere of influence. Stake at home, boycott censoring builders/rpcs, maximize your personal privacy, educate others, stay informed. ¹See Juan Benet’s talk from censorship.wtf, slides here

Inisights up next

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THE EIGENLAYER UNIVERSE Ideas for Building the Next 15 Unicorns on Top Jessy Ecosystems Lead, EigenLayer

Soubhik Deb Head of Protocol Research, EigenLayer

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WIN T ER 24 EigenLayer empowers builders to develop innovative distributed systems without worrying about how to build the underlying trust networks for these asystems. We call these distributed systems AVSs - actively validated services. We have categorized AVSs into 5 types: Rollup Services: augmenting the Ethereum rollup ecosystem with services that inherit aspects of security from Ethereum’s trust network Applied Cryptography: creating robust threshold cryptographic systems and TEE committees via decentralized nodes

MEV Management: allowing proposers to make additional credible commitments on block inclusion and ordering AI Inference: ensuring program integrity and session privacy in a cost-effective manner Our previous blog post highlighted the three types of trust that any AVS can inherit from Ethereum via EigenLayer, namely economic trust, decentralization trust, and Ethereum inclusion trust, or some combination of the three. As a recap, with EigenLayer, you can program these three types of trust:

In this blog, we will walk through a high-level mental model of how to think about AVS system design. We will use this mental model to illustrate innovative AVSs one can build by mixing and matching types of programmable trust.

Rollup Services EigenLayer enables the development of foundational services that scale Ethereum while inheriting security from Ethereum’s trust network. This modular approach enhances security, and we collectively refer to these services as ‘Rollup Services.’

This section will explore the following Rollup Services: decentralized sequencing, data availability, fast finality, keepers, watchers, and reorg-resistance.

1. Decentralized Sequencing

Economic Trust: trust from validators making commitments and backing their promises with financial stakes

Currently, rollup sequencers single-handedly decide the order of transaction execution, potentially leading to manipulation and shortterm censorship. While long-term censorship is handled in rollups using a mechanism for writing the transaction directly to Ethereum, these sequencer concerns can be mitigated by implementing a decentralized transaction ordering service.

Decentralized Trust: trust from having a decentralized network operated by independent and geographically isolated operators

In this service, users send their transactions to a network of decentralized nodes. There can be a variety of different decentralized sequencing 101

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General Decentralized Networks: bootstrapping networks easily from prover markets, and relayer markets to security monitoring counsels

Ethereum inclusion Trust: trust that Ethereum validators will construct and include your blocks as promised, alongside the consensus software they are running

ET H I N V E S TO RS C LU B services with different transaction ordering policies. We give some examples here: • Approximate first-in-first-out ordering services (so-called fair ordering protocols) •

Multilateral ordering services with increased censorship-resistance

•

Guaranteed MEV return to the rollup

•

Shared / individual sequencing across rollups

•

Threshold encrypted transaction ordering

•

Automated event-driven activation.

For any of these decentralized sequencing services, one can inherit decentralized trust from

EigenLayer, as well as reordering protection via economic trust inherent in EigenLayer.

2. Data Availability (DA) To ensure the correctness of state execution in optimistic rollups and guarantee the liveness of zero-knowledge rollups and optimistic rollups, a critical requirement is the short-term Data Availability (DA) of underlying transaction blobs processed by the rollup.

The core concept involves rollups storing these blobs with a designated set of nodes committed to storing and serving them for a specified time frame, during which anyone can access the blob.

The figure illustrates the architecture of EigenDA and where EigenLayer nodes are used to store the designated data blobs.

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WIN T ER 24 Consider situations where data-heavy consumer applications like gaming and social networking function within rollups. These apps usually have low value per data bit but need a lot of bandwidth for state execution. As a result, they demand substantial throughput, often tens of megabytes per second or more. Meeting this demand requires highly scalable data availability architectures that do not sacrifice security.

finality, Ethereum finality lag affecting crossrollup bridging, costly cross-rollup interactions, liquidity fragmentation across rollups, and limitations for ZK verification.

Rollups have faced several significant challenges, including the absence of instant and secure

It’s important to note that the fast finality layer requires high economic trust to ensure safety.

To satisfy this demand, the DA layer needs economic trust to tackle issues like the lazy operator problem via Proof of Custody. It also requires decentralized trust to guarantee continuous operation.

EigenLabs has been actively developing a solution called EigenDA to address these challenges.

The left figure illustrates the benefits of Fast Finality Layer and the right figure shows a variation of how an FFL could be built with EigenLayer nodes.

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3. Fast Finality

One potential solution to address these issues is implementing a fast finality layer within EigenLayer. In this approach, any rollup can assert a state claim on the fast finality layer, stating that the execution of a specific block of transactions leads to a particular state commitment. In ‘fast mode,’ nodes within the fast finality layer validate the rollup’s claim and provide attestations of its validity. If a supermajority of nodes attests to its validity, rollup clients can achieve economic finality nearly instantaneously.

However, in ‘slow mode,’ the attestations from the fast finality layer are subjected to a challenge period, allowing anyone to raise a challenge if they suspect malicious behavior.

ET H I N V E S TO RS C LU B

4. Keeper Network Keeper networks prove invaluable for users looking to initiate specific actions based on predefined conditions. These networks deploy nodes to respond to ‘if-this-then-that’ demands.

There are two types of keeper networks. The first type is suitable for non-time-sensitive actions, such as raising challenges to optimistic rollups within a 7-day window (further discussed in the Watcher Network section below) or managing bridge relays (as expanded in the Relayer Market section below). In such cases, the primary requirement is economic trust, as it enables the penalization of nodes engaging in misconduct.

The second type demands swift and timesensitive actions, such as preventing collateral liquidation, minting new NFTs, or executing token trades in response to specific on-chain behaviors. These demands can be met through Ethereum inclusion trust via EigenLayer, where validators commit to prioritize and fulfill such requests. This approach can potentially change the status quo and relieve users from the burden of paying high gas fees.

5. Watcher Network For any optimistic rollup (ORU) to be deemed secure, a challenge must be initiated in a pessimistic scenario involving incorrect state execution. Therefore, every ORU client requires

The figure indicates the benefits of EDA with Keeper Networks from a user-centric view.

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WIN T ER 24 assurance that a vigilant group is actively monitoring for any erroneous executions and raising necessary challenges.

This assurance can be established via economic trust by appointing EigenLayer operators as watchers. These operators can be penalized through slashing if they either make unfounded malicious challenges or fail to raise a challenge when required.

6. Reorg Resistance

At a high level, a service can be developed to guarantee that nodes with substantial stake in

The new confirmation rule for any client on the chain would be to check whether the block header has been finalized by the chain and enough stake from Eigenlayer has attested to the finalized block header.

Obtaining reorg resistance from Ethereum hinges on establishing economic trust through EigenLayer.

7. Inbound and Outbound Bridge Cross-chain bridging to and from Ethereum involves a delicate balance between interoperability and security. Centralized bridges offer excellent interoperability but compromise security. Conversely, light client bridges provide

The left figure shows the benefits of an outbound bridge with a new State Committee backed by EigenLayer nodes with economic guarantees, in contrast to the Sync Committee. The right figure illustrates how a bridge can be built with EigenLayer nodes attesting to block headers with economic guarantees.

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One of the paramount characteristics for any blockchain to be considered secure is its resistance to chain reorganizations (reorgs).

When a blockchain can leverage the economic trust provided by Ethereum, it significantly bolsters its defenses against potential chain reorgs.

Ethereum attest to the block header of the most recently finalized block of the chain. To achieve this, these nodes run the chain’s light client to verify that the finalized block has not been double-signed and is built on the most recently finalized block.

ET H I N V E S TO RS C LU B high security but incur high gas costs to run the light client smart contract.

for protection against targeted frontrunning, privacy, etc.

One can break this tradeoff between interoperability and security by having a group of opt-in nodes, who have put a significant amount of stake as collateral on Ethereum, attest to messages bridging in and out of Ethereum off-chain. At the same time, they can be slashed on-chain optimistically for wrong attestations. This can be achieved via economic trust.

The core idea behind threshold cryptography is that, given an encrypted message, at least k out of n signers can efficiently decrypt the message. In contrast, anything less than k is unable to do so.

Applied Cryptography 8. Threshold Cryptography Threshold cryptography has been proposed to achieve applications such as commit-reveal

The security of this primitive essentially requires k to be large and the set of these signers to consist of a large decentralized set that inhibits collusion and liveness attacks. This decentralized set of nodes can be inherited from EigenLayer.

9. Threshold-FHE Threshold Fully Homomorphic Encryption (FHE) enables distributed computation on encrypted data, delivering a robust privacy guarantee. As

The figure highlights one way of building threshold cryptography with EigenLayer nodes in a scenario for Shamir Secret Sharing.

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WIN T ER 24 threshold-FHE implementation necessitates decentralization, EigenLayer offers a reliable source of decentralized trust.

In this method, sensitive data is encrypted using threshold encryption, with the secret key shares distributed among the decentralized network of EigenLayer operators. Subsequently, computations are performed on the encrypted data, preserving privacy and security.

10. Trusted Execution Environment (TEE) Committees

We note that it is possible to require multiple distinct TEE models like Intel SGX, ARM TrustZone, and Amazon Nitro in the TEE Committee and require at least one sign-off from each model so that breaking the system requires breaking all these distinct trust models as well as majority collusion.

The decentralization of the TEE committee

The figure touches on one way of using EigenLayer nodes for threshold FHE where the nodes perform functions on the data without knowing the entirety of the data.

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Protocols can establish robust security guarantees by harnessing not only Trusted Execution Environments (TEEs) but also by constructing

a decentralized network of TEEs through EigenLayer, referred to as TEE Committees.

The combination of TEE and committees strictly improves the reliability of any committee without TEE: this is because a breach of the system requires both a majority of the committee to be colluding and furthermore that the security model of the TEE has been breached.

ET H I N V E S TO RS C LU B can be absorbed from decentralized trust on EigenLayer and furthermore, the economic trust can be borrowed from EigenLayer in situations where slashing is possible.

The TEE committee also provides privacy in the normal mode so that the TEE is not attacked. This makes the TEE committee an attractive solution for a variety of problems where both program integrity and privacy are required.

Decentralized Networks 11. Relay Networks Many bridges currently depend on a centralized group of relayers. When a dApp developer selects a bridge to work with, their choices are limited to the options provided by that bridge.

This limitation exists in part because setting up a bridge with a set of relays can be challenging.

To enhance system resilience, bridges can utilize a decentralized network of relay operators on EigenLayer.

12. Prover Networks In the future, we may witness the emergence of prover networks competing to generate zk proofs as quickly and cost-effectively as possible, through parallelization methods. A portion of this network can be initiated through EigenLayer nodes, leveraging the decentralization capabilities of the EigenLayer network to provide broader access to these provers and ensure the overall liveness of the network.

transactions, a level of security currently lacking in blockchain systems. A Risk Module AVS would tackle this issue by engaging a subset of nodes to simulate transactions and perform comprehensive risk analysis. If a transaction raises a red flag, the module alerts the network.

DApps can subscribe to this risk module, and any transaction seeking interaction with these DApps must undergo analysis through the risk module. The transaction is only executed when a threshold of k out of n nodes within the module signs off on its correctness, as determined by the risk analysis.

14. MEV Management In the current MEV supply chain, validators can only offer a limited commitment – that they won’t double-sign conflicting block headers (equivocation). Services like MEV-Boost rely on this rigid commitment.

EigenLayer expands this landscape by enabling validators to make a more diverse range of commitments to their counterparts, whether they are builders or direct users. This expansion of possibilities within the MEV supply chain opens the door to the development of various MEV mechanisms under the “multiple lanes” paradigm, allowing validators to express their preferences more comprehensively: •

Multi-lane block proposal, incorporating MEV-Boost’s full block auction and partial block auction like MEV Boost +/++, empowers proposers to contribute to block composition, enhancing censorship resistance.

•

Event-driven activation enables Ethereum validators to function as attributable keepers,

13. Risk and Transaction Simulation Networks Banks employ sophisticated transaction risk analysis to safeguard against malicious 108

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agreeing to activate specific event-driven transactions.

•

The purchase of blockspace futures facilitates the conversion of statistical arbitrage into atomic arbitrage.

Threshold encryption offers protection against targeted frontrunning in sandwich attacks.

It’s important to note that the first three MEV mechanisms rely on Ethereum inclusion trust via EigenLayer, while the fourth one depends on decentralization trust from EigenLayer.

15. AI Inference With the advent of trained open-source large AI models, users inferencing these models on

new queries is already becoming a hot topic.

However, the current landscape has just a few centralized entities running AI inference engines.

There are several compelling reasons for running AI inferences onchain: Program Integrity: While many services opt for centralized servers like AWS, employing zero-knowledge (ZK) techniques for Machine Learning (ML) can be cost-prohibitive.

EigenLayer seeks to broaden the market for computational integrity in ML. If you seek both cost-effectiveness and computation integrity when running AI engines for inference, especially when relying on decentralized servers is considered too risky, EigenLayer offers a solution.

By offering the ability to inherit economic trust, EigenLayer facilitates these operations.

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The figure shows how MEV-Boost+ and partial block auction can be done when proposers opt into EigenLayer to commit not stealing the MEV from seeing the block content.

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Session Privacy: EigenLayer operators running AI engines should only be able to decrypt the complete set of consumer queries if a significant portion of operators collude. This underscores the importance of decentralization, which EigenLayer inherits from the Ethereum trust network.

Federated Learning: Enabling multiple actors to participate in training AI engines ensures the privacy of datasets. For federated training to succeed, decentralization of actors is essential, a feature EigenLayer provides.

Wrapping Up The above ideas around Rollup Services, Applied Cryptography, General Decentralized Networks, MEV Management, and AI Inference represent only a handful of the use cases that are emerging from the EigenLayer ecosystem. The true potential of the EigenLayer trust network is limited only by your imagination.

We are thrilled to introduce EigenLayer as a versatile toolkit for others to craft their own protocols and services via programming trust for decentralization, economics, and Ethereum inclusion.

While we have envisioned and outlined some of these possibilities, most innovative applications are yet to be conceived. If you’re excited about these primitives, join our private research discussion group here.

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MANAGING T ONCHAIN INT Spreek DeFi Veteran and Onchain Investigator

*Practical Tips From A Defi Veteran*

Introduction Some of the most attractive opportunities in all of crypto arise from actually using the chains.

Whether it is being early to a promising new project before it is listed on any major centralized exchanges, earning substantial rewards from yield farming and airdrops, or just safeguarding your own assets without relying on a shady third party, there are many reasons to want to expand operations on chain. But these advantages do not come without downsides and risks, both obvious and non-obvious. In this article, I will discuss how to minimize custody and opsec risks, evaluate the economic reality behind the quoted yields, and assess smart contract and economic exploit risks.

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Custody Naturally, before you can transact on chain safely, it is necessary to secure your assets and the private keys containing them safely. I highly recommend using a hardware wallet for nearly everything, ideally multiple from different brands. Trezor, Ledger, and GridPlus Lattice are some of the market leaders. I personally use a Lattice for storing assets that I don’t intend on transacting regularly with, Trezor for day to day activities on Bitcoin or Ethereum, and Ledger for chains such as Solana or Cosmos.

Whichever hardware wallet you choose, it is also vital to properly secure your seed phrase / private keys. It’s important to note that these are *single* points of failure and leaking them is the most common way to lose assets. Ideally, you should create backups of these offline and store them in several safe locations. More advanced users can consider using schemes such as Shamir Secret Sharing in order to split their private keys

THE RISK OF TERACTIONS into several disjoint parts. However you choose to store your seed phrase, the most important step is to never enter your seed phrase into a computer. Never store it on a cloud backup service like Dropbox, LastPass, iCloud, etc. Nor should you ever have to enter the seed phrase for your hardware wallet into wallet software or a dapp webpage (unless your hardware has broken and you are specifically restoring your wallet into a new device). Chances are, if you are being asked for your seed phrase in such a place, you are being scammed/phished.

two. Gnosis Safe is a good option for creating a multisig on Ethereum and other EVM chains.

There also exist various centralized services that help you set up secure multisig or MPC (Multi Party Computation) wallets and serve as trusted additional signers. Casa, Fireblocks, and Qredo are a few that I have personal experience with, but you should research and choose the best one for your needs if you choose to go this route.

Another useful line of defense and flexibility can be to store most of your assets that are not actively being traded on a multisig wallet (with signers including your own hardware wallets and possibly one or two trusted friends or services to help backup). This can substantially reduce the risk of loss from a single mistake in storing seed phrases, by removing the single point of failure risks. It also makes it easy to periodically rotate keys without hassle by swapping out a signer or

Once your assets are stored safely, you probably will also want to be able to transact on chain, make trades, enter yield farms, etc. without placing them at risk. This is, unfortunately, not as easy as you might hope.

Opsec

In contrast to seed phrase related exploits, opsec related failures usually result from being tricked into signing a transaction or message that allows an attacker to steal your assets.

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ET H I N V E S TO RS C LU B Before scoffing and thinking this could never happen to you, please think again. No matter how sophisticated or experienced you are, if you take shortcuts with how you handle your signing habits, you will eventually get burned. Attackers are increasingly sophisticated and have literally hundreds of methods to try to sneak a malicious transaction all the way to the point where you are a single ‘Confirm’ button away from losing large sums of money.

I suggest a two layer line of defense to mitigate these risks. First, you should take steps to minimize the chances of having malicious transactions sent to your wallet software for signing in the first place. Second, you should develop a checklist before signing any transaction or message in order to identify risky or potentially malicious transactions and avoid completing them.

To reduce your chances of ending up on dangerous websites, you should aim to access DeFi frontends via trusted paths only. Do not follow frontend links from private messages (Twitter/Telegram/ Discord). Do not type a website URL manually. Do not google the name of a Dapp.

I have three suggested methods for accessing a new dapp safely.

Ideally, use multiple and cross check that they end up at the same place. Method 1 is to find the dapp’s page on DeFi Llama and follow the link to their official website. Method 2 is to find their token’s page on CoinGecko and follow the link to their website. The downside is that the project needs to have a token (and you need to know the correct ticker). Method 3 is to find their official twitter page and follow the link in their bio. This is the riskiest method since most major projects will have many impersonator 122

twitter accounts. Check how many mutuals you have following the page to ensure it is a genuine project Twitter – do not use follower count to verify as this metric can easily be spoofed. Once you have verified that you reached the correct site, bookmark it. Then in the future, you will access this page via your bookmark only.

Even with substantial precautions to prevent landing on malicious frontends and sites, you still also need to have a process for checking each individual transaction to make sure it is doing what you intend to do. Official trusted frontends are not infrequently taken over by hostile parties and swapped into wallet drainer sites. I recommend using the Address Book feature in your wallet software to give names to contracts and addresses you regularly interact with to make it more obvious when something unusual is happening.

Particular care should be taken with the following types of transactions: anything that transfers ETH or calls a transfer() or transferFrom() function that you didn’t expect, anything that references approve()/setApprovalForAll()/permit(), anything that references eth_sign() or pops up with a red warning sign, any unreadable hex message you are being asked to sign. Of course, not all transactions that match one or more of these will be malicious, but you should take a second to think and double check before hitting submit.

For the especially paranoid, double checking everything your hardware wallet tells you about the transaction and making sure it is the same thing you believe you are signing can be a good idea. If your computer is infected by malware, while very rare, it is not unheard of for your wallet software to be replaced by subtly different malicious software that lies about what transaction you are actually signing.

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A final type of transaction to slow down and be extremely careful with: any time your process involves pasting an address into the recipient field. One way this can go wrong is when you copy the intended recipient address, realize that you need to add a token to your wallet software before you can send it, copy the token address to add it, then inadvertently send your tokens to the token contract address.

In most cases this results in the permanent irretrievable loss of funds (and tens of millions, if not hundreds of millions have been lost this way). Another way this can fail is via so-called Address Poisoning Attacks, where a malicious third party conducts transactions to or from your addresses with similar looking addresses in order to trick you into accidentally copying an attacker address instead of the address you

intend to send to. This again, has caused huge amounts of losses. The bottom line is, before you press ctrl v and smash the send button, slow down, think, and double check everything.

Understanding Yield Sources When conducting investing, lending, or “farming” activities on chain, you will probably see many APY percentages (%) quoted to you.

However, not all of these numbers are created equal. As the saying goes, if you don’t know where the yield comes from, you are the yield.

I have a four quadrant model which I find useful for categorizing on chain yield. In quadrant 1, we have those projects that require staking a 123

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token in order to earn more of that same token via inflation rewards. This includes both the socalled “death pools” or “pool 2” that are high volatility altcoin/ETH Uniswap (or other dex) LP pairs that pay out high inflation rewards in altcoin, as well as single sided staking programs that pay out inflation in that same token. In general, this is the riskiest of the quadrants and great care should be taken with any quoted APYs or figures related to it.

In quadrant 2, “real yield,” we have those yields earned by buying a high volatility altcoin and staking it, but where rewards are paid out in less volatile currency earned by the fees generated by the DeFi protocol. These projects are generally somewhat less risky than Quadrant 1 and potentially amenable to fundamental analysis.

However, care must be taken to account for inflation paid to other sources as this can distort the true value of the rewards paid. Some projects issue inflation, pay it out to traders or users that pay fees, and then distribute those fees to stakers. Such a model often effectively ends up being merely a disguised version of Quadrant 1.

In quadrant 3, “pool 1,” we have projects that take deposits in less volatile coins and pay out rewards via governance tokens printed via inflation. In general, this tends to be the least risky of the quadrants because one doesn’t have to buy risky tokens to take advantage of the yield opportunity and because the holders/ buyers of the governance token are ultimately the ones taking the risk / cost of paying the

yield. Unlike some bygone days in 20202021, in 2023 and beyond, the yields on such pools usually aren’t especially attractive.

In Quadrant 4, we have the self-sufficient products, where you deposit less volatile assets and “eat what you kill,” i.e. only get paid fees by people who borrow or trade against your deposits. This is probably a more sustainable model than the other three, however, it also carries its fair share of risk. Research has shown that most Uniswap LPs or Defi Option Vault participants have lost money after accounting for trading losses.

Many projects in this quadrant quote somewhat misleading APY figures that exclude losses or risks of the trading/underwriting strategy being employed. When conducting due diligence of an opportunity here, you should therefore look for historical performance data as well as considering what supposed trading edge the strategy purports to be taking advantage of.

Evaluating Smart Contract/ Economic Exploit Risk Along with all the risks already discussed, the final and perhaps most publicized risk falls in the smart contract and economic exploit category.

As one can glean from the Rekt HQ leaderboard, such exploits are common and carry huge $ values of loss. Every type of project from one man shoestring budget teams to vast VC

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funded enterprises has suffered at the hands of smart contract bugs and economic exploits. It is therefore crucial for investors deploying assets on chain to be deeply aware of these risks and evaluate every project carefully before investing.

I like to start with which vertical the project is in. A project that does everything right and has no other red flags in a dangerous/risky vertical like lending or cross chain bridges is probably still riskier than a uniswap fork AMM with many more red flags. With respect to bridge risk, you should also evaluate whether the protocol has risks from other third party bridges. Most projects not on Ethereum mainnet have at least some bridge risk.

A project having extensive audits and bug

A significant bug bounty program that pays substantial rewards relative to TVL and ideally is operated via a reputable third party platform such as Immunefi, also is a significant plus point in favor of a project, though it also is no guarantee of safety. Still, even for many wouldbe blackhats, a guaranteed clean money payday with no questions asked may be better than a lifetime of looking over their shoulder.

No matter how extensive an audit history or bug bounty is, there is little substitute for battle testing on mainnet with substantial TVL. The longer a deployment (particularly an immutable one with few dependencies) has been out there without being exploited, the less likely a

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Path dependency is a significant risk factor.

If there exists a path of asset price changes, trades, borrows, etc. that can drain a protocol, that provides an obvious attack vector that an attacker may exploit even when precautions exist. Something like a Uniswap LP that is designed to be path independent provides much stronger protections against attacks. Even if an attacker moves the price of a uniswap pool substantially, once they round trip the trade, by design, the LP will be worth the same (plus fees paid). It therefore is a difficult invariant to attack. Compare this to a lender that has many vectors of path dependence (oracle updates, liquidations, borrow / lends occurring at different starting prices, etc.)

bounty competitions generally is a good sign, but far from a guarantee of safety. I do recommend reading audit reports thoroughly and seeing how many issues were found by the auditors. If there were essentially no issues found (besides some informationals or clearly copy-pasted automatically generated issues), it may be a sign that the audit was not very thorough. On the other hand, if there were large numbers of critical bugs found, it may be a sign that the developers did not take much care when coding. In general, I prefer to see audits that are somewhere in between the two extremes. It’s also worth checking the date, scope, and which commit specifically is within the scope of the audit. An audit from two years and hundreds of contract changes ago is not especially reassuring for your deposits today.

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future exploit is. Still, some bugs do persist for years without being noticed, and even very old contracts cannot be guaranteed to be safe.

A final important risk factor is centralization.

A project with a multisig with instant upgrade powers is essentially no different from sending your money to a CEX and means that a high degree of trust is required, not only in the integrity and honesty of the multisig signers but also their opsec skills in the face of sophisticated attacks from state actors such as Lazarus Group.

Generally safer are projects with time lock delays, limited powers of upgradeability (such as only being able to change certain parameters or certain contracts, but not outright take funds), or projects whose upgrades are controlled by DAO token voters.

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Be especially careful before providing unlimited approval to a contract that can be upgraded arbitrarily. A future compromised multisig or DAO could drain your wallet by upgrading the contract long after you last withdrew or used the protocol in question. Unlimited approvals are always risky and not especially recommended, but in this case it is a death wish.

Conclusion Despite all the risks and pitfalls discussed above, transacting on chain can be a relatively safe and highly lucrative activity. It requires some experience and care to avoid falling into one of the various pitfalls possible, but you should not let it scare you from taking the plunge if it piques your interest.