Will Ethereum Lose DeFi Dominance?

The biggest crypto news and ideas of the day

Jan. 6, 2022

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–Daniel Kuhn

Today's must-reads

Top Shelf

DEFI DEFERRED? Ethereum may not always be the go-to blockchain for decentralized finance (DeFi), according to a JPMorgan report. Analyst Nikolaos Panigirtzoglou argued a delay in scaling the network – including the introduction of proof-of-stake mining and sharding as part of Ethereum 2.o – could let competitors like Terra, Binance Smart chain, Avalanche, Solana, Fantom, Tron and Polygon take a greater market share (and users may not necessarily return to ETH). Ethereum's share of total value locked in DeFi has fallen from almost 100% at the start of the year to around 70% today.

CRYPTO CRIME: Crypto crime accounted for a record-setting $14 billion worth of blockchain transactions in 2021, according to a new report from blockchain research firm Chainalysis. That's nearly double 2020′s figure of $7.8 billion in illicit blockchain activity. But despite the precipitous rise in criminal activity by total volume, 2021′s figures are significant for another reason: When examined as a percentage of overall crypto transactions last year, criminal activity hit an all-time low. CoinDesk's Cheyennne Ligon digs into Chainalysis' annual report covering DeFi rug pulls, police action and total market growth.

MINING ISSUES: Kazakhstan's bitcoin mining industry, second only behind the U.S. in terms of hashrate, has been severely disrupted for a second day by a nationwide internet blackout. The country's electricity grid has been under strain in the last few months in part due to increased demand from crypto miners and coal plant failures, contributing to widespread protests and a more combative governmental stance against the crypto industry. Meanwhile, the U.S. Congress is preparing a hearing this week to examine the environmental impact of crypto mining; taking particular interest in the consensus algorithm backing Bitcoin, proof-of-work.

1 BILLION STRONG? Chinese technology conglomerate Tencent has added support for the country's digital yuan to its WeChat Pay wallet. Potentially as many as 1 billion WeChat users will now have the option to pay using China's central bank digital currency (CBDC), if they verify their identity using the recently launched digital yuan (e-CNY) wallet app, the state-run China Daily reported Thursday. China's digital yuan is the most sophisticated and most used CBDC pilot to date, which will get its international debut at the Winter Olympics in Beijing beginning Feb. 4.

BRAVE USERS: Brave announced it now has more than 50 million monthly active users of its crypto-pegged web browser, doubling growth on a year-over-year basis for the fifth year in a row. Daily active users averaged 15.5 million during December while Brave Search, the privacy-preserving search engine launched last year, had 2.3 billion annualized queries. Brave's market share is still small. For comparison, Firefox has about 211 million monthly active users.

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Overheard on CoinDesk TV...

Sound Bites

"The 2017 crypto market was decentralizing spaceships, airplanes – it was clearly vaporware. Now, although there are scams in the market, it's very much more of a real industry."

–CoinDesk research analyst George Kaloudis, discussing the 52-page annual crypto market review (2021) published today, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

Enjin to launch headquarters in Bloktopia metaverse (Crypto Slate)
Samsung Opens Metaverse Store in Decentraland (Decrypt)
a year in music and web3… (Verite/Mirror)
UK police forces have seized more than £300 million in bitcoin, according to FOIAed docs (New Scientist)
Crypto bank Sygnum raises $90 million, now valued at $800 million (The Block)
"Architect Partners is merging with crypto-native investment bank team Emergents in an effort to become the go-to M&A and financing advisory firm in the crypto" (Blockworks)

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Sponsored Content

XW Games: If You Build It, They Will Come: The Rapid Expansion of GameFi

The blockchain gaming ecosystem is rapidly evolving with new developments all the time in crypto (play-to-earn), NFTs (digital assets), and social-fi (individual DeFi). On a wider scale, a parallel can be drawn - how Las Vegas was built. At first, there was one bistro with a few slot machines and poker tables. Then more places opened with new games to play, and all winnings could be cashed out and then re-staked at each one of them. That fluidity cultivated the whole ecosystem.

Another parallel would be the growth of alternative asset classes such as financial derivatives, which confer both value and utility to their users. These tend to arrive during periods of uncertainty and over time become investable in their own right. The same is being applied in the crypto gaming space, only that it's still at an early stage.

Putting the news in perspective

The Takeaway

Should Open Source Developers Get Paid for Their Work?

Hi, Daniel Kuhn today. In a recent open letter reflecting on his invention of the World Wide Web, Tim Berners-Lee first thanked his boss.

"I was very lucky, back in 1990, to be allowed some time to sit and code," he writes, before entering into a straightforward account of how HTTP, HTML and URLs came to be. These three protocols, about 9,555 lines written in the Objective-C programming language, are the backbone of the web as we know it – the communication tool that has, as Berners-Lee puts it, "changed everything."

Berners-Lee, a trained physicist, was working at the European Organization for Nuclear Research (CERN) in Switzerland at the time. He was paid a salary for his work, even the time spent noodling. But the web, which has made countless people vast fortunes, didn't make Berners-Lee a billionaire. A few months ago, he auctioned off an image of the World Wide Web source code as an NFT for $5.4 million – one of the few times Lee has profited directly from the code.

Like other general purpose technologies, from GPS to the internet itself, developed during a particular age of massive government defense and science spending in the back half of the 20th century, the web was essentially gifted to the world as free and open source software (FOSS). Anyone can access and build on it. It's an age that some web developers pine for, and many still put Berners-Lee up as a model for open source development.

This past weekend, Laurie Voss, a co-founder of npm, a GitHub-acquired company that builds open source tools, did just that. He was making an argument against the funding model that seems to be predominant in Web 3, a buzzword to describe the litany of blockchain-based and non-crypto projects aiming to put user identity and dignity at the center of the internet.

"The whole point of 'web3' is supposed to be that it's democratic and decentralized and everybody benefits from the value they provide to the network. That's a great idea! It is entirely antithetical to a system where early adopters get outsized returns. We already have that," Voss tweeted.

In particular, Voss, like many before him, noted the potential conflicts of interest that token-based projects present. Pre-mines, or tokens minted and held in reserve for early investors and project developers, are both incentives to build useful tools that attract users and huge non-cash grants awaiting exit liquidity (read: retail token buyers).

It's all part of a larger backlash against Web 3, techlash 3.0, and crypto generally. It's not hard to see how the presence of venture capitalists like Andreessen Horowitz (a16z) and others, which stand to gain a lot by bullying for crypto adoption, stand counter to the egalitarian roots of crypto.

This all the more evident when Web 3 is compared to bitcoin, the first cryptocurrency developed pseudonymously by Satoshi Nakamoto, who, as far as we know, has never profited from their invention. That was the standard way cypherpunks and many FOSS developers operated – in it for the ideas, for the battle for privacy and digital rights. It's a romantic ideal, but doable.

"I like the idea of giving away ideas and people who can code giving away code. It enables a collaborative approach where many others can work on it and build on it. This has been a strength of Bitcoin. All the work by all the devs is given away freely and anyone can use the software as they wish," Bruce Fenton, an early bitcoin adopter and registered broker, said in a text message.

Four years ago this week, Fenton unveiled Ravencoin, a Bitcoin fork with a few modifications for throughput, that is now a billion-dollar digital asset. Fenton said he has never profited from Ravencoin and is now unaffiliated with the free and open source project. Although Fenton managed to pull a Satoshi, he doesn't necessarily admonish others looking to profit from code.

"FOSS can work with all kinds of models – patronage, partnership with for-profit enterprises or even things like sales. But whenever you are paying real money for a token it is crucial to ask what you are getting for that in return," he said.

This is a view I tend to agree with. If coders can manage to stay anonymous and walk away from their proceeds, that only strengthens a project. But FOSS is an ideal that's hard to reach. Coders code and deserve to get paid for their work. Tools like NFTs or even ICOs can be done fairly without compromising on the founding values of crypto. It's hard, but doable.

I'll state bluntly that there is absolutely no point to crypto without decentralization. Having a "founder" that sticks around is an attack vector. Having massive bag holders is unseemly. If a blockchain can be "censored," it should be. But projects can – and sometimes do – decentralize overtime. Starting from the position that everyone needs to be an ascetic like Satoshi or Berners-Lee puts everyone at a disadvantage.

Not everyone is in Berners-Lee's position when he coded the web, an employee of a publicly-funded institution building "public goods." It's a new age, we have new tools and new funding models. And thanks be. Even Berners-Lee notes the web "is not yet the best it can be."

–Daniel Kuhn