Hello Defiers! Happy weekend!
If you have a pain in your neck don’t feel bad. We are all suffering from whiplash after one of the most tumultuous weeks in crypto in some time.
First came the bombshell that the U.S. Department of the Treasury was sanctioned Tornado Cash, a staple of the industry for years, for laundering $7B worth of digital assets, including $455M stolen by North Korea’s notorious Lazarus Group and the loot from the Harmony hack in June.
Our reporters fanned out to cover the story: Jason Levin covered the breaking news on Monday, then joined forces with Claire Gu to report on how the DeFi community was reacting to the Tornado whirlwind with a mix of online civil disobedience and a whole lot of angst. Owen Fernau covered dYdX’s move to ban accounts as a result of the sanctions, and also reported on Centre’s similar move with USDC addresses.
All that drama was offset by the news that Ethereum has cleared the final stage before The Merge with the completion of the Goerli chain’s intergration into the network’s mainnet. Owen Fernau reported on the significance of this dress rehearsal for The Merge, which is set for Sept. 15. The Defiant has been covering all the angles on Ethereum’s upgrade, including the push by die-hard PoW folk to hard fork and maintain pre-Merge Ethereum. Claire Gu reported on the exchanges set to trade a token ostensibly called ETHPoW.
Meanwhile, Aleksandar Gilbert kept his eye on two big summer stories: he took us inside Solana’s crisis management through an exploit earlier this month, and in a superbly reported deep dive he unpacked the crucible at Harmony, the Layer 1 blockchain struggling to resolve a $100M hack in June. The key: Aleks talked with a lot of validators.
In another deeply reported piece, Sam Haig delved into the tumult at MakerDAO, the DeFi OG that was already going through a bout of soul searching before the Tornado sanction forced it to weigh new vulnerabilities. Sam learned the protocol is considering an “emergency shutdown” if the Feds start tagging addresses holding DAI. Yikes.
Whew… Rounding off the week, the indomitable Robin Schmidt and his crew interviewed Jessie Dickson-Lopez about the metaverse in Hollywood, and produced a cool tutorial on sudoswap.
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Flawed Response to $100M Hack Exposes Crisis of Confidence in Layer 1
Aleksandar Gilbert interviewed validators to get the inside scoop on the travails at Harmony…
Last week, after near-universal condemnation, leaders of the Harmony blockchain scrapped their proposal to reimburse community members who lost money in a $100M hack in June.
The Layer 1 network, which sports a $346M market cap and competes with other high-speed blockchains such as Solana, has been struggling to stabilize its situation ever since.
Now co-founder Stepehen Tse is offering a pair of new proposals. One would use the Harmony Foundation’s treasury to partially reimburse tokenholders over a period of months, and replenish its coffers by minting new ONE coins over several years. The other proposal would increase fees from transactions and fund reimbursement and “ecosystem growth.”
“The last few days we held many calls to discuss options and tradeoffs, engaging over 20 validators, 20 community members, and 15 bridge and DeFi partners,” Tse wrote in a governance forum debating the original proposal. “We sincerely value engaging and gathering support from our community, partners, validators, and their delegators.”
Behind the Headlines
DeFi Lender’s Stablecoin Under Pressure From USDC Contagion
In which Samuel Haig goes deep in the DeFi stalwart’s reckoning with the Tornado storm…
Now it’s MakerDAO’s turn. The DeFi blue chip is the latest protocol to be struck by shock waves from the U.S. Treasury Department’s decision Monday to sanction Tornado Cash, a so-called “mixer” that lets crypto users anonymize their transactions.
Maker is making contingency plans to execute an emergency shutdown should core contracts underpinning DAI, its stablecoin, be sanctioned by Washington, according to posts from MakerDAO founder, Rune Christensen, in the project’s Discord channels. “If we get nuked by the U.S. government, we simply die,” Christensen warned.
The move to blacklist Tornado Cash, which the Feds say laundered $7B worth of virtual currency, has already rocked USDC, the No. 2 stablecoin in terms of market value.
On Tuesday, Centre, the consortium behind USDC, blacklisted 38 wallet addresses and froze the USDC tokens they held. Centre, which was set up by Circle and Coinbase, has now banned 81 wallet addresses in total since USDC was launched in September 2018.
Crisis Management Becomes a Key Exercise as Crypto Exploits Mount
In which Aleksandar Gilbert explores the increasingly urgent practice of crisis management in DeFi.
On the night of Aug. 2, Austin Federa was at dinner with friends when notifications started pouring in through the Slack messaging app. “I was like ‘Oh, no – I have to go,’” Federa, the Solana Foundation’s communications chief recalled in a recent interview.
News of the second major crypto hack in two days had just broken, and Federa was on the front lines. Exactly 24 hours after the $200M Nomad protocol was stripped bare in a “crowd-looting”, thousands of people – the vast majority of them Solana users – had their wallets drained in a hack that sparked panic across the entire crypto industry. Solana, a he No. 9 cryptocurrency with a market cap of $15.6B, is leading a new generation of high-speed blockchains challenging Ethereum.
As word spread and users took measures to protect their assets, the pilfering ground to a halt. Experts believe there were four attackers, who exploited a vulnerability in Slope Finance’s crypto wallets and made off with an estimated $4M, pocket change by industry standards.
Nevertheless, fear that Solana or its network of partners had been compromised — theories that were quickly debunked — spurred Federa and his counterparts into an episode of crisis management.
Sharp Decline May Cast Doubt on Summer Rally in DeFi
Samuel Haig crunches the numbers and goes into the weeds to unearth some telling datapoints…
With network activity plunging, Ethereum’s transaction fees are now at their lowest level since the heady days of ‘DeFi Summer’ in mid-2020, according to data from Ycharts.
Ethereum’s average fees are at their lowest level in two years, with transactions executing for less than 13 gwei a pop. The sharp decline in on-chain activity may also cast doubt on the bullish signal that’s been driving a summer rally in Ethereum and other DeFi names: The Merge.
Investors may have to reckon with the likelihood that more Ether may not be destroyed than new coins are issued after the network shifts to Proof-of-Stake consensus in September.
In August 2021, Ethereum’s EIP-1559 upgrade went live, introducing the burning of base transactions fees. From then on, a portion of each Ethereum transaction fee is permanently destroyed.
Old Friends Return to the Forefront This Week
The penguins are back. Once on life-support before a community-led revolt led to the ouster of the founding team, the ever-popular NFT collection has seen its floor price surge 55% to 2.75 ETH ($5,200) in the past week.
On Aug. 10, the project revealed that some NFTs from the collection of 8,888 will be showcased in a physical toy collection, called Pudgy Toys.
Most of the chosen penguins belong to community contributors, leading one penguin holder to call them ‘pseudo honoraries’. Honoraries are NFTs usually awarded to community members for exceptional contributions, as in the case of BAYC Honorary Members. The collection generated over 575 ETH ($1.1M) in secondary sales on OpenSea in the past seven days, an increase of 329% over the previous week.
MakerDAO’s Founder Ponders Move Away From U.S. Dollar Rune Christensen, the outspoken co-founder of DeFi stalwart MakerDAO, triggered a bout of angst in crypto after suggesting the protocol’s stablecoin, DAI, might drop its peg to the U.S. dollar.
Tornado-Linked Arrest in Europe Riles Crypto Mavens Dutch police have arrested an alleged developer of Tornado Cash, the cryptocurrency mixer popular with hackers and privacy-minded users, FIOD, the Netherlands’ financial crimes investigative unit, announced today.
dYdX Bans Accounts In Wake Of Tornado Sanctions Contagion from the U.S. Department of the Treasury’s move to sanction privacy protocol, Tornado Cash, continues to spread.
Ethereum Completes Goerli Testnet Merge The final installment of the testnet Merge trilogy is complete. On Aug. 10 at 945pm ET, Ethereum’s Goerli testnet transitioned to Proof-of-Stake consensus.
Degens Tweak Feds to Protest Tornado Cash Ban There’s been no letup in the whirlwind unleashed by the U.S. Treasury’s sanction of Tornado Cash. One of the more eye-opening responses involved degens testing the government’s security monitors by continuing to pump transactions through the sanctioned protocol.
Layer 2 News
What is the Difference Between Market Cap and Fully Diluted Market Cap? Companies and blockchain projects represent value in different ways, typically via stocks and digital assets. In both cases, their values differ based on their value being fully accounted for, or just partially. This is the difference between market capitalization (cap for short) and fully diluted market cap.
Thanking all the amazing Defiers for the support and love this week (and always)!
🧑💻 ✍️ Stories in The Defiant are written by Owen Fernau, Aleksandar Gilbert, Claire Gu, Samuel Haig, Jason Levin, and yyctrader, and edited by Edward Robinson, yyctrader and Camila Russo. Videos were produced by Robin Schmidt and Alp Gasimov. Podcast was led by Camila, edited by Alp.
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access, while free signups get only part of the content.Click here to pay with DAI (for $100/yr) or sub with fiat by clicking on the button above ($15/mo, $150/yr.