Valid Points: Ethereum 2.0 Validators Earn Record $1.2M

Valid Points: Ethereum 2.0 Validators Earn Record $1.2M

“The biggest risk for Ethereum is that it could end up like the Concorde.”

That’s Lyn Alden, a renowned investment strategist, who wrote a blog post a few weeks back reviewing the Ethereum protocol from an investor’s perspective.

In her post, Alden points out that one of the biggest risks for the value of ether is that Ethereum never reaches mass adoption, just like the Concorde jet of the 1970s. While the Concorde was functional and operational for over 25 years, Alden writes, it never quite reached the product market fit it was seeking for commercial flight.

Ethereum has ambitious goals in aiming to become the world’s supercomputer. Developers of Ethereum anticipate the network will eventually host and run millions of active decentralized applications (dapps) ranging from finance to gaming to business and more.

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Key to this vision is a base layer protocol able to handle influxes of millions of dapp users and their transactions. The base layer of Ethereum, built for its long-term use case and vision, is Ethereum 2.0.

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So whether you’re an Ethereum enthusiast, critic or somewhere in between, it’s hard to understate the importance of Eth 2.0 to the value of ether (ETH) in the eyes of investors.

This week, we’ll explore ideas for a new Ethereum-compatible blockchain called LUKSO. Then we’ll look at the bullish price activity of ether and how that’s impacting network rewards.

New Frontiers: LUKSO

Ethereum is supposed to be boring.

Lost in the Medium tech explainers and rainbow price charts predicting $20,000 ether by end of the year is an understanding of what the Ethereum ecosystem is actually trying to accomplish: decentralized infrastructure for the internet.

Fabian Vogelsteller – founder of digital economy blockchain LUKSO and co-creator of the ERC-20 token standard – is one entrepreneur zeroing in on that notion as he explores using Ethereum’s passive technology stack for the creative economy.

LUKSO is an Ethereum blockchain but not in the way most conceive of that idea. Rather, it’s a clone of Ethereum that is 100% compatible with user-facing tools such as MetaMask. The project is currently building a new chain based on Catalyst – a clone of the Beacon Chain meshed with a stripped down variant of popular Eth 1.x client Geth that remains in the R&D phase for Eth 2.0 developers – with the end goal of on-boarding the digital economy fringes such as art, clothing and collectibles.

“By combining an execution environment (Catalyst) with a beacon chain running Casper FFG, LUKSO will likely become the first ETH 2.0 Blockchain to execute smart contracts, even before Ethereum itself,” LUKSO’s Medium post from Monday reads.

Proving ownership with NFTs

Nonfungible tokens (NFT) have been hot lately. Billionaire entrepreneur Mark Cuban recently sold a handful of NFTs in his likeness for thousands of dollars while the pseudonymous HashMask creators raked in millions over one weekend. LUKSO has also been gaining traction in that arena. The project was used to verify ownership of digital clothing for the Helsinki Fashion Week, according to an August Vogue article.

“By securing each item on a blockchain and providing digital certificates of ownership, digital items can be limited in supply, which ultimately increases their value,” LUKSO co-founder and managing partner Marjorie Hernandez told Vogue.

Unlike other blockchain’s independent of Ethereum, LUKSO is not a competitor in any meaningful sense to Eth 2.0, Vogelsteller said. Rather, it’s an independent blockchain for the digital economy that uses Ethereum’s tech stack in a similar manner to how Ethereum was originally conceived: as a quasi-programming-language for bringing blockchains to life.

And while it’s conceptually simplistic to place blockchains into silos, projects like LUKSO break the mold by showing how Ethereum is more than one blockchain. Indeed, a larger ecosystem of many Ethereum-compatible blockchains such as Ethereum Classic, Quorum or NEAR exist in concert with Ethereum.

By focusing on one specific type of user, moreover, Vogelsteller hopes to address one problem Ethereum has yet to answer: “How can we make it usable for people?”

Pulse checking Eth 2.0

If you’re new to Valid Points and the topic of Ethereum 2.0 in general, be sure to check out our 101 explainer on Eth 2.0 metrics to get up to speed about jargon and terminology used throughout this newsletter.

(Source: Etherscan (Data as of 2/9/2021 @ 21:12 UTC))

Ether price seems to be hitting new all-time highs every day this week.

On Monday, news of Tesla’s $1.5 billion investment into bitcoin and the launch of CME ether futures sent prices to fresh all-time highs at around $1,720. On Tuesday, ether prices rallied again, even as sell-side liquidity dried up, and registered an even bigger high of $1,824.

As investors and traders scramble to revalue ether in uncharted price territories, miners and validators on Ethereum’s dual blockchain network are reaping record-breaking revenue.

Ethereum 2.0 validators earned their highest daily total income ever on Feb. 8, at $1.2 million. This only accounted for roughly 2% of what Ethereum miners earned that same day, which was in the ballpark of $52.2 million.

Eth 2.0 Validator rewards as a percentage of Ethereum miner rewards Source: Source: BeaconScan

The additional ether generated on Eth 2.0 by validators is a small fraction of what miners are making on Ethereum. While the total income of validators is expected to grow as new validators enter the network and Ethereum is eventually merged in Eth 2.0, it is not likely to ever reach the same amounts as those that miners receive.

This is because Eth 2.0, by nature of being a proof-of-stake protocol, is projected to issue ether as a form of rewards at a much slower and reduced rate than in a proof-of-work protocol. Eth 2.0 issues rewards in the form of annual interest that accrues to the staked ether of validators, instead of in the form of block rewards to miners.

Daily Total Eth 2.0 validator income and Ethereum miner revenue Source: Source: BeaconScan and Coin Metrics

On the topic of network rewards, the CoinDesk Eth 2.0 validator is ready for activation on Eth 2.0 in roughly seven days time. I’m excited to watch first-hand how interest accrues to the 32 ETH CoinDesk has staked on the network and the overall performance of our independent validator setup.

For more information on how CoinDesk went about setting up its infrastructure for this unique staking project, check out our next podcast episode when Will and I speak with CoinDesk Director of Engineering Spencer Beggs.

Validated takes

A new Telegram channel called “UniWhales” is analyzing the moves of big token holders (whales) on Uniswap (Article, CoinDesk)

Bitcoin and ether hit new all-time highs as Tesla invests $1.5 billion in BTC (Video, CoinDesk)

Ethereum futures are now trading on the CME (Article, CoinDesk)

What is the ERC-20 Ethereum token standard? (Article, CoinDesk)

Yearn Finance DAI vault has suffered an exploit; $11 million drained (Article, CoinDesk)

Ethereum 2.0 slashing event post-mortem (Blog post, Staked)

Interview with MetaKovan, the pseudonymous investor who holds more than $2.5 million worth of NFT art (Podcast, The Defiant)

Factoid of the week

Open comms

Feel free to reply any time and email research@coindesk.com with your thoughts, comments or queries about today’s newsletter. Between reads, chat with us on Twitter.

Valid Points incorporates information and data directly from CoinDesk’s own Eth 2.0 validator node in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site!

Ethereum Surpasses Bitcoin To Become Largest Network For ‘Trustless’ Money Settlement

Bloomberg

(Bloomberg) – Stefan Qin was just 19 when he claimed to have the secret to cryptocurrency trading.Buoyed with youthful confidence, Qin, a self-proclaimed math prodigy from Australia, dropped out of college in 2016 to start a hedge fund in New York he called Virgil Capital. He told potential clients he had developed an algorithm called Tenjin to monitor cryptocurrency exchanges around the world to seize on price fluctuations. A little more than a year after it started, he bragged the fund had returned 500%, a claim that produced a flurry of new money from investors.He became so flush with cash, Qin signed a lease in September 2019 for a $23,000-a-month apartment in 50 West, a 64-story luxury condo building in the financial district with expansive views of lower Manhattan as well as a pool, sauna, steam room, hot tub and golf simulator.In reality, federal prosecutors said, the operation was a lie, essentially a Ponzi scheme that stole about $90 million from more than 100 investors to help pay for Qin’s lavish lifestyle and personal investments in such high-risk bets as initial coin offerings. At one point, facing client demands for their money, he variously blamed “poor cash flow management” and “loan sharks in China” for his troubles. Last week, Qin, now 24 and expressing remorse, pleaded guilty in federal court in Manhattan to a single count of securities fraud.“I knew that what I was doing was wrong and illegal,” he told U.S. District Judge Valerie E. Caproni, who could sentence him to more than 15 years in prison. “I deeply regret my actions and will spend the rest of my life atoning for what I did. I am profoundly sorry for the harm my selfish behavior has caused to my investors who trusted in me, my employees and my family.”Eager InvestorsThe case echoes similar cryptocurrency frauds, such as that of BitConnect, promising people double-and triple-digit returns and costing investors billions. Ponzi schemes like that show how investors eager to cash in on a hot market can easily be led astray by promises of large returns. Canadian exchange QuadrigaCX collapsed in 2019 as a result of fraud, causing at least $125 million in losses for 76,000 investors.While regulatory oversight of the cryptocurrency industry is tightening, the sector is littered with inexperienced participants. A number of the 800 or so crypto funds worldwide are run by people with no knowledge of Wall Street or finance, including some college students and recent graduates who launched funds a few years ago.Qin’s path started in college, too. He had been a math whiz who planned on becoming a physicist, he told a website, DigFin, in a profile published in December, just a week before regulators closed in on him. He described himself on his LinkedIn page as a “quant with a deep interest and understanding in blockchain technology.”In 2016, he won acceptance into a program for high-potential entrepreneurs at the University of New South Wales in Sydney with a proposal to use blockchain technology to speed up foreign exchange transactions. He also attended the Minerva Schools, a mostly online college based in San Francisco, from August 2016 through December 2017, the school confirmed.Crypto BugHe got the crypto bug after an internship with a firm in China, he told DigFin. His task had been to build a platform between two venues, one in China and the other in the U.S., to allow the firm to arbitrage cryptocurrencies.Convinced he had happened upon a business, Qin moved to New York to found Virgil Capital. His strategy, he told investors, would be to exploit the tendency of cryptocurrencies to trade at different prices at various exchanges. He would be “market-neutral,” meaning that the firm’s funds wouldn’t be exposed to price movements.And unlike other hedge funds, he told DigFin, Virgil wouldn’t charge management fees, taking only fees based on the firm’s performance. “We never try to make easy money,” Qin said.By his telling, Virgil got off to a fast start, claiming 500% returns in 2017, which brought in more investors eager to participate. A marketing brochure boasted of 10% monthly returns – or 2,811% over a three-year period ending in August 2019, legal filings show.His assets got an extra jolt after the Wall Street Journal profiled him in a February 2018 story that touted his skill at arbitraging cryptocurrency. Virgil “experienced substantial growth as new investors flocked to the fund,” prosecutors said.Missing AssetsThe first cracks appeared last summer. Some investors were becoming “increasingly upset” about missing assets and incomplete transfers, the former head of investor relations, Melissa Fox Murphy, said in a court declaration. (She left the firm in December.) The complaints grew.“It is now MID DECEMBER and my MILLION DOLLARS IS NOWHERE TO BE SEEN,” wrote one investor, whose name was blacked out in court documents. “It’s a disgrace the way you guys are treating one of your earliest and largest investors.”Around the same time, nine investors with $3.5 million in funds asked for redemptions from the firm’s flagship Virgil Sigma Fund LP, according to prosecutors. But there was no money to transfer. Qin had drained the Sigma Fund of its assets. The fund’s balances were fabricated.Instead of trading at 39 exchanges around the world, as he had claimed, Qin spent investor money on personal expenses and to invest in other undisclosed high-risk investments, including initial coin offerings, prosecutors said.So Qin tried to stall. He convinced investors instead to transfer their interests into his VQR Multistrategy Fund, another cryptocurrency fund he started in February 2020 that used a variety of trading strategies – and still had assets.‘Loan Sharks’He also sought to withdraw $1.7 million from the VQR fund, but that aroused suspicions from the head trader, Antonio Hallak. In a phone call Hallak recorded in December, Qin said he needed the money to repay “loan sharks in China” that he had borrowed from to start his business, according to court filings in a lawsuit filed by the Securities and Exchange Commission. He said the loan sharks “might do anything to collect on the debt” and that he had a “liquidity issue” that prevented him from repaying them.“I just had such poor cash flow management to be honest with you,” Qin told Hallak. “I don’t have money right now dude. It’s so sad.”When the trader balked at the withdrawal, Qin attempted to take over the reins of VQR’s accounts. But by now the SEC was involved. It got cryptocurrency exchanges to put a hold on VQR’s remaining assets and, a week later, filed suit.Asset RecoveryBy the end, Qin had drained virtually all of the $90 million that was in the Sigma Fund. A court-appointed receiver who is overseeing the fund is looking to recover assets for investors, said Nicholas Biase, a spokesman for acting Manhattan U.S. Attorney Audrey Strauss. About $24 million in assets in the VQR fund was frozen and should be available to disperse, he said.In South Korea when he learned of the probe, Qin agreed to fly back to the U.S., prosecutors said. He surrendered to authorities on Feb. 4, pleaded guilty the same day before Caproni, and was freed on a $50,000 bond pending his sentencing, scheduled for May 20. While the maximum statutory penalty calls for 20 years in prison, as part of a plea deal, prosecutors agreed that he should get 151 to 188 months behind bars under federal sentencing guidelines and a fine of up to $350,000.That fate is a far cry from the career his parents had envisioned for him – a physicist, he had told DigFin. “They weren’t too happy when I told them I had quit uni to do this crypto thing. Who knows, maybe someday I’ll complete my degree. But what I really want to do is trade crypto.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

Which Crypto Projects Are Based on Ethereum?

According to the crypto app tracker, State of the Dapps, there are over 3,000 decentralized apps (also known as “dapps”) currently running on the Ethereum blockchain.

These apps differ from regular mobile and web-based apps because they aim to hand users more control over the data the apps manage. Traditional apps, such as Robinhood or Twitter, are managed by a central authority, which ultimately has the last word on how their customers’ data is secured and used – for better or worse.

Dapps take a decentralized approach to data management, theoretically putting control back in the hands of the user with the help of blockchain technology – the basis of the Ethereum network. Ethereum is the name of both the world’s second-largest cryptocurrency by market capitalization (after bitcoin) and the first platform to facilitate the creation of dapps.

While the promise of Ethereum is tantalizing to proponents of the technology, it’s an open-source platform, meaning the projects built upon it are often experimental and sometimes outright scams. Conducting diligent research before investing is highly recommended.

Top Ethereum projects

Right now, many of the top Ethereum projects are focused on decentralized finance, or DeFi. DeFi aims to expand the utility of cryptocurrencies from day-to-day transactions to more complex financial use cases, such as loans and derivatives.

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The DeFi space gained significant traction in 2020, with the total value of crypto assets locked in its protocols rising over 2,000% from $650 million at the start of the year to $16.05 billion at the close.

Ethereum dapps have become so popular that the increased congestion has pushed transaction fees – the amount of ether required to send payments over the network – higher than ever. This is a direct result of dapp users competing to get their transactions processed faster by miners. The higher the fee attached to a transaction, the more likely an ETH miner will add that to the blockchain sooner.

MakerDao

Stablecoins are an effort to improve upon one of the pain points of cryptocurrencies. Crypto prices fluctuate unpredictably, making them unsuitable as a means of payment and as a reliable store of wealth. While most stablecoins are centralized, MakerDAO is different in that it has put forth a detailed plan for how to eventually decentralize the control of its stablecoin, dai.

Uniswap

Inflatable unicorn representing Uniswap logo. (Andrey Danilovich/Getty Images)

Uniswap is a decentralized exchange, meaning that unlike most exchanges it never takes control of a user’s funds. It’s the most popular decentralized exchange so far. This exchange is a cornerstone of Ethereum’s recent booming DeFi movement, facilitating trades from coin to coin. The project even attracted a “vampire” competitor, SushiSwap, which tried to suck up all its users. Another unique aspect of Uniswap is that it utilizes an automated market maker (AMM) system for facilitating trading, meaning the underlying liquidity pools that manage the actual coin-swapping are run by smart contracts as opposed to a traditional order book system.

When trading on a regular centralized crypto exchange, the market price for an asset is determined by supply and demand. In order to buy and sell, a trader must find someone on the opposite side of the order book to provide liquidity to complete a transaction. With AMM-based exchanges like Uniswap, a pricing algorithm determines the market price of each asset. Investors are incentivized to provide liquidity which is pooled together and used to execute all trades at the set market prices.

Chainlink

Chainlink is an oracle platform, which means it connects smart contracts with real-time data from the outside world such as weather information or stock prices. A smart contract uses that data to execute pre-defined instructions. For example, payout an insurance claim in the event of a hurricane.

While Chainlink has been around since 2017, the project didn’t really come to the forefront of the space until 2019 – after it partnered with Google. Chainlink is fuelled by an ERC-20 crypto token, LINK, and runs on top of the Ethereum network.

Axie Infinity

Axie Infinity is an online role-playing game where users collect and raise digital, fantastical characters called “Axies.” Under the hood, Axies are types of nonfungible tokens (NFT), which means each one is cryptographically unique, gamers have full ownership over them and in some cases have a monetary value due to their scarce, collectible nature.

Aave

Aave is a decentralized lending and borrowing platform that recently raised $25 million from leading venture capital firms Blockchain.com and Blockchain Capital.

According to tracker DeFi Pulse, Aave is currently the fourth-largest DeFi app based on the $1.14 billion locked up in the app. It was briefly the largest earlier this year.

Other Ethereum dapps

Compound : A decentralized lending platform, Compound is credited with inventing liquidity mining, where the company releases a unique coin that only those providing liquidity to the platform can obtain. This DeFi technique has since become foundational, with users tapping the technique to make money and companies copying the idea to attract users.

A decentralized lending platform, Compound is credited with inventing liquidity mining, where the company releases a unique coin that only those providing liquidity to the platform can obtain. This DeFi technique has since become foundational, with users tapping the technique to make money and companies copying the idea to attract users. WBTC : Wrapped bitcoin is a token on Ethereum that is backed 1:1 by bitcoin. The goal is to bring bitcoin’s liquidity to Ethereum. It has grown in popularity partly because investors can earn interest on the bitcoin they lock up on Ethereum.

Wrapped bitcoin is a token on Ethereum that is backed 1:1 by bitcoin. The goal is to bring bitcoin’s liquidity to Ethereum. It has grown in popularity partly because investors can earn interest on the bitcoin they lock up on Ethereum. SushiSwap : This decentralized exchange (DEX) is a fork of the popular decentralized Uniswap exchange that rewards liquidity providers with its own native SUSHI token. To date, it is a top 10 Ethereum DeFi app, according to DeFi Pulse.

This decentralized exchange (DEX) is a fork of the popular decentralized Uniswap exchange that rewards liquidity providers with its own native SUSHI token. To date, it is a top 10 Ethereum DeFi app, according to DeFi Pulse. Status : An ether wallet and private messaging system.

An ether wallet and private messaging system. Unstoppable Domains : One of the oft-touted goals of Ethereum is to decentralize the internet by making apps that are not controlled by tech giants. Unstoppable Domains is playing its part by creating domains that can’t be taken down by a central entity or government.

One of the oft-touted goals of Ethereum is to decentralize the internet by making apps that are not controlled by tech giants. Unstoppable Domains is playing its part by creating domains that can’t be taken down by a central entity or government. Kyber Network : A popular AMM, like Uniswap, created by researcher Loi Luu.

A popular AMM, like Uniswap, created by researcher Loi Luu. Basic attention token : An ERC-20 token on Ethereum exchanged between users, publishers, and advertisers on the browser Brave. When using the browser, users receive BAT from advertisers for their attention. BAT is a project led by the creator of JavaScript and co-founder of Mozilla, Brendan Eich.

An ERC-20 token on Ethereum exchanged between users, publishers, and advertisers on the browser Brave. When using the browser, users receive BAT from advertisers for their attention. BAT is a project led by the creator of JavaScript and co-founder of Mozilla, Brendan Eich. OpenSea : A marketplace for buying and selling NFTs, including Axies (described above), unstoppable domains, digital art, etc.

A marketplace for buying and selling NFTs, including Axies (described above), unstoppable domains, digital art, etc. Livepeer : A network for decentralized live-streaming, providing an alternative to YouTube.

A network for decentralized live-streaming, providing an alternative to YouTube. Decentraland: A decentralized virtual reality game, where users own virtual plots of land and can build structures such as theme parks and casinos that can be monetized.

Additional types of Ethereum blockchain dapps

There are dozens of other crypto dapps with smaller user bases than the above services. Some were more popular prior to the DeFi boom and have historical importance.

Decentralized Exchanges (DEXs)

Lending Platforms

Stablecoins

Tether: This popular stablecoin actually lives on many blockchains simultaneously. It is now dominating Ethereum transactions.

USDC

PAX

Prediction Markets

Storage Apps

Misc. dapps