🟣 Chain abstraction is in vogue
The pain points are clear, but competition abounds
Macauley Peterson & Donovan Choy
August 14, 2024
Brought to you by:
Welcome back to 0xResearch. Here's what we’ve got for you today:
Ether ETFs on track
Chain abstraction buzz
PayPal’s Solana stablecoin boom
Wednesday’s inflation data in the US came in very tame, marginally below expectations. That’s good news for people looking for the Fed to cut rates in September, but not good enough for building on yesterday’s market momentum.
Bitcoin rejected off of the short-term range high at around $61,700 following the release, shadowing the Nasdaq lower.
Net inflows into ether ETFs have been positive so far this week, and the trend of ether moving into funds is tracking the early days of the BTC ETF as a percentage of the total amount of ether outstanding.
Source: ZeroHedge
One big difference is that ether is also a productive asset through staking. The percentage of ETH supply staked is hovering around all-time highs near 28%.
Armagan Ercan, validator lead at Gnosis, doesn’t see this trend reversing anytime soon.
"Growth in the staking and liquid staking landscape is unlikely to slow down, especially with the introduction of more sophisticated financial products like ETFs," Ercan told Blockworks.
The confluence of trends also tends to reduce the available liquid supply on exchanges. Since the US spot ETFs launched, available ether on exchanges is down by roughly 1.6%, data from Glassnode shows.
Chain abstraction buzz
Chain abstraction has been trending on Twitter in the past week. If you’re not sure what "chain abstraction" really means, you’re not alone.
Chain abstraction is really a marketing buzzword that reflects a vague and broad design philosophy. It’s an effort to remove all the inconveniences of the current Web3 user experience, namely multiple wallets, gas tokens, fragmented liquidity and third-party bridges. And with already 173 L2s and L3s today, by L2beat’s count, that is certainly a problem worth addressing.
There are numerous players working in this niche infrastructure area. Some approach it from the account (or wallet) layer, others at the blockchain layer. Let’s look quickly at some of these players.
At the account level, Particle Network offers developers integration with a universal account (wallet), that pays for everything with any gas token of choice. Devs that choose to integrate with Particle can tap into the combined liquidity across all other similar chains. Built on the Cosmos SDK, Particle’s added advantage is that its coverage spans across both EVM and non-EVM ecosystems.
Operating at the account level is also the Near L1 blockchain, which recently launched "Chain Signatures," a chain abstraction feature built into its own protocol. With Chain Signatures, third-party relayers from Near can sign and execute transactions across different blockchain networks, without needing the private key of the destination network. Relayers have the added option to cover the gas fees of any user, thanks to built-in "account abstraction." From the user’s perspective, all you need is a Near wallet to go cross-chain.
Socket is also creating a "Chain Abstraction Protocol," where "transmitters" will compete for the right to execute cross-chain user requests in an offchain marketplace (modular order flow auctions). This works for any kind of transactions you’d like and it effectively pushes the burden of manually jumping through bridges to professional middlemen.
Then there are those pursuing chain abstraction at the chain level, like Polygon’s Aggregation Layer. The AggLayer is a middleware bridge that bundles all incoming transactions from the different chains connected to it into a single ZK-proof that eventually settles down to Ethereum mainnet.
Optimism also announced this week its plans to build a native interoperability protocol layer, starting by bringing together all 29 chains currently built on OP Stack, Optimism’s rollup software development kit. Like Polygon’s AggLayer, the bridge’s utility is proportional to the number of participants that connect to it.
There are many more examples, but you get the idea. Each of these players wants to unify liquidity and abstract away the jumbled cross-chain experience.
The race to complete interoperability depends on who can solve the classic collective action problem best — bringing in as many developers into your ecosystem as quickly as possible, then expanding out.
Polygon and Optimism are leveraging their brand names and rollup development stacks, Near is betting on its own chain as a starting point, while Particle has to do the hard work of aggressive business development to bring in one dapp at a time. The architectural layers of each player are different, but the end goal is the same — blending the hundreds of existing chains today into one.
— Donovan Choy (X: @donovanchoy | Farcaster: @donovan)
All 1000X listeners know that when Jonah and Avi give guidance on the markets, it’s best to pay heed.
Catch them live and in person at Permissionless III in October as they answer the perennial question: "Where are we in the cycle?"
PayPal USD growth:
Source: DeFiLlama
The supply of PayPal’s PYUSD stablecoin on Solana has flipped its supply on Ethereum’s, despite launching on Solana (29 May) nine months after Ethereum. Issued by Paxos, PYUSD is the seventh-largest USD stablecoin by market cap at $684 million, and the third-largest on Solana behind USDC and USDT.
PYUSD’s rapid growth on Solana can be explained by yield incentives being offered to depositors. Depositing to Kamino now yields a juicy 17.6% APY, or between 17% and 27% APY on Drift, on top of any additional points that protocols are running. That is a lot of yield for a "risk-free" deposit.
In comparison, PYUSD yields on Aave are 3.66%. It’s questionable how sustainable PYUSD’s growth will be, but Paypal’s decision to attack a smaller market on Solana makes sense, given the entrenched stablecoin dominance on Ethereum by Tether and Circle.
PYUSD is also pursuing a real-world use case via its PayPal and Venmo integration to 100 million US users. The stablecoin deployment on Solana leverages Solana Token Extensions, allowing merchants to maintain confidential transfers while still retaining visibility for regulatory compliance.
— Donovan Choy
Berachain is an experimental take on an alternative EVM chain as opposed to a more traditional, alt EVM L1s such as Avalanche and BNB Chain. Although the chain is innovative and has a unique approach, this also has caveats. Both Polaris EVM and Proof-of-Liquidity are very nascent, and have not yet been battle-tested which could lead to potential issues.
The Obol Collective launched a contributions program which allows all stakers to stake on distributed validators (DVs) and earn access to future governance and ownership of the Obol Collective. By staking ETH on DVs, users enhance the security and resiliency of Ethereum, and therefore improve the network’s decentralization properties.
Lido has generated over $100m in the last year alone. It is the 4th highest revenue-generating app across all apps in 2024. With year to date earnings of $26m, it also maintains a top four status in profitability. Despite strong fundamentals, the LDO token has decreased by over 60% in 2024, leading to Lido's valuation dropping to historic lows. It currently trades at a 9.0x price-to-sales (P/S) ratio, among the lowest in its peer group. Upcoming and current initiatives like Vaults and the Staking Router are poised to further solidify Lido’s dominance.
Plus, did airdrops ruin altcoin summer before it even started?
Optimism’s Superchain consists of 29 OP Stack chains today, soon to be unified through one interoperability layer.
|
|
The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.
recent research
Research
In this report, each analyst on the Blockworks Research team lays out their highest conviction thesis for 2025.