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CryptoEconomic Research

Layer 2 & Scaling Solutions | February 2022 | Week 1

Layer 2 newsletter. Digestible ecosystem news. This week we cover bridges and stablecoins.
by Dominik SchmidFebruary 11, 2022
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We have asked L2 thought leaders about significant trends they see in 2022. We couldn’t ask all of them and some answers are not official statements of the projects they are working on. The answers, however, are super interesting. Check out the blog.

A hot topic is “trustless” bridging. In this case, we are talking about multi-chain bridges, not the native rollup bridges designed to be trustless. For multi-chain bridges connecting more than two L2s or chains, it is hard to identify genuinely trustless and decentralized bridge concepts. The closest to that – according to our analysis – is indeed Connext and the NEAR rainbow bridge. I am sure there are more, and the investigation is ongoing. Maybe we need to extend L2beat to bridges somehow to show the risks and the available liquidity to a user.

What happened in the ecosystem?

  • Jay reported a vulnerability on Optimism and got a bounty of 2m$. The hack is quite interesting and shows a problem for rollups. Jay was able to create Ether on Optimism for free. He gives a talk about the vulnerability on Eth Denver at 9:40am MST on February 18th. Finger’s crossed that Boba and Metis – both Optimism forks – are also aware of that.
  • Polygon raised 450m$ from a group of investors including Softbank. Polygon has over 7k dApps deployed already and is heavily researching and investing in validity rollups.
  • In case you are familiar with the Black-Scholes model, you can earn 10k implementing that in StarkWare’s Cairo. The mathematical model changed the way of investing in wall street towards algorithmic trading for derivatives.
  • You might all have seen that already, but here you can see an interesting incident report about the Wormhole bridge attack that led to a lost of 300m$ (in tokens but still). Interestingly enough, the problem that the hacker used was already fixed but it was not merged yet. Could be a nice hint for the hacker to find an attack vector
  • StarkNet partners with ConsenSys Dilligence to be able to get Cairo contracts audited.
  • Danksharding will help rollups to confirm transaction data and proofs within the same beacon block. Honestly something we will need to look into in more depth.
  • If you have time to listen, there was a Panel of Solana, Avalanche and Terra about “Finding Common Ground” and the value alternative L1s could provide, see here.

Let’s look at the data

  • Arbitrum and dYdX almost doubled their daily transactions – which is quite impressive.
  • In a 30 day average comparison Optimism has almost half the fees of Arbitrum.
  • Terra still leads the TVL ranking – when we ignore Ethereum itself which has ~10x the TVL. Interstingly enough Terra is the only network that lost TVL over the last 7 days.
Screenshot 2022 02 11 at 16 35 32

Stablecoin Snapshot: Terra Protocol’s UST – by Andrew Breslin

Those who’ve been following the stablecoin space have likely noticed the series of significant announcements from the Terra protocol throughout the early months of 2022. These include:

… But what is the Terra protocol?

The Terra protocol is a Layer 1, proof-of-stake blockchain whose primary purpose is to support a suite of algorithmic stablecoins. Under the hood, this blockchain was built from the Cosmos SDK and is secured by a system of verification called the Tendermint consensus, in which the top validators in the network (the top 130 in Terra’s case, ranked by the value of their stake) propose, sign, and add new blocks in return for staking rewards paid out in Luna, the protocol’s native staking and governance token. 

The Terra protocol’s primary feature is Terra stablecoins, of which there are currently 15. Each of these 15 stablecoins aims to maintain a stable price relative to a different fiat currency, with the ultimate goal of providing Terra users around the globe with a stablecoin option that’s denominated in the major currency of their region. Terra stablecoins are named after their fiat counterparts. For example, Terra’s flagship stablecoin tracks the price of the US dollar and is referred to as TerraUSD, or UST.

How do Terra stablecoins remain stable?

Even amid the extreme market volatility observed in January of this year, Terra’s UST managed to maintain its peg…but how?

While there are 15 Terra stablecoins, these tokens are functionally equivalent, differing only in the price that they target. They maintain a stable price by way of open market arbitrage opportunities created by the protocol’s algorithmic market module.

More simply, there are two tokens that are native to the Terra blockchain, Terra (stablecoins) and Luna (staking and governance).

Terra are the suite of algorithmic stablecoins discussed above, which target the price of their respective fiat currency pegs. In times when demand for Terra stablecoins is high and exceeds the available supply, the price of the stablecoin rises slightly above its peg. Conversely, in times when demand for Terra stablecoins is low, and the available supply exceeds demand, the price of the stablecoin falls slightly below its peg. 
Regardless of these fluctuations in price, in the case of UST, the protocol’s algorithmic market module will always allow users to trade 1 USD worth of Luna, for 1 UST and vice versa. This mechanism incentivizes users to swap Luna for UST in times when the UST value exceeds its price target since the user can then sell their UST on the market at a profit that’s equivalent to the difference between the stablecoin price and its price target (i.e. the price spread). This act of profiting from these slight price deviations is called arbitrage and works the same way in reverse when UST’s market value falls below its price target.

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Found this research useful? Connect with the ConsenSys Cryptoeconomic Research team at [email protected]

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