1 Bet On the Future of Ethereum
Despite uncertainty in the market, I'm making a bet on the future of Ethereum!
First, I’d like to welcome everyone to my crypto newsletter! I’ll be posting here every Friday to fill you in on important themes in the world of crypto. If you’re pressed for time, check out the timestamps below for a quick update.
Welcome (0:00)
cbETH: ETH Liquid Staking on Coinbase (0:28)
Ethereum Layer 2 Activity Exploding (2:59)
By default, I’ll probably focus the most on the Ethereum and Cosmos blockchains, as I believe they’re paving the way in terms of decentralized finance, NFTs and whatever comes next. Even better, they have the most exciting investment opportunities.
The nice thing about crypto is that there’s literally never a dull moment; the amount of information out there is seemingly infinite, and something that seemed trivial a few days ago might suddenly become very relevant. In other words, there’s always something cool to write about.
Liquid Staking on Coinbase
The first thing I want to focus on this week is Coinbase’s most recent product: cbETH (short for Coinbase ETH).
If you staked your ETH on Coinbase for the long-awaited Ethereum merge, you now have the option of “withdrawing” your ETH early. I say that in quotes because you’re not actually removing the ETH from its staking contract. Instead, you’re essentially getting an IOU that you’ll have to redeem to take out your ETH later.
What’s even better is that your staked ETH still generates interest in the meantime, so you earn interest while having your original ETH synthetically freed up.
Products like cbETH are called liquid staking products. As the name suggests, they make staked assets more liquid. This is an extremely valuable feature in crypto, and it’s resulted in platforms like Lido Finance (LDO) seeing billions of dollars’ worth of inflows since early 2021:
So, why is liquid staking so important?
The simple answer is because it reduces uncertainty. Lots of people have been hesitant to stake their ETH because, until recently, nobody knew when the merge would happen (and rumors of it have been circulating since 2017).
Even now that the merge is expected on September 15th, it’ll still be at least another six months before people are allowed to withdraw their staked ETH.
When FOMO hits the market, it can cause a lot of people to jump into an investment they might not be prepared for. Back in December 2020 — when ETH staking started — I don’t think many people thought their ETH would be locked up for over two years.
So, cbETH provides a way out for people who want to cash out sooner — or the peace of mind that liquid staking brings.
Now, if you’re thinking about withdrawing cbETH, you should keep in mind that you’ll need it whenever you want to unstake your ETH. I think a lot of people are eager to cash out due to the current market conditions, but if you sell your cbETH, you run the risk of watching it rally higher and might have to pay more down the line to redeem your staked ETH.
I wouldn’t be surprised if a lot of people do this, which ironically will add even more scarcity to ETH down the line as some will never be redeemed.
Of course, we all know the merge is coming very soon, but there are some other very important things going on in the Ethereum ecosystem. At the top of the list (for me, at least) would have to be the amazing progress made in scaling the Ethereum network. This basically means that you can now make much faster transactions and pay much less in fees.
If you were around for most of the bull market from 2020 to 2021, you’ll remember the onslaught of FOMO surrounding “ETH killers” like Solana, Avalanche, Fantom and a ton of others. These blockchains saw billions of dollars flow into their apps seemingly overnight for two big reasons...
First, it was a bull market, and everyone wanted to put their money in whatever was going up the most or generating the highest yield. There were even some very fishy projects out there offering annual percentage yields in the millions!
Second, transaction fees on Ethereum spiked to ridiculous levels because of the emergence of DeFi (apps such as Uniswap, Compound, Synthetix, Maker, Aave, etc.).
While the fees were definitely annoying to deal with, I have to remind myself that it’s because Ethereum places decentralization very high on the priority list, as opposed to the faster/cheaper chains that have significantly fewer validators (more centralized).
What happened was that the audience for DeFi apps was way too big for Ethereum’s blockchain to handle. This is a far better situation than building out a blockchain for millions of people to use, and having very few loyal users (which is the case with almost every other layer 1).
The surprisingly bullish thing about all this is that a lot of people actually continued to use Ethereum, even with the high fees.
Blockchains like Solana, Avalanche and Fantom are all “layer 1 networks,” which currently handle a vast majority of cryptocurrency transactions. However, over the past six months, there’s been an increasing amount of money flowing into the next big thing: layer 2 networks.
Primer on Layer 2 Networks
Simply put, layer 2 networks are scaling solutions — that is, they allow people to transact faster and cheaper. This has been a vital improvement for Ethereum, and despite the less-than-ideal market conditions, money continues to find its way into the layer 2s.
To keep it relatively simple (this week, at least), the only layer 2 solutions that I’m going to focus on are Arbitrum and Optimism. If you’ve seen the term “optimistic rollup” anywhere, that’s the name of the method that Arbitrum and Optimism use to take some of the burden off the Ethereum blockchain.
The very high-level description of the way these work is by the following steps:
1.) The rollup software is built on the Ethereum blockchain.
2.) Say you buy ETH on the Arbitrum network. Arbitrum’s rollup processes that data off-chain, which allows for faster transactions and lower fees.
3.) Over time, the rollup bundles a bunch of these processed transactions together in batches (hence the name “rollup”).
4.) Then, the batches are sent back to Ethereum all at once in a compressed version, which is way cheaper than if each transaction was individually processed on Ethereum.
5.) When Ethereum receives the batch, there’s a “challenge period” where the transactions are checked to make sure they’re all valid, and anyone watching the network can submit a challenge.
This is all valuable technology, but in my opinion, the most important feature of Arbitrum and Optimism is that they’re backed by Ethereum’s security.
I regularly use a trading app called GMX which runs on Arbitrum, but if, for some reason, Arbitrum decided to use their own security rather than Ethereum’s, I’d stop immediately!
Layer 2 Exponential Adoption
One of the most bullish things during this crypto bear market has undoubtedly been the expansion of the L2 ecosystem. It turns out that, after all, most of the money that flowed into the “ETH killers” comes right back to Ethereum when there are opportunities to transact faster and cheaper!
Two of the best ways to measure adoption are by looking at the growth in users and the growth in total value locked (TVL). TVL basically means the amount of money that’s currently sitting in that protocol’s apps.
Here, we can see that after launching just over a year ago, Arbitrum (the first chart) is now almost at 1.2 million users and has grown its user base by 255% in 2022 alone.
And Optimism (the second chart) has served over 1.4 million users with unbelievable growth of 949% in 2022.
Not only are these Layer 2s seeing massive adoption by users, but those users are also transacting enormous amounts of money on their apps. As you can see, Arbitrum and Optimism have both broken into the top eight protocols with the highest total value locked (TVL):
Between the two, they have a grand total of $2.25 billion worth of TVL, despite most of their lives occurring during a bear market! These types of growth numbers are nothing unusual for a bull market, but when you see them during a bear market, they’re much more meaningful.
A Way to Invest in Optimism
One thing you may have noticed is that Optimism’s user base had a huge jump in late April and has been rising at a very fast rate since then. That surge coincides with their announcement that they’d be releasing a token, which is probably the most bullish announcement you can make (at least for short-term adoption) in the crypto world.
Now that they have a token (the ticker symbol is OP), they can attract users by paying out OP rewards to those who use their protocol. In fact, five of the apps on Optimism (Synthetix, Aave, Perpetual Protocol, Lyra and Velodrome) have launched promotions that will end up paying out 25.5 million OP tokens to their users. At current prices, that’s almost $30 million!
Usually, big money “giveaways” like this in crypto make me suspicious; throwing free money at people is usually a short-sighted tactic, and the hype rarely lasts.
However, this isn’t just any random blockchain that’s trying to gain the spotlight for a minute. It’s an incredible scaling solution for the most popular blockchain in crypto by far (outside of Bitcoin, that is). Just about all the money in DeFi seems to find its way back to Ethereum at some point, so I believe Optimism will do just fine.
When it comes to investing in Optimism, there’s one play that I believe stands out from the rest. Surprisingly, it’s not the OP token! At least, not yet…
Like I said, they’re doing massive giveaways of OP, which means massive price dilution will be a headwind in the short term. So far, only 5% of the max supply of OP has been put into circulation:
That probably sounds worse than it is since the other 95% will be distributed over several years. But I still think there’s a better play: Synthetix (SNX).
Synthetix was one of the pioneers of Optimism, dating all the way back to mid-2020. In fact, SNX was the first token I ever staked, and it was right after they moved their staking service to Optimism’s platform. (I was new to DeFi back then and insanely confused by all this, but don’t worry — you get used to it!)
I’ve heard people say that one year in the world of crypto is equal to 10 years in the real world, and it couldn’t be more true. In the two years since Synthetix began its transition to Optimism, they’ve introduced one of the largest sets of DeFi products I’ve ever seen.
Here’s a list of a few of their products:
• Kwenta: Perpetual Futures Trading
• Lyra: Option Trading
• Thales: Event Betting (betting on future crypto prices, sports, etc.)
• Polynomial: Passive Yield Products
The Case for Arbitrum
Not to take anything away from Optimism’s success, but Arbitrum pulled off something that I think has never been done in crypto: $1 billion in TVL with no token.
That means their user base is 100% organic, and that’s extremely important in crypto with all the scammy activity floating around. Much of this success is due to the trading app I mentioned earlier: GMX, which has pulled in over half a billion dollars’ worth of TVL at current prices.
There are some other very interesting apps on Arbitrum as well. One of my personal favorites is Dopex, where you can deposit a number of coins — including ETH and USDC — and their algorithms manage those deposits via option strategies (mostly shorting options) with the goal of making consistent, stable gains.
Another app that recently announced they’ll be launching on Arbitrum is Y2K Finance. Y2K is still in “building mode,” which means their product hasn’t hit the market yet, but their first product looks very interesting.
Essentially, they would make it possible for DeFi apps (for now, apps with stablecoins) to sell insurance to their users in case something bad happens. At first, the use case would be that users receive a payout in case the app’s stablecoin loses its peg to the dollar.
I briefly mentioned this app during a video a few weeks ago because it really caught my eye and, as far as I know, there’s nothing else like it in crypto.
That’s it for this week’s crypto update! I’ll be back next Friday with more. I hope you enjoyed the read and, as always, leave any and all questions and comments below!
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My brother has all his investments at Fidelity and he is able to view his trades/balances from his Coinbase accounts on the Fidelity platform. So once you get your account open and setup on Coinbase they make it easy to see all your investments. Hope that helps
Laurel & Dirk I would keep it simple. Go in your Coinbase app and purchase ETH as you normally would. The technicals are like Latin. You can’t really go wrong w BTC & ETH in the LT.