Web3 Watch

A very happy new year to everyone! We hope you had a great start to 2024. 

Binance’s Spot Trading Market Share

Twitter user @DefiIgnas pointed out that Binance has come out of 2023 with a lower market share when it comes to spot trading. He highlights that Binance entered 2023 with a 65.6% market share of spot trading volumes, but ended the year with 43.5%. Other CEXes like OKX, Bybit and Upbit had increased their spot trading market share within the year. Here is a summary of the changes:

• However the above data may not be a direct result of traders moving funds from Binance to other exchanges, but  could be a result of fresh capital inflow into other exchanges, by avoiding  Binance, given their recent challenges in the US. 
• Binance is still the most dominant centralized venue – despite losing its market share in spot trading, they have maintained their lead in market share when it comes to futures (using BTC and ETH as proxies)

Twitter user @DeFi_Made_Here also pointed out that DEX spot volumes are decreasing compared to CEX spot volumes in 2023.

Looking ahead should there be a bullish year ahead , we would expect an increase in trading volume across both centralized and decentralized venues this year, with centralized venues probably dominating due to their accessibility to newcomers. 

We expect Coinbase, in particular, to see increased flows, given that they are the custodian and exchange of choice for various Bitcoin Spot ETF applicants.

Layer 1 Highlights

Can Ethereum regain its footing?

Coming into the new year, markets rallied, with BTC rising from ~$42k levels to $45k+. In terms of ETH/BTC recently, and even on the first 2 days of the new year, ETH has been underperforming and has lagged greatly against BTC. This is not just because of the attention focused on the approval and launch of the Bitcoin Spot ETFs, but also because of many expressing concerns about high transaction costs on the network. 

Nevertheless, there are still potential tailwinds for the second-largest cryptoasset – the first being attention shifting to the potential of ETH Spot ETFs , and second, being the Dencun Upgrade that we had touched on in June last year. 

As mentioned previously, the Dencun Upgrade will assist Layer 2s in scaling, by providing dedicated storage on the consensus layer of the L1, making transactions cheaper and faster. The upgrade was supposed to occur in November 2023, but was delayed to Q1 of this year. 

The testnet is estimated to be launched this week on 7 January, while the mainnet is estimated to be ready in February. We await to see if the Dencun Upgrade in February will bring attention and volumes back to the Ethereum ecosystem, along with other ETH ecosystem-related plays such as L2s and more.

Parallelized EVM Executions: Sei

Sei is an EVM L1 that launched its mainnet in August 2023, along with its token, $SEI. Before launching, Sei captured much attention, with parallel executions as its unique selling point. Unfortunately, post-airdrop and launch, $SEI’s price fell from $0.25 to a low of $0.12 and has 

been flat for most of the year. However, towards the end of November 2023, the narrative of parallel executions returned, breathing life back into the token – $SEI surged from ~$0.14 to its all-time-high of ~$0.62 to close out the year (~4.42x). This momentum has continued 2 days into the new year, where $SEI reached a higher ATH of $0.75. 

Here are some potential reasons for this move higher:

• Resurgence of the parallel execution narrative
• Anticipation of another EVM L1 that leverages parallel executions, Monad
• Launch of V2 mainnet, which offers (i) higher throughput at 12.5k TPS, (ii) high-speed dApps at 390ms TTF, (iii) integration of Metamask, and (iv) easy EVM code-base deployment onto Sei
• Attention captures from the launch of memecoins – Seiyan, Seitans etc. → higher risk-reward plays on $SEI

At this point it is hard to tell which of these vectors are sustainable. However, we believe that a successful launch of Monad in the future would bring attention back to Sei, where both tokens may share a relationship similar to that of Optimism and Arbitrum. 

Layer 2 Updates

Polygon

Recently Polygon Founder Sandeep Nailwal stated that parallelization actually has already been in production for Polygon PoS for sometime.” Some in the community responded to Sandeep, accusing Polygon of trying to “attach themselves to every narrative”. At the same time, others in the community pointed out that Polygon PoS has indeed been working on it since 2022.

Regardless, the discourse has had no impact on the price action of $MATIC. 

Metis

Earlier around mid-December 2023 , Metis, an hybrid EVM L2 that utilizes an optimistic rollup design while using ZK proofs, announced that they will be offering a total of 4.6m $METIS (worth over $420m as of 2 Jan 2024) to dApps in the ecosystem, as part of its grant program. 

Upon the announcement, $METIS surged from ~$21 to ~$30 (up ~35%) within the day. Since then, $METIS has soared to over $90 within a span of 2 weeks. (4x within a month) Also, it has since surpassed  L2 incumbents such as zkSync and Base, breaking into the top 3 L2s with $738m in TVL according to L2Beat.

• It appears implementing a grants program would benefit the ecosystem in terms of TVL and its price action:

1. A recent example is Arbitrum’s Short-Term Incentive Program of ~71.4m $ARB, that caused a surge in TVL by almost half a billion, and a positive price action of its token. 
2. Another example from the previous cycle is Avalanche’s $180m DeFi liquidity mining incentive program in August 2021, followed by another $20m incentive program on Trader Joe in September 2021. Below is a screenshot of Avalanche’s TVL back in 2021:

The first injection of incentives in August 2021 caused a surge in TVL from ~$100m to over $1b within the month, with TVL hitting close to $10b within a span of 2 months. The price of $AVAX rose from ~$12 to its peak of ~$134 from August to November 2021.

The incentives will be distributed to projects in Q1 2024, following the decentralization of Metis’ sequencer – We are already seeing much capital flowing into the ecosystem and its projects, and would expect this to continue, especially once the incentives begin to roll out.

Manta

In early-December 2023, Manta unveiled their L2, New Paradigm, where users who deposit their ETH or USDC onto the L2 will receive native yield, akin to Blast. Users who bridge their ETH would earn native yield through staking via StakeStone, while users who bridge USDC would earn native yield through T-bills via Mountain Protocol. Within 2-3 weeks, Manta has accumulated up to $558m in TVL, according to L2Beat. Those that have bridged to Manta for the first-time will not be able to withdraw their funds for 69 days.

Manta’s rapid rise can be attributed to the distribution of Lucky Boxes, which are available to be claimed by users until 15 January. The more ETH bridged over to Manta, the more Lucky Boxes they can attain. There are 2 types of Lucky Boxes – (i) Common Lucky Boxes containing 1 NFT each and (ii) Frenzy Growth Lucky Box containing 2-20 NFTs each. Users who open such boxes stand a chance to obtain 6 different types of NFTs, with varying rarity. Each NFT is entitled to varying amounts of airdrops based on the NFT’s rarity. When combining the 6 different NFTs, a user will receive a ship known as “The First Modular L2”, which unlocks Special Rewards – perhaps a larger airdrop. A total of 50m MANTA will be distributed as airdrops. 

Although Manta has seen a slower rise in TVL, and lesser TVL than its closest “native yield” competitor, Blast, they have an edge by (i) granting users access to their tokens, unlike Blast which only allows users to withdraw their assets in February. They are also (ii) cutting in front of the line by aiming to launch their token this month, as compared to Blast in May, and (iii) capitalizing on the narrative of modularity, as the first ETH L2 on Celestia.

$TRB crash causes ~$2m loss to SNX stakers 

Just crossing into the new year, the volatility of $TRB has resulted in a ~$2m to 3.4m losses to SNX stakers on $TRB shorts. Within a span of 6h, $TRB pumped by 360%, followed by a crash of ~80% in the ~6-7 hours that followed.

Various members in the community have opined on various methods that could be employed to avoid such an incident. Twitter user @Defi_Made_Here stated that Synthetix’s OI caps are “very inefficient”, especially due to the fact that the OI caps were denominated in $TRB rather than USD. 

The user suggested 3 different measures that could help: (i) a skewness cap rather than an OI cap allows OI to scale, while reducing risk for LPs, as seen in Aark Digital, (ii) assigning a monetary risk measure that uses a risk engine to dynamically affect the cost of trading based on quantifiable risk metrics to abstract away the need for OI caps,, and (iii) trades having a price impact based on liquidity available in liquidity bins, rather than based on liquidity on CEXes, on OI, or no price impact at all, as seen in Chromatic.

Exploits

Orbit Chain

Another mishap that occurred on New Year’s Day was the exploit of Orbit Chain, a cross-chain bridging protocol, for ~$81.4m. (This is not to be confused with the bridge, Orbiter Finance.) The breakdown of stolen assets is as follows: 

• 30m USDT
• 9,500 ETH 
• 10m USDC
• 10m DAI
• 230.88 wBTC

The Orbit Chain team has since announced that they are undergoing investigation support and cause analysis with the Korean National Police Agency and Korea Internet & Security Agency. They are also in close cooperation with domestic and foreign law enforcement agencies. They have also identified a ‘significant clue’ and are strengthening their efforts to track the funds based on it.

Radiant Capital

On 2 January 2024, Radiant Capital, a borrow / lending protocol on Arbitrum, BNB Chain, and Ethereum, was exploited on the Arbitrum side via a new native USDC market, due to a “known rounding issue” in its codebase. Twitter user @Crypto_Ladz cites that blockchain security firms finds the cause for the exploit to be cumulative precision errors in deposit() and withdraw() operations. 

The Radiant Team has since reached out to the exploiter via an on-chain message, requesting for next steps – potentially a negotiation for a whitehat or greyhat arrangement. Operations have been halted and will be restored upon the completion of investigations. 

Approximately half a day after the exploit, TVL still remains rather flat, with no significant declines, most probably due to the temporary suspension of its lending market on Arbitrum. Strangely,  $RDNT, Radiant’s native token, merely fell by ~6.59% in a span of 2 hours, but has since negated its losses. (chart below)