DeFi: $600MM+ deposited into Blast, an L2 that stakes bridged ETH, despite rug risk
Blast features a gamified airdrop, supported by a "trust us" promise, which is the primary motive for users to deposit funds.
Gm Fintech Futurists —
Today we highlight the following:
L2s: Layer-2 Blast traps over $600mm in TVL in a week (link here)
CURATED UPDATES: Financial Institutions and Adoption; DeFi and Digital Assets; Blockchain Protocols; NFTs, DAOs and the Metaverse
To support this writing and access our full archive of newsletters, analyses, and guides to building in the Fintech & DeFi industries, subscribe below.
In Partnership
Join Fintech Meetup (March 3-6), the new BIG event with “the highest ROI” for attendees & sponsors with reasonably priced sponsorships, tickets, and rooms. Join 45,000+ double opt-in meetings, and Network with 5,000+ attendees.
👉 Get tickets Now!
L2s: Layer-2 Blast traps over $600mm in TVL in a week (link here)
In a little over a week since launch, Blast captured over $600MM in total value locked (TVL) and counting. Blast is the latest Layer-2 (L2) rollup in the market. L2s are off-chain networks built on top of a Layer-1 (L1) blockchains, like Ethereum, with the aim of scaling it by providing cheaper and faster transactions while relying on the underlying L1 for security. Blast will be an EVM-compatible optimistic rollup, similar to Arbitrum and Optimism, the two biggest L2s by transaction count.
Blast differs from its competitors by claiming to incorporate yield for ETH and stablecoins within the protocol. Tokens locked in the bridging contract — the smart contract “bridging” tokens between Ethereum and the L2 — are utilized to earn yield on the underlying blockchain, Ethereum. The yield is then automatically applied to the corresponding tokens on the L2.
ETH holdings will, supposedly, be staked in liquid staking protocols, like Lido, to generate a 4% yield for holders. Stablecoins will be invested in the Maker DAO ecosystem, with exposure to treasuries, to earn a 5% yield. We should note that Blast claims these yield-generating mechanisms are risk-free returns. There is a risk associated with any ETH staking, however small, as well as in using Maker. Further, such staking opportunities are already freely available to any crypto user and are not unique to Blast, although Blast does provide the yield “automatically”.
Blast is not yet a working product, but it has already launched a bridging contract that allows users to deposit funds. The control of this contract is currently in the power of a five-member security council, three out of five of whom are required to pass any changes. If there is a majority agreement from the council, the smart contract is able to send the deposited funds to another contract, like Maker or Lido, to earn yield. In theory, funds held in this contract cannot be withdrawn to an externally owned account (EOA), but there is nothing stopping three of the members from agreeing to send the tokens to another smart contract which enables them to withdraw to an EOA. This is a critical risk for anyone depositing funds into the Blast smart contract.
Stop putting your stuff in a custodial box and being surprised when the box gets stolen or lost.
So, why are people rushing to deposit their ETH and stablecoins into this contract? The founder of Blast is also the co-founder of NFT marketplace Blur. Blur has highly gamified their token airdrop to steal market share from competitors, and this worked very well — it was the fifth biggest airdrop in crypto, worth over $100MM, and the protocol has since retained its position as the leading NFT marketplace with a 57% market share. This is, in part, due to washtrading by insiders to create transaction volume.
Blast features an equally gamified airdrop, which is the primary motive for users to deposit funds. Users need a referral code to gain early access. Blast then requires users to follow its page on X and provide limited access to their own X accounts. The access allows Blast to follow/unfollow accounts and to view posts from any accounts the user follows, including private accounts.
Once set up, users earn points that will determine the airdrop they receive. Points are earned by depositing ETH, referring friends to grow your “squad”, and through a “super spin” lottery draw. The super spin is affected by your “luck”, which can be increased by growing your squad size, and the frequency of spins is determined by the amount of ETH you have deposited (1 ETH = 1 spin a week).
At best, this is way too much financial engineering. At worst, Blast seems to exhibit many features of a pyramid ponzi scheme, from the gamification of deposits to the fact that there is no working product. Depositors are effectively entrusting 3 to 5 strangers to hold and stake their funds on their behalf, until at least February, in the hope that they are able to capitalize on an airdrop at the end of it.
While the risks are significant, the project also gained traction due to its backing from prominent VC firm Paradigm, who have since said they do not endorse these tactics and are unhappy with the decision to launch the bridging contract prior to the deployment of its L2. The tactics adopted by the Blast team are clearly effective, but they may lead to a giant “rugging” of unsuspecting — or perhaps simply naive — depositors.
Given that the industry has just moved past Terra, FTX, and Binance sins, it would be a shame to see another black hole materialize. We are deeply anxious about the potential for irresponsible actors to destroy this progress at the expense of FOMO-ridden investors over-excited about the prospects of a crypto bull market. On the positive side, there is a case to be made that blockchain bridges, in general, should avail themselves to interest income. If the custodial conflict can be resolved, perhaps a new business model has been opened up for future projects. We expect many bridging projects, like Wormhole, to be paying attention.
👑 Related Coverage 👑
How to Reach 200,000 Fintech Professionals
With a 35% open rate and 1 million post views per month, we have an engaged audience of Fintech, DeFi, and AI enthusiasts receptive to your messaging.
👉 Contact us to learn more about our custom opportunities.
Curated Updates
Here are the rest of the updates hitting our radar.
Financial Institutions and Adoption
⭐ Binance operating without license in Philippines, regulator says - Cointelegraph
U.S. Treasury's Wally Adeyemo calls for more authority to go after bad actors in crypto - The Block
DeFi and Digital Assets
⭐ Binance to End BUSD Support on December 15, Convert User Balances to FDUSD - Decrypt
“Benevolent Dictator” Succeeds in Bringing Aave’s Stablecoin GHO Near Parity With USD - The Defiant
Blockchain Protocols
⭐ NEAR Protocol Overtakes Ethereum and Bitcoin in Key Activity Metrics - The Defiant
Wormhole Sells $225M of Token Warrants in 2023’s Largest Crypto Raise - The Defiant
dYdX Chain Launches Trading Rewards Program - The Defiant
NFTs, DAOs and the Metaverse
⭐ BLUR Up 30% Following Season 2 Airdrop, Binance Listing - Decrypt
Esports Giant Team Liquid Reveals Collab With NFT Game Illuvium - Decrypt
Uniswap DAO Approves Delegation Of 10M UNI To Active Voters - The Defiant
Web3 Gaming Company OhBaby! Partners With Paramount - The Defiant
⭐ Shape your Future
Go deeper with the Fintech Blueprint. Our premium subscription grants access to:
Wednesday’s Long Takes with a deep, comprehensive analysis.
Office Hours, monthly digital roundtable discussions with industry insiders.
‘Building Company Playbook’ series, offering insider tips and advice on constructing successful fintech ventures.
Enhanced Podcasts with industry leaders, accompanied with annotated transcripts.
Archive Access to an array of in-depth write-ups on the most important topics and companies in fintech.