July 15, 2022
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today we’re covering starkware's announcement of their initial token allocation, the latest developments in makerdao and their push to onboard real world collateral asset types, and ethereum developers' decision to simplify the mainnet merge activation process.

also, on this week’s episode of the galaxy brains podcast, we discussed new cpi inflation data, the first known woman to become a bitcoin core maintainer, and a market moving tweet by binance ceo changpeng zhao about uniswap that later turned out to be false. in addition, vp of product at galaxy digital mining rachel rybarczyk joined us on the podcast to discuss developments in stratum v2.

have a great weekend,
Market Update
The total implied network value (market cap) of the digital assets market stands at $912bn, down 5.6% from last week (when it stood at $967bn). Bitcoin’s network value is 3.43% of gold’s market cap. Over the last 7 days, BTC is down 5.4%, ETH is down 2.5%, and DOGE is down 10.4%. Bitcoin dominance is 42.68%, down one percentage point from last week.
Data current as of 9:20 PM ET on July 14, 2022. Prices and data via Messari.
Three Big Stories
🌟 Starknet Token Confirmed
StarkWare outlines decentralization path with new token & formation of StarkNet Foundation. Following 3AC’s Su Zhu’s tweet that called out the hedge fund’s liquidators for failing to exercise StarkWare token warrants, StarkWare confirmed its plans for a token, sharing an outline around its model, usage, and distribution. As background, StarkWare is building a L2 on top of Ethereum in the form of a STARK-powered ZK rollup. StarkWare built StarkEx and StarkNet, which together are home to popular applications including dYdX, ImmutableX, DeversiFi, and Sorare.

StarkWare’s announcement outlines the roadmap towards the decentralization of StarkNet, which includes the creation of the StarkNet Foundation to oversee the development of the protocol and a new token to be used for governance and to pay for gas fees. The Foundation will be responsible for developing the community decision-making process around protocol upgrades, working on the protocol upgrades, creating a system for dispute resolution, and funding public goods on StarkNet.
The token was minted with an initial supply of 10bn (not capped). The initial token allocation is split with 17% to StarkWare investors, 32.9% to core contributors, and 50.1% to the StarkNet Foundation—to be split among community provisions (9%), community rebates (9%), grants for research and development (12%), a strategic reserve (10%), donations to “highly regarded” institutions and NGOs (2%), with the remaining 8.1% left unallocated. Tokens allocated to investors and core contributors will be in a 4-year lockup with a one-year cliff and linear vesting.
OUR TAKE: 3AC's Su Zhu may have led StarkWare to disseminate information around its STARK token earlier than expected, but eventual plans to launch a token should not have come as a surprise. While token details are yet to be finalized, some critics took issue with the initial outline shared by the Starkware team including the amount allocated for Core Contributors and investors, the lack of an explicit airdrop for early users, and the intent to use the token to pay for gas fees (rather than sticking with ETH, which is currently used).
In an industry founded on the principles of decentralization, we typically take issue with large token allocations for "insiders" vs. the public. But StarkWare and other teams building out ZK rollups have been tackling one of the most difficult technical challenges of bringing scalability to Ethereum while also preserving privacy benefits. Their work will surely still be needed after the token launch (target Sept 2022) and there is an argument to be made that the teams deserve compensation. However, the allocation of the STARK token has raised eyebrows and some criticism for the lack of an explicit airdrop for early users. The initial 17% investor allocation is equal to that included in Optimism's OP, which didn’t generate as much criticism at the time. We wrote back in April that Optimism's OP token was relatively generous in rewarding early users and that having multiple rounds of airdrops was a great incentive to maintain engagement. For early StarkNet users, an airdrop has not been ruled out and can be included in the Community Provisions allocation or could come from the ecosystem project teams that are looking to provide an additional reward to their users.
Last, the intent to use STARK as the gas token of the platform may come as a disappointment to the ETH community since it removes a way for value to accrue to ETH. However, having a native token used to pay for gas provides application teams with significantly more operating flexibility, which ideally can be levered to deliver the best UX. StarkWare anticipates that fees will be paid exclusively with the STARK token, but that users will still have the option to pay fees in ETH - so value could still accrue to the ETH token depending on how this feature is implemented. After dYdX announced several weeks ago that it would be migrating from StarkEx to Cosmos due to, among other reasons, a lack of decentralization (primarily with the role of the sequencer), a STARK token provides a path towards decentralizing the platform (first, in governance and then eventually with the sequencer for data availability provisioning and submission of validity proofs). Who's to say dYdX won't be incentivized to move back to a rollup then? - CY, KN
🏦 SocGen Gets its own MakerDAO Vault
MakerDAO voted to open a new $30 million collateral vault made up €40 million in OFH bonds issued by Societe Generale (SocGen) – one of the largest French Banks. The AAA-rated bonds were first issued on Ethereum in 2020 and are backed by French home loans. SocGen has been a leader in experimenting with on-chain securitization of real-world assets (RWA), having issued its first bond-backed tokens in 2019. 

SG-Forge, a subsidiary of SocGen that oversees digital asset issuances, is responsible for pledging the OFH bonds to Maker, generating the DAI, and then loaning it to SocGen, which will convert it to USD. DIIS Group, a Paris based financial services firm contracted by Maker, will represent Maker’s real-world presence and be responsible for enforcing the loan terms on Maker’s behalf.

The loan will have a stability fee – i.e. Interest rate – of 0.05% and liquidation can occur if the collateral ratio drops below 115%. The OFH bonds will be valued daily by an independent collateral agent to ensure that their market value is above the liquidation ratio. If the value drops below the collateral ratio, the agent will notify Maker governance who can initiate the liquidation using a liquidation oracle contract specific to RWA. In the event of a liquidation, SocGen will have five days to either collateralize the loan with additional OFH bonds or pay down a portion of the loan. This is a bespoke process different from Maker’s crypto-collateralized vaults where liquidations are initiated immediately.

Only 12% of MKR token supply participated in the vote, with 83% of voted tokens supporting the proposal, 17% abstaining, and none voting against. The vote comes on the heels of two other real world asset proposals that approved a 100 million DAI loan to Huntington Valley Bank and an allocation of $500 million to US Short Treasuries and IG Corporate Bonds.

Maker has already approved five other real world asset vaults that collectively created nearly 42 million DAI. 
OUR TAKE: The past month has been a boom for Maker’s RWA strategy. The $630 million worth of real world assets that has been allocated represents a 15x increase in Maker’s exposure to RWA. Collectively, however, RWA still only represents less than represents 10% of all outstanding DAI.

At its core, Maker’s RWA initiative is focused on further diversifying the protocol’s collateral to reduce risk and hedge against DAI’s large dependence on USDC (USDC accounts for more than 50% of DAI’s collateral). Proponents of the initiative highlight the importance of RWA to expand the scale of DAI, enhance its stability, and increase its decentralization.

However, the onboarding of any RWA also increases the amount of DAI collateral subject to regulation and increases the overall complexity of the protocol as new entities must be spun up to deal with onboarding, maintenance, and in a worst-case scenario – liquidations. Unlike on-chain crypto collateral, RWAs can be difficult to price, subject to counterparty risk, and may be illiquid. This continues to be a core objection of some Maker contributors who worry that too much exposure to real world collateral could outweigh any benefits.

The collapse of crypto asset prices in recent months has depressed DeFi yields, which had been a major use case for DAI. Whereas previously investors mostly leveraged DAI to get more exposure to crypto yields, Maker’s push into RWA flips this dynamic, drawing real world yields on-chain. While, the economics of OFH are not particularly attractive (SubVentures – a member of Maker’s Strategic Finance Core Unit – said, “the deal doesn’t have good risk/reward”) it provides another opportunity for Maker to work through the difficulties of collateralizing off-chain assets with a reputable TradFi partner willing to experiment. In that regard, despite the still early steps, integrations like this are necessary steps towards building a durable template that the Maker team can leverage as it expands its integration with traditional finance and real world assets. Long term, integrating more RWA would significantly alter the landscape of DeFi and achieve a vision many advocates have proposed: replacing key real world market infrastructure with DeFi primitives. - LT
🤖 Ethereum Devs Simplify Merge Activation
On Thursday, July 14, Ethereum core developers reached a rough consensus around activating the Merge upgrade through a single client release instead of two, and now optimistically anticipate a potential Merge activation on Ethereum mainnet by September 19th. For the past two testnet Merge activations on the Ropsten and Sepolia networks, node operators have been required to first download new client software and then at a later date either download a second client release or issue a terminal total difficulty (TTD) override command to the first client release. For background on what TTD is, read this Galaxy Digital research note. For Ropsten, the dual release/TTD override in the Merge activation process was a necessary step given that the hashrate of the network was so low as to make it trivial to materially impact by a malicious mining entity. In fact, in late May, an unknown miner caused hashrate on Ropsten to 30x overnight and triggered the TTD threshold prematurely, which in turn activated the Merge before network participants were ready.

The manipulation of hashrate on Ethereum is significantly harder for a bad actor to pull off given that the actual network hashrate on mainnet is several magnitudes higher than on Ethereum testnets. However, during a prior developers call in early June, developers had discussed mirroring the dual release/TTD override process on mainnet anyways to ensure that all client teams, users, validators, and other node operators practice the same routine for the Merge upgrade through all major testnet variations. During last Friday’s All Core Developers call, developers revisited the Merge activation process in light of learnings from the Sepolia Merge activation, which highlighted the difficulty for node operators to correctly configure their client software. Complexities around client software configurations were also a risk that we highlighted in this Galaxy Digital research report.

Given ongoing concerns around Merge upgrade complexity, developers reached a rough consensus during Thursday’s Consensus Layer call to execute the Merge without a second client release or TTD override. Instead, developers have agreed to push out the upgrade through one single release on mainnet and mirror this simplified process for network stakeholders to practice on the final major testnet activation for the Merge, which is the Goerli testnet. On the topic of the Goerli testnet, developers also discussed Merge activation timing on Thursday’s call and agreed to aim for a testnet activation around July 11th. Assuming the Goerli Merge testnet activation runs smoothly, developers anticipate a potential mainnet activation for the upgrade by September 19th .
OUR TAKE: As detailed in our prior report about the execution risks associated with the Merge, the activation process for the upgrade is significantly more complex than any prior hard fork in Ethereum’s history. It requires node operators currently connecting to Ethereum to download two pieces of client software, one for connecting to the execution layer (EL) of the network and a second for connecting to the consensus layer (CL). In addition, it requires node operators to configure a third piece of software known as the Engine API to facilitate proper communication between the EL and CL nodes. The decision to simplify the Merge activation process by removing the need for node operators to upgrade both their EL and CL nodes twice is a positive step towards mitigating the execution risks of Ethereum’s transition to proof-of-stake (PoS). It reduces the risk of potential operator errors and pitfalls and improves operators’ user experience during the Merge.
Removing the need for a TTD override during the Merge activation process is not the only area of simplification that developers agreed on during Thursday’s call. Developers also agreed to delay the activation of specialized software known as “MEV-Boost” for validator node operators wanting to earn maximal extractable value (MEV) until after the Merge is considered finalized on the network. For more information about MEV on Ethereum, read this Galaxy Digital report. Finalization under Ethereum’s new PoS consensus protocol called Gasper is reached after 2 epochs. An epoch is a bundle of 32 slots, with each slot being an opportunity for a block to be proposed and voted on by validators. An epoch usually lasts 6.4 minutes, which means that transactions are normally considered finalized in Ethereum’s PoS model after 12.8 minutes. To avoid complicating the Merge activation process with an additional piece of software, developers decided on Thursday to trigger MEV-Boost in CL client software only after finalization is reached on the network—likely 12.8 minutes after Merge activation.
These simplifications to the Merge activation process are not without their own risks. As highlighted by Ethereum developer Micah Zoltu, the potential for a malicious miner to accumulate enough hashrate and materially impact how quickly TTD is hit on mainnet is low but not impossible. In addition, delaying MEV-Boost until after 2 epochs, which can contain up to 64 blocks, may mean that some validators rely on other potentially more unreliable and untrusted software to earn MEV in the interim. Both of these risks, however, developers have deemed as small in comparison to the significant gains that can be made to the user experience around Merge activation. -CK
Other News
  • GameStop launches NFT marketplace, giving users access to over 200 collections and 53,000 NFTs.
  • Celsius files for Chapter 11 bankruptcy protection
  • OpenSea fires around 20% of their staff, citing “broad macroeconomic instability”.
  • Polygon’s MATIC spikes 22% after partnership with Disney is announced to build new AR, NFT, and AI business units.
  • Brazil’s largest private bank to launch tokenization platform and crypto custody services
  • The BACC, the only advocacy body representing the interests of India’s crypto industry, is disbanded by its parent organization, calling into question the countries future in the space.
  • The research arm of the U.S. Treasury, known as the Office of Financial Research, publishes a report examining how the introduction of a CBDC could affect the stability of the banking system. 
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
or visit www.gdr.report
Overview of Ethereum's Merge Upgrade and Associated Risks
Christine Kim and Arunabh Sarkar break down the Merge activation process and shine a light on the upgrade's execution risks.

Galaxy Digital Research Podcast
Listen to our podcast on Apple, Spotify, Amazon, or wherever you listen to podcasts.

In this week's episode, we are joined by Rachel Rybarczyk from Galaxy’s Mining team to discuss developments in Stratum V2. We also discuss the latest CPI numbers, MakerDAO governance, and the addition of a new female bitcoin core maintainer.
Charts of the Week
The number of bitcoin addresses with a non-zero balance and addresses with 1+ BTC are both at all time highs. The rapid increase in 2022 of addresses with 1+ BTC can be seen as an indication that smaller holders have been accumulating during the market rout.
The amount of gas used on Ethereum has spiked this month after several months of precipitous decline, indicating that Ethereum usage and demand for block space is returning following a period of relative disinterest. Notably, recent spikes in transaction activity is coming from transfers of ERC-1155 tokens, which are tokens that can possess either fungible, semi-fungible, or non-fungible properties.
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research, Galaxy Digital
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