Optimistic Crypto Summer
… And $200M in crypto hacks
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This week we cover two contrasting stories developing in the crypto space. In one hand, we dive into the growth of Ethereum L2s, particularly Optimism, boosted by its recent token rewards program. On the other, we evaluate the grim and somewhat bizarre hacks crypto has been experiencing and what they may mean for the space.
Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Both Bitcoin and Ethereum fees dropped, with fees on the latter reaching their lowest weekly amount in over a year
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin recorded modest outflows and Ethereum small outflows as markets trend relatively lower with little conviction on either direction
Optimistic Crypto Summer
While some people deep in the crypto space dubbed 2022 as L2 ’22, the meme might just be starting to come into reality. Layer 2 (L2) platforms that bring forth scalability for Ethereum have accelerated in growth, propelled by token incentives. In particular, this has benefitted the Optimism L2, as well as protocols building on top of it.
Driving Incentives — 2021’s fuel is back and a layer higher
- In 2020, DeFi protocols such as Compound pioneered liquidity mining incentives, in 2021 Layer 1s such as Avalanche followed suit and 2022 may be shaping up to be the turn for L2s
- OP token rewards are now available in at least three protocols (Aave, Velodrome and PoolTogether) and is expected to expand to dozens more over the coming months
- 10.8% of the OP token supply (currently worth $890M) is allocated to their governance and partner funds, which are being used for teams building on top of Optimism to allocate to grow the ecosystem
- This, along with 14% of the supply (worth $1.15B) for future airdrops, is likely to drive further usage to Optimism’s network
- So far transactions on Optimism have quadrupled since rewards began being distributed to protocols
Protocols are naturally also seeing increased demand.
Accumulation & Appreciation — The largest protocols on Optimism are seeing interest from whales being reflected on their price action
- Aave became the number 1 protocol on Optimism by TVL as per DeFi Llama shortly after the OP incentives began being distributed
- Whales holding between 10k and 100k AAVE (the category with largest holders excluding exchanges and contracts) have increased their holdings by 8.2% since the June bottom and have been on a general uptrend in 2022
- AAVE’s price has climbed 120% since the June bottom, while the other two largest “bluechips” on Optimism, Synthetix (SNX) and Uniswap (UNI) have climbed 180% and 170%, respectively
- OP has quadrupled during the same time
This follows a general rebound in crypto, but it is worth highlighting ETH’s 87% increase in comparison, or for a more head-to-head comparison the 105% increase in JOE, the governance token of the largest DEX on Avalanche.
The promise of layer 2 platforms to bring cheaper transactions to Ethereum has been anticipated for long. Providing transactions under $0.25, both Optimism and Arbitrum had been getting signs of traction, which are just beginning to accelerate due to Optimism’s “reasonably sized” incentive program.
Hacks Continue to Abound
In stark contrast to the excitement building up around Optimism, hacks in crypto continue to bring fear. This week alone, approximately $200M was lost to exploits in crypto, with most of it coming from Nomad, which touted itself as a secure cross-chain token bridge.
Yet Another Bridge — Tools to send tokens from one blockchain to another have been a consistent target for hackers
- Four out of the five largest hacks in crypto protocols occurred in bridges, resulting in over $1.75B in losses based on data from Rekt News’ leaderboard
- While these hacks vary in nature — from poor private key management to smart contract bugs — it is clear that the inherent complexity of bridges pose a threat that can be exploited
Breaking Down Nomad’s Bizarre Exploit — This exploit was unlike previous bridge hacks, and most exploits in general
- Following an upgrade to Nomad’s contracts in June, they became exposed to a fault allowing addresses to process bridge withdrawals without proof of assets entering the other side of the bridge
- Once the attacker started exploiting this fault on the WBTC pool, hundreds of addresses started replicating the attacker’s code in order to steal funds from other pools (decentralized hacking anyone?)
- Fortunately, some of these attackers were so-called “whitehat hackers”, who took advantage of the exploit but returned funds
- Approximately $20M have been sent to Nomad’s official recovery address, with whitehat hackers receiving a 10% bounty in exchange for no legal action
Other exploits this week came due to a Solana wallet, Slope, which led to $6M in losses and thousands of affected users, and $1.6M exploit to Reaper Finance, a protocol in Fantom. These events highlight how crypto can still be a risky sector at large. While this may sound obvious to most, it is worth emphasizing it every now and then as new entrants come into the space.
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