Welcome to The Protocol, CoinDesk’s comprehensive weekly overview of significant advancements in cryptocurrency technology. I’m Ben Schiller, CoinDesk’s Opinion and Features editor.
In this issue:
– Can Based Rollups tackle Ethereum’s challenges?
– Lido’s new modular structure
– Uniswap’s much-anticipated Unichain launch
– Ethereum’s upcoming Pectra upgrade
Understanding the Layer-2 Landscape
BASED ROLLUPS TO THE RESCUE: In the past few years, Ethereum has adopted a layer-2 scaling strategy that encourages the emergence of auxiliary networks known as “layer-2 rollups.” These rollups aim to enhance the Ethereum ecosystem by offloading transactions, thereby reducing fees and accelerating processing times for users. However, this shift has resulted in a fragmented layer-2 landscape, making interoperability a significant challenge.
Layer-2 networks typically post transaction data back to Ethereum but often face difficulties when attempting to communicate with each other. This lack of direct communication can lead to high costs and delays when transferring assets or data. Moreover, many rollups depend on centralized sequencers—companies that control the process of transaction data submission, creating potential vulnerabilities.
In response to these concerns, Ethereum developers are advocating for a new approach: “based rollups.” Unlike traditional rollups that operate on separate layer-2 networks, based rollups delegate execution tasks back to Ethereum’s layer-1. This innovative method utilizes Ethereum’s extensive network of validators for transaction sequencing, mitigating the risk of a single point of failure.
The growth of rollups like Optimism, Arbitrum, Base, zkSync, and Blast highlights the increasing transaction volumes within the Ethereum network. Currently, there are 140 active layer-2 networks, but the user experience remains cumbersome when moving assets between them. As Ethereum expands, enhancing the communication and “composability” between these layer-2s is critical for the ecosystem’s future.
Lido’s New Modular Framework
LIDO GOES MODULAR: The developers behind Lido, the largest staking service on Ethereum, have unveiled plans to enhance the platform through modular “vaults.” This new structure will feature stVaults, customizable components designed to cater to institutional needs and complex staking strategies.
Lido revolutionized liquid staking, allowing users to pool their ether (ETH) and stake their tokens with the network in exchange for interest. Users receive a receipt called Lido staked ETH (stETH), which they can trade freely. With Lido V3’s stVaults, the framework will support diverse staking setups, enabling institutional stakers to personalize their strategies, node operators to attract high-volume stakers, and asset managers to explore new staking applications.
Konstantin Lomashuk, founder of the Lido staking protocol, emphasized the potential of customizable infrastructure: “With this, you can build even more complex products.”
Uniswap’s Layer-2 Launch
UNICHAIN FINALLY: Uniswap Labs has officially launched its much-anticipated layer-2 network, Unichain. This new platform, powered by Optimism’s OP stack, offers users faster and more cost-effective transactions compared to Ethereum’s mainnet. Designed specifically for decentralized finance (DeFi), Unichain aims to be the “home for liquidity across chains.”
For Uniswap Labs, the launch of Unichain presents dual benefits: it enhances the user experience for Uniswap and similar platforms while creating new revenue opportunities through network fees. Uniswap Labs anticipates that around 20% of the chain’s revenue will directly benefit the company.
Unichain has been in testing since October 2024 and is classified as a “stage-1” rollup, meaning it incorporates decentralization elements while retaining some centralized controls during this early phase. The network’s OP Stack framework allows developers to create interoperable layer-2 chains, leading to numerous innovative projects, including Base by Coinbase and Ink by Kraken.
Notably, Uniswap has collaborated with Ethereum research firm Flashbots to establish a Trusted Execution Environment (TEE) on Unichain, optimizing the platform for DeFi by facilitating advanced trades and ensuring quicker transaction finality.
The Anticipated Pectra Upgrade
PECTRA IN APRIL: Ethereum developers have set test dates for Pectra, the network’s first upgrade in 11 months, with a potential launch slated for April. This upgrade will introduce a range of enhancements, particularly focusing on wallets and validators, during a time when Ethereum faces increased scrutiny from its community.
During their recent bi-weekly meeting, Ethereum’s core builders decided to begin testing Pectra on February 26 on the Holesky testnet, with a follow-up on the Sepolia testnet scheduled for March 5. If successful, developers will reconvene on March 6 to finalize the upgrade’s launch date. According to Tim Beiko, protocol support lead at the Ethereum Foundation, the upgrade is expected to go live on the mainnet in early April.
Pectra, a combination of the Prague and Electra upgrades, will introduce eight significant improvements to Ethereum. Among the most anticipated is EIP-7702, aimed at enhancing the user experience of crypto wallets. Amid criticism regarding Ethereum’s performance and competition from networks like Solana, developers hope Pectra will stabilize the network and restore confidence.
Money Center Highlights
El Salvador Dispatch: The small community of Berlín is establishing itself as El Salvador’s second Bitcoin circular economy, with residents claiming, “Bitcoin City already exists. It’s called Berlín.”
LinksDAO Launches on Base: Initially starting with NFT sales, LinksDAO is now evolving in response to market dynamics.
Regulatory Insights: Hester Peirce, head of the SEC’s new crypto taskforce, indicates that memecoins may fall outside the jurisdiction of regulators.
Upcoming Events Calendar
– February 19-20, 2025: ConsensusHK, Hong Kong
– February 23-24: NFT Paris
– February 23-March 2: ETHDenver
– March 18-19: Digital Asset Summit, London
– May 14-16: Consensus, Toronto
– May 27-29: Bitcoin 2025, Las Vegas
Stay tuned for more updates on these pivotal developments in the cryptocurrency space!
