DODO #Megascope brings you this week’s Highlights:

1. Overview of Shanghai Upgrade

2. Bancor Suffers Huge Losses Due to Impermanent Loss Protection

3. Dinero Project Analysis

4. Data Check: Analysis of ETH Staking-related Data

👀 Weekly Digest

DeFi

Overview of Shanghai Upgrade

The Ethereum Foundation announced the upcoming Shapella upgrade, which is expected to take place on April 12, 2023, at UTC 22:27:35. This upgrade will enable validators to withdraw their ETH from the beacon chain.

Withdrawal Options for Validators

• Partial withdrawal: Validators can collect rewards earned by their staking validators. These rewards can be withdrawn immediately, and the node will continue to create blocks on the beacon chain.

• Full withdrawal: Validators can retrieve all funds, including 32 ETH, from the chain, which will cease their involvement in block validation.

Market Sell Pressure Prediction After Upgrade

• For ETH staked through LSD, there will be less selling pressure from the LSD protocol after the Shanghai upgrade, as it has a smoother exit channel and can be withdrawn from DEX liquidity. Most of the selling pressure will come from ETH staked through Solo and Saas, accounting for about 40% of the total staked Ethereum.

• According to market predictions, a large sell-off will occur after the upgrade, as accumulated interest can be withdrawn immediately. This will be followed by the sell-off from full withdrawals, which will be queued on the chain. The most severe selling pressure is expected within one week after the Shanghai upgrade.

• A significant portion of market predictions believe that ETH staked through Solo and Saas and in a profitable state will have an incentive to withdraw and sell.

• After the Shanghai upgrade, Ethereum's PoS staking logic will be officially operational, increasing Ethereum's long-term staking rate.

• From the perspective of Ethereum's spot price, the recent increase in market trading volume and demand has pushed Ethereum's price higher.

Impact on LSDfi

• The Shanghai upgrade allows users to withdraw staked funds, eliminating the risk of staking funds being locked and completing the last step of LSD product logic.

• For the LSD protocol, users can exchange ETH 1:1 on the chain. After the Shanghai upgrade, the discount of LSD tokens will quickly narrow, and users can exit more efficiently through DEX.

• The successful implementation of the Shanghai upgrade will further promote the development of the entire LSDfi track, increase Ethereum's staking rate, and bring more LSD assets to the market.

Bancor Suffers Huge Losses Due to Impermanent Loss Protection

Bancor previously attempted to provide impermanent loss protection for LPs, but impermanent loss can quickly amplify in extreme one-sided market conditions, leading to severe losses.

Attempts at Impermanent Loss Protection

• Single-sided liquidity provision: Bancor v2.1 allows users to participate in liquidity pools using only a single asset, lowering entry barriers and attracting more users.

• Insurance mechanism: Bancor offers insurance to users, providing a certain degree of protection when impermanent loss occurs. This mechanism makes users more willing to provide liquidity on the Bancor platform.

• BNT compensation for user impermanent loss: Bancor compensates users for impermanent loss through BNT's elastic supply. Not all tokens can receive impermanent loss protection, as Bancor uses a whitelist mechanism to control it.

Why Impermanent Loss Protection Failed

• Impermanent loss is an inevitable problem for AMMs: Impermanent loss is a temporary loss for LPs. As long as asset prices fluctuate, impermanent loss will always exist, and the more one-sided the market, the greater the loss.

• Impermanent loss is theoretically a floating loss: In theory, as long as the asset price returns to its initial price when liquidity was added, the impermanent loss is eliminated. This means that impermanent loss follows asset price changes, and it is never appropriate to compensate LPs. Even compensating LPs for impermanent loss when they exit liquidity is not advisable.

• Issues with Bancor mechanism: Essentially, Bancor compensates LPs for impermanent loss with tokens and fee income, which is unsustainable. The reason is that the impermanent loss protection is designed to attract users to provide liquidity on Bancor. The more LPs and the higher the TVL, the larger the potential impermanent loss that needs to be compensated. The market value of the token itself does not support this compensation, and at some point, it will certainly exceed the token's compensation limit. In extreme one-sided market conditions, the market will expect BNT prices to fall, further reducing the space for Bancor to provide compensation.

In-depth Analysis of Dinero Project

Redacted Cartel Launches Dinero Protocol

Redacted Cartel's Transformation

The Dinero protocol is launched by Redacted Cartel, which is reshaping itself from the application layer to the consensus layer. The Dinero protocol will allow users to stake their ETH and access a decentralized node system (RPC) using $DINERO stablecoin as the exchange medium.

Ethereum's block space is a limited resource and cannot expand with demand. Due to the execution order of transactions within a block and the network's limitation on the total number of transactions that can be included in a block, there are many opportunities to exploit this "Maximum Extractable Value" (MEV), such as manipulating front-running transactions or sandwich attacks. Dinero aims to secure a place in the "block space market" by:

1. Launching a public and permissionless RPC;

2. Launching a decentralized stablecoin as an exchange medium;

3. Launching an ETH LSD that benefits from staking rewards and protocol revenue: Pirex ETH (pxETH).

How Does pxETH Work?

pxETH is an LSD: users deposit ETH into Dinero to be used for transaction validation and receive pxETH in return. The protocol stakes ETH in Ethereum PoS and builds an RPC node system based on its validators, which will be decentralized.

Initial liquidity pools (ETH/pxETH) will be bootstrapped using Redacted governance rights and treasury funds.

What is DINERO and How Does It Work?

$DINERO will be a Collateralized Debt Position (CDP) stablecoin primarily backed by ETH (similar to DAI). Ultimately, the goal of the $Dinero protocol is to use ETH as collateral to construct Redacted Relayer, an advanced RPC that protects user transactions through this RPC node system, which is crucial for protecting Dinero protocol users from MEV attacks. $DINERO will be backed by pxETH and ETH, and users will have two vaults available for minting DINERO, one for ETH and another for pxETH.

Essentially, $DINERO is an over-collateralized stablecoin based on ETH, characterized by the introduction of LSD as collateral. The LSD token pxETH can be used to build a decentralized RPC node, thereby capturing the additional value of MEV.

Datacheck

On April 12, Ethereum will proceed with the Shanghai upgrade, which allows user to withdraw staked ETH. Ahead of this milestone, today’s #Datacheck will take a look at data performance related to the event.

1/ Trend of Staking ratio

• The current staking ratio of Ethereum is 15.64%, which is not high.

• The staking ratio slowly increased by 0.44% in the last month.

• Since April 9th, there is a trend of ETH staking ratio decrease, and the staked amount decreased by nearly 40,000, which was withdrawn through LSD Token discount. It is possibly a short-term risk control behavior before the upgrade.

2/ Stats of Staking by Category

• Staking categories include CEX, Liquid Staking, Staking Node Service and Individuals.

• Liquid Staking accounts for the largest share, which is 37%.

3/ Stats of major Liquid Staking protocols

• Lido is the absolute leader in the LSD area, with a current market share of 31.17%.

• Frax Ether has the highest recent 7-day and 30-day increments of 2.28% and 14.71% respectively. The current market share is 0.58%, with 106,000 ETH.

4/ Price of stETH

• The price of stETH has a downward trend in the last week. The price is around 0.997 as of 12:00 am on April 10th.

• Near the Ethereum upgrade, the price of LSD token is expected to gradually return to 1. Risk control needs may be the reason of selling LSD token and hence causes the decrease of the price.

5/ Selling pressure after withdrawal?

• The percentage of profit staked ETHs (tokens staked below the breakeven point $1,800) is 48.7%.

• The percentage of staked ETHs above 1800 is 51.3%.

• There is a possible short-term selling off from the profitable ETHs.

6/ The Ethereum Shanghai upgrade will have a long-term impact on the whole ETH Staking ecology, especially the Lego of LSD, and it is worth for us to look out for what kind of chain reaction will emerge.

🚄 Bullet News

Infrastructure

• Ethereum ZK Layer 2 project CryptoGPT announces a $10 million fundraise from DWF Labs at a $250 million token valuation. DWF Labs will also provide market-making services for CryptoGPT's GPT token. CryptoGPT recently launched "Alex," an AI assistant focusing on Web3.

• Ethereum re-staking protocol EigenLayer releases the first phase of its testnet on the Goerli network. Currently, only liquidity re-staking and native re-staking are supported, allowing for re-collateralization of various LSD tokens. EigenLayer confirms the current testnet as a non-incentivized early version.

DeFi

Sushiswap's RouteProcessor2 contract is attacked, with some user funds being transferred by the hacker, involving approximately 1800ETH. The hacker exploited insufficient access control in the contract, bypassing restrictions by inputting malicious address parameters. Currently, the development team is identifying affected addresses and undertaking white-hat recovery efforts, as well as formulating plans for returning the recovered funds.