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INTRO:
Houston, we have a problem!!
We strive to make DeFi mainstream, but are we ready for it? We are more than 8 billion people, while Ethereum can process not even 30 transactions per second. Yes, the situation is gonna improve in the next years but it will be still not enough. So what can we do?
Said that we are still far away from “The Solution”, there are two interesting candidates to be taken into consideration: optimistic rollups, and zk rollups. Both of them are L2, a sort of fastest blockchain that is running on top of the original one, but is it safe? And what are the differences between these two candidates?
Let’s discover it together…
FLASH NEWS:
Microstrategy announces “we bought 6.5k BTC at an average price of $23.238 per Bitcoin”, fun fact: most of the time when they announce a $BTC acquisition price tends to revert, is this time different?;
Zksync announced the launch of Era Mainnet;
Euler exploiter, after a long on-chain conversation, returned 58k ETH (+$100M) of the 96k stolen to Euler;
GUIDE OF THE WEEK:
Would you ever use a credit card to buy a coffee if you had to pay 7$ of transaction fees?
This is the problem Ethereum is facing right now.
In 2016 Vitalik didn’t design Ethereum as a scalable micropayments infrastructure but as a decentralized & secure virtual machine on which to build and develop dAPP, that is equal to say that each transaction is equal to a notarial deed, not the best choice if you want to just buy a coffee.
That’s why to overcome these limitations, developers have been investing in a range of Layer 2 scaling solutions, such as optimistic and zero-knowledge rollups:
Let's say a coffee shop starts using a zero-knowledge rollup like zkSync to process its transactions, when you buy a cup of coffee, the transaction is first processed off-chain, which means it doesn't have to compete with other transactions on the Ethereum network.
The transaction is then submitted to the zero-knowledge rollup, where it is quickly and cheaply verified using zk-SNARKs technology thus making the transaction faster and cheaper compared to on-chain transactions.
In contrast, let's say another coffee shop decides to use an optimistic rollup like Arbitrum or Optimism instead:
When you buy a cup of coffee, the transaction is first processed off-chain, but instead of being verified using zk-SNARKs technology, it is assumed to be honest unless there is evidence of fraud (“Optimistic” is taken from here).
This makes the transaction faster than on-chain transactions, but there is still a risk of delay or higher fees if fraudulent activity is detected and the rollup needs to be "rolled back" to the previous valid state.
In summary, while both optimistic rollups and zero-knowledge rollups are scaling solutions for Ethereum, they use different approaches to achieve their goals. Optimistic rollups assume most transactions are honest and only check for fraudulent activity if it appears, while zero-knowledge rollups use a privacy-preserving technology to verify transactions quickly and cheaply.
MACRO TALKS:
In not even two weeks we have gone from the panic of a collapsing financial system to the euphoria that is pushing the market, but what’s really happening, and what to expect now?
To help you understand what’s going I will use an example.
Let's suppose that you possess a considerable assortment of trading cards that hold significant value so you decide to sell some of them to earn some extra money to set aside in a piggy bank.
Now picture the government intending to do something comparable to its finances. They aim to decrease the amount of money in circulation by selling some of their valuable assets, such as government bonds, to individuals interested in buying them. The buyers pay a hefty sum to the government, and the money supply goes down because the money collected by the central bank disappears from circulation and goes into their piggy bank.
Great, aside it could lead to a not-so-pleasant counter-effect: just like in the case of your trading cards, a reduction in the money supply can lead to higher prices.
People might have to pay elevated rates to borrow money or purchase things they desire, just as the collector had to pay a considerable sum to acquire valuable trading cards.
Therefore, while quantitative tightening may assist in controlling inflation and stabilizing the economy, it may also increase the cost of goods for individuals who want to make purchases or borrow money.
But why am I telling you this?
Because this is exactly what has been happening for the past year, but things have changed dramatically within two weeks, as we can see from the picture below the FED’s balance sheet grew up by almost $400b, this is because of the recent banking crisis, the FED had to intervene in the market to cover the holes in banks' balance sheets, trying to avoid a "contagion" situation as happened in 2008.
Many people talk about a return to the state of quantitative easing and "easy money," as much as it may sound like that, but watch out…
During a period of Quantitative Easing, the Federal Reserve usually aims to lower the unemployment rate and increase consumer strength and then lends money to banks, which in turn pour this money directly into the economy by lending at favorable rates to businesses and individuals.
But what interest would the Fed have in stimulating now with inflation at 6% YoY and unemployment at an all-time low?
I'll tell you… none!
It would be like adding fuel (QE) to the fire (inflation).
At the moment the money that the FED is "printing" goes directly to distressed banks, which use this money to pay off their debts, not even 1 cent of this money is poured into the real economy.
Central banks around the world have been very clear lately: «we will continue until something big breaks, and we don't think the events that have been happening lately are "enough" to make us back off».
We will continue to monitor what happens in the coming weeks, remember to subscribe to the newsletter so you don't miss the upcoming editions!
INTO THE RABBIT HOLE:
DeFi TVL is down from 49B to 48B WoW as Bitcoin & Ethereum are breathing a little bit after the big run two weeks ago.
As a result, most of the chains are in red with Optimism being the worst performer of the week even though BNB chain and Arbitrum have seen positive flows, let’s dig a bit deeper:
OPTIMISM:
From the stablecoin inflows section of Defillama we can see that there were no particular movements except a 25M outflow registered on the 23rd;
BNB CHAIN:
Flat from the 15th;
ARBITRUM:
Arbitrum registered the biggest inflows since its inception with a +157M on the 23rd
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Gm Gm, Really loving this piece and the work you do here. I also run a web3 news substack for underrepresented creators called Facesofweb3. Would you be open to a recommendation exchange? Our subscribers need to be able to find each other!
Great job, once again!