YBB Capital: 9 Days TVL Exceeds 600 Million, Rational Thoughts on Blast Behind the Madness

Author: @YBBCapital Researcher Ac-Core

Introduction:

With the recent launch of the Layer2 network Blast by the founder of Blur, the market has shown mixed emotions in response to the strong expectations for airdrop profits. According to the official announcement, the Blast mainnet will go live in February next year, continuing airdrops based on points similar to the previous model of Blur. Within just a few days of the announcement, the growth of Blast's TVL has been impressive, but this sudden focus on Layer2 by Blur undoubtedly triggers three possible outcomes: sparking a new round of hotspots; burying a huge landmine and related projects' "copycat operations"; and from a marketing perspective, this event is undoubtedly a market competition between strong technical Layer2 and strong consensus Layer2.

Review of the Basic Structure of Ethereum Layer2

Image Source: Top Ethereum Layer 2 Networks

After Blur proposed its new narrative of "Stake Layer2," let's first understand the basic structural types of current Ethereum Layer2 before making judgments. It is a scalability solution aimed at increasing transaction throughput and reducing transaction costs by introducing second-layer protocols or protocol stacks on the Ethereum blockchain, which can be roughly summarized into the following types:

State Channels

Definition: State channels are a solution based on direct exchanges of signatures between parties without the need to write every transaction to the blockchain. The basic principle is to create an off-chain environment between participants, allowing transactions to occur off-chain, with only the final state being broadcast to the network when it needs to be submitted to the blockchain. This method greatly improves transaction efficiency and throughput.

How It Works: In a state channel, participants can open a channel, execute multiple transactions, and then finally submit the channel's final state to the blockchain. Thus, only the opening and closing of the channel require on-chain transactions, while transactions within the channel can occur off-chain, avoiding the costs and time delays of executing every transaction on the blockchain.

Example: The Lightning Network, which is a state channel solution for Bitcoin. Users can make fast, low-cost micropayments off-chain, with the final state written to the blockchain only when the channel needs to be closed. On Ethereum, the Raiden Network is a similar state channel solution that achieves highly scalable transactions by creating a many-to-many channel network.

Sidechains

Definition: Sidechains are chains that are separate from but compatible with the main blockchain, which can have its own consensus mechanism and block generation rules. Users can lock assets on the main chain and then trade on the sidechain, ultimately submitting the transaction results back to the main chain. This approach improves overall network performance by achieving higher throughput on the sidechain. Here are several common sidechain contract bridging methods:

Pegged Bridge: A mechanism for cross-chain interaction that achieves asset anchoring or mapping between two chains. In this bridging method, users lock assets on one chain, while a corresponding amount of assets is generated on another chain. This often involves some trusted intermediaries responsible for overseeing the locking and releasing of assets;

Lock-and-Mint Bridge: A bridging method that locks assets on one chain and then creates a corresponding amount of assets on another chain. Users lock assets on the original chain, and the bridging protocol issues the corresponding amount of tokens or assets on the target chain. This method typically requires a trusted intermediary or multi-signature contract to ensure the security of the locking and releasing process;

Cross-Chain Atomic Swap: A decentralized method that allows users to perform atomic-level swaps between two chains, meaning either all transactions are completed or none are. This method typically uses smart contracts and hash locking to ensure the reliability of transactions. Atomic swaps do not involve trusted intermediaries but require more complex smart contract designs;

Proxy Bridge: A method of cross-chain interaction through an intermediary proxy. Users send assets to the bridging proxy, which performs the corresponding operations on another chain and then sends the corresponding assets to the target address. An example of this method is executing transactions between two chains through multi-signature contracts;

Light Client Bridge: A light client bridge uses lightweight clients to track the state on the source chain and then generates the corresponding state on the target chain. This method does not require the locking and unlocking of assets but ensures the reliability of interactions by verifying the states on both chains. This is relatively common in some Layer2 solutions on Ethereum.

Plasma

Definition: Plasma is a Layer2 framework originally proposed by Vitalik Buterin, one of the founders of Ethereum. Its design is inspired by a tree structure that contains multiple independently operating child chains. Each child chain can process transactions and only submits the final state to the main chain in case of disputes. This structure allows each child chain to be viewed as an independent sidechain, operating at lower costs and higher throughput.

How It Works: The key idea of Plasma is to reduce the burden on the main chain by decentralizing transaction processing across multiple child chains. This layered structure helps improve the scalability of the entire system while maintaining security requirements for the main chain. However, Plasma also faces challenges, such as designing exit and dispute resolution mechanisms for child chains.

Hybrid Solutions

Definition: These are hybrid approaches adopted by some Layer2 solutions that combine the advantages of state channels and sidechains, aiming to provide more flexible solutions in different usage scenarios.

How It Works: In the system, state channels can be used to handle certain high-frequency transactions while utilizing sidechains for larger or less frequent transactions. This hybrid approach allows for the selection of the optimal solution based on actual needs, enhancing the overall flexibility of the network system.

Rollups

This is currently the mainstream and well-known scaling solution, primarily using the method of migrating computation and storage off-chain. A recent report from Chainstack's blockchain infrastructure department shows that without Layer2 Rollup networks like Optimism and Arbitrum, Ethereum transaction fees would be four times the current prices. It is mainly divided into two categories: Optimistic Rollup and ZK Rollup.

• Optimistic Rollup: It adopts an "optimistic execution" approach, assuming transactions are valid and only rolling back in case of disputes. This reduces the burden on the main chain and increases overall throughput. However, an effective dispute resolution mechanism is needed to ensure the system's security;
• ZK Rollup: Uses zero-knowledge proofs to verify transactions on the sidechain, ensuring the validity and security of transactions. This method executes transactions on the sidechain and then submits verification data to the main chain, fully leveraging the powerful capabilities of zero-knowledge proofs, providing high privacy and security.

Validium Chains

Validium Chains combine the characteristics of sidechains and state channels by executing transactions off-chain while using zero-knowledge proofs to ensure the validity of transactions. This method processes transactions off-chain, avoiding the costs of executing every transaction on the main chain while ensuring the security and verifiability of transactions. This provides a novel combination for high performance and privacy protection.

State Rent

First, it should be noted that State Rent is not a Layer2 solution but an improvement mechanism on the main chain. It introduces rent to encourage users to release unused states, thereby alleviating storage pressure on the chain. Although it does not directly increase transaction throughput, State Rent helps optimize the use of on-chain resources and improve overall network efficiency.

Back to Blast Itself

Image Source: Season 3 Rewards & Loyalty

These different types of Layer2 solutions are all dedicated to solving the scalability problem of blockchains, and each solution has its unique advantages and applicable scenarios. Choosing the appropriate method usually depends on the specific application requirements, security needs, and user experience considerations. Currently, it has been confirmed that Blast relies on a 3/5 multi-signature to control the recharge address, and most Layer2 also rely on multi-signatures for management. Even though the issue of centralized sequencers in Rollups has not yet been resolved, from the perspective of community consensus, Blast has still achieved tremendous success in the short term.

Potential Risks of Lido

Image Source: ASIA ARYPTO

Lido is a decentralized staking service based on Ethereum that allows users to stake their ETH tokens into the Ethereum 2.0 network, thereby supporting Ethereum's PoS (Proof of Stake) mechanism. The Stake model of Blast essentially stakes users' ETH assets in Lido and RWA, distributing the profits back to users and developers, with native tokens as additional rewards. Therefore, locking a large amount of funds in Lido's network also increases the security risks for stakers, facing a certain degree of increasingly "centralized" staking methods, which may be accompanied by the following risk factors affecting the Lido project:

Liquidity Risk: Lido's liquidity is one of the key factors for the project's successful operation. If liquidity is insufficient, users may face difficulties when they want to exit staking or withdraw funds. This situation may be influenced by market factors, network congestion, and other factors. Possible solutions to this problem may include establishing more flexible exit policies, increasing the number of market participants, or collaborating with other DeFi projects to enhance overall liquidity.

Technology Upgrade and Evolution Risk: The Ethereum network and blockchain technology are in a rapid development phase and may undergo upgrades and evolution. Lido must keep up with these changes in a timely manner to ensure its technical infrastructure can adapt to the latest standards and upgrades to maintain system security and availability.

Over-Centralization Risk:

• Node Centralization: Although Lido aims for decentralization, the actual validator nodes are still operated by specific institutions or individuals. If these nodes are subject to some form of control or collusion, it could lead to centralized control of the entire system;
• Social Engineering and Malicious Behavior: Validator node operators may be subject to social engineering attacks or other forms of malicious behavior, which may include nodes being attacked, going offline, or being maliciously manipulated;
• Technical Centralization: The core functions and key infrastructure of the Lido protocol may be controlled by a few technical entities, leading to risks of technical centralization. For example, if upgrades to the core protocol are too centralized, it may lead to excessive concentration of control over the protocol;
• Capital Centralization: The issuance and staking of Lido's tokens may be controlled by some large holders, who could exert disproportionate influence on the protocol, as shown in the data from Dune on November 29: the total amount of ETH staked on the Ethereum beacon chain exceeded 28.64 million ETH, with Lido's market share reaching 32.20%;
• Governance Centralization: If the governance mechanism of the protocol is too centralized, decision-making power may be concentrated in the hands of a few entities or individuals, neglecting the voices of the broader community;

Data Source: Dune

Contract Economics Risk: The project's economic incentive mechanisms need to be carefully designed to ensure the long-term interests of users and the ecosystem are protected. Improper incentive mechanisms may lead to capital outflows, system instability, or other negative consequences. The project team should continuously evaluate and optimize these incentive mechanisms to adapt to changing market conditions and user behaviors;

Security Audit Risk: The security of smart contracts is the cornerstone of the success of the Lido project. If there are vulnerabilities in the smart contracts, it may lead to the loss of user funds. Therefore, conducting thorough and regular security audits of the contracts is crucial. At the same time, the project team needs to actively adopt feedback from the security community and promptly fix any identified vulnerabilities;

Community Governance Risk: The design and implementation of the community governance model may affect the project's development direction and decision-making process. If community governance is not effective enough, it may lead to difficulties in decision-making, hindering the project's development. Therefore, the project team should maintain close cooperation with the community, establish transparent governance mechanisms, and encourage broad community participation;

Black Swan Events: Unpredictable events may have a significant impact on Lido. The project team needs to establish flexible risk management strategies to respond to emergencies and ensure the system has sufficient resilience to withstand risks.

Thoughts and Impacts on Blast:

Image Source: Official Blast

Pacman announced that it has raised $40 million for the Blur ecosystem, with participation from Paradigm, Standard Crypto Investment, and several angel investors including Lido advisor Hasu and The Block CEO Larry. The birth of Blast comes with the halo of Blur and the financing support of Paradigm, attracting attention from the outset, especially with the recent narrative boost, prompting many reflections.

1. Where Does the Native Yield of Layer2 Blast Come From?

When users deposit tokens into the Blast (L2) network, they are essentially locking equivalent tokens, which Blast stakes in Lido and RWA, distributing the profits to users while also allocating original points to them. This brings two direct issues:

• Locking a large amount of user assets in Lido increases the centralization of the staking track to a certain extent. For users, they not only need to consider the operational security of Blast but also that of Lido. Assuming both are secure, if the TVL continues to rise and the uncertainty brought by secondary market prices persists, various factors may introduce more uncertainty risks to the entire Ethereum ecosystem;

• If we view Blast as a newly innovative "Stake Layer2," while users lock a large amount of ETH assets to earn yields, they also lock a significant amount of liquidity. How Dapp applications within the Blast ecosystem will obtain liquidity and how to narrate new token issuance expectations is also a question worth pondering.

2. Technology vs. Consensus: Which Direction of Layer2 is More Likely to Be Accepted by the Market?

First, the main goal of blockchain is to solve trust and security issues in transactions. Once information is confirmed and added to the blockchain, it will be permanently stored unless someone can control more than 51% of the nodes in the system. The industry's development relies on technological advancements. From a technical perspective, Blast has no innovation; it merely takes a different approach, and strictly speaking, Blast does not belong to Layer2.

However, the strongest essence of blockchain remains finance, with technology relying more on mathematics and code, while finance is intertwined with more psychological expectations. The most successful aspect of Blast is leveraging its own and Paradigm's strong traffic to directly hit users' expectations for project airdrops. To some extent, compared to other strong technical Rollups, it has distributed the profits from gas arbitrage to users as a result of staking. Liquidity is the soul of all public chain systems, and through the expected airdrop, Blast has achieved a strong consensus wave in the short term. In the short term, strong consensus will still be accepted by the market, but maintaining it in the long term requires more opportunities.

3. Implications from Paradigm's Research Director Dan Robinson?

Image Source: X (Twitter) @danrobinson

Disagreement on Blast Project Decisions:

• Order of Bridging and L2: Paradigm mentioned that they disagree with the decision to launch bridging before L2. This may indicate that they believe launching bridging before the Layer 2 solution is ready could pose risks, potentially affecting the project's stability and security;
• No Withdrawals for Three Months: Similarly, regarding the decision to prohibit withdrawals for three months, Paradigm may believe this sets an unfavorable precedent for users, potentially raising concerns and dissatisfaction among them.

Concerns About Marketing Approaches:

The text mentions dissatisfaction with the marketing approaches of the Blast project, pointing out that these methods may undermine the image of a serious team. Specifically, it may refer to issues with how the project or technology is promoted, potentially presenting exaggerated or inaccurate representations.

Support for Pacman and the Team's Past Work:

Paradigm reflected on their support for Pacman and his partners' past work, from Namebase to Blur to Blend. This indicates that Paradigm has a certain level of trust in this team based on their demonstrated technical capabilities and track record of building excellent products over the years.

Support for the L2 Vision:

Paradigm stated that they invested in the Blast team because Pacman proposed a vision for L2 chains and hoped to use it to expand the success of the Blur project. This indicates that Paradigm believes the Blast team has the ability to provide a valuable L2 solution and positively contribute to the entire ecosystem.

Discussions with the Team:

Paradigm emphasized that they have discussed their concerns with the Blast team, which has shown a willingness to communicate with them. This indicates that both parties are willing to resolve issues through dialogue when difficulties or disagreements arise.

Responsibility and Exemplary Role:

Paradigm emphasized their sense of responsibility in the crypto space, stating that they are aware that people may pay attention to their practices in this field. They clearly stated that they do not support certain strategies, emphasizing their seriousness about their responsibilities within the ecosystem.

Overall, this passage reflects Paradigm's specific objections to the decisions made by the Blast project, but also expresses their support for the past work of the Blast team and emphasizes their sense of responsibility in the crypto ecosystem. Subsequently, according to Wu's blockchain news, Pacman also tweeted to clarify several necessary points:

• The high yields offered by Blast are not a Ponzi scheme; their profits come from Lido and MakerDAO, based on Ethereum's staking yields and on-chain T-Bills, which are core components of both on-chain and off-chain economies and are sustainable;
• The market strategy (GTM) is unrelated to Paradigm; although Paradigm provides consulting on technical L2 design, GTM is entirely decided internally by Blast;
• The invitation system of Blast is not a new mechanism; it has existed for a long time and aims to reward users who contribute to the L2 ecosystem, which is the reason for the existence of invitation rewards.

Note: This paragraph's analysis represents the author's personal views and does not involve guidance; it can be ignored if there are objections.

4. Rapid Surge of Over $600 Million TVL Market

Data Source: DeBank

Since Pacman, the founder of Blur, announced the launch of the new project Blast on November 21, as of November 29, the total value locked (TVL) in Blast has reached $614 million in just one week, sparking overall discussions in the industry. This "Stack-centered Layer2" has undoubtedly achieved tremendous success in market consensus.

5. "New Assignment" from ApeCoin!

Image Source: ApeCoin Official

The original text mentioned a proposal called "ApeChain," aimed at promoting research, deployment, and management within the ApeCoin DAO ecosystem (see the original text in the extended link). The text stated that the team met with several technical solution partners to discuss the advantages and weaknesses of each technical solution in seeking support from each partner. After careful consideration, the project team chose to support Layer2 Rollups to better attract developers to build on ApeChain.

This leads us to wonder if ApeCoin intends to catch up with the hype of Blast at the first opportunity?

Its future development will be compatible with the Optimism Superchain ecosystem and promises to provide basic token grants to assist ApeCoin DAO in participating in Superchain governance. Does this suggest that ApeCoin is leveraging the TVL siphoning effect of Blast to quickly catch a wave of hype? The specific content of DAO expenses includes: infrastructure, business operations, developer relations, and ecosystem development.

Among the infrastructure are:

• Blockchain explorers like Blockscout, Etherscan, or open-source alternatives like Otterscan;
• Oracles: Chainlink, Pyth, or Redstone;
• Layer 1 data publishing fees in ETH;
• Related operations of sequencers.

Two ways to handle expenses during the discussion phase:

• Directly launch the ApeChain (AC) token, with no expenses borne by the DAO;
• The team will raise funds for the operation and development of ApeChain and will distribute governance tokens to ApeCoin supporters in the future.

In conclusion, the launch of Blast from a marketing perspective is undoubtedly a huge success, leveraging its inherent industry influence to directly explain the airdrop rules based on points, attracting massive capital for staking in the short term, and igniting a new wave of market enthusiasm for staking. Its short-term accumulation of over $600 million in TVL has also drawn the attention of other Layer2 and Ape communities. However, it is important to note that it carries related uncertain risks and should be approached with caution.

Extended Links:

【1】https://blockworks.co/news/ethereum-rollups-save-gas-fees

【2】https://twitter.com/eternal1997L/status/1729128004239216863

【3】https://forum.apecoin.com/t/apechain-a-team-research-deploy-manage-apechain/20163