🎼Ether madness, ether madness🎶 • letter 140

Save the kids and listen to Jesus, this is Colton from Hedgehog, the app that helps you buy baskets of cryptocurrency and automate your digital asset exposure wherever you custody funds. Don’t forget we also now support an on-chain TBILL token for those of you who want highly liquid, Aaa-rated US government debt, and you can reply here for more details!

We’re obviously not the only ones, as real-world assets and memecoins keep posting numbers, and the hits keep coming in terms of bullish fundamentals across ecosystems. We’re even seeing new applications for futures products deeper down the top ten than BTC and ETH! But all is not well in the land of web3:

Gary takes out a hit

Things were going well for Ethereum after a very successful hard fork onto the Dencun upgrade, which dramatically reduced transaction costs across those L2s posting their state to Ethereum. But then tragedy struck: their warrant canary clause disappeared from the open source code repository! Now, it’s all baseless speculation on who exactly subpoenaed information from the Ethereum Foundation, but it’s a sign that the eye of Sauron is upon them at last.

It comes at a time when hopeful ETH ETF issuers have been deferred on their approvals, and Fortune has published some rumors that the SEC is investigating whether Ethereum’s switch to proof of stake (“PoS”) has changed the currency’s status as a security. However, there is no small amount of evidence to suggest that, by the same logic that handed the BTC ETF to Grayscale, PoS Ethereum has already been determined not to be a security via the approval of the ETH futures ETF post-PoS upgrade.

Down at the Ol’ L1 and L2

Relevant to Dencun, there was truly another 🔥 question from my team the other week: what's the difference between sending ETH on the Ethereum network versus sending ETH on the Arbitrum network?

This is a surprisingly deep question that requires you to understand things about the difference between a layer one chain (L1) and a layer two chain (L2), and the tradeoffs they make in their design space based on the different goals and requirements of an L1 versus an L2.

An L1 chain is designed to be a source of truth, which means that there should be as little spam as possible and as many people checking the state of the chain as possible. That means the L1 has to charge higher fees when people want to post lots of transactions on the chain at once (which helps to make spam expensive), and it has to pay for the attention and labor of all the validators who are making sure the chain state is valid.

This can sometimes make it uneconomical for people to post transactions directly to an L1; right now it'll cost you ~$20 in ETH on Ethereum just to give permission to a smart contract for it to spend your money!

That's where L2s come in. These chains are designed for throughput, and to get around the problems of L1s, they team up with an existing L1 to occasionally post a snapshot of their state into the bigger, more secure chain.

So when you create your L2, you create a smart contract on the L1 and fund it with an amount of tokens on the L1. Once these tokens are locked up on L1, you can mint an equivalent number of tokens on L2. And now, every time the L2 posts a checkpoint on the L1, you have a guarantee that all the validators on L1 checked the L2's math and accounted for every penny in the contract to make sure it's all there.

But there's a catch! You don't have the same guarantees on the L2 chain in between checkpoints. This is the tradeoff that L2s make in order to go fast and stay inexpensive.

But what about my wallet? Does that mean when I spend money on Arbitrum it'll also spend money on Ethereum? Not quite!

When you generate your address with a seed phrase, you're really creating a random number between 0 and 2^256. It would take longer than the lifetime of the universe to guess this number, so it never changes, and you can use it to generate addresses anywhere.

This number can reveal a public address on the Ethereum network and the Arbitrum network, or sign transactions on either network. And on the outside, the public address may look the same! But under the hood, the balance of your address on each network is actually in separate vaults that are unlocked by the same key.

So to move balances between each network, you have to bridge funds from one to the other, and transactions on one network otherwise won't affect your balances elsewhere.

This is the exact kind of complexity we're trying to erase at Hedgehog, so you don't have to worry about which network your funds are on or when. We hope to take care of all the hard parts so you can enjoy the fun parts of web3.

Weekly feature

This week we’re featuring JUP, the well-known Solana DEX aggregator that airdropped tokens to all of its traders at the end of January. Solana has been growing rapidly all year, with miner fees outpacing Bitcoin’s this past week, and even an appearance at the top of a CoinGecko report on their site traffic and protocol popularity. Given the increased activity, it makes sense to look to the protocols that are benefitting from growing volume on the chain.

Aggregators provide a useful service, in that they help you to find the best prices that are available when people choose not to coordinate on where they keep their liquidity. The aggregator tries to find you price improvement, and they keep a few cents of the transaction while, hopefully, still offering you a better price. In the US, it’s actually a duty of registered broker-dealers to provide you best execution, and once DEXs can likewise offer guarantees that your counterparty meets certain Know-Your-Customer and Anti-Money Laundering requirements, it’s very likely that they’ll become a preferred solution to traditional finance options.

If you have a strong thesis to take advantage of these tokens, it could make sense to allocate into DEX aggregators like 1INCH, 0X, JUP, KYBER, PSP, and COW. Maybe you’ll even want to use on-chain metrics like gross transaction volume or fees generated to drive your allocation decisions.

What are your best tips for moving? I’m planning to hit the road in about a month, and I could use all the advice I can get.

Keep hedging,
— Colton