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Follow the (Onchain) Data Dammit

A letter to Onchain Data

Welcome to the 12 new people who joined the onchain letters community since Tuesday!

I'm thankful for all 86 of you and I hope everyone is having an awesome Friday 🔥

If you're enjoying my writing, please share Onchain Letters with your friends in Crypto 🤝

Today's letter is a bit different than the last few. It's less of a technical/strategy deep dive and more of a blog post.

There's two sections:

  1. A letter to Onchain Data - rundown of a few events that happened this week that served as my wakeup call to being more intentional about looking at the numbers. Narratives can be misleading.

  2. Give me the data! - I went through 100s of dashboards and curated the top charts to keep an eye on in 2024.

A letter to Onchain Data

After publishing my post on Ethereum's Broadband Moment on Tuesday, I felt a bit confused about what to write for my next letter. I have an ongoing note sheet filled with various onchain topics but none seemed exciting enough to dive deeper into yesterday.

One thing I've been realizing about myself this past week is the fact that I tend to latch onto a few narratives and forget to look at the data. And to be fair, this is a common trap that many people fall into. The fast paced nature of Twitter and news cycles lead to most people becoming a "yes man" instead of investigating things themselves.

My writing definitely leans optimistic but it would be silly of me to just write long form pieces strictly expanding on what "I'm observing". If my goal is be a crypto analyst, then it's my job to play a better devil's advocate and use metrics to back my words.

Naturally, forming good arguments and frameworks takes practice. But I need to start being more intentional about checking the metrics on a weekly basis.

Why am I saying all this?

Well, I came across a couple of things this week that surprised me.

Ethereum Client Diversity

On Monday, I saw this tweet from DC Investor saying he's unstaking all his ETH with Coinbase because they're only running a supermajority client:

After doing some digging around, I realized that even the freaking Ethereum protocol is not actually safe 😨.

For those of you that missed the news, last weekend, a good chunk of Ethereum's validators went down due to a bug in Nethermind's code.

If you don't know what that sentence means, here's a simple tl;dr:

Stakers are people who run Ethereum client code to keep the protocol running. They are the backbone of the entire ecosystem.

Ethereum has two sets of clients:

  1. Execution

  2. Consensus

There are a variety of implementations anyone staking can pick to run their clients.

The popular execution clients are Geth, Nethermind, and Besu.

And the primary consensus clients are Prysm, Lighthouse, and Teku.

Goal: make sure none of these clients are run by >33% of the validators. We're in the danger zone if one client is being used by >50% of stakers.

Fortunately, at the time of last week's incident, only 8% of Ethereum's validators were running Nethermind's code. So the protocol was unharmed and most people didn't even realize that something had happened.

However, this naturally sparked conversation about the elephant in the room: Geth (execution client written in go). Currently, as of this morning, 78% of execution clients run Geth. This makes it a supermajority client. What happens if there's a bug in Geth?

"The buggy client has more than 2/3 of the stake. In this case, the buggy client will not just build chain A – it will actually have enough stake to “finalize” it...The impact when one client is in a 2/3 supermajority is quite catastrophic, and it is also a relatively likely scenario."

-Dankrad Fesit

Client Diversity

All these client providers are expected to update their code for each upgrade meaning there's no static client. As long as Ethereum is upgrading, all of the options above must upgrade. When the Dencun upgrade happens in a few months, there's a chance that there's a bug in the Geth code and all hell could break loose for Ethereum.

After looking at the client diversity chart, I wondered who the largest stakers were. And look at this...just Lido and Coinbase control >45% of the execution client marketshare!

But wait, it gets better. Guess what % of the 292k Lido validators run Geth. 66.7%.

And what about Coinbase's 137k validators? 🤯

Execution Client Diversity

So, what can the community do about this?

Sassal makes a great point in a recent Daily Gwei episode - it's the Ethereum community's job to look at the data and put pressure where we need to.

The unfortunate part about FTX was that none of us could do anything because the books were behind closed doors. But, Ethereum is open source. If we know that there is an issue with client diversity, then it's literally irresponsible for us to do upgrades with 78% of stakers using Geth.

Fortunately, DCInvestor's tweet was a great wake up call for the community. He even got on a call with the folks working on the Coinbase staking team which led to this announcement.

I'm going to continue monitoring the numbers these next couple of months till the Dencun upgrade.

Arbitrum Market Share

Also, when I was writing my last post, I spent a good amount of time on L2 beat and was shocked to learn that Arbitrum has 48% of the entire L2 market share! I don't think I've used a single dapp in the Arbitrum ecosystem. This is probably because I spend a ton of time in the OP stack ecosystem (Farcaster, Zora, Base). But I can't help but think that there has to be something big brewing in Arbitrum. What's driving all that capital there ($10 billion)?

So I decided to change that - it would be irresponsible of me to make bold L2 claims without ever having used Arbitrum. I'll do a post about what I learn in the next few weeks.

Cast

Bitwise ETF is Onchain

This announcement earlier in the week by Bitwise was a pleasant surprise. Seeing the tweet seems obvious because "oNcHaIn DaTa" but it's worth noting that this is the first time any ETF product ever can show proof of reserves publicly realtime.

When I was writing my post on BTC ETF two weeks ago, I didn't even stop and think that this is now possible. My hope is that all ETF providers will do the same.

I don't have much to add here other than the fact that it's worth remembering how novel and incredible of a concept onchain data is. Proving data publicly was literally not possible at anytime in history up until 15 years ago. Just the fact that a tool like Dune Analytics exist today is simply mind-blowing.

Forget the rest of the world, even within crypto there are countless examples of why accounting transparency is so essential (FTX, Voyager, etc).

Nic Carter

The key takeaway is that the crypto industry is unique in the sense that we have access to track way more data than pretty much any other builders or traders out there. However, if the community doesn't actually dive in and track the numbers, then it's a wasted opportunity to call out weaknesses and grow faster.

Give me the Data!

Okay, with that being said, I wanted to make sure this letter brought some value to all of you. Below, I compiled a set of links to charts & dashboards that I found helpful and think are worth bookmarking for this year.

I also asked the Farcaster community for any suggestions and included them below as well.

Cast

Dune Dashboards

Other Charts

  • L2 Dashboards

    • Growthepie to see info on fees and transaction activity

    • L2 Beat to see the stages of decentralization each rollup crosses in 2024

  • Account Abstraction

    • Bundle Bear covers AA activity on Polygon, Arbitrum, Optimism, Base, & Ethereum

    • From Jason Chaskin: "Even though 4337 went live in early 2023, the tooling, infra, and standards surrounding it needed to be developed There are still improvements that need to be made, but this year the tools are there to build products that you can onboard your grandma to"

  • Discussed this in my letter to Electric Capital last week, but I'll be watching closely for the next crypto developer report. Are the number of monthly active developers growing in the ecosystem?

  • Not a dashboard but a list of 30 crypto narratives of 2024 and related tokens to that topic.

That's all for today's letter - hope everyone has a fantastic weekend!

- YB

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