Coinbase

By Michael Li, Vice President, Data at Coinbase

Hackathons have been a long-standing and important part of Coinbase culture, as they give our engineering teams the opportunity to collaborate with one another and experiment directly with the tools that are enabling a new era of open finance.

At Coinbase, we acknowledge that Web3 unlocks a whole new realm of possibilities for developers that are largely yet to be explored. In order to pursue these possibilities confidently, engineers need to have a baseline knowledge of the ecosystem, the Web3 stack, and key smart contract concepts across different blockchain protocols.

This year, we used the time set aside for the annual Coinbase hackathon to kick off Smart Contract Hack Days to give all of our engineers a crash course in Web3 development for real-world applications.

Time to BUIDL

In December, we assigned all participants to project pods of 5–10 individuals which were led by an experienced Coinbase team member that had been through in-depth blockchain engineering training. Following a day-long crash course in Solidity (developer tools and workflow), each pod had 48 hours to build a demo that would be judged on product, engineering, and design.

Participating pods had a chance to score one of the eight awards and crypto-forward prizes. Award categories included People’s Choice (selected by the entire audience), Learning Showcase (the pod that demonstrated the most learning through working on their project), Judges Choice (overall judge favorites), Best Executed (evaluates quality, teamwork and overall execution), and Most Creative (the most exciting and creative take on hack day guidelines).

Hack Day Showstoppers

Among the 44 pods that presented on Smart Contract Hack Demo Day, the top 5 categories of project submissions spanned Web3 infrastructure, gaming, DAOs, NFTs, and event ticketing.

While there were many strong ideas presented, some of the key ones to highlight (along with their taglines) include:

• (Gas)tly: Complete gas transactions with confidence
• Concert-AMWest-2: A NFT concert ticket and a marketplace contract that can transfer funds from the buyer to the marketplace and royalty to the musician
• GenEd Labs: A charitable giving DAO that enables the ethical investor to leverage the blockchain to close the skill gap within underserved communities.
• Real-Time Shibas: Capture the yield farms with your Shiba army
• BridgeIt: Pooling deposits together for cost-efficient bridging
• Not So Bored Apes: Decentralizing and revolutionizing the casino world one step at a time

What We’ve Learned After Experiencing a Day in the Life of a Web3 Dev

We were inspired by the number of creative product ideas that were presented during this time and took many important insights away to be applied for future training and hackathons.

Some of these insights include:

• Teams need more focus time to execute — many projects felt they lacked adequate time to execute due to competing priorities from day-to-day work. We will improve by providing full dedicated time for all participants in the future.
• Participants would like more autonomy in team creation — team dynamics are important. Finding teammates who share a similar vision or vibe or may have complementary work styles and perspectives can go a long way, especially in high-pressure scenarios.
• Save room for ideation — rather than being assigned to projects, participants may feel more engaged or motivated to take an idea over the finish line if they feel more passionate about what they’re building.

What’s Next?

One of the most exciting things about Web3 is its limitless potential. It is likely that it will touch every single industry — whether that be as the infrastructure that underpins a wave of new products or as the tool for interacting with brands and businesses in a more trustless and equitable way. This year’s hackathon, in many ways, is a testament to the efforts needed to onboard developers from the world of Web2 to Web3.

At Coinbase, we remain optimistic about the future of the industry and are committed to spearheading new initiatives that will allow our teams to continue learning, creating and building together.

We are always looking for top talent to join our ever-growing team and #LiveCrypto. Learn more about open positions on our website.

Highlights from Coinbase’s First Smart Contract Hack Days was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Heidi Wilder, Special Investigations Manager & Tammy Yang, Blockchain Researcher

Part 1: What are Bridges? Bridge Basics, Facts, and Stats

Illicit actors are often attracted to the newest forms of technology, and bridges are unfortunately no exception to that rule. Illicit actors are defined as individuals or groups conducting illicit activity, such as scams, thefts, or other illegal activity, on the blockchain. In the previous section of this blogpost, we covered the Wormhole and Ronin bridge exploits.

Analyzing the use of Ethereum bridges by illicit actors in January 2021 through April 2022, we find that Ronin, Wormhole, followed by Polygon and Anyswap have the most volume flowing through them.

To date, Ronin bridge’s exploit that took place in late March is the largest hack in the DeFi space, totalling more than $540 million in funds stolen (as of the day of the bridging of funds). We discussed this exploit in more detail in our previous blockpost. Unsurprisingly, this hack makes up the largest illicit volume with the Ronin bridge.

Wormhole’s Ethereum-Solana bridge was attacked in February 2022, leading to a loss of over $250m.

Polygon’s bridge was primarily abused by Polynetwork’s exploiter (although funds were returned), the bZx hackers, and the AFK System rug pull. The bZx hackers appear to have literally gone back and forth between chains to decide which ones were best to consolidate funds. Ethereum won in the end.

Anyswap BSC bridge was primarily used as a bridge by the Bunny Finance flash loan attackers, Squid Game rug pull and Vee Finance hackers.

Why would illicit actors want to bother bridging at all?

Illicit actors’ reasons for bridging funds between networks are both similar and different compared to the general population of bridge users. Possible reasons include:

• Consolidation. Combining funds through bridging makes them easier to handle and to generally then launder onwards.
• Obfuscation. Bridging over funds to other networks adds another layer of complexity to tracing funds on-chain. Tracing funds that travel through a bridge requires tracing capability on both networks and linking them through the bridge.
• Faster and cheaper transactions and to use assets that are not native to the network. Bringing over funds to other faster and cheaper networks can aid illicit actors in transferring their funds more rapidly at a lower cost. The added ability to access assets that aren’t native to the network allow both licit and illicit actors to gain price exposure to a non native asset, while also enjoying the benefits of the other network.
• To access a broader selection of dApps. As blockchain monitoring has become increasingly popular, so has scrutiny of illicit activity:

a) Instead of immediately cashing out, some illicit actors will choose to bridge over funds and then yield farm with them for a period of time, which has the benefit of passing time and earning interest on their proceeds.

b) Alternatively, illicit actors will also leverage certain DeFi protocols that help break the chain in order to obfuscate the true source of funds.

But how are illicit actors employing these methods in practice? What happens after someone has bridged over funds to another chain? Can you track through a bridge to the other side?

Because of the transparency of the blockchain and of many bridge protocols, we can trace through various bridges to identify the ultimate destination of funds.

Below are some recent examples of how illicit actors are employing bridges and how we can trace through bridges to identify the ultimate destination of funds.

Consolidation and obfuscation — as seen with an NFT phishing scheme

NFT phishing scams are nothing new, but the scale at which NFT phishing scams are occurring on social media is rampant. In this particular case, we observed several Murakami Flower phishing scams, among other popular impending NFT releases.

In this case, we observed that several of these scams bundled together their ill gotten ETH in a novel way.

Instead of pooling their ETH together on Ethereum, they bridged over the funds to the Secret Network, which was likely an attempt to obfuscate the source and destination of funds.

Although they may have bridged over funds to the Secret Network, they continued to bridge over to the same address over and over again. Consolidating funds from various phishing schemes allowed them to better get a grasp on their funds.

Accessing a broader set of dApps — an example of using bridges to then yield farm with ill gotten gains with the Squid Game rug pull

In November 2021, the Squid Game token rug pulled. Although the token was launched on Binance Smart Chain (BSC), funds were bridged over to Ethereum. While this was likely for obfuscation purposes, it was also to gain access to Ethereum-based dApps.

In particular, once the attackers bridged over funds to Ethereum, they opted for two yield farming strategies, which allowed them to earn interest on their ill gotten gains.

The first, was to swap funds to USDT and to supply liquidity to the ETH/USDT Uniswap pool (one of the deepest pools on Uniswap). The second was to take the ETH and to lend it on Compound.

While the attackers have begun to cash out, they have not only waited out the heat but have also made some interest while doing so.

Accessing a broader set of dApps — an example of using a bridge to access DeFi protocols to break the chain of traceability with a malware operation

A malware and ransomware operation primarily sourced funds from victims in Bitcoin over the years. However, in the latter half of 2021, the operation began to bridge over funds to ETH using Ren.

This allowed the attackers to mint renBTC. Using a particular protocol, Curve.Fi Adapter, the operators were able to immediately swap the newly minted renBTC for WBTC. Both renBTC and WBTC are BTC-backed tokens on the Ethereum blockchain. It’s important to note that the attackers specifically wanted WBTC though, which they could then deposit to Compound.

Compound is a DeFi protocol that allows users to earn interest on their deposits. When a user deposits funds into Compound, such as ETH, they are provided with cETH or Compound ETH in return, which can be exchanged through Compound for the original ETH amount deposited plus interest earned. Alternatively, users can also use the cETH as collateral to then borrow other tokens.

And that’s exactly what the malware operations did. They used cBTC as collateral to then borrow stablecoins from Compound, particularly USDT and DAI. And with those stablecoins they then cashed out at various exchanges.

The idea here is that the malware operators were attempting to obfuscate the true source of their funds and to make it seem like they received funds directly from Compound.

What can we do about this?

Because of how public, traceable and permanent the blockchain is, we can leverage it to not only identify illicit actors bridging funds across blockchains but also to stop them. The primary mechanism for this is blockchain analytics.

Here are some steps we can take as an industry to combat illicit actors’ bridging of funds:

• Work with blockchain intelligence providers to identify cross-chain transactional flows to quickly identify when illicit funds have hopped from one network to another;
• Block illicit actors addresses’ on both sides of a bridge;
• Monitor inputs and outputs of protocols that are heavily abused by illicit actors who bridge over funds.

Using these and other tools we aim to preserve the integrity of the ecosystem while also encouraging innovative concepts, like bridges, to expand the crypto economy.

What are Bridges? Illicit use of bridges was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Around the Block from Coinbase Ventures sheds light on key trends in crypto. Written by Connor Dempsey

TLDR:

• Despite the market downturn, Q1 was another highly active quarter for crypto venture funding.
• On the infrastructure side, we’re seeing a ton of activity within cross-chain solutions and DAO tooling. New layer-1s are still being incubated.
• Familiar DeFi primitives developed on Ethereum are expanding into newer layer 1s, and Polkadot is picking up steam.
• NFT projects are focused on bringing more utility to the space, with Yuga Labs making serious waves over the quarter.
• The rise of Axie Infinity has attracted successful traditional gaming devs to build in Web3, with South East Asia emerging as a hotbed of activity.

After peaking in November 2021, liquid crypto markets fell into the new year and more or less treaded water in Q1. The private markets, however, kept up the torrid pace set last year.

According to data from The Block, Q1 2022 saw a record of $12.5 billion in venture funding — a figure that has increased for seven consecutive quarters. Coinbase Ventures was busy as well, closing 71 new deals in Q1, generally targeting early stage investments. We will note that we’re starting to see signs of a slow down, particularly with later stage investments, that will likely be visible in our Q2 activity.

Deal volume is a reflection of the continued influx of new companies and projects being formed in the space. This is aided by the low startup costs that crypto & Web3 companies enjoy thanks to open-source code and the ability to bootstrap or self-fund via token issuance.

CBV overview

As a refresh:

• Coinbase Ventures advances crypto & Web3 by partnering with exceptional founders who share Coinbase’s mission of creating more economic freedom for the world.
• We’ve been recognized as one of the most active corporate VCs in the world by deal count.
• Ventures partners with founding teams at the earliest stages and throughout their journey. We invest across all categories within the cryptoeconomy, seeking to align ourselves with the best and brightest minds in the space.
• To date, we’ve invested in 300+ teams building everything from layer 1 protocols, Web3 infrastructure, centralized on-ramps, decentralized finance, NFTs, metaverse technologies, developer tooling, and more.

We generally break down our investments across six categories. Within these six categories, here’s how our activity shook out in Q1 ‘22.

Given that we invest in projects in their infancy, our activity can offer a lens into what the industry has in store in the near future. With that, let’s dive into some of the trends and themes that we identified in Q1.

Cross-chain & Web3 infrastructure bloom

In the early days of crypto, Bitcoin and Ethereum dominated. With new layer 1s coming online in recent years, ecosystems outside of BTC/ETH have exploded, and there are now more than 10 chains hosting over $1B in value.

The growing value across multiple networks has brought an increasing need for value on one chain to flow to another. As such, we’re continuing to see cross-chain infrastructure being built out to facilitate activity between blockchains (CBV Q1 investments: LayerZero, ZK Link, LiFi, Foxchain, Socket, Composable Finance).

Even with the multi-chain future assured, we’re still seeing new experimental layer 1s in development. Our investments in Aptos (general purpose L1 from former Diem employees), Celestia (modular blockchains), and Subspace (Proof-of-Archival consensus) suggest that the industry is not done innovating at the base layer. It also begs the question — will the dominant layer 1s of today someday be usurped? Time will tell.

Further up the stack, there’s more tooling on the way to help DAOs and Web3 communities flourish. Solutions for payroll (Diagonal, Zebec), social engagement & networking (Taki, Backdrop, Bonfire), and commerce (Rain) all point to a future where these online communities can coordinate more seamlessly.

DeFi’s multi-chain proliferation

Speaking of the multi-chain world, we’re seeing familiar patterns emerge across these burgeoning layer 1 networks. Basically, Ethereum set the tone for the foundational apps and protocols needed for an ecosystem to thrive: an AMM (Uniswap), money markets (Compound/Aave), an oracle (Chainlink), and yield aggregators (Yearn.Finance) to name a few.

For an emerging layer 1 to compete, teams understand they’ll need those same foundational primitives. As such, it’s becoming common to see Ethereum’s DeFi building blocks replicated across layer 1s like Solana, Avalanche, NEAR, Polkadot, etc. Betting on these foundational protocols is a good way to gain exposure to a broader ecosystem: a playbook we followed in Q1.

For example, from our Q1 investments, Aurigami on NEAR and Solend on Solana resemble Compound. Katana and Francium on Solana resemble Yearn.finance. Redstone resembles Chainlink, leveraging Arweave for cheaper storage to offer oracle services to longer tail tokens and NFT data feeds. And while these projects resemble apps first created on Ethereum, they’re each innovating in unique and differentiated ways.

Polkadot Cometh

Elsewhere in DeFiland, we were particularly active in the Polkadot ecosystem in Q1. With the long-awaited launch of Polkadot parachains arriving at the end of 2021, we’re seeing momentum around DOT pickup steam.

You can think of Polkadot as a network that you can launch layer 1s on top of. Each of these layer 1s, called parachains, are capable of interoperating with one another. With parachains live, Polkadot is now capable of hosting user applications.

We’ve now invested in 4 of the 5 live parachains (Acala, Moonbeam, Parallel Finance, and Astar) and waded deeper into the DOT waters in Q1 with investments in Composable Finance, Satori, and Coinbase alum Luke Youngblood’s new project: Moonwell.

NFT expansion pack

After a breakout summer, NFT sales have come back down to earth a bit from their earlier highs. Below the surface, however, innovation is more vibrant than ever.

Where NFT activity in 2021 centered around simple buying and selling (aka flippin’ JPEGs), the next wave of projects are building utility around NFTs. NiftyApes and PawnFi, for example, are working to bring liquidity to NFT holders by letting them take out loans collateralized by their NFTs. Platforms like Cymbal aim to bring more community and social features around NFT ownership.

Yuga Labs, the studio behind Bored Ape Yacht Club, made waves this quarter by raising at a $4B valuation to build a BAYC branded metaverse. Next, they acquired the IP rights to NFT collections CryptoPunks and Meebits. They capped it off by announcing a movie trilogy (produced by Coinbase) where BAYC NFT holders can submit their NFTs to be cast in the films and get paid a licensing fee — an interesting new experiment with on-chain licensing.

GameFi 2.0

Blockchain based gaming had its coming out party in 2021 centered around the rise of Axie Infinity. Sales of Axie Infinity NFTs peaked at a staggering $848M in August before falling precipitously. (Note that despite the obvious trend reversal and a major hack, Axie still posted a respectable $30M in March NFT sales).

Axie’s multi-billion dollar run was enough to put the entire gaming world on notice and the next wave of blockchain based games have been quietly raising ever since. Notably, many of the teams raising have track records building highly successful mobile, web, and AAA games (Clockwork Labs, Block Tackle, Summoners Arena, Third Time, Avalon).

The blockchain based games of the future will infuse crypto NFTs into more familiar Web2 gaming formats — MMORPGs, FPS, MOBA etc. Other CBV portfolio companies like Joyride will make it easier for game devs to integrate crypto/NFTs into existing titles.

At present, South East Asia is establishing itself as the center of the crypto-gaming world, led by the Philippines and Vietnam, among others. We’re particularly excited by developments in this region and the progress of Vietnamese based gaming guild and CBV portfolio company Ancient8.

Ventures outlook

Amidst a shaky macro picture, many crypto investors are on edge. More frequently, we’re getting asked how the market downturn will affect CB Ventures’ activity. To date, there’s no shortage of high quality entrepreneurs building in crypto and Web3. It isn’t however unreasonable to expect a slowdown should prices continue to sag, similar to what’s been observed in broader venture funding (down 19% QoQ). Regardless, our strategy won’t change much.

It bears reminding that some of the most successful projects of today were funded during the bear market of 2018/19. In that light, our early investments in projects like Compound, OpenSea, Polygon, Arweave, Starkware, Blockfi, NEAR, and Messari among others come to mind. As such, we’ll continue to invest in quality founders and projects moving the industry forward regardless of broader market conditions.

It also bears repeating just how much the investible Web3 landscape has broadened: DeFi, NFTs, DAOs, metaverses, and gaming are all evolving across a rich array of layer 1s. Then there’s cross-chain infrastructure to stitch all together as well layer-2 solutions to help it all scale. Not to mention a thousand other ideas not yet dreamed up. In other words, there’s more than enough innovation taking place to keep the CB Ventures’ team busy indefinitely.

This website does not disclose material nonpublic information pertaining to Coinbase or Coinbase Venture’s portfolio companies.

Disclaimer: The opinions expressed on this website are those of the authors who may be associated persons of Coinbase, Inc., or its affiliates (“Coinbase”) and who do not represent the views, opinions and positions of Coinbase. Information is provided for general educational purposes only and is not intended to constitute investment or other advice on financial products. Coinbase makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information on this website and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Unless otherwise noted, all images provided herein are the property of Coinbase. This website contains links to third-party websites or other content for information purposes only. Third-party websites are not under the control of Coinbase, and Coinbase is not responsible for their contents. The inclusion of any link does not imply endorsement, approval or recommendation by Coinbase of the site or any association with its operators.

Coinbase Ventures Q1 recap and market outlook was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Heidi Wilder, Special Investigations Manager & Tammy Yang, Blockchain Researcher

Introduction

Recent questions have been raised about how bridges and mixers work both for legitimate business purposes and illicit financial transactions.

Although mixing services have been extensively analyzed for years, bridges are a newer concept that became popular in 2021. Bridges allow crypto holders to ‘move’ (or ‘bridge’) their assets between different blockchains. This allows them to hop from one chain to another and gain exposure to other networks.

We observed a sharp increase in cross-chain activities from Ethereum beginning in April 2021. The daily number of deposit activities to Ethereum bridges reached its peak in the Summer of 2021 and the highest single-day record of over 60,000 transactions bridging from Ethereum occurred on September 12, 2021.

This two-part blog post aims to explain what bridging is, why it has become so popular, and why bad actors are bridging over funds across networks.

What is a bridge?

A bridge is an application that uses cross-chain communication technology to enable transactions between two or more networks, which can be Layer 1s, Layer 2s, or even off-chain services. Simply put, a bridge allows crypto holders to transfer their assets from one network to another. For example, a USDC holder on Ethereum might want to transfer their USDC from Ethereum to Avalanche via a bridge application.

However, a bridge doesn’t move an asset between chains, it links the asset on one network to its representation (i.e. a wrapped version) on the other network. The cross-chain transaction is achieved via ‘locking’, ‘minting’, and ‘burning’ that accounts for the link between the representations on different chains. We’ll discuss exactly what these terms mean in the following two examples.

Let’s say Alice wants to bridge 100 ETH from Ethereum to another network called Network Other (a made up blockchain network) via a bridge application called Bridge (also made up):

1. Alice deposits 100 ETH to the Bridge contract on Ethereum;
2. The Bridge contract on Ethereum locks the assets and informs the other Bridge contract on Network Other; the asset cannot be accessed until the users requests a withdrawal;
3. The Bridge contract on Network Other mints (creates) 100 tokens representing the locked ETH (i.e. wrapped ETH);
4. The Bridge contract transfers the newly minted wrapped ETH to Alice’s address on Network Other:

Alice now holds 100 wrapped ETH on Network Other. Later, she receives 10 wrapped ETH from someone else. Now, her address balance on Network Other increases to 110 wrapped ETH. She decides to withdraw all back to Ethereum:

1. Alice sends 110 wrapped ETH to the Bridge contract on Network Other;
2. The Bridge contract on Network Other burns (destroys) the 110 wrapped ETH and notifies the Bridge contract on Ethereum;
3. The Bridge contract on Ethereum validates the withdrawal request (e.g. whether Alice really owns 110 wrapped ETH on Network Other). If all checks out, it unlocks 110 ETH to Alice’s address on Ethereum:

How and when did bridging get so popular?

Bridging took off in 2021. Especially after April 2021, we saw cross-chain traffic from Ethereum increased exponentially — both in daily number of transactions and unique addresses deposited to the Ethereum bridges. We believe this upward trend is likely driven by one of the reasons below:

• Increase in the number of bridge applications. Wormhole launched the Ethereum-Solana bridge, Multichain (AnySwap) launched the Ethereum-Fantom bridge and Ethereum-Moonriver bridge, and Celer launched the cBridge in 2021.
• Increase in the number of new networks that can connect with Ethereum. Avalanche, Ronin, Arbitrum One, Optimism, and Solana were launched in 2021.
• Increase in the number of decentralized application (dApp) projects launching on chains other than Ethereum and incentivized usage of these systems.

Why do users bother bridging at all?

Normally, users want to bridge from one network to another because they want:

• Faster and cheaper transactions. For example, alt-Layer 1s like Polygon, Layer 2s like Arbitrum One and Optimism are the well-known scaling solutions to Ethereum.
• To use assets that are not native to the network. For example, users can gain price exposure to a currency like Bitcoin on Ethereum, with the help of bridge projects like Ren and Wrapped Bitcoin.
• To access a broader selection of dApps. A user might want to bridge funds from Ethereum to the Ronin Network to access Ronin-specific applications, such as their gaming dApp; since some dApps aren’t deployed on Ethereum mainnet because of its limitation on transaction speed and block size.
• To gain additional income from incentive programs. Many users choose to bridge because destination networks or projects on destination networks may send free tokens to members of their communities.

What’s happened since 2021?

A lot happened in 2021. Between July and November, many new dApps and new networks were launched. Bridging activities from Ethereum were at its peak during the time. Most of the bridges became quieter from Q4 in 2021. However, this was not the case for the Polygon PoS bridge — we saw strong and steady bridge traffic, in the number of deposit transactions, from Ethereum to the Polygon Network throughout 2021, which eventually led to Polygon PoS dominating cross-chain traffic in Q1 2022.

Figure 1 below shows the daily number of deposit transactions to Ethereum bridges. We theorize that the sharp spike around September 11, 2021 was driven by the launch of Arbitrum One.

Figure 1 Daily number of transactions deposited to Ethereum bridges since 2021.

Let’s take a look at bridge dynamics in deposit and withdrawal volumes in USD. Figure 2 below shows the daily deposit and withdrawal volumes in USD in Q1 2022. We believe that some sharp spikes in volumes were event-driven (e.g. launch of a new project, airdrop, incentive program, whale activity, bridge exploits, etc.)

• Top 3 in total deposit volume in Q1 2022 are AnySwap Fantom bridge (green, ~$8.4B), Avalanche bridge (pink, ~$7.8B), and Polygon PoS bridge (blue, ~$4B);
• Top 3 in total withdrawal volume in Q1 2022 are Avalanche bridge (pink, ~$10.5B), AnySwap Fantom bridge (green, ~ $6B), and Polygon PoS bridge (blue, ~$3.8B);

We also observed a very interesting fund movement pattern, especially with the AnySwap Fantom bridge, where large amounts of funds were moved to the Fantom network, and then withdrawn back to Ethereum mainnet after a very short period of time.

Figure 2 Daily deposit volume in USD to Ethereum bridges in Q1 2022

How safe are bridges?

As with most new technology, there are some risks to consider. For example, there are risks that users’ funds can be stuck during the deposit and withdrawal process, or they can be victims of cyber theft. When users decide to bridge an asset, they should also be aware of the underlying risks so that they can make more risk-driven decisions.

Theft Risk is the most common risk that can lead to bridge contracts losing part or all of the funds. Here are some problems that may lead to theft:

• Bugs in smart contracts. Programming or logical errors can have a serious impact on bridge security, creating opportunities for attackers to steal the locked funds from the bridge contracts.

The latest example is the Wormhole attack in February 2022 (details here). The attacker spotted a loop hole in the smart contract code, minted 120K Solana ETH without bridge approval and withdrew 80,000 ETH from Ethereum in Feb 02, 2022. Luckily, Jump Trading covered the gap by depositing 120K ETH back to the bridge contract on Ethereum.

Figure 3 Daily deposit and withdrawal volume in USD to Wormhole bridges

• Compromised custodians. Most of the bridge applications nowadays rely on external authorities to interact with the bridge and withdraw funds. They are the custodians of the locked funds — they can be trusted parties (e.g. AnySwap bridges) or a pool of validators bonded by stakes (e.g. Polygon PoS bridge and Ronin bridge). Then there is a risk that the custodians may be compromised or act maliciously.

On March 23 2022, the Ronin attackers compromised all four validation nodes run by Sky Mavis. Sky Mavis is the company who created the Axie Infinity game, Ronin Network, and the Ronin bridge. Together with the fifth validator (run by Axie Dao), which whitelisted all messages sent by Axie Infinity at the time, attackers gained control over the majority of the validators (5 out of 9).

The attacker then withdrew 173,600 ETH and $25.5 million USDC from the Ronin bridge on Ethereum without going through any verifications (more details here and here).

Figure 4 Daily deposit and withdrawal volume in USD to Ronin bridges

• Hostile Layer 1 miners/validators. If more than 50% of the Layer 1’s computing power or stakes are controlled by hostile miners or validators, they can attack bridges on chain and steal the locked funds. For example, they can revert a completed deposit transaction on Ethereum after assets are bridged to another network, which allows attackers to withdraw funds from the other network without depositing on Ethereum (more details here). Or, they can prevent bridge contracts getting updates from the other network, which may lead to major damage to user’s funds that are locked at the bridges.

These scenarios are unlikely to happen, but not impossible. In a worst case scenario, if assets locked at an exploited bridge were already bridged over from another network and used in DeFi applications, this may lead to a cascading contagion over multiple blockchain networks.

Bridge users should be aware that the loss by theft is usually not reversible.

What do we expect for 2022?

Given the explosion of bridges in 2021, we believe their popularity will continue to rise, especially as we are expecting to see developments in below areas:

• Bridging demand. As more networks and bridges launch this year, we expect to see more users wanting to bridge between networks;
• CEXs. More centralized exchanges (CEXs) will enable direct deposit and withdrawal to alt-Layer 1s and Layer 2s in 2022 (some already happened here, here and here).
• Bridge security. As more users willing to bridge, more crypto assets will be locked at the bridge contract — creating a honeypot effect, increasingly attracting hackers.
• Risk awareness. Many bridging decisions are cost-driven at the moment. We believe people have different risk appetites. However, there is a big difference between risk weighting choice of a bridge vs. choosing a cheap bridge solely because of the low fees.

It will be interesting to see, with more information and discussions around bridge security becoming available, if more risk-driven decisions would be made when it comes to choosing a bridge in the future.

Now that we understand what bridges are, why they’ve gained mass appeal, and what potential security concerns are with them, in our next blog post we’ll discuss the use of bridges by bad actors.

What are Bridges? Bridge Basics, Facts, and Stats was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Sanchan Saxena, VP of Product, Ecosystem Products

gm NFT Community,

Last year we announced Coinbase NFT, a Web3 social marketplace for NFTs. Since then, we’ve been building in the open and getting input from the NFT community. We shared previews of our progress with collectors and creators and received amazing feedback. We learned that people don’t just want better tools to buy and sell NFTs: they want better ways to discover them, better ways to find the right communities, and better spaces in which they can feel connected with each other. That’s why we’re building a product that’s much more than a transaction. We’re looking to empower people to create, collect, and connect.

Our beta is live today!

We’re taking the first step on that journey by releasing our beta. Starting today, anyone can check out the first version of Coinbase NFT at nft.coinbase.com and explore the vast collection of NFTs on the Ethereum blockchain.

Beta testers will be able to create a Coinbase NFT profile to buy and sell NFTs using any self-custody wallet, whether that’s Coinbase Wallet or something else. For a limited time, there’ll be no Coinbase transaction fees. We’ll eventually add fees, which will be in-line with Web3 industry standards, and we’ll provide notice before anything changes.

We’re starting with a small set of beta testers who’ll be invited based on their position on our waitlist. We’ll start at the top of the waitlist and open access to more people over time. Stay tuned as we gradually make access to create profiles, buy, and sell on Coinbase NFT available to everyone.

Here’s what else you’ll find in the product

Curate your profile and connect

You can create a profile that represents you by curating it with the NFTs that tell your story. Connect any self-custody wallet to select the NFTs you want to highlight, or hide, on your profile.

Build and engage your community

The rise of NFT communities have shown us that online conversation extends far beyond the moments around transactions. We’re building a place that’s for more than just buying and selling. We want Coinbase NFT to be a place that helps creators and collectors build and engage their communities.

Follow other profiles and start the conversation with comments. Once signed in, you can post comments directly on NFTs, and can up/downvote comments as conversations unfold.

Discover the best NFTs

Effortlessly browse NFTs for sale with the Discover feed. We’ll make personalized NFT recommendations to save you time searching for them. As you engage with the marketplace, recommendations will improve based on what you buy, what’s trending, who you follow, and more.

Easily buy and sell NFTs

We‘ve made buying and selling NFTs simple and easy. Get inspired by the NFTs in your feed, on collection pages, and on profiles. Check out everything that’s for sale on the Shop Tab and find one that you love.

As you explore these features, you’ll notice a wide range of projects from featured creators like Doodles, Boss Beauties, and Azuki. Creators are the lifeblood of our community and an essential component of our vision. Look out for more updates from us in the coming months on how we’ll continue to invest in creators to help more people break into the creator economy, including an update about how we’ll be honoring creator royalties.

What’s next for Coinbase NFT?

In the coming weeks and months, we’ll add more features that will gradually bring our vision for a web3 social marketplace to life. We’re planning to add drops, minting, token-gated communities, and the option to buy NFTs with your Coinbase account or a credit card. We’ll also add support for NFTs on multiple chains. And over time, we intend to decentralize more features by moving them from Coinbase tech to decentralized solutions.

We’re just getting started and can’t wait to explore new ways to bring people together around NFTs and the creators behind them. We’ll continue to listen, learn, and build based on feedback. To stay updated and tell us what you think, and follow us on Twitter.

gm! Coinbase NFT is now in beta was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Part 3 — Blockchain heuristics through time

In our last post we introduced the cornerstone of scaling up blockchain analysis, commonspend, and its pitfalls. In this blog post we’ll explore more complex and novel blockchain analysis scaling methods, their drawbacks and why time is a critical feature of blockchain analytics.

1. Change prediction

Change prediction is the second most commonly applied UTXO heuristic. It aims to predict which receiving address is controlled by the sender. A hallmark of UTXO blockchains is that when addresses transact, they move all outputs. The surplus amount is normally returned to the sender via a change address.

Consider the transaction below and try spotting the change address that belongs to the sender:

The change address is likely 374jbPUojy5pbmpjLGk8eS413Az4YyzBq6. Why? In this case, prediction logic relies on the fact that the above address is in the same address format as the input addresses (P2SH format, where sender’s addresses start with a “3”).

Among other factors, rounded amounts (i.e. 0.05 or 0.1 BTC) are often recognized as the actual send, with the rest being redirected to the change address. This suggests that change prediction relies not only on technical indicators, but also on elements of human behavior, like our affinity for rounded numbers.

Naturally, a more liberal change prediction logic that takes into account multiple variables in favor of a desired outcome can potentially lead to misattribution and mis-clustering. In particular, blockchain analytics tools can inadvertently fall into the trap of unsupervised change prediction — that’s why it is vital for blockchain investigators to be mindful of the limitations posed by this approach.

2. Change prediction, not a fact

Consider a more challenging example:

We have legacy addresses (starting with a “1”) sending on to two other legacy addresses. So which one is the change address?

The best way to figure out which address is the change address is to look at how each address spends BTC onwards. Usually output addresses receiving rounded amounts are not change addresses — but this could be wrong. So let’s just place our bet on the latter output address:

1Hs6XkSpuLguqaiKwYULH4VZ9cEkHMbsRJ — its next transction is as follows:

At first glance, this sort of looks like the pattern we saw in a previous transaction. The only aspect that stands out is a significant decrease in fees.

Looking at a second output address — 12Y8szPTeVzupEfe5RXs84fRsJJZBVhTgG — we see that its next transaction is distinct from the transaction it previously made:

The fees also look low compared to our initial transaction. And we notice that both our output addresses’ next transactions involve the original 1Hs6XkSpuLguqaiKwYULH4VZ9cEkHMbsRJ address in their outputs. Following the address’s next transaction we arrive to output #1’s next transaction.

To simplify, let’s visualize:

The diamonds in the above graph represent transactions — whereas the circles represent addresses. Notice that input address 15sMm6Rkf9hzz6ZtrrdhxdWZ8jGW12gQ93 commonspends in a transaction with 12Y8szPTeVzupEfe5RXs84fRsJJZBVhTgG. Therefore, output address #2 is in fact our change address!

This example illustrates how complicated change prediction can become leading to erroneous results.

3. Bespoke heuristics are still heuristics

Entities that attempt to preserve privacy in very public blockchains, such as exchanges and dark markets, may go out of their way to create their own wallet infrastructure that makes it difficult for blockchain investigators to identify how they operate. For these cases, blockchain analytics companies will create bespoke heuristics for these particular entities.

Still, no heuristics are foolproof. Parameters and limitations for blockchain analysis depend on how restrictive the scope is — or how much room is left for interpretation. A conservative approach would dictate not attributing anything that cannot be determined with close to 100% certainty; a liberal approach would allow wider attribution, at the cost of expanding the potential margin of error.

This also applies to any bespoke heuristic that is constructed with specific blockchain entities in mind. This is illustrated well by the above mentioned coinjoin Wasabi example. Although the transaction in question highly likely to belongs to Wasabi wallet, we need to ask ourselves what this transaction is displaying:

Most likely this transaction is displaying Wasabi addresses commonspending with other users’ addresses. As complexity increases, the accuracy of attribution decreases — especially if we consider that a user might own one or more addresses in this transaction.

Every blockchain analytics tool will have a different set of parameters and rely on different heuristics. That is why differences between clusters displayed by various tools are so common — for example, the SilkRoad cluster will each time look differently, depending on the blockchain analytics software used to conduct its analysis.

In fact, even with only comonspend applied, we see how the block explorers CryptoID and WalletExplorer both show different sizes of the Local Bitcoins cluster.

4. In blockchain analytics the future can impact the past

Einstein would probably admire blockchains, because they are one of the few examples of where the future can change the past — at least from an attribution perspective. For example, 14FUfzAjb91i7HsvuDGwjuStwhoaWLpGbh received various transactions from a P2P service provider between August and mid-September 2021. So we might think that this address could belong to an unhosted wallet.

But if we check on that address a couple days later on September 30, 3021, we suddenly notice that it’s been tagged as Unicc, a carding shop. What happened? This address commonspent 15 days later with an address we already knew belonged to Unicc — making it a part of the Unicc cluster.

This is a simple example, but you can imagine from a Compliance and market intelligence perspective that these after-the-fact attributions can have some ripple effects.

Conclusion

Blockchain analytics is an increasingly complex field of expertise. It is not as straightforward as it seems and the difficulty is compounded by the fact that conclusions are drawn not only from blockchain, but also from external sources that are often ambiguous.

It is not possible to call blockchain analytics science — after all, scientific experiments can be replicated by unrelated parties who, by following a set scientific methodology, will come to the same conclusions. In blockchain analytics even the ground truth can have multiple facades, meanings and interpretations.

Certainty of attribution is almost scarce and because multiple parties are relying on different tools for conducting transaction tracing on blockchains, it can sometimes yield dramatically different results. That is why educational efforts in this area should continuously emphasize that even the most robust, tooled-up methodologies are prone to errors.

Nothing is infallible — after all, blockchain analytics is more art than science.

Part 3 — Blockchain heuristics through time was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Faryar Shirzad, Chief Policy Officer

The digital economy is permanently changing the nature of financial services globally and digital assets are at the center of much of this rapid change. This is something clearly understood by the UK Government. John Glen, Economic Secretary to the Treasury, used his recent keynote speech at Fintech Week to highlight the opportunities crypto presents to the UK economy — and that the country is keen to embrace them. Noting that the UK is second only to the US in the global league table of fintech hubs, Mr Glen was clear in his message that “the UK is open for business, open for crypto companies… we want this country to be a global hub, the very best place to start and scale crypto companies.”

Coinbase welcomes Economic Secretary Glen’s statement and commends the vision of the UK Government that stands behind it. The UK’s depth and strength in capital markets, fintech leadership, its globally respected regulators, its deep talent pool, and the innovative dynamism of the country’s economy combine to present an opportunity for the UK to be a leader in the next technology revolution and to become a global powerhouse for web3.

There is no question that fintech in the UK is growing rapidly and that the broader financial industry will increasingly be built on crypto rails. Mr Glen himself referenced the 200% year-on-year rise in fintech investment. He’s not a lone voice seeing the potential. Some of finance’s most influential voices are waking up to crypto’s economic and transformational power. From funds and VCs to the real economy investor, the UK is increasingly embracing crypto and recognizing its social, cultural, and economic utility.

This is a continuation of a global trend. Larry Fink, chairman of BlackRock, the world’s largest asset manager, for example, revealed in his latest letter to CEOs that BlackRock is investigating how digital currencies, stablecoins and underlying technologies “can help serve” clients of the $10 trillion firm. At the retail level, Coinbase’s own research reveals that about a third of people in the UK who are aware of crypto own or have owned digital currency, and twice that amount intend to increase their holdings. We’re at an inflection point in the adoption curve.

But increased adoption is only the tip of the iceberg. As the possibilities of how crypto can revolutionize traditional finance reveal themselves, there will be so much more innovation at the core of this movement. Whether that’s existing payment systems being streamlined through digitalization or complex contracts being hosted on the blockchain, whole new economic frontiers will open up, bringing new employment with them.

As Mr Glen himself said, these developments create an opportunity for the UK to leverage its existing and formidable advantages to be a leader in digital innovation. He says that if crypto is going to be a “big part of the future, then the UK wants in, and in on the ground floor.” We believe the country can do this by taking steps to build a more free and open financial system, bridging the gap between traditional financial services and the crypto industry, and supporting economic growth and jobs.

Get it wrong and there’s a risk the UK cedes a critical dimension of its financial and technological leadership, and signals to the next generation of entrepreneurs to look elsewhere to build, hire, and grow. Coinbase believes and has advocated for thoughtful regulation for digital assets around the world. We applaud the work and deep thinking that the UK Government is doing to address consumer risk, market integrity and competition in the financial sector — these are critical issues and require careful analysis.

But what is also critical now is continuing this positive reframing of the debate to focus on the opportunities from digital assets, as opposed to just the perceived risks. Without such clarity, there is a danger the UK is left behind, particularly as more and more entrepreneurs and businesses seek to use crypto rails to build their new ventures. For example, we are concerned that the proposed changes to the existing Financial Promotions Regime to cover crypto will, unless recalibrated, render a de facto ban on the marketing of crypto services in the UK.

Looking ahead, we want to highlight some key principles for consideration by the Government as it considers how to best put the UK on the path to be a web3 leader:

Creation of a tailored framework for digital assets

Digital assets — and in particular blockchain technology — allow for increased efficiency in the financial sector and offer a transformational level of financial empowerment for everyday people. That is why the UK Government’s decision to bring the cryptoeconomy into a central focus of its policymaking is so important. The cryptoeconomy, however, is rapidly evolving, and policy should adapt with it through a regulatory regime that is flexible enough to cope with current and future needs as they emerge — all informed by input by stakeholders and the public.

This is a point the UK authorities clearly appreciate and understand. Mr Glen said that crypto will bring dynamism to finance and that regulation must therefore be dynamic too, “rather than a static, rigid thing.” His analogy of envisioning regulation as “computer code, which can be refined and rewritten when needed” is well-stated and absolutely correct. Marrying this vision of dynamism with the work of regulators who have achieved their international status by being reliable and predictable is clearly something that will require some effort.

For example, industry eagerly awaited the publication of the UK Government’s Stablecoin Consultation response and broadly supported the proposal to bring stablecoins — where used as a means of payment — under a clear regulatory framework. However, success will be determined by how well and quickly this is implemented. The UK Government’s planned consultation and implementation of tailored digital asset regulation will need to be a fast follow to ensure that the UK does not fall behind.

Oversight by a dedicated policy & supervisory unit

Creating a dedicated policy unit and an equivalent supervisory unit with the resources to oversee digital assets would be a worthwhile investment, potentially with a cross-regulatory function much like the Digital Economy Taskforce as proposed by the Kalifa Review. It would need to be staffed by those with specialist knowledge of the sector and could also act as a single point of contact for the industry and present clarity for new and emerging businesses who are considering the UK as their home.

Again the UK Government shows its foresight, with Mr Glen sketching out a new world for both the “newly regulated and the regulators”, with a Government Minister driving the process, including the establishment of the Crypto Engagement Group. For him to imagine a policy of industry and authorities “working together and learning from each other” while maintaining high standards, yet being flexible and working at the pace that the speed of innovation needs” sets the UK as an inviting home for web3 entrepreneurs Mr Glen’s challenge is to make sure that he delivers on his promise to create “robust and effective innovation that won’t hinder innovation, but will boost it.”

International harmonization & Industry coordination

With digital assets rapidly becoming a worldwide phenomenon, countries around the world are competing to establish themselves as leaders and to embrace the potential of the new, decentralized web. As the UK emerges as a leader in crypto and digital assets, it has a unique opportunity to work with other like-minded countries to create a workable international framework for regulation. All this needs to be done together with the industry and other stakeholders in a consultative and transparent manner. True innovation means engaging with the people working with those who have important perspectives on how the best policy outcomes are achieved. A fresh focus on digital assets does not mean leaving established institutions behind — they will unquestionably play an important role in the future and in many cases, will adopt blockchain technology as a critical component of their infrastructure.

To conclude, we must recognize that digital assets are a technological breakthrough that allows us to increase economic freedom for everyone. The UK Government certainly recognizes this, though Mr Glen rightly says that “no one knows for sure what the future of crypto looks like in the UK.” But what he has shown is that the UK clearly sees that the future can only be embraced by not focusing exclusively on perceived risks, but instead also seeing the opportunities.

Mr Glen finished his address by saying “we’re on the cusp of something important, we have the opportunity to shape and lead it.” By following through on this vision and by implementing consistent, proportionate and appropriate regulation as soon as possible, the UK can not only help bring about a better, safer, more resilient and fairer system for everyone, but also help unlock broader innovation. The UK government — and Mr. Glen specifically — deserve enormous credit for setting the stage for the UK to play an important role in the future of innovation.

Optimism and Urgency Lie at the Heart of UK’s Global Crypto Potential was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

By George Liu and Matthew Turk

In part one of this quant research piece, we introduce the decentralized finance (DeFi) collateralized lending platform known as Compound Finance and discuss its use case for stablecoins, in comparison to the notion of a “risk-free” interest rate from traditional finance (TradFi). Our goal is to tie these concepts together to educate on how different types of low-risk investment work within the TradFi and crypto markets.

This introduction examines stablecoin lending yield and shares insights on yield performance, volatility, and the factors driving lending yield. Part two of this piece will examine the factors that drive lending yield in more detail.

What are Stablecoins?

Stablecoins are a niche part of the ever-growing crypto ecosystem, primarily used by crypto investors as a practical and cost-efficient way to transact in cryptocurrency. The invention of stablecoins in the crypto ecosystem is brilliant because of the following properties:

• Similar to the fiat currencies used in model economies, stablecoins provide stability in price for people transacting across digital currencies or between fiat and digital currencies.
• Stablecoins are native crypto tokens that can be transacted on-chain in a decentralized manner without involvement of any central agency.

With the growing adoption of cryptocurrencies by investors from the TradFi world, stablecoins have become a natural exchange medium between the traditional and crypto financial worlds.

Risk-Free Interest Rate

Two of the shared core concepts in the traditional and crypto financial worlds are the concepts of risk and return. Expectedly, investors are likely to demand higher return for higher risk. During the current Russia-Ukraine war, the Russian interest rate increased from an average of approximately 9% to 20% in 2 weeks, which is a clear indication of how the financial market reacts to risk.

Central to the framework of risk and return is the notion of a “risk-free” rate. In TradFi, this rate serves as a baseline in judging all investment opportunities, as it gives the rate of return of a zero-risk investment over a period of time. In other words, an investor generally considers this baseline rate as a minimum rate of return he or she expects for any investment, because rational investors would not take on additional risk for a return lower than the “risk-free” rate.

One example of a “risk-free” asset is the U.S. Treasury debt asset (treasury bonds, bills, and notes), which is a financial instrument issued by the U.S. government. When you buy one of these instruments, you are lending the U.S. government your money to fund its debt and pay the ongoing expenses. These investments are considered “risk-free” because their payments are guaranteed by the U.S. government, and the chance of default is extremely low.

A “risk-free” rate is always associated with a corresponding period/maturity. In the example above, treasury debt assets could have different maturities, and the corresponding risk-free rate (also called treasury yield) are different as well.

The duration could be as short as one day, in which case we call it overnight risk-free rate or general collateral rate. This rate is associated with the overnight loan in the money market and its value is decided by the supply and demand in this market. The loans are typically collateralized by highly rated assets like treasury debt, and are thus deemed risk-free as well.

Source: WallStreetMojo

Compound V2 and Stablecoin Lending Yield

With the growth in acceptance of crypto assets and the corresponding market globally, crypto based investing has become a popular topic for people who have been previously exposed only to the traditional financial market. When entering into a new financial market like this, the first thing these investors generally observe is the risk-free rate, as it will be used as the anchor point for evaluating all other investment opportunities.

There is no concept of treasury debt in the crypto world, and as such, the “low-risk” (rather than risk-free) interest rate is achieved in DeFi collateralized lending platforms such as Compound Finance. We use the term “low-risk” here, because Compound Finance, along with many other DeFi collateralized lending platforms, are not risk-free, but rather subject to certain risks such as smart contract risk and liquidation risk. In the case of liquidity risk, a user who has negative account liquidity is subject to liquidation by other users of the protocol to return his/her account liquidity back to positive (i.e. above the collateral requirement). When a liquidation occurs, a liquidator may repay some or all of an outstanding loan on behalf of a borrower and in return receive a discounted amount of collateral held by the borrower; this discount is defined as the liquidation incentive. To summarize risk in DeFi, the closest we can get to risk-free is low-risk.

To clarify, for the sake of this post (and part two), we are looking into Compound V2. On Compound, users interact with smart contracts to borrow and lend assets on the platform. As shown in the example diagram above:

• Lenders first supply stablecoins (or other supported assets) such as DAI to liquidity pools on Compound. Contributions of the same coin form a large pool of liquidity (a “market”) that is available for other users to borrow.
• The borrower can borrow stablecoins (take a loan) from the pool by providing other valuable coins like ETH as collateral in the above diagram. The loans are over-collateralized to protect the lenders such that for each $1 of the ETH used as the collateral, only a portion of it (say 75 cents) can be borrowed in stablecoins.
• Lenders are issued cTokens to represent their corresponding contributions in the liquidity pool.
• Borrowers are also issued cTokens for their collateral deposits, because these deposits will form their own liquidity pools for other users to borrow as well.

How much interest a borrower needs to pay on their loans, and how much interest a lender can receive in return, is determined by the protocol formulas (based on supply/demand). It is not the intention of this blog to give a comprehensive introduction to the Compound protocol and the many formulas involved (interested parties please refer to the whitepaper for an in-depth education). Rather, we would like to focus on the yield that an investor can generate by providing liquidity to the pool, which will facilitate our yield comparison between the two financial worlds.

A Compound user receives cTokens in exchange for providing liquidity to the lending pool. While the amount of cTokens he holds stays the same through the process, the exchange rate that each unit of cToken can be redeemed with to get the fund back keeps going up. The more loans are taken out of the pool, the more interest rate will be paid by the borrowers, and the quicker the exchange rate will go up. So in this sense, the exchange rate is an indication of the value of the asset that a lender has invested over time, and the return from time T1 to T2 can be simply obtained as

R(T1,T2)=exchangeRate(T2)/exchangeRate(T1)-1.

Additionally, annualized yield for this investment (assuming continuous compounding) can be calculated as

Y(T1,T2)=log(exchangeRate(T2)) — log(exchangeRate(T1))/(T2-T1)

USDT/USDC Lending Yield Analysis

While the Compound pools support many stablecoin assets such USDT, USDC, DAI, FEI etc, we are only going to analyze the yields on collateralized lending for the top 2 stablecoins by market cap, i.e. USDT and USDC, with market capitalizations of $80B and $53B respectively. Together, they make up over 70% of the total market for stablecoins.

Here below are the plots of the annualized daily, weekly, monthly, and biannual yields generated according to the formulas in the previous section. As one can see, the daily yield is pretty volatile, while the weekly, monthly, and biannual yields are respectively the smoothed version of the prior granular plot. USDT and USDC have pretty similar patterns in the plot, as lending of both of these assets experienced high yield and high volatility for the start of 2021. This indicates there are some systematic factors there that are affecting the DeFi lending market as a whole.

Source: The Graph

One hypothesis of the systemic factors that could affect the lending yield involves crypto market data such as BTC/ETH prices and their corresponding volatilities. To illustrate an example (higher risk in this case), when BTC and ETH are in an ascending trend, it is believed that many bull-chasing investors will borrow from the stablecoin pools to buy BTC/ETH and then use the purchased BTC/ETH as collateral to borrow more stablecoins, and then repeat this cycle until the leverage is at a satisfying high level. This leverage effect helps the investors to magnify their returns as BTC/ETH keeps going up. We will explore this analysis more in part two of this blog post.

Future Directions

This blog has given a broadly applicable introduction to DeFi collateralized lending through the lens of Compound Finance and how it compares to “risk-free” rates from TradFi. As mentioned above, in part two of this blog post, we will further examine collateralized lending yields and share our insights on yield performance, volatility, and driving factors.

We, as part of the Data Science Quantitative Research team, aim to get a good holistic understanding of this space from a quantitative perspective that can be used to drive new Coinbase products. We are looking for people that are passionate in this effort, so if you are interested in Data Science and in particular Quantitative Research in crypto, come join us.

The analysis makes use of the Compound v2 subgraph made available through the Graph Protocol. Special thanks to Institutional Research Specialist, David Duong, for his contribution and feedback.

Part 1: Quantitative Crypto Insight: Stablecoins and Risk-Free Rate was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Starting immediately and as part of an effort to increase transparency by providing as much information symmetry as possible, Coinbase will be using this blog post as a pilot to communicate assets under consideration for listing in Q2 2022 (April 1st, 2022 to June 30th, 2022).

April 1 — June 30 2022 Roadmap

The following assets are under consideration for listing on Coinbase in the 2nd quarter of 2022. Transfers and trading are not supported for these or any other assets until a listing is officially announced. Depositing these assets into your Coinbase account before an official announcement may lead to permanent loss of funds.

ERC-20 tokens on the Ethereum network

1. Aleph.im (ALEPH) — Contract Address: 0x27702a26126e0b3702af63ee09ac4d1a084ef628
2. Arcblock (ABT) — Contract Address: 0xb98d4c97425d9908e66e53a6fdf673acca0be986
3. BiFi (BIFI) — Contract Address: 0x2791bfd60d232150bff86b39b7146c0eaaa2ba81
4. Big Data Protocol (BDP) — Contract Address: 0xf3dcbc6D72a4E1892f7917b7C43b74131Df8480e
5. Binance USD (BUSD) — Contract Address: 0x4Fabb145d64652a948d72533023f6E7A623C7C53
6. BitDAO (BIT) — Contract Address: 0x1A4b46696b2bB4794Eb3D4c26f1c55F9170fa4C5
7. Botto (BOTTO) — Contract Address: 0x9dfad1b7102d46b1b197b90095b5c4e9f5845bba
8. Chrono.tech (TIME) — Contract Address: 0x485d17A6f1B8780392d53D64751824253011A260
9. Coin98 (C98) — Contract Address: 0xae12c5930881c53715b369cec7606b70d8eb229f
10. DappRadar (RADAR) — Contract Address: 0x44709a920fccf795fbc57baa433cc3dd53c44dbe
11. DEXTools (DEXT) — Contract Address: 0xfb7b4564402e5500db5bb6d63ae671302777c75a
12. DFX Finance (DFX) — Contract Address: 0x888888435fde8e7d4c54cab67f206e4199454c60
13. Dope Wars Paper (PAPER) — Contract Address: 0x7ae1d57b58fa6411f32948314badd83583ee0e8c
14. Drep [new] (DREP) — Contract Address: 0x3Ab6Ed69Ef663bd986Ee59205CCaD8A20F98b4c2
15. Elastos (ELA) — Contract Address: 0xe6fd75ff38adca4b97fbcd938c86b98772431867
16. Gemini USD (GUSD) — Contract Address: 0x056Fd409E1d7A124BD7017459dFEa2F387b6d5Cd
17. Honey (HNY) — Contract Address: 0xc3589f56b6869824804a5ea29f2c9886af1b0fce
18. Hopr Token (HOPR) — Contract Address: 0xf5581dfefd8fb0e4aec526be659cfab1f8c781da
19. Index Cooperative (INDEX) — Contract Address: 0x0954906da0Bf32d5479e25f46056d22f08464cab
20. Indexed Finance (NDX) — Contract Address: 0x86772b1409b61c639eaac9ba0acfbb6e238e5f83
21. Jupiter (JUP) — Contract Address: 0x4b1e80cac91e2216eeb63e29b957eb91ae9c2be8
22. Kromatika (KROM) — Contract Address: 0x3af33bef05c2dcb3c7288b77fe1c8d2aeba4d789
23. LockTrip (LOC) — Contract Address: 0x5e3346444010135322268a4630d2ed5f8d09446c
24. MATH (MATH) — Contract Address: 0x08d967bb0134f2d07f7cfb6e246680c53927dd30
25. Monavale (MONA) — Contract Address: 0x275f5Ad03be0Fa221B4C6649B8AeE09a42D9412A
26. Morpheus Labs (MITX) — Contract Address: 0x4a527d8fc13c5203ab24ba0944f4cb14658d1db6
27. mStable Governance Token: Meta (MTA) — Contract Address: 0xa3bed4e1c75d00fa6f4e5e6922db7261b5e9acd2
28. Muse (MUSE) — Contract Address: 0xb6ca7399b4f9ca56fc27cbff44f4d2e4eef1fc81
29. Nest Protocol (NEST) — Contract Address: 0x04abeda201850ac0124161f037efd70c74ddc74c
30. Opacity (OPCT) — Contract Address: 0xdb05ea0877a2622883941b939f0bb11d1ac7c400
31. OpenDAO (SOS) — Contract Address: 0x3b484b82567a09e2588a13d54d032153f0c0aee0
32. PARSIQ (PRQ) — Contract Address: 0x362bc847A3a9637d3af6624EeC853618a43ed7D2
33. PolkaFoundry (PKF) — Contract Address: 0x8b39b70e39aa811b69365398e0aace9bee238aeb
34. Polkamon (PMON) — Contract Address: 0x1796ae0b0fa4862485106a0de9b654eFE301D0b2
35. RAC (RAC) — Contract Address: 0xc22b30e4cce6b78aaaadae91e44e73593929a3e9
36. SelfKey (KEY) — Contract Address: 0x4cc19356f2d37338b9802aa8e8fc58b0373296e7
37. StackOS (STACK) — Contract Address: 0x56a86d648c435dc707c8405b78e2ae8eb4e60ba4
38. StaFi (FIS) — Contract Address: 0xef3a930e1ffffacd2fc13434ac81bd278b0ecc8d
39. Strike (STRK) — Contract Address: 0x74232704659ef37c08995e386a2e26cc27a8d7b1
40. Student Coin (STC) — Contract Address: 0x15b543e986b8c34074dfc9901136d9355a537e7e
41. SwftCoin (SWFTC) — Contract Address: 0x0bb217E40F8a5Cb79Adf04E1aAb60E5abd0dfC1e
42. Sylo (SYLO) — Contract Address: 0xf293d23bf2cdc05411ca0eddd588eb1977e8dcd4
43. TE-Food (TONE) — Contract Address: 0x2Ab6Bb8408ca3199B8Fa6C92d5b455F820Af03c4
44. UnMarshal (MARSH) — Contract Address: 0x5a666c7d92E5fA7Edcb6390E4efD6d0CDd69cF37
45. Wrapped Ampleforth (WAMPL) — Contract Address: 0xedb171c18ce90b633db442f2a6f72874093b49ef

SPL tokens on the Solana network

1. Apricot Finance (APT) — Contract Address: APTtJyaRX5yGTsJU522N4VYWg3vCvSb65eam5GrPT5Rt
2. Bitspawn (SPWN) — Contract Address: 5U9QqCPhqXAJcEv9uyzFJd5zhN93vuPk1aNNkXnUfPnt
3. Green Satoshi Token (GST) — Contract Address: AFbX8oGjGpmVFywbVouvhQSRmiW2aR1mohfahi4Y2AdB
4. Media Network (MEDIA) — Contract Address: ETAtLmCmsoiEEKfNrHKJ2kYy3MoABhU6NQvpSfij5tDs
5. Realy (REAL) — Contract Address: AD27ov5fVU2XzwsbvnFvb1JpCBaCB5dRXrczV9CqSVGb

*This is not an exhaustive list of all assets under consideration. Any asset not referenced in the list does not preclude any such asset from potential listing.

As a reminder, Coinbase recently introduced an Experimental label that may be applied to newly listed assets. Some of the assets mentioned above may be listed with this Experimental label.

Disclaimer & Risks: There will be times when an asset is delayed or removed from consideration for listing for any number of factors. While we will try to make every reasonable effort to minimize this risk of occurrence, it should be understood that all information in this blog is in no way intended to be relied upon as a promise or guarantee of listing. Coinbase reserves the right to discontinue this blog post.

Changelog

Changes to our roadmap will be updated and communicated here regularly.

Why are you considering listing these assets?

As mentioned during our launch of Asset Hub, our goal is to list every asset possible that meets our standards for legal, compliance and technical security. These standards do not take into account the market cap or popularity of a project. This means there are assets that we have concluded do not meet our standards and thus will not be listed on Coinbase at this time.

If we haven’t yet listed a popular asset, it is likely due to various reasons including:

1. We have concluded that the asset does not meet our minimum listing standards across legal, compliance and technical security
2. We do not have enough information about the asset
3. Technical integration work is required

Our review process is outlined in greater detail here.

How do you choose which “types” of assets to support?

We are working to add support for additional networks and ecosystems as we aim to provide the greatest inventory of assets to our users.

Today we support 3 “types” of assets for trading on Coinbase:

1. Native assets on their own network (recent examples include MINA and STX)
2. ERC-20 tokens on the Ethereum network (recent examples include APE and GALA)
3. SPL tokens on the Solana network (recent examples include ORCA and FIDA)

Resources on listing criteria

• Proof of alignment
• A guide to listing assets on Coinbase
• A look into Coinbase’s commitment to compliant asset listings
• How Coinbase thinks about the legal review of new assets
• How Coinbase thinks about security
• Securing an ERC-20 token for launch on Coinbase

NOT INVESTMENT ADVICE

The content is for informational purposes only, is general in nature and should not be relied upon or construed as legal, tax, investment, financial, a promise, guarantee, or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer by Coinbase or its affiliates to buy or sell any cryptocurrency or other instruments in any jurisdiction in which such solicitation or offer would be unlawful under the laws of such jurisdiction. Additionally, Coinbase Ventures may be an investor in the crypto projects mentioned here, and additionally, Coinbase may hold such tokens on its balance sheet for operational purposes. A list of Coinbase Ventures investments is available at https://ventures.coinbase.com/. Finally, Coinbase has a conflict of interest policy that prevents board members or Coinbase employees from being involved in a listing decision where they have a financial interest.

Increasing transparency for new asset listings on Coinbase was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Coinbase is reducing the number of confirmations required for several assets on the platform. We expect this change to both improve customer experience and security posture.

What’s changed

New confirmation requirements for Bitcoin, Litecoin, Ethereum, and Ethereum Classic pursuant to the table below:

Why we made these changes

Confirmation requirements for assets are based on many factors. These factors change over time just like the assets themselves. To ensure a great customer experience, Coinbase continually evolves our security posture and periodically amends confirmation requirements.

For Bitcoin, Ethereum, Litecoin, and Ethereum Classic, it has been determined that confirmation requirements can be reduced. In practice, this means that deposits will be confirmed on Coinbase faster than before while still meeting a high bar for asset security.

Announcing new confirmation requirements was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.