GM, this is your Daily Bolt briefing.
In this edition, we’re providing you with a report detailing cbETH, the Real Yield ETH, and more.
Also; continue on to our Note of the Day to gain some intriguing insights from Revelo Intel’s Nick Drakon and Souvlaki on Circle’s new transfer technology for native USDC, and how this could impact existing bridges and stablecoin wrapping solutions…
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1/ Sommelier Finance - Real Yield ETH and the $cbETH Thesis
Preview: In this Twitter Spaces Josh from Sommelier Finance hosted Sunand Raghupathi from Seven Seas Capital, Stephen TCG (DeFi Dojo) from Define Logic Labs, and Andrew from Coinbase to discuss $cbETH and its role in Sommelier Finance's Real Yield ETH vault, and more! Click here to listen to the full episode (36 mins).
Read our Note (12 mins) and save 24 mins.
Here are some key takeaways:
Stephen, states that Define Logic Labs have partnered with Seven Seas Capital to create a project called Real Yield $ETH vault on Sommelier Finance. Stephen highlights that Define Logic Labs’ significant contribution to the Real Yield ETH Vault was determining that the $cbETH-to-peg play (arbitrage opportunities when $cbETH is below peg) had the best risk-reward after analyzing over 20 different ETH mainnet yields daily.
Sunand mentions Seven Seas Capital has been a part of the Sommelier ecosystem and has launched the Real Yield $USD vault. They then co-launched the Real Yield ETH vault with Define Logic Labs.
Andrew, an employee of Coinbase, spoke about the fit of $cbETH in DeFi and expressed excitement about the growth within the Real ETH Yield Vault. He appreciated how protocols build on top of each other, highlighting the power of DeFi.
Andrew provides an explanation of $cbETH, which is different from other Liquid Staking Tokens (LSTs). It’s not a protocol but a liquid-staked $ETH by Coinbase. Users can stake their $ETH on Coinbase, wrap the staked position, and receive an equivalent amount of $cbETH. This can then be used in various on-chain applications.
Andrew clarified that $cbETH uses a C token model with a floating exchange rate with $ETH. The staking yield accruing to the underlying balance can cause the exchange rate to increase over time, with one $cbETH potentially representing more than one staked $ETH. This model was chosen to ensure easy integration within DeFi and Bridges.
Andrew explains that as a centralized entity and the issuer of $cbETH, Coinbase can’t directly provide or incentivize liquidity. He sees this as an opportunity for protocols like Sommelier, as the trading fees from liquidity provision for $cbETH could outperform those from other protocols with incentivized deep liquidity.
Stephen explains that LST (liquid staking token) arbitrage is a strategy he appreciates and has utilized on instruments such as stETH and stATOM. LSTs are backed by the deposit asset and the yield. They can be redeemed in the future for the underlying asset plus the yield.
He further explains that if there is a depeg, the time to unstake the asset equals the time needed to realize the depegged ROI. He mentions that the ETH LSTs didn’t have the ability to be arbitraged until the launch of Shanghai, after which the arbitrage opportunities became more tangible.
Stephen states that the faith brought into the ecosystem by the ability to unstake ETH LSTs in a specific timeframe (he believes it’s 13 days) pushes the peg very close to parity. He outlines two strategies: purchasing spot and waiting for the value to increase close to parity, or traditional arbitrage—buying the spot at a discount and unstaking it for the full value.
Stephen explains that each $cbETH is backed by approximately 1.035 $ETH, meaning every $cbETH will be redeemable for 1.035 $ETH at some point. If one can buy 1 $cbETH for 1 $ETH and redeem it later, a 3.5% arbitrage profit could be made. However, the current price is almost at parity, making this difficult.
WOMM - Circle's CCTP and Its Potential Implications
In this episode of What’s On My Mind, Nick Drakon and Souvlaki discuss the Circle's Cross Chain Transfer Protocol, its possible use cases, and its implications. Read our notes below to learn more.
Background
Nick Drakon (Host) - Founder of Revelo Intel, Host at DeFi Sparks podcast, and full-time investor.
Souvlaki (Host) - Researcher at Revelo Intel, Co-Host of DeFi Sparks podcast.
Circle's Cross Chain Transfer Protocol (CCTP)
Nick explains that CCTP is a cross-chain transfer protocol developed by Circle specifically for $USDC.
Souvlaki explains the process of moving $USDC between chains before CCTP. The steps include selecting the destination chain, triggering the transfer, and transferring the tokens from the wallet to the bridging contract on the source chain.
Souvlaki mentions that there are two possible outcomes after the transfer. In one scenario, the bridging contract holds the tokens on the source chain and mints a synthetic version of the underlying asset (e.g., $USDC) on the receiving chain, which is then released to the user's wallet. This process leads to fragmented liquidity with multiple versions of the asset.
Souvlaki introduces an alternative solution developed by Multichain. They utilize the "Anycall" option, where they burn the tokens on the source chain and mint them on the destination chain based on liquidity in the bridging contract. However, if Multichain lacks sufficient liquidity, they issue a debt token called $anyUSDC, which users need to hold until enough liquidity is brought across the chain.
Souvlaki mentions that the Cross-Chain Transfer Protocol (CCTP) eliminates the challenges presented by the above-mentioned scenarios.
Nick and Souvlaki believe that these methods presented challenges, such as fragmented liquidity.
Nick also says that locked tokens in bridging contracts could be exploited, posing risks to $USDC as a whole.
Souvlaki expresses that with CCTP, users can move their $USDC from one chain to another where $USDC exists natively without interacting with any bridging contracts. The protocol burns the $USDC on the source chain and instantly mints new tokens on the destination chain, reducing overall risk to the system.
How does CCTP work?
Nick explains that when users want to move their $USDC between chains where it exists natively (currently Ethereum, Avalanche, Stellar, Tron, Solana, Hedera, Algorand, and Polygon), they go to a specific dApp that supports CCTP.
According to Nick, the protocol destroys the user’s $USDC on the source chain and creates new tokens on the destination chain. He says that this reduces native USDC that needs to be locked in any of these bridges.
Nick explains that the supply of $USDC doesn’t decrease in total, which can only be achieved by Circle since they are the issuer of the $USDC.
Souvlaki says that on-chain confirmation is required for certification before authorizing the minting of $USDC on the destination network.
Souvlaki states that this functionality currently exists between Ethereum and Avalanche but will expand to other networks in the future.
Souvlaki thinks that CCTP will lead to a reduction in $USDC on networks that do not natively support it. Souvlaki believes that the bridging risk is now outsized by getting authentic $USDC because it can be supported natively across multiple networks.
Nick mentions that one advantage of CCTP is the ability to send to a different destination address, which can be useful. Nick explains that institutions prefer native $USDC available chains, making it easier for them to move money around faster.
Use Cases and Implications of CCTP
Nick says that developers can provide a gasless experience to users by building new dApps on top of CCTP and trigger processes without having users go through every step.
Nick states that a possible use case that can be developed through CCTP is a dApp that allows the user to swap $ETH on Mainnet to get $AVAX on Avalanche. He says that in the background, the dApp swaps $ETH for $USDC, sends it to Avalanche, burns it on the mainnet, mints new $USDC on Avalanche, and swaps the $USDC to $AVAX and the user receives the $AVAX on Avalanche.
Nick says that Chainlink is working on Cross-Chain Interoperability Protocol (CCIP), which allows chains to communicate with each other and work similarly to CCTP.
Souvlaki mentions that the most interesting thing about CCTP is that the certification allows for checks and balances to be in place and ensures that the net circulating supply of native $USDC isn’t impacted when anyone uses the bridge.
He also mentions that this concept could form the basis for future integrations into the real world. The system works such that when a user sends to the bridge, there's a check to ensure that the $USDC has been burned and there are enough reserves in real-world deposits to authorize the mint on the destination chain.
Souvlaki also believes that CCTP’s cross-chain messaging could be the foundation technology for using blockchain to confirm real-world assets. This cross-chain messaging system could be used for instantaneous confirmation of transfers of title deeds, properties, vehicles, and more.
Souvlaki thinks that cross-chain messaging could allow for confirmation of real-world asset transfers such as property or vehicle titles. He believes that private transactions like property or vehicle titles may be the first implementation of cross-chain messaging.
Nick says that Circle has announced that CCTP will allow cross-chain NFT purchases. It enables users with $USDC on Avalanche can buy NFTs on Ethereum.
According to Souvlaki, CCTP’s cross-chain messaging could potentially become a big implementation without relying on a Chainlink Oracle since they aren’t listed as one of the partners of CCTP.
Nick discusses that there is a possibility of monetizing cross-chain messaging technology through a fee system. He sees this area of innovation as essential infrastructure. He suggests that if someone could monetize it - even if it's by earning a small amount each time a transaction takes place - it could become a fantastic business given the high-speed nature of these digital rails.
Souvlaki concludes by praising this advancement in reducing risk for end users and creating a seamless experience. He considers it a step in the right direction, although the ultimate destination remains uncertain.
Important Links
aiPX is the official sponsor of the Daily Bolt by Revelo Intel
In a post-FTX world, securely trading with leverage and earning real yield in a decentralized manner has never been more important.
aiPX offers cutting-edge risk management for liquidity providers, leverage trading, and a suite of products between perpetuals, binary options, and synthetics.
Earn passive yield and trade with leverage straight from your wallet.
Take the step, join aiPX.