Welcome to The Protocol, CoinDesk’s weekly wrap-up of the most important stories in cryptocurrency tech development. I’m Ben Schiller, CoinDesk’s Opinion and Features editor.

In this issue:

• Can Based Rollups solve Ethereum’s problem?
• Lido goes modular
• Uniswap finally unveils Unichain
• Ethereum’s Pectra upgrade is coming

Network news

BASED ROLLUPS TO THE RESCUE: In recent years, Ethereum has embraced a layer-2 scaling roadmap—a plan that encouraged the development of third-party auxiliary networks called “layer-2 rollups”—to help scale the base Ethereum ecosystem. Offloading activity to these upstart networks has helped bring down fees and improve speeds for end-users, but it has led to a massive, deeply fragmented ecosystem of layer 2s. But while layer-2 networks all post data back down to Ethereum, they often struggle to communicate directly with one another, meaning passing assets and data between them can become expensive and cumbersome. There’s also the risk of centralized sequencers: reliance on company-controlled black boxes to pass transaction data between blockchain layers. As a result, some Ethereum developers are pushing rollup tech that takes a new approach to security and interoperability: “based rollups.” Based rollups differ from most existing rollups because they shift execution duties—such as processing transactions—back to Ethereum’s layer-1 rather than handling them on a separate layer-2 network. When someone transacts on a layer-2 rollup, their transaction is processed through a component called a “sequencer.” The sequencer batches multiple transactions and submits them to Ethereum for settlement. While sequencers provide efficiency and generate revenue for rollup operators by strategically ordering transactions, they also introduce a single point of failure. Based rollups avoid this vulnerability by using Ethereum’s built-in sequencing—its massive community of validators—rather than a single centralized sequencer. Rollups like Optimism, Arbitrum, Base, zkSync, and Blast have quickly grown to support larger transaction volumes than Ethereum itself. According to L2Beat, there are currently 140 live layer-2 networks, but the experience of operating between them—passing assets and other data between networks—has become clunky. As Ethereum becomes bigger and layer-2 networks become more integral to its functioning, improving communication between layer-2s—in other words, improving “composability”—has become more important than ever. — Margaux Nijkerk Read more.

LIDO GOES MODULAR: The developers behind Lido, the largest staking service on Ethereum, have proposed revamping the staking platform with modular “vaults.” The new framework would introduce stVaults, a customizable component designed to help Lido accommodate institutions and more complex staking strategies. Lido currently allows investors to pool their ether (ETH) together and “stake” their crypto — locking up their tokens with the network, helping to secure it in exchange for interest. Lido pioneered liquid staking: users get a receipt on their deposits called Lido staked ETH (stETH) that they can trade at any time. With liquid staking on Lido, entering and exiting staking positions became as simple as buying and selling stETH tokens. Lido V3’s stVaults are “modular smart contracts designed to meet the diverse and evolving needs of Ethereum participants,” according to a press release shared with CoinDesk. The upgrade would enable staking setups beyond cut-and-dry liquid staking. Specifically, stVaults will be able to help institutional stakers who want to personalize their staking setups, node operators who want to attract high-volume stakers, and asset managers who want to create new staking use cases. “What is important to understand with customizable infrastructure, is that you can in general build even more complex products,” said Konstantin Lomashuk, the founder of the Lido staking protocol. — Margaux Nijkerk Read more.

UNICHAIN FINALLY: Uniswap Labs, the primary developer behind one of the largest decentralized exchanges (DEX), Uniswap, shared Feb 13 that its long-awaited layer-2 network, Unichain, is now live. Powered by Optimism’s OP stack, Unichain—like other layer-2s on Ethereum—offers faster and cheaper transactions compared to Ethereum’s mainnet. Developers can deploy apps onto the network, which has been optimized specifically for decentralized finance (DeFi) and aims to serve as “the home for liquidity across chains,” according to Uniswap Labs. For Uniswap Labs, the benefit of launching a layer-2 is twofold: it will provide a better experience for users of Uniswap and similar platforms, and it will create a new revenue opportunity in the form of network fees. A representative for Uniswap Labs told CoinDesk that “around 20%” of the chain’s revenue will go directly to the company. Unichain has been in testing since October 2024 and is classified by Uniswap Labs as a “stage-1” rollup, meaning it has elements of decentralization but retains some centrally-controlled safeguards at this early phase. The network is built on the OP Stack, a modular framework that lets developers build interoperable layer-2 chains based on Optimism’s optimistic rollup technology. Several well-known teams have come out with their own OP Stack-based layer-2’s, including Coinbase’s ‘Base’, Kraken’s ‘Ink,’ World’s ‘World chain,’ and Sony’s ‘Soneium.’ “We are anticipating a world of many, many different use cases, of which trading is a small subset,” Adams told CoinDesk in an interview. In collaboration with Ethereum research and development firm Flashbots, the Uniswap team said it has created a Trusted Execution Environment (TEE) on Unichain, a secure area for more sensitive transactions and is meant to optimize the chain for DeFi by allowing for more advanced trades and faster transaction finality. — Margaux Nijkerk Read more.

PECTRA IN APRIL: Ethereum developers have officially set test dates for Pectra, the network’s first upgrade in 11 months, putting it on track for a potential April release date. Pectra will contain an array of improvements — with a special focus on wallets and validators — but it comes at a period of heightened scrutiny for Ethereum, which has recently faced pressure from its community to refocus and catch up with competitors. Ethereum’s core builders decided on Thursday during their bi-weekly “All Core Developers” call to begin testing Pectra on Feb. 26 on the Holesky testnet, with a follow-up test on the network’s Sepolia testnet slated for Mar. 5. Should those tests succeed, the developers will reconvene on Mar. 6 to determine when to launch the upgrade officially. According to Tim Beiko, the protocol support lead at the Ethereum Foundation, developers expect the upgrade to hit mainnet in early April. Pectra — a portmanteau representing two separate upgrades, Prague and Electra — includes eight major improvements to the second-largest blockchain. Among the most-anticipated is EIP-7702, which is supposed to improve the user experience of crypto wallets. The Ethereum community has been facing an identity crisis over the last few weeks. Its native token, ether (ETH), is underperforming against other cryptocurrencies, and competitor networks like Solana have drawn attention and talent from the Ethereum ecosystem — the first-ever programmable blockchain and still the most trafficked. Amid the controversy — much of it directed at the Etheruem Foundation, which coordinates chain upgrades and is currently undergoing a major leadership shuffle — developers are hoping that Pectra will help put the network on steadier footing. — Margaux Nijkerk Read more.

Money Center

El Salvador Dispatch

Berlín, a city of 20,000 people, is home to El Salvador’s second Bitcoin circular economy. “Bitcoin City already exists. It’s called Berlín,” said one resident. Tom Carreras reports.

LinksDAO Launches on Base

LinksDAO began by selling NFTs, but the market has moved on in the time since.

Regulatory and policy

Hester Peirce, head of the SEC’s new crypto taskforce, says that memecoins likely to fall outside the regulator’s jurisdiction.

Calendar

Welcome to The Protocol, CoinDesk’s weekly wrap-up of the most important stories in cryptocurrency tech development. I’m Ben Schiller, CoinDesk’s Opinion and Features editor.

In this issue:

• Movement Labs rolls out dev mainnet
• Cardano hard forks to decentralized governance
• SSV DAO unveils SSC 2.0
• Musk pushes blockchain in government

Network News

MOVEMENT LABS ROLLS OUT DEVNET: Blockchain firm Movement Labs has deployed a developer mainnet to advance its goal of bringing Facebook (META)’s Move Virtual Machine (MoveVM) to Ethereum. The developer mainnet’s launch will begin the deployment of Movement’s core infrastructure and allow selected partners to start implementing decentralized finance (DeFi) protocols, according to an emailed announcement on Tuesday. The release follows the initial mainnet launch of Movement in December and precedes the planned public mainnet beta release next month. Move was developed as a part of Facebook’s ill-fated digital currency project Diem, which was shelved at the start of 2022. The technology was also used to create the Sui and Aptos layer-1 networks. Movement Labs, with the help of a $38 million Series A funding round led by Polychain Capital, is extending the programming language to an Ethereum layer 2 for the first time. Coinciding with the public mainnet’s deployment, Movement will also unveil a multi-asset liquidity program to provide the foundation for decentralized finance (DeFi) applications. Read more.

CARDANO HARD FORKS TO DECENTRALIZATION: Proof-of-stake blockchain Cardano was due to switch to decentralized governance Jan. 29 after the Plomin hard fork takes effect, Cardano Foundation, a non-profit organization backing the project, said on X. “The Plomin hard fork takes effect, marking the transition to full decentralized governance. ADA holders gain real voting power – on parameter changes, treasury withdrawals, hard forks, and the blockchain’s future,” Cardano Foundation said. “[It’s] A milestone in blockchain governance.” Cardano’s ADA token changed hands at 93 cents at press time, up 1.4% on the day, according to data from CoinDesk and TradingView. A hard fork is a non-backwards compatible change to the blockchain’s programming. The Plomin hard fork needs Stake Pool Operators to upgrade their nodes and approve the upgrade with a 51% vote. As of last week, nearly 80% of nodes had elevated to the new version. Read more.

SSV DAO 2.0: The SSV DAO, the decentralized autonomous organization behind the decentralized staking protocol SSV Network, unveiled a new framework, called “SSV 2.0,” allowing applications to make use of “based” technology by leveraging Ethereum validators. SSV 2.0 will be the most ambitious project for the SSV Network, according to a press release shared with CoinDesk, and will bring based applications (bApps) to Ethereum. “Based” applications, especially “based rollups,” are a new type of technology attracting the attention of Ethereum developers as it allows for better interoperability while improving the security of networks on top of Ethereum. Based rollups specifically can be seen as a solution to the many layer-2 networks on Ethereum today, which have caused much fragmentation across the space. By leveraging “based” technology, those protocols or applications can “base” their security and execution operations off of Ethereum’s layer-1 validator set. Currently, layer-2 networks use “sequencers” to order transactions and post those back to Ethereum. Sequencers are criticized for being single points of failure. By using layer-1 validators to do the execution and security work, networks can avoid the downfalls of using centralized sequencers. Ethereum developers agree that based rollups allow for better interoperability in the network. Ethereum ecosystem members have gathered over the last few weeks to find ways to solve this issue, and based rollups are seen as a major breakthrough for that. Now the SSV Network will also tackle these issues by bringing applications with based technology to Ethereum. Read more.

MUSK PUSHES BLOCKCHAIN: in his role leading the new Department for Government Efficiency (D.O.G.E.), Elon Musk suggested that using a digital ledger would be a cost-efficient way to track federal spending, secure data, make payments and manage buildings, according to people familiar with the matter. Several representatives of public blockchains have met with affiliates of D.O.G.E., the people said. The department was created in response to the federal government’s spending of $6.7 trillion in fiscal 2024, which Musk in October called “wasted” money. He promised the department — whose acronym is a nod to Musk’s favorite cryptocurrency, dogecoin (DOGE) — would slash the figure to at most $2 trillion. Given the department’s name and Trump’s determination to establish crypto-friendly policies in the U.S., Musk’s plan to incorporate blockchain technology doesn’t come as a surprise. In addition to creating D.O.G.E. on Jan. 20, Trump signed an executive order to create a working group on digital assets led by venture capitalist David Sacks with a mandate to identify all regulations that currently touch crypto within 30 days, among other things. Read more.

Money Center

XRP Strategic Reserve

• Ripple’s Brad Garlinghouse has ignited a debate about a putative national crypto reserve, saying “I believe it should be representative of the industry, not just one token (whether it be BTC, XRP or anything else).” Bitcoiners hope it will be a bitcoin-only reserve.

DeepSeek Hits Tokens

Regulatory and policy

Calendar

The Financial Stability Oversight Council published its 2024 annual report Friday, addressing various risks and areas of concern within the U.S. and global financial system. As it has done for the past few years, the report highlighted the role of stablecoins and the digital asset sector more broadly — though it stopped short of suggesting FSOC would take any concrete steps toward curbing these concerns.

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The narrative

For yet another year in a row, the Financial Stability Oversight Council — a group composed of the U.S.’s financial agency heads — warned that unchecked stablecoin growth could be an issue for the U.S. and global financial systems in its annual report.

Why it matters

The Financial Stability Oversight Council is tasked with ensuring the U.S.’s financial stability, and has for years asked Congress to pass legislation addressing the crypto market. The 2024 report reiterates these concerns.

Breaking it down

For the last few years, FSOC has warned that stablecoins exist outside any sort of federal regulatory framework, and their collective size could pose risks to financial stability. Friday’s report once again noted that potential risk. At the same time it also urged Congress to pass legislation addressing stablecoins and market structure, much as FSOC’s previous reports have.

“Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards,” the report said. “This run risk is amplified by issues related to both market concentration and market opacity.”

The report referred to Tether’s USDT composing some 70% of the total global stablecoin market as one issue regulators should watch.

The lack of any kind of federal regulatory framework is likewise an ongoing concern, the report said. Some states have frameworks for stablecoins, but this is insufficient for the concerns FSOC has.

“Although a few are subject to state-level supervision requiring regular reporting, many provide limited verifiable information about their holdings and reserve management practices,” the report said.

Though FSOC has warned for the past few years that it may have to take whatever actions it can should Congress not act, it’s unclear to what extent, if any, it may actually be able to do so. FSOC will be composed of new regulators within the coming months.

“Additionally, many crypto-asset market firms and issuers remain outside of, or in noncompliance with, the U.S. financial regulatory framework,” the report said. “As such, the crypto-asset spot market may continue to experience significant fraud and manipulation. The Council recommends that Congress pass legislation that provides federal financial regulators with explicit rulemaking authority over the spot market for crypto-assets that are not securities.”

“We have also been addressing emerging risks from significant technological changes,” Treasury Secretary Janet Yellen said in a prepared statement. “Digital assets and artificial intelligence bring potential benefits such as efficiencies, but also financial risks, cyber risks, and risks from third-party service providers. The Council continues to call for legislation to create a comprehensive federal prudential framework for stablecoin issuers and for legislation on crypto assets that addresses the risks we have identified.”

Wednesday

• 15:00 UTC (10:00 a.m. ET) The House Financial Services Committee held a hearing about technology and finance, serving as a sort of swan song for outgoing committee Chair Patrick McHenry (R-N.C.).

• (Bloomberg) Bloomberg has a list of stories its team wished they wrote, and really what it shows is there was a lot of good journalism this year.
• (The Verge) South Korean President Yoon Suk Yeol declared martial law earlier this week. That lasted for a few hours, after opposition party lawmakers literally scaled fences amid mass protests against the declaration to end the imposition.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Bluesky @nikhileshde.bsky.social.

You can also join the group conversation on Telegram.

See ya’ll next week!