The Tally Newsletter, Issue 37
June 23, 2021
Welcome back for issue 37 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen.
This week we cover:
Stakehound and SharedStake ETH2 staking projects suffer loss of funds
Uniswap’s Defi Education Fund proposal goes up for a vote
Plus brief updates from around the ecosystem.
Prominent Ethereum Staking Solutions Suffer Losses
TL;DR: Both Stakehound and Shared Stake have suffered from custody lapses affecting their tokenized ETH staking products.
While Ethereum’s proof of stake rewards are often pitched as the future risk free rate of defi, currently there’s still considerable risk in participating. In the past day, we’ve seen two defi staking providers suffer serious losses due to the unique technical and custody issues involved in staking on the ETH2 beacon chain.
The first news to break involved Stakehound, a pooled staking provider that offers a tradable stETH token representing user deposits. They had partnered with Fireblocks to create threshold signatures allowing for withdrawal of funds once this is enabled with the ETH2 merge upgrade. But it emerged that some of the necessary signatures had been lost, potentially locking 38,000 ETH permanently.
While the loss was initially discovered on April 29, the issue has now moved into the open after Stakehound filed a lawsuit against Fireblocks in the Israeli High Court. There’s a marked disagreement between the parties over their responsibility, with Fireblocks claiming it had no contractual obligation to hold backups. It’s not possible to apportion blame without knowing the contract specifics, but this demonstrates one of many potential risks of ETH2 staking where funds can be lost even without malicious intent.
While details are still emerging, it looks like rival staking provider SharedStake suffered from a more targeted vulnerability. With it not yet possible to control ETH2 withdrawals through a smart contract or other code based mechanism, some level of custody risk is involved in all pooled staking products.
In SharedStake’s case, it looks like they have been impacted by theft rather than loss of keys. The protocol’s native SGT token was drained from a vulnerable timelock contract and dumped on the market, sending the price nearly to 0. With primary suspicion for the exploit falling on a lead project dev, there’s also concern for the safety of depositors’ staked ETH. Compromised withdrawal keys would allow the exploiter to seize funds once the beacon chain is merged with Ethereum (expected in 2022). This has forced the price of SharedStake’s vETH2 token down to 22 cents on the dollar.
These two episodes show that it may be too early to use ETH2 staking yields as defi’s risk free rate - there is still high credit and custody risk, and these schemes rely heavily on trust in the operator. This can also help explain the difficulty new service providers face breaking into the pooled staking market, as it’s tough to overcome the trust and liquidity advantages of established players like Lido.
Uniswap Votes on Defi Education Fund
TL;DR: The proposal would grant 1 million UNI for legal advocacy, and includes some additional safeguards to improve on the original draft.
While Harvard Law BFI’s proposal to fund a Defi advocacy fund ran into a snag last week, it’s now back on the docket for Uniswap governance voting.
The proposal was originally pitched as a political defense organization, to focus on legal advocacy and lobbying on behalf of defi protocols and participants. But this title was seen as overly combative so in the final on chain proposal it has been recast as a Defi Education Fund, seeking to inform policymakers and legal experts of defi’s unique features and benefits.
In addition to a realigned message, the content has also seen some significant changes. One of the largest concerns with the initial proposal was the large sum of funds (1 million UNI tokens) requested and lack of direct governance oversight. To address this, the final proposal envisions a multisig consisting of committee members to approve and disburse funds to the legal advocacy organization in tranches.
Over time, the committee also plans to use Tally’s Safeguard system to empower governance with direct veto power over funding requests. There are some concerns about tax implications of funds being returned to governance from a multisig committee, but governance may be able to sidestep this by redirecting funds to another external organization.
This proposal was originally put up for a vote last week, but due to Uniswap proposal 4’s upgrade to a new governor alpha contract it no longer had the necessary permissions to transfer funds from the Uniswap timelock. The new proposal will be live for voting through next Monday, giving UNI holders the final say on approving the largest single DAO expenditure to date.
In Brief:
Legal organization releases model for DAO incorporation:
Rari Capital pursues franchise agreement with Fuse lending market fork on Polygon sidechain:
Binance based lending and stablecoin project Venus sees core team exodus after huge losses:
Flipside Crypto pitches expansive grant for Uniswap community enabled analytics
Compound votes on proposal to split liquidation fees between liquidator and protocol reserves:
Opportunities:
Tally is hiring for several positions! Check out our job postings here.
Thanks for joining us for issue 37 of the Tally Newsletter. Be sure to check out the Tally governance app and join us on Discord for the latest updates!
Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com
Best,
Nate, Tally