Note: This started out as an internal document, reconfirming our priorities and values as we watched the First Contagion, the collapse of Luna, in early 2022. Today, we’re watching the Second Contagion and the collapse of one of the over-leveraged wildcat banks we allude to below. Although we didn’t predict the collapse of FTX, nor are we trying to predict what’s next, we continue to operate by our principles first approach. This approach means working on solutions for our core principles of self custody and peer-to-peer transactions in the Web3 space. It’s why we have never worked with or used FTX before and why our current roadmap remains unchanged. What the FTX collapse has done for us, though, is affirm our approach and hasten our desire to bring about vast improvements to the UI/UX problems that create a barrier to self custody for many users. We hope the following will give insight as to why we’re taking the approach we are and we hope you’ll join us on our journey to making Web3 better, easier, and safer for all.
It’s always a good idea to revisit your priorities and values especially in this time of uncertainty in blockchain, cryptocurrency, Web3, and technology at large. We’ve written before about what the value proposition of blockchain is and why we’re building technology as close to the consensus layer as possible. Fundamentally, the consensus mechanism is what powers a new medium; exchange of value without the need for a third party, peer-to-peer transactions. It’s clear that many of the current issues in the Web3 space today are due to egregious speculative activity and attempted takeovers from centralized entities acting far away from the consensus layer.
We’ll briefly touch on some recent issues in Web3, the major reasons we think they occurred, and why we’re building Casimir to help fix this.
Bridge Attacks – In February 2022, the DeFi platform Wormhole was exploited for $325 million. Wormhole was a popular VC backed blockchain bridge designed to allow users to access tokens across chains using a single access point. More recently the Binance Smart Chain was exploited for $100M+. While bridges are a potentially convenient solution to the mass of protocols in existence, a single smart contract or hot wallet with $100M+ of deposited tokens is proving to be too attractive of a target for hackers. So far in 2022, over $2B worth of tokens on bridges have been hacked!
Decentralized in Name Only – The first of the warning bells of the impending 2022 cryptocurrency sell-off was the collapse of Terra. There are a range of reasons why Terra collapsed but simply, algorithmic stable coins backed by digital assets have fundamental challenges due to the volatile nature of digital assets. This early breakdown from Staking Rewards names a combination of an overreliance on the yield platform Anchor combined with significant off-chain usage on exchanges being a driving factor in the collapse of Terra. Those externalities, controlled by central entities, effectively subverted the consensus mechanism of the project by operating off-chain where overleveraged risk could not be observed. Additional issues were caused by a concentration of premined tokens in the hands of Terraform Labs who essentially controlled protocol voting and overrode the desires of some in the community to reduce risks. A more recent postmortem in June 2022 showed that the liquidity issues and subsequent depegging of the UST stable coin were caused by Terraform Labs themselves.
The Rise and Fall of CeDeFi – Next to fall, and still unwinding, is the “Centralized Decentralized Finance” (CeDeFi) company Celsius. Companies like Celsius and BlockFi have driven huge growth in Web3 by offering high interest rate yields on your deposited tokens. They act as a bank but don’t do a good job of indicating the potential risk their depositors face nor do they follow the same regulations as traditional banks. Celsius was exposed to Terra and potentially lost $500M there alone. More recent are revelations that Celsius executives cashed out just prior to the collapse and bankruptcy filing.
Last of the “(first) contagion” was the collapse of Three Arrows Capital. Ongoing investigations are looking at whether 3AC took large margin longs on cryptcurrencies through fraudulent activity and then were subsequently liquidated over the past month of pullbacks. Overall, it sounds pretty bad for 3AC management and they might be going to jail.
The unifying thread of these major collapses was the concentration of digital assets and their control into single points of failure. Even worse, the users themselves were in the dark, unaware of what was occurring with little visibility into the behind-the-scenes actions of those companies. What the latest round of speculative growth in Web3 was built around was, in short, unsustainable, over-leveraged, unregulated, wildcat banking, totally divorced from the core ideas of a decentralized currency. This mentality has unfortunately not changed since the beginning of the year and more liquidity crises are not out of the question.
Unfortunately, all of these problems were intentionally created (not the fallout of course); many players in the Web3 ecosystem today are attempting to rebuild traditional business models around SaaS and fee extractional models by creating layers of complexity that separate users from the core Web3 value proposition: Peer-to Peer-transactions.
While the 2022 drawback in Web3 did a lot to refocus the industry on its core principles, there are still growing centralization and regulatory concerns:
Ethereum Merge – Ethereum 2.0 staking is currently heavily concentrated among major cryptocurrency exchanges and the Lido Pool. So far, just two centralized staking providers, Coinbase and Lido, have mined almost 50% of Ethereum blocks post merge. Control of cryptocurrencies by “banks” (Coinbase, Kraken, BlockFi, FTX, etc) presents a threat to the uncensorable features of the Ethereum blockchain. With control of the Ethereum blockchain and operating under U.S. regulatory policies, these entities must implement any and all controls as required by law. What this means is that cryptocurrencies would effectively become fiat currencies – implemented by decree from the state.
If we are to avoid this scenario we must help create a truly decentralized ecosystem where a few centralized entities can’t control the Consensus mechanism of a Web3 protocol. We need native Web3 solutions – peer to peer, decentralized solutions and tools that empower the users, not centralized market makers. We’re building Casimir to do just that.
Decentralization – Probably the most overused and watered down word in the space is “decentralized.” Nearly everything in blockchain/web3 is called decentralized, whether or not it actually is. The unfortunate reality is that blockchains are decentralized in name only. A recent study by Trail of Bits for DARPA concludes blockchains are fairly centralized. They report that the pooled mining for Bitcoin gives a Nakamoto coefficient of 4 to Bitcoin and Proof of Stake protocols aren’t much better. I won’t get into criticism of the overall piece by Trail of Bits, particularly the misassociation of pools and protocol control for Bitcoin, but the Nakamoto Coefficient for Proof of Stake is worth analyzing. Chris Remus of Chainflow has written extensively on Staking Decentralization and currently maintains a live Nakamoto Coefficient tracker that predates the Trail of Bits report. The Nakamoto coefficient is a measure of decentralization and, by definition, the number of nodes needed to control the Consensus mechanism of the protocol. The lower the number, the less decentralized. At the time of this writing, some major protocols have very low Nakamoto Coefficients, of note Polygon is at 3.
The goal of Proof of Stake protocols should be to get the highest Nakamoto Coefficient number possible, which would make it very difficult to manipulate the protocol since it would require simultaneous compromisation of hundreds of nodes. For example, Cosmos has an active set of validators of 150, around the world. Compromising all of them would be likely impossible, however the Nakamoto Coefficient of Cosmos, is only 7, meaning that to control the Consensus mechanism of Cosmos would only take a compromise of the top 7 Cosmos validators. A tough job to be sure, but a lot easier than the 150 total active validators in the Cosmos ecosystem.
What this means in practice is that the allocation of staked tokens should be spread across all validators as equally as possible, not continually concentrated in a few of the already heavily staked validators.
So why are the Nakamoto coefficients so low? Let’s talk about the User Experience
The Web3 user experience today… sucks. You’re forced to either leave significant returns on the table and surrender control of your assets to a major exchange; or, endure the inconvenience of manually staking across multiple protocols, wallets, platforms, and websites. It’s harder to know what’s going on and it becomes easier to get scammed through faulty or malicious smart contracts.
The easiest way to manage multiple digital tokens and assets is through centralized exchanges like Coinbase, which leave a lot to be desired. You give up custody of your tokens and if you’re staking, you’re missing out on potential rewards that Coinbase scoops up in the form of third party fees. If you’re more adventurous, you may have multiple wallets and multiple staking websites you use. You have the benefits of self custody but are forced to go through the process of managing the wide range of websites and wallets you have to interact with the various protocols. It becomes confusing to manage and monitor all of your stuff and there aren’t any good solutions today that help you compile everything.
What’s more, current Web3 non-custodial products, like MetaMask, fall far short of protecting users from scams or interacting with bad smart contracts. Because cryptocurrencies are so difficult to interact with and understand, even seasoned pros get manipulated and hacked.
Let’s look at how this poor user experience even affects the Consensus mechanisms of PoS protocols. One of the easiest ways to stake in the Cosmos Ecosystem is using Keplr, a mobile/web wallet that allows you to stake to any of the Tendermint based protocols. However, users trying to stake with Keplr aren’t given much to work with.
A new Staker has no way of deciding who to stake to. There are no easy ways of determining whether an above listed validator is reliable or participating in the governance of a protocol. Users have no real reason to choose a validator outside of the top ten, because there are no tools to sort and research each individual validator. So, people end up picking validators from the top of the list due to the appearance of quality. We can see this effect in the Nakamoto Coefficient of Cosmos today, which is 7. What’s more, two of the top five Validators for Cosmos are cryptocurrency exchanges. In Proof of Stake today, cryptocurrency exchanges have an outsized impact on the consensus mechanism of proof of stake protocols.
So, we’re left where we started. Exchanges offer the best user experience and are gaining control over Proof of Stake protocols. Since exchanges are likely to be regulated more like banks in the future, we are looking at a future where Proof of Stake is controlled by banks. What this means is that they control consensus. They can censor accounts, users, or transactions that they don’t like or are told to by the government. That’s a fundamental threat to the idea of decentralization and Web3 as a whole – an uncensorable digital currency.
Our conclusion is that a poor user experience is driving centralization and will continue to lead to major single point of failures like Celsius unless we create tools that allow users to take full advantage of the protocols they use.
How we’re building Casimir
First, we reexamined how Web3 is being built today. It’s been often stated that Web3 is “going to be just like the internet”. It’s certainly true that there may be some parallels in growth trajectory and societal impact; however, for many projects in the space today, “just like the internet” means being built using today’s internet: AWS/Google Cloud, numerous HTML websites, and centralized SaaS powerhouses. With Casimir, we want to break the paradigm of today’s Web3 and reexamine how users interact with and use blockchains, digital value, and Web3 overall.
We are getting off the Web 2.0 rails and building something new, a native Web3 experience that prioritizes decentralization, user experience, and user control. We’re building the first true Web3 portal, capable of integrating with any wallet, any blockchain, and any token, allowing users to easily navigate Web3 and interact with the protocols directly, not through a centralized exchange or a variety of unconnected websites.
Improving the User Experience through Decentralization
We’re starting bottom up. Unlike current UIs, designed with traditional Web2 architectures, we’re starting at the Consensus and Infrastructure layers of Web3. These layers of decentralized node infrastructure providers hold fully indexed blockchain databases, provide APIs for querying, a network of worldwide decentralized nodes for consistent uptime, and build blocks of transactions as they are added to the blockchain. Today, most users are forced through third parties to access blockchains, which introduces extra costs for transactions and token management. By accessing these nodes directly, users are assured of uptime, uncensorable and low cost transactions, and minimized fees taken by the normal third party intermediaries. Also, with the right tools, users can access on-chain analytics and other information that these nodes carry. This information can protect users by providing transparency to the entities they’re interacting with as well as information about smart contracts and other on-chain data. Today there simply aren’t good enough tools to make on-chain information available and usable to the everyday user.
There are 3 key areas we’re focusing on as we design Casimir: Usability, Security, and Transparency.
Usability: Similar to a Mint or Personal Capital, it will be a place where users can aggregate their digital currencies and assets, for an easy place to manage what they have across the various protocols they use. Many Web3 users have multiple wallets and assets from a variety of protocols, so a single location for them to better manage and view their assets is much needed without it being a single point of failure for any stakeholder. With our multi-chain approach and Multiwallet Connect we can effectively be an interoperability solution without the bridge.
Casimir will do more than just a Mint, however, it will allow users to interact with their chosen protocols, accessing mints and air-drops, Stake and manage their digital currencies across protocols beyond ethereum, and access specialized tooling that helps protect users. We’ll build and continue to add features like this that help users use Web3.
Our business model isn’t built around trading or exchange fees. Unlike an exchange, we’re not front running trades or building in hidden custodial fees. Our base product will always be free to use and we’ll make money by offering a premium subscriber product as well as through our infrastructure services. We believe you’ll not only have a better user experience, but you’ll actually save money as well.
Security: Unlike most centralized exchanges and custodians, we will never take custody of user’s wallets or tokens. This means we are able to leverage existing on-chain security to protect users at a much higher level. It also means we will never be worried about liquidity or will be trading a user’s tokens on the backend. Although Casimir will be a single site, it won’t be a single point of failure. The code is open source and we will never take custody of user’s digital tokens or NFTs. If Casimir goes away tomorrow, no funds will disappear and users will still have access to all of their tokens.
Unlike traditional Web2, we’re not building around user account management, user analytics, and productizing the user. We’ll never ask for a user’s email address and build an internal profile because not only does this create a security vulnerability for our users, it’s also unnecessary. Our users will always be able to login through their wallet which means they will always control their login credentials.
As part of our usability effort we’re building a smart contract analyzer for users to know what their interaction with a smart contract will *actually* do and monitor the smart contracts they’ve given permissions to and control permissions on old contracts. Because we are working at the protocol level, we are able to provide users with real time information and on chain analytics to help users make the best decisions with their digital assets.
Transparency: As the name indicates, every on chain action on a public blockchain is publicly accessible. Every wallet, every transaction. This transparency is unique in financial systems where the books of banks or governments are not available to everyday users. Today, many Web3 financial providers continue to hide behind their proprietary systems and their financial solvency is only available to the select. What’s worse is that these companies (in the US at least) often skirt regulation loopholes to avoid the same auditory requirements banks have.
In a world where Bitcoin was launched in the face of a banking crisis, with a desire to bring about a new and transparent financial system to the world, the actions of many major players in the space today are in direct opposition to the values of Web3.
Casimir will help change this. We leverage our fully indexed chains to provide transparency analytics to our users. While block explorers and address balances are always available to those who know how and where to look, we’re making it easier for users to interact with and use Web3 indexed information. We’ll allow users to easily sort data, see large and identified wallets, track large transactions, and match wallets with organizations so that proof of reserves can be ensured.
We’re here to create a better Web3 user experience. For us that means enabling users to better use the decentralized capabilities of the space, not to trade better in the crypto casino. We’ve got a long way ahead of us, both to build something better but also to help users learn the importance of self-custody and what decentralization truly means.
Over the next few months we’ll present some of the specific technology developments we’re working on to help achieve our goals including non-custodial Ethereum Staking, cross-chain wallet integrations, and a cross-chain single sign on. You can follow our progress on github and join us on Discord. We’re striving to create an open ecosystem that empowers the user and we hope you’ll join us.