Decoding Blast: Delving into Potential Risks and Controversies Behind its Viral Popularity

Abstract

Blast can provide passive interest on funds held within Layer 2 accounts.

The reasons why Blast has gone viral can be attributed to these main factors: the groundwork laid by Blur's success, support from financial institutions, and Blast's unique referral program and enticing airdrop incentives.

The risks associated with Blast primarily center on two key aspects: technical challenges related to multisig security and potential financial design risks.

What Is Blast?

Blast is a Layer 2 solution that provides passive interest on funds held within Layer 2 accounts, thereby making it particularly appealing for idle funds on Layer 2 networks. In the crypto sphere, cryptocurrencies can be broadly classified into two categories: deflationary and inflationary. The former, represented by BTC, is characterized by a fixed supply that places a cap on the total number of cryptocurrencies created. Conversely, the latter category, primarily led by Ethereum, experiences a gradual supply increase over time with a predetermined annual issuance rate. This distinctive feature allows Ethereum to offer a stable staking yield of 3% - 4%, a mechanism Blast leverages to generate interest earnings.

To be specific, when users deposit funds into Blast, the corresponding ETH is promptly locked on the Layer 1 network for native staking, primarily through Lido. Subsequently, the ETH staking rewards are automatically returned to users on the Blast. While incorporating the native Ethereum staking feature, Blast also offers passive interest on stablecoins. More precisely, when users bridge stablecoins like USDC, USDT, and DAI to Blast, Blast secures the locked stablecoins on the Layer 1 network and places them into DeFi protocols, such as MakerDAO, backed by US Treasury Bonds. The generated profits are then automatically returned to users on Blast in the form of USDB, which is Blast's native stablecoin. According to Pacman (Tieshun Roquerre, the co-founder of Blur), Blast's vision extends beyond serving Blur and aims to support all types of Dapps. This includes decentralized exchanges (DEXs), lending platforms, derivative trading, NFT financing (NFTFi), and even social finance (SocialFi) applications.

Factors Driving Blast's Popularity

On November 21, Pacman announced the launch of a new project called Blast. As of November 28th, the total staked assets on Blast have surpassed $580 million. The reasons why Blast has gone viral can be attributed to these main factors:

1. Blur's success has laid the foundation for Blast to build a broad community base. According to official sources, Blur stands as one of the largest NFT marketplace protocols on the Ethereum network, boasting over 330,000 users and facilitating NFT transactions valued at an impressive $7 billion.

2. Blast has garnered extensive trust and confidence, thanks to support from financial institutions. With the launch of Blast, Pacman announced that the project has successfully secured a $20 million financing. Notable investors, including Paradigm, Standard Crypto, eGirl Capital, and angel investors like Andrew Kang (Co-founder of Mechanism Capital), Hasu (Strategic Advisor at Lido), and Larry Cermak (CEO of The Block), have contributed to the project's funding. This backing from esteemed investors and industry leaders has bolstered Blast's credibility, fostering confidence within the community.

3. Blast's distinctive referral program and airdrop incentives have significantly fueled its rapid fundraising. Participants can earn points by inviting others, and when the invitee earns points, the inviter also receives points. In the first level of the referral relationship, the inviter is rewarded with a +16% bonus points, while in the second level, they can earn an additional +8% bonus points. Regarding the points, the official announcement states that Blast is planning to launch its mainnet and enable withdrawals on February 24th next year, with the "redemption" of Blast Points becoming available on May 24th, 2024.

Exploring Potential Risks and Controversies Surrounding Blast

The risks associated with Blast primarily center on two key aspects: technical challenges related to multisig security and potential financial design risks. The team is actively addressing technical issues, with a focus on enhancing multisig functionality. However, further observation is necessary after the mainnet is launched. On the other hand, the financial design risk stems from Blast's reliance on Ethereum-native applications such as Lido and MakerDAO for its interest-generating mechanism. While leveraging the advantages of Ethereum's modular ecosystem, Blast is exposed to potential systemic risks if these foundational applications encounter vulnerabilities or failures.

At the technical level, concerns have been raised about Blast's multisig security. L2Beat has highlighted that, despite being named LaunchBridge, the Blast contract (0x5f...a47d) is not a Rollup Bridge but rather a straightforward custodial contract protected by a 3/5 multisig address. Moreover, Blast lacks the necessary validity proofs for an L2 state root and does not have an anti-fraud mechanism in place. Jarrod Watts, Polygon Labs' developer relations engineer, underscored that the five wallets signing Blast's multi-signature contract are newly created addresses, and their identities remain unknown. According to him, Blast falls short of meeting L2 criteria, lacking essential features such as a testnet, transactions, a bridge, a rollup, or the ability to send transaction data to Ethereum. Furthermore, Blast approves the arbitrary "mainnetBridge" contract to spend the maximum possible number of its LIDO and DAI.

In response to concerns from the technical community, Blast has begun to voice its stance and defend its security model. On the 27th, Blast issued a statement on X, underscoring that security is a multifaceted matter encompassing smart contracts, browsers, and physical security dimensions. They argued that immutable smart contracts, often perceived as more secure, may entail more significant risks, especially in complicated agreements. Blast emphasized the importance of upgradeable contracts, stressing that the specific upgrade mechanism plays a crucial role. Time-locked upgradable contracts may harbor vulnerabilities, and in certain cases, the only means to prevent exploitation is to execute on-chain operations ahead of malicious actions. In such scenarios, the implementation of time locks has the potential to diminish the security of smart contracts. This is precisely why each L2 solution incorporates a direct upgrade path. Moreover, Blast underscores the paramount importance of multisig security, mirroring the approach of other L2 projects such as Arbitrum, Optimism, and Polygon, which also employ multi-signature mechanisms for bolstered security.

From a financial design perspective, Blast strategically depends on two projects to safeguard the security of Layer 2. Blast utilizes Ethereum staked on Layer 1 through Lido to generate interest. Meanwhile, Blast's native stablecoin aims to generate revenue from US Treasury bonds via the MakerDAO channel. On November 22nd, contributors to the Lido DAO issued a statement acknowledging the discovery of an early platform vulnerability that impacted the active node operator, InfStones, using Lido on Ethereum over the past few months. This vulnerability had been disclosed to InfStones by dWallet Labs in July 2023. The node operator has since confirmed that the vulnerability has been addressed. In addition to technical challenges, MakerDAO also grapples with regulatory issues that, if they arise, could potentially affect Blast.

Summary

From an innovation standpoint, Blast indeed showcases some notable financial innovations. The introduction of a risk-free interest rate presents an attractive option for idle funds. However, there's an evident sense of haste in the project team, and the current state of Blast doesn't quite qualify as a fully-fledged Layer 2 solution. As accurately criticized by Paradigm, "Blast has established an unfavorable precedent for other projects, and its excessive marketing endeavors have undermined the team's credibility." Analyzing its financial design, Blast's strong ties with Lido and MakerDAO offer both apparent benefits and hidden financial risks that are beyond its direct control.