Vitalik Buterin’s significant caution regarding the layer-2 strategy.

Also: Open-source alternative for bitcoin miners, EF’s quantum-computing team and a new lending protocol for XRP

What to know:

Welcome to The Protocol, CoinDesk’s weekly summary of the most significant developments in cryptocurrency technology. I’m Margaux Nijkerk, a reporter at CoinDesk.

In this edition:

• ‘You are not scaling Ethereum’: Vitalik Buterin provides a stark reality check to major crypto networks
• Bitcoin miners receive an open-source alternative as Tether launches MiningO
• Quantum threat materializes: Ethereum Foundation focuses on security with leanVM and PQ signatures
• Flare introduces a new method for XRP holders to generate yield through a substantial DeFi upgrade

Network News

VITALIK BUTERIN STATES LAYER-2 ROADMAP ‘NO LONGER MAKES SENSE’: Ethereum co-founder Vitalik Buterin expressed that the function of layer-2 networks necessitates reevaluation as the main Ethereum network continues to scale and transaction costs remain low. In a post on X, Buterin remarked that the initial rollup-centric roadmap, which positioned layer-2s as the primary scaling solution for Ethereum, “no longer makes sense.” This roadmap envisioned layer-2s as secure extensions of Ethereum capable of managing most transactions while benefiting from Ethereum’s security assurances, often referred to as “branded shards” of the network. Buterin indicated that two developments have undermined that original perspective on layer-2 networks. Firstly, progress towards advanced decentralization among layer-2s has been slower and more challenging than anticipated. Secondly, Ethereum is now scaling directly on layer 1, with fees remaining low and gas limits projected to rise significantly. He contended that since Ethereum itself is scaling, layer-2 networks are no longer essential to act as formal extensions of Ethereum. He also pointed out that numerous layer-2s are “not able or willing” to adhere to the decentralization and security standards mandated by the model, and some may intentionally choose not to progress beyond “stage 1,” potentially for regulatory reasons. — Margaux Nijkerk Read more.

BITCOIN OPEN-SOURCE ALTERNATIVE: Tether has launched an open-source operating system for bitcoin mining, proposing it as a method to simplify the operation of mining infrastructure while decreasing dependence on proprietary, vendor-controlled software. The stablecoin issuer announced the introduction of MiningOS (MOS), describing it as a modular, scalable mining operating system suitable for everyone from hobbyist miners to large organizations. The platform aims to eliminate the “black box” characteristic of many mining setups, where hardware and monitoring tools are tightly bound to proprietary platforms. “MiningOS changes that — introducing transparency, openness, and collaboration into the core of Bitcoin infrastructure,” Tether stated on the project’s website, emphasizing that the system is designed with “no lock-in.” According to Tether, MOS employs a self-hosted architecture and interacts with connected devices via an integrated peer-to-peer network, enabling operators to manage mining operations without depending on centralized services. The company noted that miners can modify settings through a companion platform based on the scale of their operations and output requirements. CEO Paolo Ardoino referred to MOS as a “complete operational platform” that can adapt from a home setup to an “industrial grade” site across multiple locations. Tether initially revealed plans for an open-source mining OS in June, asserting that new miners should have the ability to compete without relying on costly third-party vendors for software and management tools. — Shaurya Malwa Read more.

STORY CONTINUES BELOWDon’t miss another story.Subscribe to The Protocol Newsletter today. See all newslettersSign me upBy signing up, you will receive emails about CoinDesk products and you agree to our terms & conditions and privacy policy.

ETHEREUM FOUNDATION POST-QUANTUM TEAM: Quantum computing has long posed a theoretical threat to the integrity of blockchain cryptography. However, recent months have shown a shift in this perspective. While the Bitcoin community has been discussing potential threats to its protocol for the last year, the Ethereum community appears to be taking its first steps in this area. “Quantum computing is transitioning from theory to engineering,” stated Thomas Coratger, who leads the Ethereum Foundation’s (EF) post-quantum (PQ) team. “This alters the timeline, and it indicates a need for preparation.” Earlier this January, the foundation officially prioritized post-quantum security, establishing a dedicated team to advance research, tools, and real-world enhancements to safeguard the network’s cryptographic principles. Concurrently, key industry players are developing their defenses: Coinbase announced an independent quantum advisory board composed of leading cryptographers to guide long-term blockchain security strategies, indicating that even custodial frameworks must prepare for risks associated with the quantum era. Moreover, within the ecosystem, Optimism, one of Ethereum’s largest layer-2 networks, has outlined a formal 10-year roadmap to transition its Superchain stack, from wallets to sequencers, towards post-quantum cryptography, pledging to phase out susceptible signatures and ensure continuity across layer-2 networks. Collectively, these actions signify a clear shift: post-quantum security is no longer a peripheral concern for the distant future, but an immediate issue influencing development strategies, governance discussions, and ecosystem coordination across Ethereum and beyond. For the EF, the transition towards post-quantum security is not about signaling an alarm, but rather avoiding being caught unprepared. — Margaux Nijkerk Read more.

NEW LENDING PROTOCOL FOR XRP ASSETS: The Flare blockchain has launched lending and borrowing capabilities for XRP-linked assets through an integration with Morpho, a crypto lending protocol that operates across multiple Ethereum-compatible chains. This update enables users to lend and borrow with FXRP, a variant of XRP designed for Flare, as stated by the team behind the blockchain. Flare presented this initiative as a means of providing XRP holders with additional opportunities to earn yield and utilize their tokens beyond mere holding or trading. Historically, XRP has offered fewer decentralized finance (DeFi) options compared to tokens developed on smart contract platforms. Flare has aimed to alter this by developing tools that allow XRP to be utilized in on-chain applications while retaining the original XRP on the XRP Ledger. FXRP holders can now deposit their tokens to earn interest or use FXRP as collateral to borrow other assets, including stablecoins. Flare indicated that these positions can also be integrated with other features on the network, such as staking and yield products, for users seeking more active strategies. Unlike older lending applications that consolidate various assets into a shared pool, Morpho is set up with distinct collateral and borrowed assets, with the terms established when the market is created. This structure is designed to prevent issues in one market from affecting others. — Shaurya Malwa Read more.

In Other News

• The evolution of asset management is expected to be “wallet-native,” rather than merely digital, according to Sandy Kaul, head of innovation at Franklin Templeton. During her speech at the Ondo Summit in New York on Tuesday, Kaul envisioned a future where all financial assets — stocks, bonds, funds, and more — are held and managed through tokenized digital wallets. “The totality of people’s assets will be represented in these wallets,” she noted. The panel, which included Cynthia Lo Bessette from Fidelity, Kim Hochfeld from State Street, and Will Peck from WisdomTree, concurred that tokenization is no longer a theoretical concept. After years of gradual progress, the infrastructure is now established, and use cases are broadening beyond initial experiments. The panelists cautioned that building utility and trust is currently the industry’s most significant challenge. “The concept of bringing an asset and representing it on-chain with a token is the simplest part,” said Lo Bessette, who leads digital asset management at Fidelity. “The most challenging aspect is creating the ecosystem for utility.” Despite recent advancements, adoption remains at an early stage. Hochfeld, global head of digital and cash at State Street, remarked that much of the ongoing work is focused on internal and client education. “We’re not yet witnessing a rush to the door,” Hochfeld said. “We need to experiment … and determine what is effective.” — Helene Braun Read more.
• TRM Labs, a blockchain analytics startup employed by global law enforcement and financial institutions, secured $70 million in a recent funding round that elevated its valuation to $1 billion. The Series C round, as reported by Fortune, was led by Blockchain Capital with participation from Goldman Sachs, Citi Ventures, Bessemer, Thoma Bravo, and Brevan Howard. To date, the firm has raised nearly $150 million, having completed another $70 million fundraising round in 2023 along with several smaller fundraising efforts, bringing the total to $220 million. The firm’s software assists in tracing cryptocurrency transactions across various blockchains, a service increasingly sought after as crypto-related crime grows more intricate. TRM counts several major government entities, including the IRS and FBI, among its clientele and has been an early adopter in tracking not just Bitcoin but also a range of other cryptocurrencies, a decision that has distinguished it from competitors. This advantage has become increasingly valuable as criminal networks diversify their use of tokens and platforms. — Francisco Rodrigues Read more.

Regulatory and Policy

• At a White House meeting aimed at bridging the gap between crypto firms and Wall Street bankers, the crypto representatives — who outnumbered the bankers significantly — left with the impression that the banks were hesitant to finalize a deal regarding crypto market structure legislation. The White House provided new directives, according to sources familiar with the discussions: Reach a consensus on new language concerning stablecoin yields before the month concludes. The crypto industry’s primary policy goal is still struggling to gain traction in the U.S. Senate, and the longer it remains delayed from a floor vote in the overall Senate, the less likely it is to occur this year. The gathering, led by President Donald Trump’s crypto adviser Patrick Witt, primarily focused on whether stablecoins should be linked to yield and rewards. Policy experts from both the crypto sector and Wall Street banks convened in the White House’s Diplomatic Reception Room for over two hours to discuss how to reform the most contentious provisions of the bill. The talks will proceed with a more focused group, and the White House has requested that they arrive prepared to agree on actual amendments to the bill’s language. One source indicated that the banking representatives were affiliated with trade associations and might need to secure approval from their members before advancing in the negotiations. — Jesse Hamilton Read more.
• Rui-Siang Lin, the alleged operator of the dark web narcotics marketplace “Incognito Market,” received a 30-year sentence in U.S. federal prison, as per a statement from the U.S. Attorney’s Office