This Week in Crypto

The overall cryptoassets market declined by ​​9.37% over the past seven days, according to data gathered by CoinMarketCap. Bitcoin declined by 5.7% over the past week, while Ethereum performed 10% worse. UK inflation hit a 40-year high of 9.4%, with the main contributors being soaring energy prices which are expected to increase sharply in October. While the Bank of England is scheduled to hike interest rates in August, the European Central Bank (ECB) went ahead with a 50 BPS interest rate hike, its first since 2011, which raises rates to 0% putting an end to the eight years Europe has been experimenting with negative rates. ECB will most probably introduce another rate hike in September. In its quarterly earnings report filed to the Securities and Exchanges Commission (SEC), Tesla revealed that it had sold 75% of its Bitcoin holdings, worth $936M. As revealed in their earnings reports, Bitcoin’s 59% dip in Q2 cost Tesla, MicroStrategy, and Block $5B collectively. However, this figure is not scaring any of the affected CEOs who have continuously tweeted about their eagerness to buy more BTC.

Figure 1: Bitcoin Network Value to Transactions Ratio

Source: Glassnode

As more tech companies hand in their earnings reports, it’s important to keep an eye on the on-chain indicators such as the Net Value to Transactions Ratio (NVT). As shown above, a high NVT ratio indicates that the price of Bitcoin is overvalued, whereas downtrends like the one seen on July 24 indicate that investors are buying Bitcoin at a discount. If the ratio starts moving sideways, that means the cryptoasset entered a growth trend.

Key Takeaways

• The first insider trading case involving cryptoassets
• Ethereum exchange balances reaching lowest point since July 18
• Sushi molding into an interoperable DEX
• Opensea competes with Solana’s Magic Eden
• A new era for Ethereum’s scalability is upon us with zkEVMs

Macro, Regulations; Spot, and Derivatives Markets

In the US, the SEC has been investigating insider trading within crypto exchanges and only last week that we started seeing the fruits of it. A former Coinbase product manager and two others got arrested for wire fraud in the first insider trading case involving cryptoassets. On that note, the SEC listed 9 tokens as securities, these include those of Amp, Rally, DerivaDAO, XYO Network, among others.

Russian President Vladimir Putin amended the law banning use of cryptoassets as payments to include other token types, such as security tokens, utility tokens and even NFTs as forms of payment for goods and services in the country. This drastic measure comes most likely as a response to the crypto donations gathered for icons of the Russian opposition behind bars last year. A few days after this amendment news broke out that Russian activists are turning to crypto to support Ukrainian refugees.

The Terra Luna nightmare is still haunting some exchanges in Korea, with authorities raiding Bithumb, Upbit, Conine and four other exchanges along with eight other residential and office addresses for a pending fraud case connected to the collapse of UST. Moreover, Taiwan’s chief financial regulator told the banking industry that they should not grant the virtual assets providers (VASPs) the status of merchant in operations with credit card holders.

Nevertheless, last week saw several signs of crypto adoption around the world, these include:

• BNP Paribas enters crypto custody space
• Fidelity sees strong demand for 401K BTC funds
• Crypto.com gains regulatory approval from Cyprus and Italy
• Gemini receives VASP by the central bank of Ireland.

Last but not least, a framework of rules regulating stablecoins is brewing in the UK House of Parliament, as part of the broader financial services and markets bill, aimed at strengthening the UK financial system post-Brexit. The framework is expected to see the light before August’s summer break.

On-chain Indicators

The wider crypto market turned optimistic last week as the news surrounding the soft schedule of Ethereum's merge began circulating on social media. Even though a target date was set for the event on the 19th of September, Tim Beiko, the ETH core developer, articulated that this is still very likely to change in case of any last-minute code adjustments.

Figure 2: ETH balance on exchanges

Source: Glassnode

Nevertheless, the news still became a catalyst for the wider market rebound and caused investors to hoard Ethereum to levels not seen since July of 2018 by withdrawing from exchanges into cold storage, as depicted above.

DeFi

Figure 3: Top 7 DeFi Assets Weekly Performance

In what can be seen as a new paradigm for interoperability, Sushi - the 10th DEX by volume - has released its latest crosschain AMM dubbed SushiXSwap. The feature built on LayerZero’s stargate bridging technology will allow the exchange to facilitate crosschain swaps across 7 chains. This is a giant leap as some of the hurdles for embracing truly decentralized dApps have been clunky user interfaces and sophistication to move assets from one native network to the other. However, by leveraging Stargate’s omnichain messaging protocol, users are now in a position to make one-stop agnostic swaps across all networks, without having to worry about different gas currencies to pay for transaction fees or final-destination liquidity.

Checking into the money-market vertical, Curve finance announced they are working on releasing an over-collateralized stablecoin that should adopt a similar corresponding mechanism to that of MakerDAO’s. That means LP positions will be used as collateral, designed to assemble sticky liquidity, drawing on Maker’s collateralized debt position model. The stablecoin is projected to amplify the cash flows to liquidity providers by benefiting from borrowing fees that will accrue to the protocol and cashing in on the stablecoin wars that Curve has been accommodating over the past year. Alternatively, AaveV3 was recently deployed on both Goerli and Optimism Goerli’s testnets. The move is meant to encourage developers to continue testing the dApp in both experimental environments before the mainnet launch.

In a crucial step pushing the true decentralization of the staking industry forward, Rocketpool has announced a roadmap that should see its protocol scale up by orders of magnitude on the back of several soon-to-be-released features. The protocol is now expected to reduce the collateral requirements from 16 to 4 ETH, introduce staking-as-a-service to cater to financial institutions hoping to capture some of ETH yield before the merge arrives, and Integrate ‘solo staker migration system’, allowing for direct withdrawals from the beacon chain once it goes live. On the contrary, Lido finance is attempting to fortify its dominance over the liquid-staking vertical by enabling stETH to be traded on L2 protocols. Finally, the blue-chip synthetic issuance protocol, Synthetix, signed a partnership with Jump crypto to facilitate deep liquidity across its platform.

NFTs, Metaverse, and DAOs

NFTs have had a bad few months struggling amid the market crash, however the trading volume increased by almost 17% over the past week.

Figure 4: Daily NFT trading volume per marketplace

Source: Dune/21Shares

Uniswap is integrating with SudoSwap to offer NFT trading in the coming few months. This follows Uniswap’s acquisition of Genie. This indicates that Uniswap isn’t exactly keen on hosting its own NFT market aggregation platform, but rather diversifying marketplaces on the DEX. In a bid to compete with Solana’s Magic Eden, Opensea introduced its new launchpad feature for minting NFTs on Solana. On another note, Apecoin also announced it will introduce staking in the fall.

This past week also saw signs of corporate and state adoption of Web3 tools, these include:

• UAE wants metaverse to inject $4B into the economy, adding 40K jobs.
• Meta partners with fashion startup DressX to release virtual clothes.
• Animoca Brands, Alien Worlds, The Sandbox, Star Atlas, Dapper Labs, and Decentraland join hands in an alliance DAO named OMA3 (Open Metaverse Alliance for Web3) to develop metaverse standard.
• LinkedIn co-founder will launch an NFT collection on Solana’s Magic Eden.
• Swiss watchmaker Franck Muller is set to debut digital wearables on Binance NFT marketplace.

The news item that took the gaming realm by storm was Minecraft’s announcement that it won’t be adopting NFTs, saying that the latter could create models of scarcity and exclusion that conflict with the guidelines and the spirit of Minecraft. On the other hand, Epic Games’ CEO Tim Sweeney responded to a tweet asking him if his company’s going to follow Minecraft’s pursuit by saying they definitely won’t. More developments in the GameFi hemisphere include:

• Usain Bolt gets selected as an ambassador for Step App, a move-to-earn fitness app.
• StepN wants to use 5% of its $122.5M profits to initiate a buyback and burn program of its green metaverse token (GMT).
• Axie has a new major upgrade to transform the game into a play-and-earn from play-to-earn model.

Crypto Infrastructure

Figure 5: Top 7 Infrastructure Assets Weekly Performance

Source: 21Shares

A new dawn for Ethereum’s scalability is upon us as the lead story has unveiled multiple zero-knowledge EVM-based rollup solutions. As a refresher, ZK rollups are considered the holy grail of scaling as they effectively bundle transactions, which materially reduces gas costs and increases throughput while inheriting Ethereum’s base layer security. In addition, crypto-based ZK proofs can be contemplated as a monumental step in the right direction as it allows for new compelling use cases to emerge. For example, they can help in advancing decentralized digital identity solutions that can be adept in proving age or address without disclosing the actual details. They can also aid with anonymous proxy voting, private messaging, or in other cases, confidential transacting. The last would be imperative to onboard financial institutions hoping to leverage DeFi without disclosing too much information about their positions.

At first, Polygon announced their principal EVM-equivalent L2 rollup, which is deemed a breakthrough, owning to the fact that it significantly reduced the proof-generation time, a core aspect of zero-knowledge proofs, in addition to being compatible 1-to-1 with the Ethereum operating system. This means developers can now use the same tooling and programming language to build new dApps on top of the L2 as they would on ETH, in contrast to the previous delimiting solutions. The public testnet launch should take place in early Q1 of 23. Another protocol adopting Polygon’s EVM-equivalency approach is Scroll, which announced the pre-alpha testnet for their zkEVM flavored rollup. This will allow users to try out a minimal set of apps and execute simple transactions on top of the network. Finally, zkSync was the third in line to announce that the mainnet for their very own zkEVM rollup, zkSync2.0, will launch in 100 days.

On the other hand, Avalanche shared some of the sector’s spotlight due to the increased developmental activity relating to its subnets’ growth. First, we learned that XANA, the eth-based sidechain for metaverse projects, will metamorph into a subnetwork on Avalanche. The scalable infrastructure project is expected to use its own native taken XETA as a gas currency for the new subnet to accrue the most value to their token holders/supporters. Reports were also put forward by Kevin Sekniqi of Ava Labs that 5 other gaming companies will be joining the avalanche network as subnets.

We’re still catching a flow of new info when it comes to assessing the true impact of the financial meltdown instigated by Luna, amplified by Celsius, and exacerbated by 3AC’s insolvency. For instance, the Singaporean crypto exchange Zipmex had at first paused withdrawals after admitting to lending out roughly $53M to the troubled firms BabelFinance and Celsius. Withdrawals were resumed shortly following the firm’s revelation that several interested parties are in discussion with them and are in the process of offering a rescue plan.

As for the companies with a previously known exposure, the following has occurred over the past week:

• BlockFi disclosed having $1.8B in outstanding loans, $600M in uncollateralized loans
• They also instituted a ‘Voluntary Separation Program’ to further reduce headcount
• Blockchain.com is expected to cut 25% of its workforce complemented with the closure of its Argentinian office, meanwhile, Gemini is letting go of another 10% in its second round of lay-offs since the financial meltdown
• Korean startup fund Uprise, who gambled user funds in shorting Luna, will reimburse investors.
• FTX and Alameda have provided Voyager with a bail-out plan that would extricate its customers, which Voyager has rejected and called a low-ball as it harms clients and benefits them only.
• Vauld is reported to owe $363M out of $402M in total liabilities.
• Binance.us inaugurating an affiliate program after Coinbase suspended theirs - responding to the recent turbulent market conditions.
• FTX is also considering acquiring Bithumb.

Media Coverage

21Share’s co-founder and president Ophelia Snyder made an appearance on ETF TV to talk about investor demand and product development during the crypto winter. You can watch the segment here.

Our Director of Research Eliezer Ndinga was interviewed for a report on Forbes to talk about the price developments of Bitcoin and helpful indicators during risk-off environments. You can read the full report here.

Finally, our very own research associate Adrian Fritz was featured on Trend Report about the adoption of DeFi during the bear market. You can read the report here.

News

Paraguay Gets 100MW Deal for Crypto Mining

What happened?

The Commons Foundation signed a 100-megawatt power purchasing agreement with Paraguay's grid operator, buying energy over the span of 10 years to power its crypto mining. This comes a week after the country passed a bill regulating crypto mining and trading. This deal is estimated to create 1,000 jobs over the next four years in Villa Hayes at the Jose Falcon district in central Paraguay.

Why does it matter?

Similar to many neighboring countries in South America, Paraguay’s iconic rivers have encouraged the state to build dams, one of which is the world’s largest, that have made electricity prices become as cheap as 5 cents per kilowatt hour. Paraguay relies heavily on hydroelectric power on which the country's grid runs almost entirely. Most of the electricity generated from one of Paraguay’s dams, and the world’s largest in terms of annual production, is exported to Brazil under a treaty that is set to expire next year. Hence, the government is looking to attract Bitcoin miners to soak up excess energy.

On a separate yet similar note, data gathered by BTC Mining Council shows that mining usage of sustainable energy reached 59.5%. This goes hand in hand with our thesis at 21Shares, that with soaring energy prices coupled with the consequential market crash and miners losing profits, governments with an abundance of energy will begin attracting proof-of-work mining operations as a lucrative way of generating revenue amid the global financial crisis.

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