This Week in Crypto

It has been announced last Thursday that the last stop before the Merge on September 19, the Goerli testnet, was implemented successfully, creating a rally across interrelated parts of the ecosystem such as Solana, Polygon and Lido, as depicted in the figure below.

Figure 1: Price and TVL Developments of Major Crypto Sectors

Source: 21Shares, DeFi Llama, Coingecko

Key takeaways

• Europe gets a 6th AML authority to oversee crypto
• Bitcoin’s NUPL increases, enters Hope/Fear phase
• The impact of Tornado Cash ban is rippling through the DeFi sector
• Netflix builds a metaverse to promote a movie
• Successful ETH Goerli testnet merge, next landmark is the mainnet merge on Sep 15/16

Macro, Regulations; Spot, and Derivatives Markets

The US dollar dipped by from Wednesday to Friday against the euro and other major currencies after the Consumer Price Index appeared to have risen only 8.5% in July, less than expected thanks to energy prices declining by 4.6% and gasoline 7.7%. On the other hand, China is cutting interest rates amid economic slowdown and unemployment on the rise.

In its earnings report, Coinbase reported a net loss of $1.1B in Q2, including impairment charges. The company also missed the $874M revenue estimate, reporting $803M. On the flip side, Coinbase expressed eagerness to continue with their targetted M&As to make the best out of the bear market.

Less than a week after the US Treasury banned Tornado Cash, the Dutch authorities arrested one of its developers who was later revealed to be Alexey Pertsev as a result of investigations that started in June. This news spread a wave of agony among the crypto community, unable to comprehend why authorities would go after developers who merely write code rather than the actual users who have committed illicit activities on the crypto mixer.

While Tornado Cash spurs controversy around the globe, NFTs have been doing rounds in Europe, as a regulator expressed concerns at a conference in South Korea that NFT collections are to be treated like crypto under the Markets in Crypto Assets (MiCA) law. As technical negotiations for the MiCA framework are still taking place until the end of September, parties are negotiating the mechanisms determining when NFTs are both fungible and not unique and thus would fall under MICA obligations.

In other news, the EU is set to create a sixth anti-money laundering authority, AMLD6, to have direct oversight over the crypto industry. In a bid to reduce jurisdictional arbitrage between different member states, the European Commission first announced its plans in July 2021 and then the European Council published an update towards the end of June 2022, revealing January 2023 to be the date AMLD6 is to be established. The European Parliament aims to discuss it further with its members after the continent’s August vacation.

In the US, the CFTC and SEC have proposed a new law obliging hedge funds with over $500M of net assets to disclose their crypto exposure along with information related to concentrations and borrowing in a confidential filing. This new law aims to enhance the Financial Stability Oversight Council's ability to monitor systemic risk and bolster wider regulatory oversight.

In a bid to combat illegal gold mining, which accounts for half of Brazil’s gold mining industry, a new bill in the South American country is proposing to tokenize mined gold via blockchain technology.

On-chain Indicators

Figure 2: Net Unrealized Profit/Loss Ratio of Bitcoin (YTD)

Source: Glassnode

The Net Unrealized Profit/Loss ratio, as the name suggests, aims to describe the state of profit and loss of a certain network. Figure 2 shows that Bitcoin has entered the Hope/Fear phase after a month of capitulation. In fact, the ratio has increased from 0.08 to 0.12 over the past week, indicating higher profitability.

Figure 3: Net Unrealized Profit/Loss Ratio of Bitcoin (2011-2022)

Source: Glassnode

Historically, that would mean Bitcoin’s profitability is close to 2019 levels, as shown in Figure 3.

DeFi

The Ethereum ecosystem continues to be the focal point of discussion following the latest successful testnet merge. We’ve covered how some heavyweight DeFi projects have already signaled the demise of the ETHPOW potential fork since they will exclusively support the new POS chain. This week, Circle of USDC announced they would solely support the POS chain, following suit with Tether, Frax, and Chainlink’s decision. The absence of reliable service providers on the forked chain indicates that DeFi will experience rough conditions, which means that ETHPOW might become a ghost chain without any active financial ecosystems.

The repercussions of the tornado cash ban on DeFi began to emerge immediately following the verdict. First, Circle banned 37 addresses with ties to the sanctioned mixer, freezing $75K in the process as a matter of complying with the treasury department’s order. DyDx, the derivatives offering, also locked out a handful of users on the back of their interaction with the mixer. Other users expressed their frustration as they were wrongly flagged, with the speculation that their ETH hopped by the mixer protocol at some point which meant that it was now considered tainted funds.

To showcase the intricacy of enforcing the newly issued sanction, an unknown individual sent 0.1 ETH to more than 600 prominent crypto addresses, including Brian Armstrong of Coinbase, Jimmy Fallon, and Randi Zuckerberg. Justin Sun of Tron was also amongst this group as he revealed he was blocked from interacting with the Aava front-end, along with many other users, as his address was tagged due to TRM’s integration. The DeFi protocol wasn’t the only compliant dApp as UniSwap, Balancer, and Oasis have all censored tornado-linked addresses as a function of integrating the same TRM sanctions screening tool. Aave and DyDx have both unblocked multiple accounts since then who were identified to be victims of the dust attack; however, this demonstrates the fragility of the issued sanction against software rather than individuals and the delicacy of enforcement.

In the same vein, MakerDAO’s founder weighed out the possibility of an ‘emergency shutdown’ if the FED sanctions begin reaching for DAI addresses. This is plausible as DAI is backed by 35% of USDC, making it the largest single collateral backing the stablecoin. Another systematic issue the protocol is facing is its reliance on USDC to maintain DAI’s peg stability. That is why the protocol is also considering a $3.5B ETH market buy order to convert the stability reliance from USDC. Although this is bullish for the biggest smart-contract platform by market cap, we remain cautious as this move somewhat mirrors Terra Luna’s decision to have BTC as collateral backing its UST stablecoin. That said, using BTC as collateral didn’t prove to be a sturdy backstop for the cryptoasset, and thus we remain sceptical of the sustainability of such a decision.

We also saw the following across the wider verse of DeFi:

• Interlay launched a new BTC-backed stablecoin on the Polkadot network
• Binance recovered ~85% of CRV stolen funds from last week’s hack
• ClearPool integrated LayerZero for seamless bridging of Cpool between ETH, MATIC
• TronDao Reserve granted Wintermute access to its vault to enable minting and burning USDD
• Polkadot’s DeFi-hub exploited on the back of their newly misconfigured liquidity pool that resulted in minting $1.2B aUSD, more than 99% of current token supply.

NFTs, Metaverse, and DAOs

Netflix rented out virtual land on Decentraland to promote its new movie “The Gray Man” for a month, replicating a scene inside the action movie where users can explore around a maze, which is a fundamental part of the movie. In its first week, 2,000 Decentraland users flocked to Netflix’s installation.

South Korean Web2 metaverse platform Zepeto is set to launch its Web3 version, ZepetoX, built on Solana. South Korea has showered tech startups, like Zepeto, building metaverses with $200M in grant money to boost the country’s tech sector and create more jobs.

OpenSea unveiled its new “Stolen Items” policy to tackle stolen NFTs. This step follows a recurring phenomenon where NFTs would be stolen and resold on the marketplace, with the unknowing buyer getting penalized on several occasions. On a lighter note, Sandbox is bringing “Paris Hilton’s mansion” to its metaverse Collab to introduce her world to the metaverse. Other arguably more important developments in this space include:

• Theta Network to issue Galaxy NFTs offering Samsung users an innovative experience, including access to events via ThetaPass.
• Vitalik Buterin proposed NFT stealth sending that conceals senders' addresses (zk-SNARKS to ERC721 standard).
• Magic Eden proposed to create ApeCoin DAO to allow Ape holders to transact on the platform with 0.75% fees, after last week’s news of supporting ETH.

Crypto Infrastructure

All eyes were on Ethereum this past week when the Goerli network executed its final merge rehearsal as the testnet successfully transitioned to Proof-Of-Stake. The road is now paved for the main Ethereum network to complete its own merge on the 15/16 of September, depending on when specifically the blockchain achieves its required total terminal difficulty TTD level to begin listening to the new POS chain.

Nevertheless, the captivating story was overshadowed by the unfortunate ramifications of the Tornado Cash mixer ban. The privacy-preserving dApp has been resorted to in the money laundering activities within the space by scammers and hackers, a case in point where the DOJ accused the protocol of aiding the Lazarus group in laundering more than $450M of stolen funds from the Ronin hack. Furthermore, predicated on the ban’s guidelines, several crypto-native service providers started terminating accessibility to the protocol, such as Infura and Alchemy. Both projects are now blocking Ethereum API access to all users to prevent interaction with the smart contract.

In other infrastructure news, Arbitrum revealed its latest Nova chain, an L2 built on top of the network’s Anytrust technology, tailored for gaming and social dApps. The chain is already expected to welcome the migration of Reddit’s community points system from Ethereum. Near protocol unveiled a new Javascript software development kit that will allow the community of 20 million coders to write smart contracts in the legacy language. A move that is intended to accelerate the dApp development on top of the sharding-based chain. Finally, Sam Williams, the founder of the decentralized storage network Arweave, revealed that six new services would join the network’s growing ecosystem. Amongst some of the interesting deployments will be stamp protocol, a new web3 offering allowing content consumers to commend published content by rewarding their creators while browsing the permaweb

The following also occurred for crypto-native Entities

1. Kucoin wallet integrated 1inch to improve native token swaps
2. Crypto.com secures Electronic Financial Transaction Act and VA Service Provider Registration in South Korea
3. Houbi CEO discussing selling majority stake
4. Poloniex, MEXC, Bitmex to allow speculation on ETHPOW forks
5. Binance to scrutinize support for POW forks
6. Bitmex to launch perp swap contracts for foreign currencies
7. FTX partnered with liquidity provider - Paradigm - to launch 1-click future spreads
8. Nuri bank declared insolvency following Celsius bankruptcy
9. ZipMex granted 3 months window to fix its liquidity issues

News

UN Development Arm Advises Developing World to Ban Banks from Holding Crypto

What happened?

The UN Conference on Trade and Development, UNCTAD, released a warning to emerging economies that the rising use of crypto for domestic payments challenges states' authority in monetary matters, and may cause leakage of development funds.

Why does it matter?

Whether it’s in Afghanistan, Lebanon, or Venezuela, we’ve seen unarmed communities benefiting from blockchain technology for remittance. In some cases, getting paid in crypto has become a necessity when countries are sanctioned or have their banking systems failed.

Our thesis at 21Shares has always been that imposing a holistic ban on crypto would essentially cause more harm than prevent evil. On numerous occasions, data banks and think tanks have reported that illicit activities in the crypto industry are in decline. Chainalysis reports that illicit activities represent 0.15% of all crypto transactions in 2021.

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