This Week in Crypto

Markets entered another week of resistance, with Bitcoin closing at $20.6K on Monday, close to where it started a week before. Despite a brief jump over the $21K and $1.6K marks that lasted for three days, Bitcoin and Ethereum barely moved over the past week, increasing by 0.5% and decreasing by 0.2% respectively. The biggest winner of last week’s rally was Polygon, which increased in returns by 43% after getting monumental institutional recognition as JPMorgan traded tokenized cash deposits on the Polygon blockchain last week, which we’ll delve deeper into in the DeFi section. Other winners, as seen in the figure below were Binance Coin and Lido which increased in returns by nearly 4% and 13% respectively.

Figure 1: Weekly TVL and Price Performance of Major Crypto Categories

Source; 21Shares, Coingecko, DeFi Llama

Key takeaways:

• Binance signs nonbinding agreement to buy FTX's non-U.S. unit to help cover a "liquidity crunch"
• The Fed seized more than $3B in Bitcoin stolen from the Silk Road in 2012.
• Hetzner kicks one-fifth of Solana validators off the cloud hosting platform
• JPMorgan and Singapore’s Central Bank testing DeFi’s Infrastructure

Spot and Derivatives Markets

Figure 2:

Source: Glassnode

The chart above plots the average funding rate (in %) set by exchanges for perpetual futures contracts. A negative funding rate means that short positions have to pay long positions periodically and usually indicates a bearish sentiment since more short traders are dominant, and vice versa. As seen in Figure 2, the funding rates of most exchanges have risen above the zero mark over the past week, except for those of Kraken and FTX, who are currently in a downtrend, with the latter getting potentially acquired by Binance. For context, you can read our FAQs on the event here and you can check our dashboards on Dune Analytics here.

On-chain Indicators

Figure 3:

Source: Glassnode

The amount of Ethereum powering smart contracts is on the rise, as shown in Figure 3. Nearly 30% of the total supply of Ethereum is held in smart contracts. This indicates that the utility behind Ethereum’s value is intensifying, which means that the cryptoasset’s dollar figure will in turn follow suit.

Macro and Regulations

As expected, the Federal Reserve raised the interest rate by 75 basis points and signaled it might be nearing an inflection point. Bank of England also went for another 75 BPS interest rate hike, reaching the highest in 33 years. Europe’s annual inflation rate is up to 10.7%, with energy accounting for over 40%. On that note, Canadian energy provider Hydro-Quebec - the fourth largest hydropower producer in the world - proposed to stop supplying the blockchain industry with renewable energy. We have reiterated in previous newsletters that the debate on the energy consumption of proof-of-work mining is an ideological one, where the worthiness of the industry is in question, which is visibly very subjective.

The US Department of Justice (DOJ) announced that it seized $3.36B in Bitcoin stolen from the illegal marketplace Silk Road back in 2012, during the 2021 raid on the residence of the hacker James Zhong, who pled guilty of wire fraud which carries a maximum sentence of 20 years. The sentence is scheduled to be determined on February 22. This marks the DOJ’s second-largest seizure after the $3.6B stolen from the Bitfinex exploit in 2016, retrieved earlier this year. As US Attorney Damian Williams puts it, “thanks to state-of-the-art cryptocurrency tracing” law enforcement will continue tracking down hackers and executing these seizures will take less time as security apparatuses are more acquainted with the infrastructures of cryptocurrencies. On that note, crypto-focused VC firm Paradigm is holding its first public event on November 16 in Capitol Hill for educating policymakers on the areas they’re aiming to regulate.

Many developments in central bank digital currencies (CBDC) have happened over the past week. The New York subsidiary of the Federal Reserve piloted a cross-border transaction with the digital dollar as part of what’s being called Project Cedar with impressive improvements in settlement; down from 2 days to less than 10 seconds. On the other hand, Project Orchid is the name of Singapore’s mission to enable a programmable Singapore dollar. Singapore-based financial services group DBS is partnering with Open Government Products, a tech team employed by the government, to launch a live pilot for the issuance of purpose-bound money-based vouchers, issued using tokenized Singapore dollars on a blockchain.

On that front, Canada is set to examine stablecoins and CBDCs in its next budget, as well as the European Commission, with a rather ambiguous timeline. European Central Bank President Christine Lagarde said in a video statement that the European Commission will draft a legislative proposal on a digital euro soon.

Crypto Infrastructure

L1. More than 1000 Solana nodes were de-platformed as Hetzner banned any network-related activity. Although the cloud hosting provider is home to roughly 40% of Solana's validators, forming 20% of total stake, terminating the node's connection luckily didn't impair the network. 40% of the total stake had to be taken offline for it to be considered delinquent and consequently cripple the network's consensus mechanism. That said, the network continued producing blocks as nodes quickly relocated their operations to alternative providers, while others temporarily deactivated their stake. Hetzner's hostile approach extends beyond Solana, as they've previously warned Ethereum node operators to sunset their operations as it violated their service level agreement. 11.8% of ETH nodes are now running on top of the cloud provider, down from 16% in September.

Solana. On a relevant note, Google Clouds is now running a validator node on Solana. The firm also announced they'll be expanding the support of their newly unveiled node engine towards the network, following Ethereum's implementation. Notwithstanding the role of these centralized service providers in bootstrapping the node operations for the wider industry, it remains ever clear that the blockchain industry is in dire need of decentralized cloud hosts that would diversify the node distribution and avoid central points of failure. In other news, Neon EVM announced they would deploy its mainnet on December 12. The protocol will enable developers to port ETH-based smart contracts onto Solana for the first time, with dApps like Aave looking to be amongst the first adopters. Finally, Solana announced they'd support the 5G helium network on its saga phone. The integration could be a key driver to accelerate adoption as it helps users earn rewards while abstracting the complexity of utilizing both Solana and a crypto-powered cellular network.

Cosmos & Scalability. The Cosmos blockchain is undergoing a historic on-chain governance vote that could elevate the network to new levels. Dubbed proposal 82, the manifesto suggests revamping the utility of ATOM by introducing features that could transmute the project’s troubling tokenomics into an attractive asset and establishing it as the preferred reserve currency for the IBC ecosystem. One will be the interchain scheduler, a blockspace market for MEV transactions that would monetize the toxic flow, while the other is an interchain allocator. An initiative that leverages the scheduler’s treasury to align the economic incentives of the Cosmos ecosystem players by investing and funding ATOM into projects that will drive its growth and expansion. The vote, which attracted some controversy on the back concerns around the issuance of ATOM, began on the 31st of October and is expected to last for 2 weeks. In other news, Boba network announced its expansion to the BNB chain. The optimistic rollup integration is the third scalability solution for the BNB after the Autobahn and zk-based rollups.

Decentralized Finance

Figure 4: Top 10 DeFi Assets Weekly Performance

Source: 21Shares, Coingecko

Stablecoins. Circle began moving its USDC reserve into Blackrock’s managed and SEC-registered fund. The allocation will include short-term treasury assets - 80% of USDC’s reserves - while keeping the remaining cash capital of 20% shared across its banking partners. The move is designed to increase the protocol’s revenue and take advantage of the issuer’s idle assets. Worth mentioning here that this move could catalyze DeFi to begin offering more competitive interest rates than TradFi, especially as the US short-term treasury bills currently yield higher returns. This move could drive the growth of DeFi as it inspires protocols to follow Circle’s suit and build up sustainably risk-free treasuries. A notion that would be driven by investing in US government bonds to capitalize on the high CB interest rates, meanwhile helping protocols weather the brutal market conditions if crypto endures a prolonged downturn. In a similar vein, Solana will support a native implementation of Circle’s euro coin EUROC next year, complementing its main presence on Ethereum.

TradFi Goes DeFi. The Monetary Authority of Singapore (MAS) executed its first real-world implementation for DeFi protocols. DBS, JPMorgan and SBI Digital asset holdings were all involved in the central-bank-backed experiment to scrutinize the limitations and benefits of leveraging the rails of the DeFi infrastructure. The 3 banks used a modified version of the Uniswap DEX and the permissioned Aave ARC lending protocol on Polygon, to exchange Singapore’s govt security bonds for Japanese bonds, combined with Japanese Yen for Singapore Dollars. In its report of findings, MAS echoed the benefits of DeFi in enabling instant settlement, trading, and clearing while emphasizing its role in reducing fees on the back of eliminated intermediaries. The central bank went as far to argue that DeFi could facilitate the creation of a global liquidity hub for tokenized assets extending across disparate markets and asset classes. That said, MAS has two more pilot projects examining blockchain technology. The first is an attempt to exchange tokenized assets for trade finance in collaboration with Standard Chartered Bank of the UK. In contrast, the second explores the tokenized issuance of wealth management products that HSBC and UOB will oversee.

NFTs and Metaverse

If you read this newsletter from start to finish, you would know by now that Polygon is on a roll. Graduating students from the national university of Mongolia are scheduled to receive honors as SoulBoundTokens on Polygon. Meta announced it is building a full end-to-end toolkit on Instagram that can be used for the whole NFT cycle — from creation, starting on the Polygon blockchain, to showcasing and selling NFTs both on and off the gram.

Yuga Labs announced that they are working on an interoperability standard to help bridge between NFTs and its platform “Otherside” as well as other metaverses. Web3 browser Opera launched an NFT analytics tool called DegenKnows, for on and off-chain analytics. Both efforts are a further testament that the industry that unites all Web3 tools is ripe for development and construction which could indicate that investment in this space has a long lifespan.

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