The markets recovered shortly after Genesis’ bankruptcy and a law enforcement action against Bitzlato, accused of laundering $700M, with Binance being the last destination for the funds. Bitcoin and Ethereum increased by 9% and 4%. The biggest outlier this week was the staking-as-a-service platform, Lido, which increased by 26% over the past week; users have been allocating billions to collect rewards. Increasing by 25%, Optimism came as the outlier in last week’s rally amongst scalability solutions. Cardano also stood out within the layer 1s last week, increasing by 9%. The jump could be attributed to the announcement of a new Cardano upgrade, SECP, capitalizing on interoperability and secure cross-chain deployment of decentralized applications (dApps). SECP is scheduled to tentatively launch on February 14.

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

Source: Coingecko, DeFi Llama. Data as of January 23 close.

Key takeaways:

• A CFTC commissioner urges the world for a global standard for regulating crypto.
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• Polkadot upgrades its interoperability protocol, Fantom unveils its decentralized ecosystem funding initiative.
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• Circle, the issuer behind USDC, switches auditors from Grant Thornton to Deloitte.
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• Panelists in the World Economic Forum predict a tokenized future and Seoul to fully launch a public metaverse for its public services in 2026.

Spot and Derivatives Markets

Figure 2: Bitcoin Long/Short Ratio

Source: Coinglass

The chart above can depict the current market sentiment in the futures market, which has been conservatively bullish over the past few weeks. Investors between buying long and selling short futures contracts have been at a tight rivalry this week, with the exception of January 20 when the appetite picked up, leaning towards longing Bitcoin by 52.46%.

On-chain Indicators

Figure 3: Inflation Rate of Bitcoin versus Ethereum

Source: Glassnode

Since the Merge of September 15 last year, Ethereum’s supply change is now nearing -3K ETH, according to data collected by Ultra Sound Money. That means that ETH is gradually becoming a deflationary asset, thanks to a post-Merge mechanism that removes a portion of ETH that has been spent on transaction fees. That is in comparison to its rival cryptoasset, which has also progressed on the deflating front on the back of Bitcoin’s halving slated to happen next year.

Macro and Regulations

Adverse macro conditions continue.

• Japan's inflation rate hit its highest level in 41 years, with consumer prices rising to 4% year-over-year in December, which is double the 2% target of the Bank of Japan, which is expected to end its yield-control policy that has been keeping interest rates near zero.
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• With an inflation rate of 25%, Pakistan’s central bank raised its key interest rate to 17%.
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• Argentina’s inflation rate is also running hot at a whopping 95%, the highest in 30 years, with interest rates holding steady at 75%.
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• On the other side of the globe, UK’s inflation cooled down for the second consecutive month, hitting 10.5% in December, down from 10.7% in November.

Genesis filed for Chapter 11 bankruptcy protection, revealing they have less than $500M in assets, whereas its biggest creditor has a claim to $765M.. In a letter sent to its shareholders, Digital Currency Group (Genesis’ parent company) announced it’s suspending quarterly dividends to weather the market environment.

FTX in Court: The troubled crypto exchange reported to creditors that although it had recovered $5B, about $415M were still missing from reserves of both FTX International ($323M) and FTX US ($90M) due to hacks that have taken place since the bankruptcy filing in November. The exchange’s former CEO, Sam Bankman-Fried (SBF), challenged FTX’s report, saying the US arm is solvent. SBF wasn’t alone in this effort; the exchange’s chief regulatory officer Daniel Friedberg accused FTX’s lawyers and Ryne Miller of misconduct and submitted his testimony to that in an objection (filed by an FTX customer and creditor) to the retention of law firm Sullivan & Cromwell (S&C) in the exchange’s bankruptcy case on January 19. Despite the controversy, the objection was rejected by the bankruptcy court in Delaware, giving S&C the green light to continue representing FTX during its bankruptcy proceedings. With regards to SBF’s criminal court proceedings, the federal prosecutors seized almost $700M in cash and assets connected to the exchange’s former CEO.

Law Enforcement and Regulations: US Justice Department announced what they called “a major international cryptocurrency enforcement action” by arresting the founder of Hong-Kong-registered Bitzlato, accused of laundering $700M, and disclosing that Binance was one of three main counterparties along with Russian-based “Hydra” and “The Finika.” Europol seized $19.5M from Bitzlato and had a member of its senior management arrested. In other news, CFTC commissioner Caroline Pham called for a global standard for regulating crypto in a Bloomberg interview as a hedge against crypto meltdowns like FTX and Terra Luna. Japan’s regulators, on the other hand, want the US and Europe to treat crypto like they do traditional banks. The European Parliament’s final vote on Europe’s landmark crypto bill, Markets in Cryptoassets known as MiCA, is postponed until April due to an expected delay in translations.

Central Bank Digital Currencies (CBDCs): Countries are racing to solidify their central bank digital currency (CBDC) strategies. The digital yuan has been part of China’s circulating cash data since December and was used to buy securities for the first time ever. Bank of America said in a report led by Alkesh Shah that CBDCs and stablecoins are the organic evolution of money and payments. Thailand’s central bank will be implementing a CBDC for the Thai Baht wholesale market in the first quarter of 2023. The government is currently working with the Monetary Authority of Singapore (MAS) to handle remittances between the two countries using the new currency. On the other hand, the Bank of England is questioning the need for a digital pound after the European Central Bank’s publishing of their digital euro stocktake. To strengthen the role of the digital euro on the international scene, interoperability with other CBDCs will be crucial to facilitate cross-currency use. The lack of interoperability across CBDC systems may become one of the key weaknesses of these initiatives in contrast with globally-accessible fiat-pegged stablecoins.

Adoption: Russia and Iran are working on a gold-backed stablecoin to de-dollarize foreign trade. The project will only be possible when Russia regulates cryptoassets, which has been in the works since September. Other signs of adoption that happened last week include the following:

• Brazil’s second-largest private bank Bradesco launched its first tokenized bank credit note, worth the equivalent of $1.95M.
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• CashApp has now fully integrated Bitcoin’s layer 2 protocol, Lightning Network, for its mobile phone payments. The integration started in October.
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• Robinhood began rolling out its Web3 wallet to the over a million users on its waitlist. “Robinhood Wallet” is a self-custody wallet that allows users to swap crypto with no network fees on Polygon.

Crypto Infrastructure

Layer 0:

• Polkadot: released V3 of its interoperability protocol dubbed XCM. The upgrade, which took 15 months to materialize, is focused on enhancing programmability, bridging, and the functional multi-chain decomposition. Programmability, in this case, would help execute more sophisticated messages, such as safe dispatches, where the cross-consensus messaging system ensures the receiving chain is running on the same software as intended before initiating a transfer. On the other hand, bridging will construct more cohesive interoperable ecosystems and enable the blooming of complex applications that leverages several parachains and networks. Finally, the upgrade will disintegrate the relay chain into multiple chains focused on governance, staking, and validation to help the core chain fulfill its objective of primarily securing parachains and passing messages amongst them.

Layer 1:

• Fantom: The ETH alternative has unveiled a new tool to help finance the development of projects on top of the Fantom network. Dubbed the Ecosystem Vault, the on-chain fund will take a cut of 10% of the network’s transaction fees and redistribute them to the designated projects. Projects looking to secure funding by the vault must lock in the approval of 55% of the community, with at least 55% of the network’s stakers to be present. This is a worthy development as it helps the community directly participate in the bootstrapping of its ecosystem and introduce further transparent systems that align the interests of both involved users and developers.
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• Solana: Solflare wallet announced it’ll be amongst the first to implement prioritized transaction fees on the Solana network. The non-custodial provider is introducing this feature to help users seamlessly process their respective transactions during times of high congestion. Solflare will monitor the network to identify if the L1 is overloaded, then proceed to hike the fees accordingly to accelerate the processing of transactions for users paying the premium over the rest of the wallets. This will be an integral improvement to help the network combat spam transactions who are exploiting the network negligible fees. On the flipside, tools like Flashbots to mitigate front-running prioritized by the highest transaction cost, will be an important implementation on the Solana network.
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• Avalanche: There is now more BTC circulating on the Avalanche network than the amount held on Bitcoin’s Lightning network. Titled BTC.B, the total number of tokens bridged over to Avalanche has reached a total sum of 5700 BTC as opposed to 4929 BTC on top of Bitcoin’s L2 scalability solution. The growth rate on Avalanche is impressive, notably since the network’s cross-chain bridge was launched in June of last year, in contrast to Bitcoin’s complementing solution that has been around since early 2017. Users can leverage BTC.B to use their idle capital across DeFi rather than transact with it on top of Bitcoin’s lightning network, making for a far more compelling use case for the asset.

Layer 2:

• Polygon: After launching two consecutive testnets to battle test the network’s zkEVM rollup since last October, the cofounder of Polygon announced on Twitter that the solution should be deployed on the mainnet ‘soon’. Although we don’t have a tentative date yet for when the scalability solution might see the light, we remain hopeful that it won’t take long as Polygon isn’t the only network planning to release its zkEVM as zkSync, scroll and Consensys are all working are laying the groundwork to launch their scaling solution.
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• zkSync: The ETH scaling solution teamed up with the infrastructure provider Espresso system to enable private transactions on top of its zkEVM public network. The current experiment for the rollup is to leverage Espresso’s privacy-oriented technology called Configurable Asset Privacy (CAPE). Although Espresso’s CAPE privacy tool is still on testnet, the integration is expected to help entities initiate transactions and carry out their on-chain activities without necessarily exposing it to the wider public. This is an incontestable condition for institutions to come on board and experiment with DeFi without worrying about broadcasting their financial operations.
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• Metis: The Optimistic rollup network revealed that it had joined forces with Stargate protocol. In its first new chain expansion for Stargate since its launch in March 2022, Metis will be utilizing the cross-chain liquidity solution, built on top of the Layer Zero omnichain communication protocol, to help bridge assets across networks. In addition, the collaboration will commence with enabling cross-chain compatibility for USDT, allowing the token to be natively transferred between the seven other blockchains that Stargate currently supports. This exciting initiative addresses some of the woes of cross-chain bridges, which were a prime target for hackers last year, as we saw the siphoning of close to $2.5B from the vulnerable infrastructure.

Decentralized Finance

Figure 4: Top 10 DeFi Assets Weekly Performance

Source: Coingecko, DeFi Llama. Data as of January 23 close.

Stablecoins:

• Circle: The issuer behind the USDC stablecoin revealed last week that the company would partner with a big four firm to provide audits for its Proof-of-Reserves. Circle will drop the services of Grant Thorton as an accounting firm and switch auditors to Deloitte for auditing the reserves of its stablecoin. This is a net positive for the industry at a time when other crypto-native companies were led into thinking that the big four were reluctant to provide PoR audits for private companies. Thus, the collaboration should instill confidence in the space and signal that other serious companies should go down the same route. In similar news, Circle announced that its interoperability protocol, CCTP designed exclusively to deliver the cross-chain regime for its stablecoin, is inching closer to launch. Circle is expecting Cross Chain Transfer Protocol to roll out before the culmination of Q1, although a testnet has already been deployed on Ethereum’s Goerli and Avalanche’s Fuji networks.
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• Australia: is planning to launch a stablecoin pegged to the Australian Dollar. The National Bank of Australia expects the fiat-backed token AUDN to be released halfway through this year, aiming to deploy it on top of Ethereum and Algorand. AUDN is not Australia’s first aim at leveraging blockchain to create a digitized representation of their Dollar, as the nation and New Zealand Banking Group teamed up with the custodian Fireblocks to issue another stablecoin pegged to the AUD. That said, The Bank of Australia professes that the stablecoin will be utilized to service in areas such as cross-border money transfers, repurchase agreements, and carbon credit trading.

Ethereum Ecosystem:

• Sushi: The fourth largest DEX by TVL unveiled its latest roadmap for 2023. The DEX’s ambitious blueprint for this year includes many aspiring initiatives to help revamp the exchange and bring it back to profitability. To that end, the new CEO, Jared Grey, announced that the protocol would introduce a new DEX aggregator, launching before the end of Q1, to help increase revenue for token holders on the back of growing swaps and volume. In addition, Sushi will be rolling out a decentralized incubator named Sushi Studio, which should help drive the growth of self-funded projects, and an NFT marketplace dubbed Shoyu. That said, Sushi’s north star is to boost the profitability of its biggest product, its exchange. That is why the project will be focused on releasing a new AMM featuring a concentrated liquidity mechanism to help it compete for market share against the leading exchanges, Uniswap and Curve Finance. Sushi lost over $30M in paying out incentives for liquidity providers throughout 2022, causing the DEX’s treasury to have funds covering less than 18 months of runway. Hence, the new roadmap came at a crucial time to help the exchange become more sustainable.
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• MakerDAO: The money market protocol pushed a new governance proposal to gauge the community’s support for holding the GUSD stablecoin as part of DAI’s reserves. As a refresher, DAI is MakerDAO’s stablecoin, while GUSD is Gemini’s. The controversy around the latter stems from the fact that the exchange is in hot water as its Earn program was reliant on the yield generated by the now-troubled crypto lender Genesis, which owns close to $900M in debt to earn users. The community was wary due to fears that the exchange could claim back its GUSD in the scenario that it declares bankruptcy, which the Winklevoss twins have clarified since then that the stablecoin isn’t a property of the exchange in a blog post on the MakerDAO forum. For context, the community approved the decision to include GUSD last year, lured by the increased revenue (1%) that would get redistributed back to the DAI holders. That said, The governance vote was on the brink of removing support to GUSD until the largest delegate - GFX labs - received enough capital from ParaFi (investor in Gemini) to swing the vote towards keeping GUSD. Correspondingly, Paxos is now trying to emulate an analogous offer by suggesting to pay MakerDAO a daily marketing fee that accumulates to $29M annually to hold $1.5B of its USDP and include it as part of DAI’s reserves.

NFTs and Metaverse

Web 3 in WEF: A panel in Davos, led by Circle’s CEO Jeremy Allaire and CoinDesk’s Michael Casey, concluded that the economy would become increasingly tokenized in the future. Carbon credits, housing, electricity, government bonds, foreign exchange, and other real-world assets will be traded on the blockchain. Public services are in the process of tokenization in South Korea; Seoul is launching a digital replica of the city with the aim of improving its public services, in contrast to public concerns that this project is a misuse of public funds. The “public metaverse” is planned to be fully implemented by 2026; users can get tax consultation and access counseling. Additionally, the public metaverse will also make space for a support center for struggling SMEs.

The Polygon Ecosystem is still literally making moves, as NFT marketplace Rarible announced the expansion of its white-label marketplace building tool on Polygon. A Solana-based Web3 game, Synergy Land, is also moving to Polygon, who said they had enlisted Xternity to streamline the game’s migration. Powered by Fireblocks, Xternity is a secured, both self-custody and direct custodial wallet specifically designed for gamers. Web 2 companies seem to be harvesting the fruit of their integration with Web3 last year. On Instagram, the Polygon-based collection Aku’s Dream Lab sold out in 11 seconds.

Next Week’s Calendar

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