Monthly Review
Sep 26, 2023

Monthly Review – July 2022

Monthly Review – July 2022

This Month in Crypto: Executive Summary

The total cryptoassets market cap increased by 22.3% month-over-month, according to data gathered by CoinMarketCap. The jump was influenced by the excitement raving around the Merge, which finally got a tentative launch date. As shown in the figure below, DeFi protocol Lido saw 313% returns over the past 30 days, while Ethereum scalability solution Optimism saw 168%. In the meantime, Bitcoin and Ethereum respectively saw an 18% and 47% increase over the past month. Moreover, the correlation between Bitcoin and S&P 500 stood at 0.5 in mid-July, down from 0.6 levels for two months.

Figure 1: Price and TVL developments of the major crypto categories

Source: 21Shares

Key takeaways from this report

  • UK published bill regulating stablecoins
  • Merge got a launch date, Ethereum holders hoard
  • Developments on stablecoins
  • Uniswap onboarding NFT marketplaces on its DEC
  • Luna, Celsius, and the Three Arrows Capital contagion

Macro, Regulations; Spot, and Derivatives Markets

US inflation was recorded at 9.1%, and was followed by the Federal Reserve raising interest rates by 75 basis points for the second time in a row to reach a total of 2.5%. 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 basis points 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 the figure below, we can deduce that inflation rates globally are close to those of the late 1970s.

Figure 2: Inflation rates over the years

Source: Bridgewater Associates

July saw the first insider trading case involving cryptoassets, as a former Coinbase product manager along with two others got arrested for wire fraud. On the back of this case, the SEC listed the tokens of Amp, Rally, DerivaDAO, XYO Network among five others as securities. Whereas in Korea, exchanges that include Bithumb, Upbit, Conine and four others are being investigated for a fraud case connected to the collapse of Terra’s stablecoin UST. Some of the significant regulatory developments that happened this month include the following:

  • The US Treasury published a framework for international engagement on digital assets.
  • Taiwan imposed a a de facto ban on purchasing cryptoassets with credit cards.
  • Paraguay passed a bill regulating crypto mining and trading
  • The UK published the Financial Services and Markets act, that regulates the use of stablecoins in payment.

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. Not only will this deal create an estimate of a thousand jobs over the next four years, but it will also absorb the excess energy generated by the world’s largest electricity-producing dam.

Crypto exchanges have had a tough quarter, but some have been taking leaps toward a global footprint this month. received regulatory approvals in Cyprus and Italy, meanwhile, Spain gave Binance the green light for operations in the country via its subsidiary Moon Tech. More global adoption this month includes:

  • Gemini granted VA service provider license by central bank of Ireland.
  • Nubank launched in Brazil, allowing over 57 million users to purchase Bitcoin.
  • Huobi received licenses in Dubai and New Zealand.

On-chain Indicators

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. As more tech companies hand in their earning reports, it’s important to keep an eye on the on-chain indicators such as the Net Value to Transactions Ratio (NVT). As shown below, 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.

Figure 3: Bitcoin Network Value to Transactions Ratio

Source: Glassnode

As shown in Figure 3, this indicates that while the price of Bitcoin moves sideways, wallets holding at least one Bitcoin are on the rise. Addresses holding a Bitcoin or more have increased by almost 20K since last month.

Figure 4: Wallets holding a Bitcoin or more over the past month

Source: Glassnode

The launch date announcement of the Merge has been a catalyst for the wider market rebound and caused investors to hoard Ethereum to levels not seen since July 2018 by withdrawing from exchanges into cold storage, as depicted below.

Figure 5: Ethereum balance on exchanges


Figure 6: Assets under DeFi’s management in July

Source: 21Shares

Although the dust still hasn’t settled yet with regards to the collapse of the UST stablecoin and its complementary Luna token, projects within the subsector have been forging ahead with cementing some of their current designs, while others are in the process of introducing new stablecoin projects that address the woes and shortcoming of offering that already exist on the market.

  • Tether expanded its USDT coverage to the embryonic OKXChain.
  • Tether disclosed they will be releasing a new stablecoin pegged to British Pound Sterling in early July, $GBP₮.
  • Tether said there is no Chinese commercial paper among its reserves, holding $3.7B in commercial down from $30B a year ago
  • Accounting giant KPMG was appointed to audit the monthly reserves of Blackfridge’s new fully-sterling-backed pound-token (GBPT).
  • Curve Finance announced they are working on releasing an over-collateralized stablecoin that should adopt a similar corresponding mechanism to that of MakerDAO’s.
  • Circle published a comprehensive report to break down its USDC reserves, revealing that almost 35% of its reserves sit in cash, while the rest is invested in short-term US treasuries with maturity dates averaging less than 45 days.
  • Aave is launching a decentralized, algorithmic, yield-generating stablecoin, GHO, whose role is to enhance its lending protocol.

Stablecoins also gained further institutional adoption in July. The EU-regulated payment bank Banking Circle added USDC onto its payment rails, with Coinbase as one of the bank’s liquidity providers.

MakerDAO continued to lead in bridging TradFi to the embryonic DeFi market throughout July. It first began by ratifying a new proposal to invest $500M in 80% treasuries and 20% bonds to diversify its reserves and earn further risk-free yield. Subsequently, the Industry giant proceeded with embracing real-world assets (RWAs) via officially enlisting Société Générale to the protocol’s vaults. The passed proposal should now see Société Générale Forge, a subsidiary of the French bank, use its OFH token as collateral in order to borrow up to 30M in DAI tokens. OFH are euro-denominated covered bonds rated Aaa and AAA by Moody’s and Fitch, respectively. In addition, a 87.24% vote passed that would see the protocol provide a $100M DAI Vault to Huntingdon Valley Bank, a 151-year-old lender in Pennsylvania with $500M in assets.

The notion of tokenized debt securities isn’t a new phenomenon, as JPMorgan’s permissioned Onyx digital assets blockchain has already processed $350B worth of trading volume for on-chain bonds. What differentiates MakerDAO’s move is its reliance on a public network (Ethereum) to oversee the issuance of new bonds/securities as well as unlocking further utility for them by designating them as collateral to take out loans against. This is a key development that we’ll be closely watching as we believe that the world has barely scratched the surface of what is possible with tokenization.

Entering a new paradigm for interoperability, Sushi - the 10th DEX by volume - has released its latest cross-chain AMM dubbed SushiXSwap. The feature built on LayerZero’s stargate bridging technology will allow the exchange to facilitate cross-chain 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.

NFTs, Metaverse, and DAOs

A fake job ad on LinkedIn turned out to be the culprit behind the Ronin exploit, costing Axie Infinity $540M back in March. It all happened when a senior engineer downloaded the fake job offer in PDF; little did they know that the file contained spyware that essentially took over four out of nine validators on the Ronin network. In fact, data gathered by Certik identified social media as a ‘major Web3 pain point’ as phishing attacks increased by 170% in Q2, most of which happened on social media platforms lacking verification of their users, such as Discord and Telegram.

Barely 48 hours after Gamestop launched its NFT marketplace, the trading volume recorded $3.5M while it’s still in beta. This is almost twice the trading volume on the Coinbase NFT platform which has been live since May.

The Syscoin layer-1 blockchain has completed integrating the Luxy NFT marketplace, the first official NFT marketplace available on Syscoin. Luxy is a marketplace to buy and sell NFTs, a collection launchpad, which also includes support for audio and video tokens and offers discounts for LUXY token holders.

HSBC’s inaugural on Sandbox seemed to have motivated KEB Hana Bank in South Korea to offer banking services in the metaverse. Users can access the virtual branch of the bank and request basic banking services like experiencing coloration opportunities and getting insight into promoted investment.

  • UAE wants metaverse to inject $4B in its economy, adding 40K jobs.
  • Catalonia is building its own metaverse
  • Central African Republic president launched crypto initiative, Saga, aiming to expand Bitcoin adoption and creates a metaverse
  • Meta partnered with fashion startup DressX to release virtual clothes.
  • Animoca Brands, Alien Worlds, The Sandbox, Star Atlas, Dapper Labs, 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.

In a $32M Series A led by Animoca and Samsung Next, Planetarium Labs is setting its sales to engage its community to develop open-source games and participate in the governance of the Web3 game company.

Samsung Electronics launched its Space Tycoon, a virtual playground built inside the metaverse platform Roblox, a global gaming platform that has quietly integrated NFTs. Space Tycoon is a virtual space where users can create and play games and share experiences using Samsung Electronics’ products together with alien characters in space, taking design and functionality cues from the business simulation ‘tycoon’ genre.

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.

Minecraft 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.

  • 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

July was markedly a monumental period of growth for the infrastructure layer, particularly surrounding Ethereum and its complementary ecosystem of L2 solutions that underpin the crypto universe.

First, a tentative soft-schedule was announced in mid-July for when the merge is expected to materialise. The frenzy led to characterizing the recent rally as the Merge trade as it is now professed that the mainnet merge would take shape on September 19th, despite it is still likely to change. This confirmation was accompanied by three shadow forks and one testnet chain-merge throughout July, where the Ethereum’s Sepolia testnet POW chain executed its own merge and transitioned to POS, the last destination before the Goerli testnet where the merge is supposed to make its final stop between 6-12 Aug . Ethereum then finished its tenth mainnet shadow fork on July 27th.

Multiple L2 projects also enjoyed their fair share of attention on the back of sweeping protocol developments. Polygon, for instance, was at the forefront as 48 projects have migrated from the Terra to the L2 ecosystem. Polygon’s Zero-Knowledge(ZK) Rollup solution, Polygon Hermez, will also roll out Ethereum Virtual Machine(EVM) compatibility so that developers can easily migrate their projects to Polygon Hermez. The network was also selected to become part of Disney’s accelerator program where MATIC’s price has jumped 63% since the announcement on July 13.

Other Ethereum scaling solutions whom made headlines this past month:

  • Arbitrum’s new chain Arbitrum Nova went live on July 12 on its mainnet and is open for developers to deploy their apps.
  • Loopring is performing more than 10% better since last week on the back of Gamestop’s trading volume mentioned in the previous section.
  • Starknet token targeted to launch in September with 10 billion total supply, which will be used for staking, governance and network fees

Moreover numerous zero-knowledge EVM-based rollup solutions have hit the market, signalling a new dawn for Ethereum’s scalability. As a refresher, ZK rollups are considered the holy grail of scaling as they effectively bundle transactions while maintaining minimised data exposure, all of 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 decentralised 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.

Polygon first announced their principal EVM-equivalent L2 rollup, which is deemed a breakthrough, owing 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 flavoured 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.

Other L1 news include, but are not limited to:

  • Celo suffered network outage for the 1st time
  • BNB unveiled DappBay to alert users of potential scams, Integrated with Axelar for crosschain communication
  • FTM deploying dApp security analyzer on mainnet to notify users about potential risks
  • Cosmos passed new improvement proposal, introducing liquid staking and interchain security, expecting bigger role for ATOM
  • AVAX to welcome 6 new subnets
  • An ETH-based sidechain metaverse will pivot to a subnet
  • 5 other gaming companies will migrate and join AVAX as subnetworks

LUNA, Celsius, 3AC contagion

The remarkable aspect of the 3AC and celsius contagion is that DeFi proved its resiliency and held up the notion that code is indeed law in the world of cryptographic primitives. Unlike deals done in the traditional financial world, pre-agreed terms and conditions must be honoured as immutable applications only understand conditional statements and do not simply attend to externally unconventional circumstances. The proof of this argument is that Celsius and 3AC did in fact pay out their obligations towards MakerDAO and Aave long before proceeding to honour the deals struck with CeFi institutions who eventually turned out to be insolvent.

This was demonstrated as Celsius reclaimed $172M collateral from Aave and Compound by paying down $95M to the DeFi platforms. Celsius also paid down $41M to Maker on July 7, freeing up its $440M collateral. A day later, Tether announced it has liquidated its overcollateralized BTC loan to Celsius with “no losses” to the stablecoin issuer

That said, July was the Lehman brothers’ moment of the crypto space as it’s been close to a month and the market is still in the process of fully realising the impact of Luna’s collapse, and the resulting insolvency of some of the biggest names within the space.

  • Celsius officially filed a petition for bankruptcy and disclosed a $1.2B deficit hole in their balance sheet.
  • Vauld reached out to its creditors and exposed a shortfall of north of $70M due to mark-to-market losses on BTC, ETH and MATIC trades.
  • Crypto exchange/lender, Voyager, which loaned $650M unsecured debt to 3AC, has filed for bankruptcy and voluntarily delisted its common share from the Toronto Stock Exchange.
  • The default impact on the crypto exchange, is approximately $270M. According to their CEO, the exchange is still solvent and liquid.

Other firms are attempting to make their affected customers whole:

  • Coinflex is now permitting users to withdraw 10% of their locked assets, while simultaneously commencing their arbitration procedure against an investor, to free-up $80M of locked capital after updating their deficit .
  • Voyager has also asked for the judge's permission to unblock the withdrawal of $350M from the NY-based Metropolitan Commercial bank custodian in order to honor their clients’ requests.
  • 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 previously known exposure, the following has occurred over July:

  • BlockFi disclosed having $1.8B in outstanding loans, $600M in uncollateralized loans
  • They also instituted a ‘Voluntary Separation Program’ to further reduce headcount
  • is expected to cut 25% of its workforce complemented with the closure of their 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 has provided Voyager a bail-out plan that would extricate its customers, which Voyager has rejected and called it a low-ball as it harms clients and benefits them only
  • Vauld is reported to owe $363M out of $402M in total liabilities
  • inaugurating an affiliate program after Coinbase suspended theirs - responding to the recent turbulent market conditions
  • Babel Finance lost over $280 million in proprietary trading with customer funds

What We Expect

The wider market could be in for a bit of a relief as it seemed that the most recent 75 bps FED interest hike was priced in since BTC and ETH both gained ~10% on the back of the news. The Federal Reserve takes August off which means that the market doesn’t have to be concerned with another short-term monetary tightening cycle, until the committee reconvenes on September 23rd. Jeremy Powell's latest statement signalled a dovish tone as he articulated that the recently adopted tightening measures have achieved its purpose in reducing consumer spending. The FED has now achieved its 2.25-2.50% target rate after the latest interest hike in July, which explains that we might be headed towards what is known as a soft-landing that would see the FED reverse its QT policy adopted since the beginning of 2022.

zkEVM-based solutions to begin surfacing, as well as fierce competition amongst the L2 vertical fueled by the trio announcement of Polygon, scroll and zkSync. We can anticipate eyeing solutions that serve use cases such as private messaging, confidential transactional execution through zk-powered dark pools or privacy-focused zk-based solutions like Aztec, or even decentralised digital identity powered by Zero-Knowledge proofs.

With the ETH merge approaching, high beta plays related to the eth-based ecosystem should expectedly drive the momentum as a proxy for the sector as a whole. For instance, with Lido representing ETH2.0 and Matic mirroring scalability solutions that aim to improve on Ethereum’s efficiency, we’ll see more protocols falling under those groupings to continue outperforming the rest of the market

Fork-related assets should also start performing better on the back of the merge. Miners plugged into the Ethereum network will need to find a new home that accommodates, and is welcoming to host their mining hardware. Ethereum classic and Bitcoin cash both did relatively well in the last week of July as the final testnet merge is approaching, hence miners might have already started locating their new homes. Original ETH chain might get another fork, though unlikely as Vitalik has advocated for ETH classic as an alternative chain for people preferring the POW security guarantees. Other POW networks might also start experiencing a migration of miners like KDA, Starcoin, Aleo, Conflux. It is also convecivale to witness growing miner exodus to web3 offerings powered by POW like Akash, Livepeer and Render networks where miners can contribute their surplus GPU powers.

Optimism Bedrock and Arbitrum Nitro should set the stage for L2 development to accelerate and for its security to be hardened. Bedrock will introduce rollup design that leverages Ethereum engine API to achieve consensus/execution client separation, capable of using any type of rollup (ZK, optimistic), and squeeze every last drop of gas savings when transferring data to the main Ethereum chain.

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