Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 185

Newsletter - Issue 185

This Week in Crypto

Markets were relatively quiet during the holidays as Bitcoin’s weekly volatility hovers near all-time lows. As of Monday’s close, Bitcoin and Ethereum traded up 2.88% and 5.12%, respectively. In addition, the biggest movers of last week were Solana (-15.65% in TVL) among the alternative Layer 1s, Optimism (6.98%) among the major Layer 2s, and Lido (9.17%) among the most prominent DeFi players.

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

Source: CoinGecko, data as of December 26 (close price).

Key takeaways:

  • Bitcoin’s weekly volatility is at near all-time lows.
  • Visa is proposing to launch automatic recurring payments on top of StarkNet.
  • CME Group and CF Benchmark launch DeFi reference rates for Aave, Synthetix, and Curve.
  • Solana’s popular NFT projects, DeGods and Y00ts, will leave the blockchain and migrate to Ethereum and Polygon, respectively.

Spots and Derivatives Markets

Figure 2: BTC Funding Rates

Source: lookintobitcoin.com

If we look at the derivatives market, BTC funding rates have been consistently positive since December 16, indicating that many investors are positioned to the upside after the market downturn caused by the FTX debacle last month (see Figure 2).

On-chain Indicators

Figure 3: Weekly BTC Volatility

Source: BitMEX, TradingView

The BitMEX Weekly Historical Bitcoin Volatility Index is at near all-time lows. There are only two other instances where we saw similar levels of volatility in the last five years, yielding opposite outcomes. The most recent precedent is July 2020, which marked the beginning of last cycle’s bull run. The other precedent is October 2018, before Bitcoin experienced a 50% drawdown from $6,000 to $3,000. In both cases, we saw a steep rise in volatility, a pattern we could observe in the coming weeks.

Figure 4: Bitcoin: Market Value to Realized Value Ratio (MVRV)

Source: Glassnode

Figure 4 above shows BTC's market value to realized value. "Market value" refers to market cap, while "realized value" refers to the cost basis of supply. Historically, high MRVR ratios have coincided with market tops, while values below one have preceded past cycles' bottoms. The MRVR ratio for the past month has been at levels not seen since February-March 2019, in the final stages of the past bear market.

Macros and Regulations

Bloomberg data revealed that China's economic activity continued to slow down in December as the massive COVID-19 outbreak spread across the country. In this regard, Chinese authorities are abolishing their zero-COVID policies. The government will stop requiring inbound travelers to go into quarantine from January 8, the National Health Commission (NHC) said on December 26. On another note, on December 27, S&P Global released its S&P CoreLogic Case-Shiller Index, the leading measure of US home prices. Data released for October 2022 shows that home prices declined across the United States for the fourth consecutive month.

FTX Aftermath: On December 21, the Securities and Exchange Commission (SEC) revealed that Caroline Elison, Alameda Research's former CEO, and Gary Wang, FTX's co-founder, pleaded guilty to criminal charges "for their roles in a multiyear scheme to defraud equity investors in FTX" and are cooperating with prosecutors. The announcement came after Bankman-Fried agreed to be extradited from the Bahamas to the US to face criminal charges for the multibillion-dollar fraud scheme. On December 22, Bankman-Fried clinched a bail deal to be released on a $250 million bond secured against his parent's property. The bail deal ​​requires Bankman-Fried to surrender his passport and remain in home confinement at his parents' Palo Alto home while he awaits a trial in New York.

Grayscale GBTC Tender Offer: Grayscale Investments announced that they would explore a tender offer for up to 20% of the trust if the SEC doesn't approve its application to convert it into a spot exchange-traded fund (ETF). The tender offer would directly appeal to shareholders to sell their shares, currently trading at a 46% discount. In June, Grayscale sued the SEC after the US regulator rejected its ETF application. For context, Grayscale is owned by Digital Currency Group (DCG) and is a sister company of the lending desk Genesis Global Capital, which is at the heart of crypto's market contagion.

Bitcoin Mining: On December 21, Bitcoin miner Core Scientific filed for Chapter 11 bankruptcy. Greenidge, another mining company, reached an agreement with its creditor, fintech firm NYDIG, to restructure approximately $74 million worth of debt. Amidst rising energy costs and declining BTC prices, many mining companies have struggled to stay afloat. On November 18, Glassnode data suggested that Bitcoin miners were selling ~135% of BTC per day from mining and their treasuries. In other words, miners were liquidating the entirety of newly-mined coins and portions of their BTC reserves. This situation may lead to more miners shutting down and further consolidation in the mining industry in the coming year.

Crypto Infrastructure

This week, the Avalanche network announced it is bringing out the Banff 5 network upgrade. The software update will introduce a critical protocol feature called Warp Messaging, which enables seamless native communication between subnets. Before this feature, subnets had to rely on sophisticated bridging systems to help with the cross-chain transmission of tokens and information. With this release, subnets can cross-communicate and request the transfer of data and programmable commands on the back of a cryptographic signature scheme known as BLS multi-signature. Warp messaging is also expected to unlock a paradigm of new exciting use cases for the L1, including cross-chain staking and other primitives. In other news, Avalanche Core, the all-in-one Web 3 wallet, announced yet another feature following the unveiling of the application's mobile-based version. The exhaustive wallet now offers crypto-to-fiat conversion on the spot via a new partnership with Coinbase Pay.

L2: In a rather timely announcement depicting the explosive year of growth that scalability solutions have endured, Visa submitted a new proposal to set up automatic recurring payments on top of the StarkNet network. The proposed system would leverage a new feature known as "account abstraction," a core tenant of the Ethereum roadmap yet to be implemented on mainnet. The giant payment company chose Starknet as the network already has this feature

For context, Ethereum has two types of smart contracts: Externally Owned Accounts (EOA) and Contract Accounts. EOAs have a private and public key pairing which helps them initiate transactions. On the other hand, Contract Accounts are smart contracts that rely on predefined codes to trigger particular transactions. In that view, accounts abstraction refers to the process of unifying both contracts under a single merged type that makes it easier for users to interact with blockchain-based applications. This mechanism would enable user accounts to behave like smart contracts, unlocking many new use cases. For instance, users could set up delegate accounts that process automatic periodic payments on users' behalf. Account abstraction can also unlock a broader range of innovative features that simplify the Web 3 experience for average users, including gasless transactions or changing the account signer at every particular interval to increase security.

Finally, Polygon launched the second testnet for its zkEVM rollup solution. The final experimental playground will present recursions, a component that empowers L2s to use one zk validity proof for validating a batch of other zk proofs - ultimately aiding in authorizing multiple transactions in one go. The new feature is expected to help Ethereum exponentially scale up on the back of parallel execution. In addition, Ethereum gas costs will also decrease as part of Polygon's roadmap.

Decentralized Finance

Ethereum Ecosystem: Uniswap disclosed a new collaboration with MoonPay to help users purchase crypto directly with their credit cards. Initially, users were expected to either (1) buy crypto on centralized exchanges and then deposit the funds to MetaMask to interact with DEXs, or (2) use one of the already supported payment methods, such as Transak or Wyre. The addition of MoonPay provides a versatile range of options that users from around the world can take advantage of to buy USDC, USDT, WBTC, WETH, and DAI on the Ethereum, Optimism, Arbitrum, and Polygon networks. In other news, CME Group and CF Benchmark launched reference rates for three of the sub-industry's blue chip protocols: Aave, Curve, and Syntethix. CME will rely on several exchanges, including Coinbase, Gemini, Kraken, and Bitstamp, to provide the asset pricing data for the three tokens. The latest offering from the world's largest derivatives exchange, combined with the previously-launched Uniswap reference rate, should help the exchange provide institutional coverage for protocols with the lion's share (40%) of the total value locked on the Ethereum network. The move is significant as it pushes for more substantial institutional involvement in the DeFi space. Finally, the Aave DAO has ratified a new proposal to integrate Chainlink's Proof-of-Reserves system into the money market protocol. Although the opaque nature that centralized exchanges like the defunct FTX operate in doesn't reflect Aave's environment, as the latter lives fully on-chain, there are still other security risks to which it could be exposed. Namely, Aave will leverage Chainlink's PoR to provide assurances around some of the protocol's bridged assets. In other words, the protocol would offer attestations around the collateralization of some of the Aave V2 and V3 markets' bridged assets on the Avalanche network to include tokens such as USDT, DAI, and USDC. Thus, this process would ensure assets have properly audited backing before allowing users to borrow against them, and remove the need to rely on a centralized authority for proving the reserve reporting.

Solana Ecosystem: Lido Finance, the biggest liquid staking platform by TVL, launched its V2 iteration on top of the Solana network. The second version of Lido on Solana improves the validators’ profitability. First, it waives the necessity of 100% commission nodes. Second, validators will now receive block rewards and staking rewards in SOL (instead of stSOL) to their accounts directly. Finally, it will set the maximum node commission to 5%. The aim of these changes is to contribute to a more secure staking experience for Lido users. In addition, the Solana ecosystem also witnessed the launch of Chainlink Price Feeds, marking the first instance of Chainlink bringing its oracle services to a non-EVM blockchain.

NFTs and Metaverse

More consolidation towards Ethereum and its Layer 2s: Two of the most popular NFT projects on Solana, DeGods and Y00ts, announced that they would be leaving the blockchain and migrating to Ethereum and Polygon. DeGods will be moving to Ethereum, Y00ts to Polygon. Interestingly, Y00ts’ volume would make up 41.4% of Polygon's NFT Volume. We believe we could see a continuation of this trend and more projects moving to Ethereum and its Layer 2s, as the success of the merge dismisses the competitive advantage of competing blockchains. Also, Polygon has been on a partnership winning streak lately after successfully attracting big companies like Nike, Starbucks, Walt Disney, Instagram, and Reddit.

Fidelity to enter the Metaverse: Fidelity Investments has filed three trademark applications in the United States for a host of Web 3 products and services, including an NFT marketplace and trading services in the metaverse. Fidelity is the latest big brand to join the metaverse bandwagon, which has seen names from the banking industry, like J.P. Morgan, to the fashion industry, like Adidas and Gucci, partnering with metaverse protocols to offer digital user experiences.

Yuga Labs hires Activision Blizzard President as CEO:
On December 19, the parent company behind the Bored Ape Yacht Club collection announced the hiring of Daniel Alegre, former Activision Blizzard President, as CEO. Alegre will help advance Yuga's ambitious metaverse, "Otherside." Activision Blizzard, one of the world's largest gaming companies with renowned titles such as Call of Duty, World of Warcraft, and Candy Crush, generated $8.8 billion in revenue last year.

Next Week's Calendar

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