Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 187

Newsletter - Issue 187

This Week in Crypto

Positive signals continue in crypto’s second all-positive week with the largest short squeeze in months. Bitcoin increased by 21% week-over-week and broke the 200-day moving average (SMA) threshold for the first time in 381 days. In the last bear market it took Bitcoin 386 days to trade above its 200-day SMA. Ethereum soared by 18% over the past week. Outliers of last week’s rally were Solana, Optimism, and Curve. Solana, which has increased by a whopping 46%, seems to be still enjoying the hype created by the meme token called BONK. Optimism stood out within major scalability solutions, soaring by 41%, which can be attributed to a surge in transaction volume that could have been made on the back of announcing the Shanghai testnet to be slated to take place next month. Finally, within DeFi, Curve came in first place with a weekly performance of 33%.

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

Source: 21shares, Coingecko, DeFi Llama. Data as of January 16 close.

Key takeaways:

  • Bitcoin increased by 21% week-over-week and broke the 200-day moving average (SMA) threshold for the first time in 381 days.

  • SEC launches investigations and lawsuits on Gemini and Genesis.

  • Polygon proposes a network incremental improvement to address fee spikes and mitigate chain-reorganization.

  • BONK, a “meme coin” creates hype on Solana-based NFT marketplace Magic Eden.

Spot and Derivatives Markets

Figure 2: Total Crypto Liquidations

Source: Coinglass.com

Over the past week, we have seen the largest short squeeze in months of over $1 billion liquidated on Binance, OKX, and Bybit. This dynamic is an indication that there were more funds betting against Bitcoin and the recent positive rally disappointed their positions. The recent price action is simply a regression to the mean. We are back to levels where we were post the LUNA debacle and pre-FTX. In other words, as an industry we are better off without FTX and Alameda. However, it is important to note that this rally may not be long-lasting as we may face mispriced headwinds.

On-chain Indicators

Figure 3: Ethereum’s Network Value to Transactions Signal

Source: Glassnode

The chart above measures the market sentiment of Ethereum, dividing its market cap by the 90-day moving average of daily transaction volume. NVTS signal closed at almost 87 on Monday, increasing by 14% week-over-week. This increase means that Ethereum’s market cap is outpacing its transaction volume, which aligns with the price movements of scalability solutions.

Macro and Regulations

As expected, inflation cooled down in the US in December, increasing by 6.5% year over year. However, inflation has surged in other countries around the world, like Egypt, which is struggling with a devaluating Egyptian pound and a whopping 22% annual inflation rate in December. As a result, the World Bank told member states to brace themselves for the potentially slowest global economic growth in three decades.

FTX Developments: The FTX bankruptcy hearing on Wednesday revealed that the exchange’s former CEO Sam Bankman-Fried had given instructions to FTX cofounder Gary Wang (who pleaded guilty last month) to create a backdoor for Alameda Research, FTX’s trading sister company, to nonconsensually borrow from the exchange’s customers via a credit line worth $65B. So far, the troubled crypto exchange recovered $5B in liquid cryptoassets, that is aside from the $425M held by the Bahamas authorities. On the other hand, BlockFi’s bankruptcy files demonstrated how a $400M loan from FTX wiped out $800M in equity of 13 of the crypto lender’s executives. Nevertheless, there are over a hundred entities interested in buying four businesses owned by FTX, the European and Japanese arms of the crypto exchange, in addition to Ledger X and Embed, for which bidding will start on Wednesday, January 18, and approval hearings will end by March 27.

Law Enforcement and Investigations: The exploiter, who had scooped $110M from the Solana-based exchange Mango Market back in October, is currently under investigation by two of the strongest financial authorities in the US, the Securities and Exchanges Commission (SEC) and the Commodity Futures Trading Commission (CFTC). To recap, Solana’s Mango Market experienced a classic act of market manipulation that dragged the Layer 1’s TVL down by over 20%. Avraham Eisenberg later revealed himself, claiming that he was part of a group of investors that benefited from the “highly profitable trading strategy” and that their actions were legal open market actions. Eisenberg managed to inflate the native MNGO token relative to stablecoin USDC by buying MNGO in bulk. Its price spiked by 1,300% in October as a result. With the inflated MNGO tokens, Eisenberg used them as collateral to take out more USDC loans. On December 28, Eisenberg was arrested for market manipulation and fraud charges made by the Department of Justice. If anything, this case is a reminder that no one can outsmart the law, not even in crypto, and especially for a practice as old as time like market manipulation. Other investigations that were announced last week included:

  • Ooki DAO: Last year, the CFTC filed a lawsuit against Ooki DAO for running an unregistered crypto futures trading facility and failing to conduct proper know-your-customer checks. The deadline for response was January 10, 2023 – which led the regulator to call for a default ruling in the absence of the defendant(s).
  • Zipmex: Given the investigation that started last year by the SEC of Thailand, Zipmex had until January 12 to prove the exchange wasn’t running as a digital asset fund manager without permission. The products in question were ZipUp and ZipUp+ which allowed customers to earn returns on their tokens. It is worth noting that Zipmex was also in the process of a $100M venture capital buyout.
  • Core Scientific: The bankrupt bitcoin mining company is under investigation for securities fraud by a law firm representing the company’s investors, alleging that Core Scientific has sold both its mining and hosting businesses in a series of questionable transactions before dumping onto the market via SPAC.
  • Genesis and Gemini: On January 12, the SEC sued troubled crypto money markets Genesis and Gemini for selling unregistered securities as part of Gemini’s lending program “Earn.” Two days before the lawsuit, Gemini’s cofounder took to Twitter to call out Genesis, and its mother company Digital Currency Group for allegedly defrauding Gemini and 340K Earn users.
  • Binance.US: The US arm of the world’s largest crypto exchange received initial court approval of its acquisition of Voyager, to the dismay of the SEC. After the final court hearing scheduled in March, Binance.US will buy Voyager’s assets, and users will be able to retrieve 51% of their investments.

Regulation and adoption: The former president of Japanese crypto bank project Komainu was named CEO of Dubai’s crypto regulator, the Virtual Assets Regulatory Authority (VARA), responsible for granting licenses to crypto operators and regulating the sector in the Emirate. A new landmark digital securities bill was passed in El Salvador to make way for Bitcoin bonds. In the UK, the House of Lords argued for greater regulation of cryptoassets than the Financial Services and Markets Bill. Some other signs of adoption that we saw last week:

  • Europe: Abn Amro became the first EU bank to launch a digital bond on a public blockchain using Fireblocks on the Stellar blockchain.
  • UAE: Billion-dollar Web3 fund launched in the UAE by former BlackRock executive.
  • Twitter: the social media network is developing a new mechanism allowing users to reward each other with coins via Stripe.
  • US: Ondo Finance launched tokenized US treasuries, which we will delve deeper into in the DeFi section.

Crypto Infrastructure

Layer 1:

  • Avalanche: Amazon inked a new partnership with Ava Labs to help streamline node deployment. The collaboration will help support Avalanche’s infrastructure and dApp ecosystem and introduce one-click node deployment for individuals aspiring to run as a validator. Further, Ava labs is expected to bring in subnet deployment as a managed service to the AWS stack allowing institutions and governments to readily launch their customizable chain anchored to the broader secured network. Although this is an excellent opportunity for Avalanche to grow its foundation by allowing the rapid onboarding of new validators, the crypto industry needs to start prioritizing building out truly decentralized infrastructure that can withstand downtime, outages, and potential overreaching regulatory crackdowns.

  • Ethereum: ETH developers released another feature clearing the way for the materialization of the Shanghai upgrade. The update introduced Devnet 2; an alternative testnet curated for developers to help them experiment with the network and prepare for ETH withdrawals. That said, some of the anticipated network upgrades will now be postponed in favor of ensuring that users will be able to withdraw their staked ETH. Namely, proto-danksharding (EIP 4844) will be pushed back until later in the year, per the last developers' call on Thursday, to prepare for the Shanghai upgrade in late March. EIP 4844 is a procedure that entails allocating more space for data, rather than mere transactions. This layout differs from sharding, where the objective is to save up more space for transactions as opposed to references of data that L2s process. The newly proposed transaction type will help rollups reduce gas costs in the interim period until danksharding is fully implemented.

  • In other news, Metamask revealed its new in-house feature allowing users to stake their ETH directly. Lido Finance and Rocket Pool, the two largest liquid staking providers by market share, will build the railway for this process. Users depositing their stake will receive their stETH from Lido or rETH from Rocket Pool, rebalancing synthetic tokens which compound the initial deposit with the daily accrued staking rewards and reflects the generated yield directly to the wallet. This is a key event as it disentangles the complexity of staking and allows for the wider participation of solo stakers via utilizing some of the solutions offered above, such as Lido, which doesn’t require a minimum staking amount unlike the 32 ETH requirement. The inclusion of Rocket Pool is also significant as it is the most decentralized amongst the universe of liquid staking providers with 1,971 nodes.

Layer 2:

  • ConsenSys: This week, ConsenSys revealed that r its zkEVM rollup’s testnet is now open for select users. Individuals who opted in will start receiving emails to begin the onboarding process, which will initiate by bridging funds onto the testnet network. The move comes only a month after the original announcement.

  • Polygon: Similarly, Polygon announced that the first public testnet of its newly inaugurated zkEVM solution is now deprecated. Polygon released its second testnet last week after it carried out a security audit on the first one to investigate recursion combined with the ability to properly generate valid state transitions. Beyond zkEVM, Polygon is simultaneously working on improving its POS sidechain. The network is scheduled to activate a hard fork later today that will address the gas spikes that occur during times of high demand, in addition to the block reorganization issue.

  • Arbitrum and Optimism: Finally, Arbitrum and Optimism are now outpacing Ethereum’s daily transfers. Both L2s had undergone a slew of network improvements, Optimism Bedrock and Arbitrum Nitro, that improved their capability to process faster transactions with cheaper fees. To that end, the dual scalable networks are now processing more transactions combined than ETH mainnet.

Decentralized Finance

Figure 4: Performance of Top 10 DeFi Protocols

Source: Coingecko. Data as of January 16 close.

Ethereum Ecosystem: Ondo Finance launched a tokenized fund to facilitate exposure to US debt securities., The ETH-based DeFi platform allows stablecoin swaps into three different tranches of US treasuries and bonds:

  1. Ondo US Short-Term Government Bond Fund (OUSG), earning 4.64% on the back of investing into Blackrock’s US Treasuries ETF (SHV).
  2. Ondo Short-Term Investment Grade Bond Fund (OSTB), offering a slightly higher annual return (5.45%) due to risker allocation towards short term investment-grade corporate bonds.
  3. Ondo High Yield Corporate Bond Fund (OHYG), returning a more attractive dividend (8.02% APY) by investing into Blackrock’s high yield bond - relatively the riskiest out of the 3 offerings.

This is a development worth monitoring as blue-chip protocols like Aave, Compound, and Maker offer 1-2% returns on stablecoin deposits, which is negligible compared to the risk-free rate found on the back of last year’s increasing interest rates determined by the Federal Reserve. Thus, we have yet to see how the injection of new collateral backed by real-world assets will spur outflows from crypto-native strategies on lending markets to RWA-backed strategies. This may be the case if US treasuries and corporate bonds remain attractive going forward.

In similar news, Societe Generale withdrew $7M for the first time from MakerDAO. The process marks the first time the digital-asset-centric subsidiary (SG-Forge) uses its real-world asset vault that is backed by tokenized securities in the form of home loans. The French giant launched its vault in August 2022 after the MakerDAO community approved the governance vote to add the bank to its ecosystem and supply them with a $30M debt ceiling. Along the same line, Block Tower looks to be taking a cue from Societe Generale as the institutional credit fund began borrowing up funds from MakerDAO. As a refresher, Block Tower and MakerDAO collaborated last December to bring on $220M worth of real-world assets on-chain through Centrifuge - a credit financing protocol enabling the tokenization of real-world fixed-income products. The project uses the Tinlake platform to tokenize debt securities and bring them on-chain. In the case of Block Tower, the credit fund leveraged Tinlake to tokenize structured credit products, including consumer ABS, auto ABS, and CLO, into tokens representing a claim of ownership. Although the first two on-chain financing operations were conducted during the last week of December, the credit fund has only begun to leverage the RWA-backed capital situated in the BlockTower series 4 pool on MakerDAO which is integrated with Centrifuge.

NFTs and Metaverse

Bonk Inu on Magic Eden creates hype. Back in December, a group of 22 developers on Solana decided to create a token that would steer bad traction away from the Layer 1 that got deeply affected by the collapse of FTX. The BONK token’s primary utility is to activate Solana and lift her up out of FTX’s dark aftermath, which it did very well. In this effect, BONK tokens are currently used to mint NFTs on Solana’s bluechip NFT marketplace Magic Eden, but all BONK will be burned permanently. There is no ambition to launch a blockchain for BONK or create any utility for the token other than using it in Solana-based casinos or buying the Solana Saga phone.

Lens Protocol: Building a social media protocol to compete with the likes of Facebook and Twitter, Lens has opened the door for token-gated content that allows creators to monetize and make their content exclusive to token holders. According to data collected by DappRadar, Lens has 1.6K unique active wallets making a total of 44.6K transactions at the time of writing.

Delegate Cash: Another innovation that took Crypto Twitter by storm is delegate.cash, a decentralized registry that, as the name suggests, delegates cold wallets to a proxy so that the frequency of exposing valuable cold wallets to websites is reduced. The solution surged in traction and popularity when Bored Ape Yacht Club announced it was onboarding the “warm wallet” solution.

Apple: Last but not least, Apple is launching a mixed-reality headset, and it plans to drop more details this year.

Next Week’s Calendar

Source: 21shares, Forex Factory, CoinMarketCal

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