Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 190

Newsletter - Issue 190

This Week in Crypto

Markets crumbled in its first week after US regulators cracked down on Paxos, ordering it to halt minting BUSD. Bitcoin and Ethereum decreased by almost 6% and 10%, respectively, over the past week. Headwinds have affected Avalanche and Optimism the most, decreasing by 15.6% and 27%, respectively. What may be contributing to Optimism’s drop is the surprise token airdrop launched by the network on February 9, sending 11.7 million governance tokens to more than 300,000 wallets to distribute 19% of its initial governance token supply, as Ethereum’s scalability solution targets wider adoption to compete with its rival, Arbitrum. Maker DAO’s native token MKR was the biggest winner in last week’s rally, declining by 2.7%. The DAO’s resistance could be attributed to its blue-chip lending protocol, Spark Protocol, which it announced last week to compete with Aave. The DAO also integrated Chainlink for its DAI stablecoin, which is expected to accrue flows with the potential growth of investors' appetite for decentralized stablecoins in light of the recent regulatory crackdown.

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

Source: CoinGecko, DefiLlama, Close Data as of February 13, 2023

Key takeaways:

  • Paxos halts BUSD minting in compliance with the Securities and Exchanges Commission in the latter’s latest series of crackdowns on unregistered securities.
  • The Zhejiang testnet successfully simulated staked ETH withdrawals, and developers set February 28 as the target date for Sepolia.
  • Aave’s decentralized stablecoin, GHO, is live on Ethereum’s Goerli testnet, while Tether’s USDT gains market share over USDC and BUSD.
  • Bitcoin’s Taproot upgrade soars in adoption and opens the door for Bitcoin-native NFTs.

Spot and Derivatives Markets

Figure 2: Total Bitcoin Liquidations

Source: Coinglass

Over the past week, we have seen the largest long squeeze in months of over $530M liquidated on Binance, OKX, and Bybit. This dynamic is an indication that there were more funds betting on Bitcoin, and the recent negative rally disappointed their positions on the back of the series of regulatory crackdowns on crypto companies in the US.

On-chain Indicators

Figure 3: Bitcoin Taproot Adoption

Source: Glassnode

Figure 3 shows that Taproot adoption surpassed 5% for the first time on February 1 and reached 17.68% on February 9. The sudden rise in Taproot adoption is attributed to the launch of a project called Ordinals, which enables Bitcoin-native NFTs. Created by Casey Rodarmor, Ordinals embed image-related data into the Bitcoin blockchain using the input field in Taproot transactions. The Taproot upgrade, activated in November 2021, makes it cheaper to store arbitrary data and allows users to store as much data as they like in a single transaction, as long as they pay for it and the total block size remains under 4MB. Before Taproot, one had to use multiple transactions or inputs to store large amounts of data.

The introduction of NFTs on Bitcoin can expand its use cases beyond a store of value asset and, perhaps more importantly, drive more demand for block space. The latter would increase fees, which would be a net positive for the long-term security of the network, especially as the emission of new BTC will end in 2140.

Macro and Regulations

Tension is increasing between China and the US as the latter shot down a surveillance balloon linked to the Chinese government flying over Alaska. China is also accusing the US of illegally flying surveillance balloons over its airspace, which the White House denied. In crypto, tension is increasing just the same.

Law Enforcement: In a Wells notice sent to Paxos, the Securities and Exchanges Commission (SEC) revealed its plans to sue the blockchain infrastructure company for listing Binance USD (BUSD), the third-largest stablecoin by market cap, claiming it’s an unregistered security. Following an order issued by the New York Department of Financial Services, Paxos announced it would halt issuing BUSD to comply with US regulations. Following the latter’s announcement, Binance’s CEO Changpeng Zao announced that Binance is exploring other jurisdictions and non-USD-pegged stablecoins to ringfence its users from the second-order effects of the regulatory crackdown.

This was an anticipated escalation of the US government’s feud with Binance, primarily regarding money laundering concerns. Last month, Binance faced scrutiny from the Department of Justice for being the final destination of the money laundering of $700M. The repercussions of this development go beyond taking a toll on the stablecoin market and make crypto companies think twice before registering in the US.

  • Galaxy Bahamas received approval from the Securities Commission of The Bahamas in December for registration as a digital asset business under the Digital Assets and Registered Exchanges Act of 2020.
  • On the other hand, as part of a settlement with the SEC, crypto lender Nexo will be stopping their Earn Interest product for all clients based in the US on April 1, and all fixed terms will then be unlocked.

In November 2022, Polkadot announced it had found a solution for the crypto industry to mitigate regulatory risk when it comes to unregistered securities. The solution – coined “token morphism” – is the process Polkadot achieved to transform a given protocol’s native token from security to software. In light of the SEC’s latest series of crackdowns, Polkadot wants to conduct a research study that would provide guidance on token morphism. The project will cost about $90K, which the company is looking to finance via its treasury.

Between tighter regulations and celebrated adoption:

  • EU: Banks would have to place the maximum possible risk weight on cryptoassets under a draft law published by the European Parliament on February 9.
  • France: Registration conditions for French crypto firms will be tightened as of January 2024. New crypto companies will have to meet extra rules on internal controls, cybersecurity, and conflicts of interest, according to amendments published on February 10.
  • El Salvador: In a report published on February 10, the IMF admitted that the risks the agency warned the government about when it announced Bitcoin as a legal tender didn’t materialize due to limited use. Yet, the agency reiterated the risks that may come with Bitcoin bonds that the country paved the way for last month.
  • Brazil: Banko do Brasil, the country’s oldest bank, announced that Brazilian taxpayers can now pay their dues with crypto in a joint initiative with Bitfy, Latin America’s largest non-custodial crypto wallet.

Crypto Infrastructure

Layer 1: Ethereum: On February 7, the Zhejiang testnet successfully simulated staked ETH withdrawals. Zhejiang is the first of three testnets in the final pre-launch sequence before the Shanghai/Capella upgrade is activated. On February 10, Ethereum core developers agreed on February 28 as the target date for launching the Sepolia testnet. After Seoplia, Goerli – the most critical public Ethereum testnet – will be the final step before staked ETH withdrawals are enabled on the Ethereum mainnet. Although the Shanghai upgrade contains several features, its most anticipated one is allowing withdrawals. Full withdrawals will be available for "exited" validators, whereas partial withdrawals will be available for active validator balances above 32 ETH. As of today, core developers expect Shanghai to occur in mid-March.

Layer 2:

  • Arbitrum: On February 7, Offchain Labs – core developers of Arbitrum – announced a programming environment upgrade dubbed Stylus that will allow developers to deploy smart contracts written in popular programming languages like Rust, C, and C++, that run in a single execution environment alongside EVM contracts. Stylus is also expected to enable faster dApps and lead to a decrease in transaction fees. The initiative aims to facilitate the transition from Web 2 to Web 3, attracting a broader set of developers and expanding use cases in the Arbitrum ecosystem. Offchain Labs co-founder Steven Goldfeder emphasized that although Arbitrum is fully interoperable with the Ethereum Virtual Machine, "EVM equivalence is the floor (critically important), but not the ceiling (there's much more that we can do)." Stylus' introduction is a step toward the ceiling.
  • StarkNet: On February 5, StarkWare, the company behind the StarkNet zero-knowledge rollup, announced they would open-source the StarkNet Prover under the Apache 2.0 license. In the words of Eli Ben-Sasson, president and co-founder of StarkWare, the Prover is "the magic wand of STARK technology that generates the proofs that allow unimaginable scaling." In other words, the Prover allows StarkNet to "roll up" transactions and compress them into a small cryptographic proof secured by the Ethereum blockchain. The move will be part of the final phase of StarkNet's path to decentralization, allowing the community to maintain and develop the network independently. It will also promote more collaboration and audits of the code, improving its quality in the long term.

In addition, on February 6, StarkWare announced a partnership with Chainlink Labs. Chainlink price feeds are now available on StarkNet testnet and eventually on mainnet. In turn, StarkNet will join the Chainlink SCALE (Sustainable Chainlink Access for Layer 1 and 2 Enablement) program. As part of the program, StarkNet tokens will cover certain operating costs of the Chainlink price feeds that power the network’s emerging DeFi ecosystem.

Layer 0:

  • The Cosmos Hub: A grant program dubbed "ATOM Accelerator DAO" (Proposal 95) passed through an on-chain vote on February 10. As part of the program, the Grant Committee will receive 588,000 ATOM or ~$7.7 million from the Cosmos Hub to encourage bright new developers to build on the Hub and re-establish its importance in the broader Cosmos ecosystem. According to Youssef Amarani, author of the proposal who will take on the role of program manager in the DAO, grants will focus on funding small to medium-sized projects that can improve the Cosmos Hub's core technology, products, and ecosystem.

Decentralized Finance

Figure 4: Top 10 DeFi Assets Weekly Performance

Source: CoinGecko, Close Data From Feb 7 to Feb 13, 2023


  • GHO is live on testnet: on February 9, Aave’s native stablecoin GHO went live on Ethereum’s Goerli testnet. GHO will be fully decentralized, overcollateralized, and pegged 1:1 with the US dollar. Regarding collateral, GHO will resemble Maker's DAI in that it will be backed by a basket of cryptoassets chosen by users, who will mint GHO tokens against their supplied crypto collateral. The process will feel familiar to existing Aave users as it's almost identical to the current borrowing mechanics on the platform. When a user mints GHO, the collateral remains locked and accrues interest until the borrower repays the position. Once the borrower repays the principal with the accrued interest, GHO is burned (removed from circulation), and the collateral is returned. One of the most underappreciated aspects of this process is that 100% of the interest fees paid are sent to the Aave Treasury, meaning that GHO will boost Aave's profits and contribute to the long-term sustainability of the DAO. In contrast, Aave only keeps a small portion of the interest rates on existing loans, while liquidity providers (LPs) take the lion's share.

Stablecoins are arguably the most significant innovation that has come out of DeFi thus far. Ironically, the three top stablecoins by market cap (USDT, USDC, and BUSD) are all centralized. Combined, they represent more than 90% of the stablecoin market, which stands at ~$137 billion. In this regard, GHO is an exciting development not only for Aave but the broader DeFi ecosystem. Beyond boosting the usage of Aave, it will be interesting to see if GHO can gain market share on the centralized incumbents, especially given the stance that US regulators have taken this week. However, given the LUNA-UST debacle from last year, decentralized stablecoins may have to rebuild their vertical brand and continue to be battle-tested in the coming years. Thus far, DAI is the only decentralized stablecoin that has endured several cycles, although it has a tiny market share compared to centralized players.

  • USDT gains market share: Figure 5 below shows the year-to-date percentage change in the circulating supply of USDT, USDC, and BUSD. Tether's USDT has increased by 3.20% to $68.39 billion, while BUSD has decreased by 3.30% to $16.15 billion and USDC by 7.27% to $41.29 billion. Unintuitively, what previously made USDC the most secure stablecoin bet among many investors has now added a new risk vertical. By choosing to comply with US regulations, the market is seeing an increased regulatory risk with Circle's USDC and Paxos/Binance's BUSD due to the actions taken by US regulators this week. On the other hand, Tether is owned by iFinex, a Hong Kong-registered company that also owns the crypto exchange BitFinex. On February 9, Tether released its latest attestation report completed by BDO. The document revealed that the USDT issuer registered a net profit of ~$700 million in Q4 2022.

Figure 5: YTD % Change in Circulating Supply of Top Stablecoins (USDT, USDC, BUSD)

Source: Glassnode, based on daily data from 31-Dec-2022 to 12-Feb-2023

Liquid Staking Lido V2: the technical contributors of Lido presented the proposal for Lido V2, the most significant upgrade in the protocol's history and a massive step toward its decentralization roadmap. The proposal introduces two important changes: Withdrawals: After the Shanghai upgrade, stETH holders can withdraw staked ETH and its associated rewards from Lido on a 1:1 basis. The proposed withdrawal mechanism will have two modes – "Turbo mode" as a default assuming the Ethereum network functions as intended, and "Bunker mode" for "catastrophic scenarios." The Staking Router: Currently, the Lido DAO selects node operators to act as validators on Ethereum to benefit the protocol by adding their addresses to the "NodeOperatorsRegistry" contract. The Staking Router transforms the registry into a "plug and play" modular architecture that allows anyone (from home stakers to DAOs) to create an independent Lido staking module. While the Staking Router is responsible for allocating resources across all modules, each module will manage its internal operator registry, store keys, and staking rewards allocation between participants. Stakers will benefit from a diverse set of validators as more node operators participate in staking with Lido, increasing the resiliency and decentralization of the Ethereum blockchain. Finally, the Staking Router will also allow external developers to contribute to the Lido protocol.

Regarding the next steps for Lido V2, seven independent audit service providers will conduct a thorough security assessment of all the upgrade-related code during February. At the end of this month, the DAO will undergo a signal snapshot vote on the upgrade.

NFTs and Metaverse

Crypto’s blinding absence at the Super Bowl: It was not a surprise that crypto ads were nowhere to be found at the Super Bowl in the US last weekend; however, Web 3 still made an appearance. An NFT project by Web3 gaming company Limit Break that goes by DigiDaigaku launched a $6.5M ad promoting its Dragon Eggs collection. Users could just scan the QR code presented in the ad, through which they could mint the digital collectible for free. Dragon Eggs soared on secondary markets after the Super Bowl ad, although they were free to mint.

Figure 6: Number of Ordinals NFT mints to Bitcoin by Type

Source: @ilemi on Dune Analytics

Continued innovation despite headwinds: As mentioned earlier in this report, Bitcoin’s use case has broadened to accommodate NFTs, thanks to Ordinals that allowed users to mint over 76K NFTs over the past week, as shown in Figure 6, peaking on February 9 with over 20K inscriptions. Bitcoin hit 44M non-zero addresses thanks to the Ordinals NFT project. NFT marketplace Magic Eden announced it is laying off 22 of its staff as part of a company-wide restructuring that would allow them to reach their goals this year, according to the CEO and co-founder Jack Lu. Moreover, the cross-chain NFT marketplace partnered with the Web 3 payments solution MoonPay to introduce credit card payments that would allow users to purchase NFTs across chains using a credit or debit card, Apple Pay, and Google Pay. MoonPay has also partnered with LooksRare in an industry-wide effort to leap towards a cross-chain future to facilitate the onboarding of users into mass adoption.

Next Week’s Calendar

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