Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 194

Newsletter - Issue 194

This Week in Crypto

The banking default risk in the United States started spreading to European banks, taking down Credit Suisse with a takeover by UBS. However, for the second consecutive week, the crypto markets performed in the opposite direction of the macro headwinds. Bitcoin was the biggest winner of last week’s rally, increasing by 15.5%, while Ethereum increased by 3.9%. The biggest losers were Polygon (-6.72%), Maker (-26%), and Lido (-13.86%), which announced it would launch withdrawals of staked ETH by mid-May, two weeks after Ethereum’s Shanghai upgrade.

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

Source: Coingecko, DeFi Llama. Close data as of Mar 20, 2023.

Key takeaways:

  • Crypto’s market cap increases by 8.5%, despite the looming default crisis in traditional finance.
  • Arbitrum unveils token, Cosmos launches Replicated Security.
  • Lido Finance anticipates mainnet withdrawals by mid-May, National Australian Bank conducts its first Cross Border transaction using its own stablecoin on Ethereum
  • Saudi Arabian NFT marketplace “Nuqtah” raises seed funding from Animoca Brands and Polygon.

Spot and Derivatives Markets

Figure 2: Bitcoin Options

Source: Coinglass.com

Demand for Bitcoin options contracts has increased to levels we haven’t seen since 2021, inching close to $12B on March 19 alone, with Deribit enjoying the lion's share of ~$10B. This could mean a trend of allocating investments in cryptoassets as a hedge against inflation and the default contagion risk going around in the banking sector.

On-chain Indicators

Figure 3: Ethereum’s Network Value to Transactions Ratio

Source: Glassnode

Analogous to the price to earnings for stocks, the Network Value to Transactions (NVT) Ratio can help track the realized valuation levels of an asset. As shown in Figure 3, an NVT ratio as high as 300 indicates that Ethereum may be overvalued since the network value, or market cap, is higher than the transaction volume. Whereas downtrends like the one seen in 2017 indicate that transactions are outgrowing the network value and investors may be buying Ethereum at a discount. Although the chart above indicates that the market cap outweighs the volume of transactions on the network, historically speaking the second-largest cryptoasset by market cap is still in a healthy valuation range.

Macro and Regulations

Traditional banking default crisis accentuates polarization between regulators: To weather the contagion risk of the collapse of Sillicon Valley Bank, the Federal Reserve lent out $300B worth of short-dated treasuries to troubled banks over the past week. The contagion extended to Europe, where Credit Suisse experienced a liquidity crunch predictable with credit default swaps reaching record levels. Brokered by the Swiss government, UBS agreed to buy its rival for $3.23B in stocks, assume $5.4B in losses, and receive an extra $108B in liquidity assistance as part of the emergency merger deal by the SNB. Another feared target in the European banking scene would be Deutsche Bank, down by 12.53% over the past week.

In the heat of the burgeoning banking default crisis, the economic spokesperson for the right-wing ECR political party in the European Parliament, who is also Belgium’s former minister of finance, called on banning crypto. Although highly unlikely, such claims mean that the industry still has a lot to do to demystify cryptoassets and the underlying technology that ties them all together. On the other side of the globe, Maria Vullo, a former superintendent at the New York State Department of Financial Services (NYDFS), confirmed that Signature Bank did not shut down because of its crypto-holding clients. This polarization and increased anxiety between policymakers emphasizes that our research is more important now than ever.  

Regulations in Europe: The continent’s most anticipated crypto legislation, Markets in Crypto Assets, will hold its last negotiations on April 18. The Dutch Authority for Financial Markets (AFM) vowed to the crypto industry that it would not go easy on enforcement, even if it meant that companies will offshore in return. Last week, the European Parliament passed two controversial laws regulating crypto.

  1. Data Act is intended to empower consumers and companies by giving them a say on what can be done with the data generated by smart contracts. The bill mandates that a kill switch be added to smart contracts, however, it is unclear who hits it. Concerns were raised about immutability and how the kill switch defeats the non-altering nature of smart contracts.
  2. Digital Wallets, the bill includes zero knowledge (zk) proofs to protect users’ privacy by verifying a position without giving up unnecessary data. Aside from that, the bill is intended to grant users access to public services as well as wallets. Concerns were raised about the removal of provisions for electronic ledgers.

Adoption: Progressive step towards adoption, crypto stakeholders joined the CFTC Tech Advisory Committee, which is meant to help identify and understand the impacts and implications of technological innovation in financial services and markets.

Crypto Infrastructure

Arbitrum Foundation is set to launch its governance token, ARB, on March 23rd, which will be utilized for steering the development of the Arbitrum One and Nova networks. Like Optimism, gas fees for settling transactions on the mainnet layer will continue to be paid in ETH. The upgrade will also introduce Orbit, a platform enabling developers to build Arbitrum-based rollups on top of the network. This move resembles Optimism’s vision of becoming a super chain via their decision to launch OpStack, the platform on which Coinbase recently publicized it’ll build its upcoming ETH scalability solution called Base. That said, Arbitrum leads the scalability race, possessing over 50% of the L2 market share, owing to the fact that it had developed its fraud-proof system at a time when its biggest competitor is still lagging behind. It is worth noting that the combined daily activity of L2 has been consistently surpassing Ethereum, as evidenced below.  

Figure 4: ETH VS L2 Daily Transactions

Source: L2Beat

After rejecting the ATOM 2.0 vision in late 2022, Cosmos community rallied last week to give the green light to one of the most eagerly anticipated features, Replicated Security (RS). Originally called Interchain Security, RS enables the central Cosmos Hub to provide security assurances to all consumer chains hoping to become part of the broader Cosmos ecosystem. Traditionally, projects were expected to handle security by bootstrapping their validator set. After the update, newer projects can enjoy higher security guarantees as the main Cosmos validator set will validate other Cosmos-based networks This upgrade is crucial for Cosmos as it ensures equal footing with its biggest competitor, Polkadot, who pioneered the shared security model.

Filecoin has introduced a new feature called Filecoin Virtual Machine (FVM), which is a runtime environment allowing the creation of smart contracts on top of its storage network, similar to Ethereum's EVM. With FVM, developers can build more complex applications that serve the data economy, transform the network into a smart-contract platform and offer vital features like perpetual storage, and the curation of high-quality datasets via the concept of DataDAOs. This feature brings Filecoin in line with Arweave, which dominates the storage industry with its native perpetual storage capability and support for programmability. Check out our latest SoC for a more in depth breakdown of the storage vertical.

Decentralized Finance

Figure 5: Top 10 DeFi Assets Weekly Performance

Source: Coingecko. Close data as of March 20, 2023.

Lido Finance, the largest staking provider by AUM, expects mainnet withdrawals on its platform to go live by mid-May. Although Ethereum is scheduled to implement withdrawals on the mainnet by the 12th of April per the last developers' call, Lido only wants to rush the deployment of withdrawals once it has fully audited and battle-tested the new array of smart contracts that will activate the function.        

Figure 6:

Source: Dune

Uniswap has officially expanded to the BNB network. The largest decentralized exchange by market share is deployed on the ETH alternative network via integration with the wormhole bridge protocol. Uniswap’s improved capital efficiency makes it a key contributor to improving liquidity conditions across DeFi on any network it launches. Thus, we expect BNB to experience much growth over the coming months. The deployment should help Uniswap capture a greater share of the market, which Pancake swap dominates at 48%, generating more revenue for the blue-chip protocol.

National Australia Bank completed its first cross-border transaction. The bank leveraged the Ethereum blockchain to build smart contracts for seven different global currencies as part of its pilot to test a multicurrency cross-border settlement execution strategy. The experiment's success, traced on Etherscan, highlighted the benefits of tokenization when assessing the reduced costs for processing international transactions and providing full transparency and auditability. NAB's move echoes that of the Monetary Authority of Singapore, where they piloted a foreign exchange transaction swapping between tokenized deposits of Japanese Yen and Singaporean dollar.  

Spillover of USDC Depeg: MakerDAO is implementing circuit breakers for its peg-stability-module (PSM) to deactivate troubled stablecoins from being used as collateral during turbulent times. Additionally, the governance vote that ended on March 16th approved Maker to allocate $750 million towards US Treasury bonds to diversify DAI reserves and earn an expected ~4.5% in annualized yield. This move is essential for Maker's growth as more than half of its earnings are now generated from RWA investments. Allocating into US treasuries is a safer option as government bonds are backed by the full faith and credit of the US government, providing greater security than dealing with potentially unstable banks. This should position crypto-based treasuries in a safer position during macro headwinds triggered by the current US banking crisis. We expect this trend to continue as high-interest rates are incentivizing more projects to take advantage of RWA investments.

Figure 7: MakerDAO’s Revenue by category  

Source: SebVentures on Dune Analytics

Metaverse and NFTs

Figure 8: NFT Activities on Ethereum

Source: 21shares on Dune Analytics

NFT trading dipped due to SVB collapse, but there’s a silver lining: As uncertainty loomed around the safety of USDC, NFT traders went silent. March 11 saw the least number (11,440) of active traders since November 2021. According to data gathered by Dappradar, the sales count dropped by 16% while trading volume dropped by 51%, and recovered shortly after. The flight to Bitcoin seen over the past week, coupled with NFT inscriptions on the network, have all been contributing to Bitcoin’s resistance. On March 16, DeGods announced there would be 500 NFTs minted with Bitcoin. According to the Ordinals Theory, a count of 500  one-hundred-millionth of a Bitcoin will carry ​​individual identities allowing them to be tracked, transferred, and imbued with meaning.

Investor appetite grows for metaverse and NFTs in the Middle East:  Saudi Arabia’s first-ever licensed NFT marketplace, Nuqtah, raised seed funding from Polygon and Animoca Brands. Metatime, a crypto exchange in Turkey, raised $11M to finance its ambitious plans to build a blockchain, an NFT marketplace, a wallet, and issue a stablecoin. Unsurprisingly, crypto is making waves in this inflation-hit country, ranking 12th in crypto adoption. Increased investor appetite in the NFT industry is also a catalyst to accelerate the plethora of use cases NFTs are yet to showcase. A recent survey by Kaspersky Research, found that 72% of people in the UAE are confident the NFTs will have increased use cases in the future.

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