Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 197

Newsletter - Issue 197

This Week in Crypto

The crypto market traded sideways over the past week, with some notable outperformers. Last week's big news was that Jane Street and Jump Crypto – two of the world's largest market makers – would pull back from trading digital assets in the U.S. due to increasing regulatory pressure. Bitcoin and Ethereum decreased by 1.69% and 1.58% week-over-week, respectively. On the decentralized finance front, Lido stood out with a 15.76% price increase over the same period. Lido's outperformance is likely due to the release of Lido v2 on May 15, which enabled users to finally redeem their stETH (staked ETH). Lido remains the largest staking provider in Ethereum, with a ~31% market share.

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

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

Key takeaways:

  • Jane Street and Jump Crypto will cease market-making in the U.S. for digital assets due to increasing regulatory pressure.
  • Bitcoin’s BRC20 is splitting the community while inspiring other legacy payment networks to continue innovating.
  • Tether posts $2.48B in excess reserve, Lido Finance V2 Goes live.
  • Blur launches Blend, an NFT lending protocol, while Business Insider declares the death of the metaverse.

Spot and Derivatives Markets

Figure 2: Total Liquidations

Source: Coinglass, data from April 30 to May 14, 2023.

On May 10, we saw over $100 million in liquidations after a pseudonymous source tweeted false information alleging that Bitcoin wallets controlled by the U.S. government were on the move. Most positions liquidated were long, as BTC dropped 5% from ~$28,200 to ~26,800 in less than an hour (see Figure 2). The market's overreaction was entirely avoidable. For instance, we built a dashboard over two months ago that anyone can access to monitor the U.S. government-controlled wallets in real-time.

On-chain Indicators

Figure 3: Average fees paid per Bitcoin Block

Source: Glassnode

The increase in activity resulting from the introduction of Ordinals and BRC-20 has prompted miners to amass greater revenue from fees compared to inflationary issuance in the previous month. The disparity between the earnings miners derive from block issuance versus fee accumulation has been observed on only five occasions throughout Bitcoin's history, as depicted in the chart above. It is crucial to acknowledge the notable disparity at hand in order to comprehend the captivating new paradigm that Bitcoin has embraced.

Macro and Regulations

Regarding macroeconomic developments, all eyes are set on the debt ceiling standoff between Kevin McCarthy, speaker of the House, and President Joe Biden, who will reconvene on May 16 to strike a deal. If they fail to reach an agreement, we will witness an unprecedented U.S. default in as little as three weeks that would be catastrophic for the U.S. economy. A CEA simulation on the effect of a protracted default shows an immediate, sharp recession on the order of the Great Recession. In the simulation, the stock market would plummet close to 50% in Q3 2023. Since 1960, Congress has raised or extended the debt ceiling 78 times.

Aside from the debt ceiling drama, we also had a few data releases:

  • On May 9, a Gallup survey revealed that only 36% of U.S. adults were confident that Jerome Powell would do or recommend the right thing for the economy. The figure represents the lowest reading Gallup has recorded for any prior Fed chair.
  • On May 10, U.S. inflation data slightly beat expectations - the CPI increased 0.4% in April, which equated to an annual increase of 4.9%, the lowest annual figure since April 2021.
  • On May 11, the Bank of England hiked interest rates by 25 bps to 4.5%, in line with expectations, as inflation remains sticky. It also signaled the possibility of future hikes to return inflation to the 2% target in the medium term.
  • On May 12, the University of Michigan survey data revealed poor U.S. consumer sentiment and a long-term inflation expectation of 3.2%, the highest in twelve years.

Jane Street and Jump Crypto will cease market-making in the U.S. for digital assets, because of an intensified regulatory crackdown on the industry. The impact this move will have on liquidity cannot be overstated. For instance, the bid-ask spread – the de facto measure of market liquidity – increased significantly last week for fiat pairs amongst U.S. exchanges. After the FTX collapse in November, it's evident that the U.S. government has increasingly used the banking sector and other agencies to crack down on the crypto industry, as shown by the closure of Signature and Silvergate banks or the relentless actions by the SEC.

On a related note, the U.S. Chamber of Commerce called out the SEC over its lack of regulatory clarity and not responding to Coinbase's rulemaking petition. In July 2022, Coinbase petitioned the SEC to publish a rulemaking regarding digital asset securities. Without an SEC response, U.S. investors and lawmakers can't even ask the most fundamental questions, such as which cryptoassets are deemed securities. This has led to an unfair regulatory playing field, making many crypto companies reconsider their presence in the country.

Crypto Infrastructure

The congestion on the Bitcoin network has driven a few developers to discuss censoring transactions related to BRC-20. Although the movement will not garner backing in canceling token-standard, it still shows the controversy it is yielding within the community. Bitcoins forks could emerge if the current minor discussions escalate; however, we assume a lack of support from the rest of the ecosystem participants. Miners would resist as the cohort finally found a growing source of revenue. On the other hand, users may reject the new chain as Bitcoin has once again become an exciting network with untapped potential, allowing them to trade assets and NFTs, although a very-early experiment. Along the same lines, the buzz of smart-contract capabilities has induced Litecoin to process 585K daily transactions, scoring a 500% increase week-over-week after adopting the LTC-20 standard as the network continues trialing asset issuance. Bitcoin cash also just implemented a hard fork upgrade that introduces token creation on top of the network, allowing similar BRC-20 experiments to transpire.    

That said, Bitcoin is experiencing a slew of improvements for generating tokens and NFTs with the advent of ORC-20. The new standard will offer a built-in mechanism to address double spending along with the ability to upgrade tokens. The excitement around Bitcoin isn’t slowing down either as the Wormhole bridge, along with an integration with Threshold network, will allow tBTC, a Bitcoin native multi-chain derivative backed by BTC, to be available in the DeFi ecosystem of compatible and non-compatible operating-systems to Ethereum, akin to Windows and Mac.

Figure 4: Number of minted ORC-20 tokens

Source: 21Shares on Dune

Last week, Ethereum encountered two technical challenges that briefly hindered the timely finalization of transactions on its network. However, the diverse range of node client software played a vital role in mitigating the impact of these challenges. Due to this diversity, not all validators were affected by the identified bug, ensuring that transaction processing continued across the network. The Ethereum foundation has promptly released a set of bug patches to address the underlying issue related to validators, although the root cause remains unidentified.

Encouragingly, the amount of ETH deposited in the beacon chain has surpassed the quantity withdrawn since the Shanghai upgrade on April 12. This recent data highlights the increasing confidence users have in Ethereum's potential as a productive asset and underscores their commitment to treating ETH as a long-term, yield-bearing and a deflationary investment.

Figure 5: Breakdown of ETH deposits and withdrawals

Source: 21Shares on Dune

Decentralized Finance

Figure 6: Top 10 DeFi Assets Weekly Performance

Source: GoinGecko


Tether, the issuer behind the largest centralized dollar-denominated stablecoin by market cap, achieved a record high of $2.44 billion in excess reserves, marking an increase of $1.48B since Q4 of last year. The “Assurances Report” of Q1 demonstrated the company’s assets to be worth $81.8 billion, with the majority invested in the U.S. Treasury Bills. The striking finding is that Tether invested 2% of its reserves in Bitcoin and 4% in Gold. Tether’s allocation to Bitcoin is crucial as it could help to offset some of the selling pressure expected throughout the rest of the year by Mt Gox claimants and the US DOJ publicized intent to sell its seized BTC assets from the silk road case.

Ethereum ecosystem

The Uniswap community is mulling over a new governance discussion to debate implementing pool fees, 1/5th the size of the liquidity pools fees across V2 and V3 versions of the exchange. The proposal, still in the discussion stage, is designed to grow revenue for the protocol’s treasury and share profits with the token holders. That said, it is improbable that the community will accept the motion as the Uniswap Foundation is based in the US. Namely, activating the fee-switch could deem the UNI token as a security amidst the regulatory uncertainty the US is grappling with. Nevertheless, it’s a conversation worth paying attention to as it could have significant ramifications for the protocol.

That said, the total volume processed on Uniswap has eclipsed Coinbase for the fourth consecutive month. Although the recent meme-coin frenzy drove the surge in activity on Uniswap, the trend nevertheless reiterates the swelling interest in non-custodial infrastructure following the series of centralized failures the industry had to endure over the past 18 months. Finally, Uniswap is conducting an on-chain vote to deploy the DEX to Polkadot’s Moonbeam network. Slated to end on the 17th of May, Uniswap branching out to other chains is beneficial to deepen liquidity, lower fees, and boost the user experience, all while introducing reliable financial infrastructure that stood the test of time compared to the rest of the DEXs.

Figure 7: Total Traded Volume between Uniswap vs. Coinbase vs. Binance

Source: The Block

The governance proposal to upgrade the Lido Finance protocol has officially passed. With a near-unanimous support of 99%, Lido V2 went live today. The new version will enable ETH withdrawals by providing an in-house mechanism to switch back to ETH from stETH and introduce a ‘staking-router’. The latter refers to an apparatus that will facilitate the onboarding of validators in a more permissionless manner, designed to help decentralize the protocol’s node infrastructure layer. Lido’s upgraded withdrawal capacity is vital as the protocol is home to close to 31% of the total staked ETH. Thus, it’s essential to monitor the flow of capital through the protocol to have a nuanced understanding of the Ethereum economy.

Figure 8: Dominance of Staking Entities

Source: 21Shares on Dune

To that end, Aave's founder put forward a governance discussion on converting the protocol treasury's ETH into stETH and rETH, Lido's, and rocket pool's respective liquid staking derivatives. This trend will continue growing as projects prefer yield-bearing assets that help generate revenue while freeing capital and unlocking the utility of ETH to be used across the DeFi ecosystem without giving up the yield. Implementing this strategy will likely lead other protocols to take foot and trigger a positive flywheel of adoption for liquid-staking protocols.

NFTs and Metaverse

Figure 9: Weekly Ethereum NFT volume market share

Source: Hildobby, Dune Analytics

Blur launched Blend, an NFT lending protocol. Today, many users are priced out of their favorite collections because they have to pay the full price of NFTs upfront. Blend allows users to make a "down payment" (like buying a car or house) and pay the remaining balance later to gain full ownership of their digital collectible. Conversely, if users need liquidity but don't want to sell their NFTs, they can borrow ETH against their NFTs without needing to sell. Blend is the latest innovation coming from Blur, which has consolidated its lead over OpenSea with almost 60% of weekly NFT volumes on Ethereum. However, it's crucial to note that borrowing against a speculative and sometimes illiquid asset can be extremely risky.

Tim Sweeney, Epic Games founder and CEO, mocked a Business Insider article titled "RIP Metaverse: an obituary for the latest fad to join the tech graveyard," sarcastically suggesting that the 600 million active users in games like Fortnite, Minecraft, and Roblox could mourn its passing together. Traditional media outlets declaring the death of the metaverse today are reminiscent of these same outlets claiming the death of Bitcoin, Ethereum, and crypto countless times over the past decade.

Next Week’s Calendar

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