Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 202

Newsletter - Issue 202

This Week in Crypto

Bitcoin and Ethereum fell by 2.38% and 3.76%, respectively, over the past week. However, the correlation between the two cryptoassets and equities is at a two-year low, signaling a healthy sign of decoupling; over the past month, the correlation was at an average of 0.12. Solana was the best-performing asset among the largest cryptoassets by market cap, with a rise of  10.88% WoW and 5.18% in total value locked (TVL). Polygon came in second in gains, increasing by 3.21% over the past week, possibly due to their new roadmap dubbed Polygon 2.0. The decentralized exchange Curve increased by 3.16% over the past week on the back of the 40% rally of its native stablecoin crvUSD in the past 7 days. Moreover, assets on Stacks, Bitcoin’s scalability solution, soared by almost 13%, in the aftermath of the new token standard igniting Bitcoin Ordinals, as we discuss later in this report.

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

Source: Coingecko and DeFi Llama. Close data as of Jul 10, 2023.

5 Things to Remember in Markets this Week:

  • Larry Fink’s Change of Heart: Traditional finance key players changing their stance on crypto has been a recurring theme snowballing over the past two years. The latest convert is BlackRock’s CEO Larry Fink, who said that crypto, especially Bitcoin, could revolutionize finance and could be used as a hedge against devaluing currencies around the world. Fink was known for his skepticism around this asset class, describing Bitcoin as an “index of money laundering” in 2017. Since then, the crypto community has been demystifying this ever-evolving asset class which is patiently collecting the harvest of this effort.
  • The Bitcoin network is likely to get busy with recursive inscriptions, thanks to BRC-69, a new standard proposed by Bitcoin Ordinals launchpad platform Luminex. Recursive inscriptions were introduced last month by Ordinals developers to overcome Bitcoin's size limitation that restricts the size of NFTs to 4 MB per block. BRC-69 is designed to simplify the creation of Recursive Ordinals collections, reduce inscription costs, and streamline the on-chain pre-reveal process. The new standard preserves all on-chain resources while achieving a 90%+ optimization of block space, which is dependent on the size of the initial collection and the network fees. This development could mean more activity on Bitcoin’s scalability solutions, such as Stacks. In the long run, recursive inscriptions pave the way for graphic-intensive applications to be built on the Bitcoin blockchain.

Figure 2: Daily & Cumulative Number of Bitcoin NFTs

Source: 21shares on Dune

  • Circle Eyeing an Expansion into Japan, Contemplating a Yen-Backed Stablecoin: Japan is emerging as a crypto hub following its revised enactment of the Payment Service Act on June 1st. This legislation only recognizes fully-collateralized and fiat-backed tokens as legal tender while designating banks and trust companies as custodians of fiat deposits. Mitsubishi UFJ Trust and Banking (MUFG), Japan's largest bank with $800B in AUM in 2020, has already publicized its intent to launch a fiat-backed stablecoin on Cosmos and the Progmat issuance platform in the spring of next year. In light of these developments, Circle's founder aims to expand its services in Japan, given the country's unique positioning and ahead-of-the-game status compared to its European counterparts. Thus, it'll be worth monitoring the evolution of Japan as an Asian crypto hub and if its model will inspire other major economies to follow suit.
  • Bitcoin Miners Surpassed Cumulative Earnings of Past Five Quarters: Bitcoin miners have experienced a significant rebound in revenue following a prolonged period of subdued on-chain activity. In Q2, miners accumulated an impressive $184 million from transaction fees on the Bitcoin network, marking a 270% increase compared to Q1. While the surge in fees can be partly attributed to Ordinals and smart-contract innovations, Bitcoin’s price appreciation played an equal role in boosting miner revenue driven by the multiple catalysts that emerged in 2023 so far. Namely, the announcement of major US asset managers applying for a spot BTC ETF has contributed to the upward momentum of the asset in the past three weeks, in addition to the recurring need for a non-state monetary system that hedges against banking instability and failures, as seen earlier in March.

Figure 3: Bitcoin Miner Fee Revenue by Quarter

Source: Coinmetrics

  • DyDx began its long-anticipated launch on Cosmos. Although mainnet deployment is expected to take place in Q4 of this year, users can start testing the experimental version of the platform to execute limit orders, along with other advanced trading features on testnet. The decision to migrate the platform was driven by the need to reconcile the lack of decentralization introduced by the design limitations of scaling solutions infrastructure and embarking on a meaningful solution that grapples with Ethereum’s scalability issues. That said, DyDx’s successful live launch could inspire other protocols to adopt a comparable model of transforming their dApps into application-specific blockchains that cater to the project’s distinctive needs.

Figure 4: Markshare of Perpetual Decentralized Exchanges Volume

Source: TheBlock

What You Should Pay Attention To

Polygon Labs unveils the infrastructure powering the Polygon 2.0 network. The new architecture comprises four key layers: Staking, Interoperability, Execution, and Proving, with the core innovations centered in the first two components. The Staking layer will facilitate a shared security model, bolstering the security of new chains connected to the wider Polygon network. Interoperability will enable cross-chain messaging and atomic swaps, facilitating direct asset transfers without relying on wrapped assets, which have been vulnerable to smart contract hacks. Additionally, Polygon proposed an upgrade for their flagship scaling product (POS SideChain), transitioning it into what’s known as zkEVM Validium. This unique approach stores data off-chain and utilizes validity proofs to ensure data integrity, reducing computational costs and making it cheaper for users to interact.

To avoid sacrificing data availability, Polygon will leverage the existing POS chain validator list to proliferate transaction data across the entire 2.0 ecosystem. If implemented successfully, Polygon could be the first protocol to use a decentralized sequencer to help order transactions on its solution. This is a crucial milestone that Arbitrum and Optimism haven’t achieved yet. Polygon’s consolidated architecture could be key in improving Ethereum’s scalability issues and present an effective solution for cross-blockchain transfers that don’t rely on vulnerable bridges. The ambitious plan should help offer users a cohesive experience akin to using a unified blockchain platform. That said, Polygon’s announcement has coincided with a surge in deposits into the scaling solution, as shown below, taking the value north of $50M in AUM.  

Figure 5: Polygon Newest Scaling Solution AuM

Source: 21shares on Dune Analytics

Multichain Bridge Exploit Leads to Losses North of $130M. Multichain, formerly known as Anyswap, is a cross-chain bridging solution connecting numerous smart contract and scaling networks. On July 6th, the bridge suffered an attack resulting in the unauthorized transfer of more than $120M worth of tokens across multiple bridges. In response, the Multichain team temporarily suspended the entire bridge's operations as they investigated the mysterious exploit, while Circle and Tether managed to freeze more than $65M in stables. Although Multichain is connected to multiple networks, the Fantom ecosystem has been particularly impacted due to its extensive use of bridged tokens supported by the Multichain team. Thus, we’ll closely observe the network to understand the full extent of the damages incurred by the Ethereum competitor's universe of assets.

Figure 6: Total Assets Locked in the MultiChain Fantom Bridge

Source: Forked off @salva on Dune Analytics

On the flip side, the second-order effect of the 44th hack this year is that the ETH core developers community is now discussing an improvement proposal that could finally protect smart contracts against exploits. Dubbed EIP 7265, the Circuit Breaker proposes to temporarily suspend the outflow of protocol-wide tokens when a predefined metric surpasses a specific threshold, and either revert the transaction or impose a delayed settlement. The solution would be agnostic to the underlying protocol and would only look at token inflows and outflows as the actionable metric, and thus could prove invaluable to the broader crypto stack infrastructure.


Next Week’s Calendar

These are the top 3 events we're monitoring for next week.

  • Q2 Bank earnings: Data coming in on Friday should paint more color of the stress regional banks are under and the health of lenders.
  • 8 Central Bank Representatives from the UK, EU, and U.S. to deliver speeches throughout the week, expected to generate heightened market volatility.
  • Polygon’s 2.0 tokenomics: expected to learn more about the revamped token role in the broader Polygon ecosystem and its evolution.

Source: ForexFactory

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