This Week in Crypto

Bitcoin barely moved over the past seven days while Ethereum saw an increase in price by 4.9%. Avalanche recorded a 21.31% increase week-over-week, following its listing on Robinhood on August 8 alongside Stellar. Other outliers from this past week are Chainlink and Polkadot, each recording an increase by 19.7% and 16.27% respectively, in addition to Binance Coin whose price increased by almost 14%; all on the back of developments which we will delve deeper into further in this newsletter.

Key Takeaways

• New bipartisan bill wants to hand jurisdiction over BTC and ETH to CFTC
• Wallet addresses holding 100 ETH or more increase ahead of Merge
• USDT, FRAX to honor redemptions on new POS ETH chain, won’t support PoW fork
• Gaming dApps account for 60% of all blockchain activity in July
• Multiple ETHPOW forks are expected to launch post-merge

Macro, Regulations; Spot, and Derivatives Markets

Bank of England raised interest rates to 1.75% in the biggest increase since 1995, while estimating inflation to peak at 13.3% in October. July’s US inflation data is scheduled to be released on August 10 and the next Federal Reserve meeting is slated to take place on September 21.

In its earnings report, Microstrategy reported a $918M impairment charge on its Bitcoin holdings in Q2, compared to $414.2M for Q2 of 2021. On the back of that news, former CEO of Microstrategy Michael Saylor stepped down to assume the role of executive chairman to focus primarily on innovation and long-term corporate strategy, while continuing to provide oversight of the Microstrategy’s Bitcoin acquisition strategy as head of the Board’s Investments Committee.

A new bipartisan legislation wants to hand the regulatory authority over Bitcoin and Ethereum to the Commodities Futures Trading Commission (CFTC). There has been a long dispute in Congress over whose place it is to regulate cryptoassets, the Securities and Exchange Comission (SEC) or the CFTC. The Digital Commodities Consumer Protection Act of 2022 grants the CFTC "exclusive jurisdiction" over cryptocurrency trades that meet commodities law. Aiming to bring more clarity into the space, the bill aims to introduce a new term “digital commodity,” leaving it up to the CFTC to define.

The SEC charged 11 people linked to Forsage for fraud, calling the decentralized smart contracts platform a textbook pyramid scheme. A few days later, documents were leaked to the public showing that the SEC had open cases on all US-based crypto exchanges, along with Binance. More law enforcement that took place last week:

• New York State Department of Financial Services marked its first crypto law enforcement action by fining Robinhood $30M for violating cybersecurity and AML laws, an event the company has been expecting since last year.
• Celsius is facing a lawsuit from over 300 of its custody clients claiming rightful ownership of $180M of firm’s assets locked in bankruptcy proceedings.
• Portuguese banks closed accounts of crypto exchanges, on the back of “suspicious transactions.”

Senator Elizabeth Warren of Massachusetts wants the Office of the Comptroller of the Currency to rewrite guidelines permitting banks to hold reserve-backed stablecoins like USDC and USDT. Meanwhile, the European Central Bank called stablecoins and Bitcoin problematic while calling central bank digital currencies a “holy grail” for cross-border payments in a report published earlier this month.

On-chain Indicators

Figure 1: Lightning Network Capacity

Source: Glassnode

The Lightning Network, which allows for near-instant transaction finality, has almost 4.5K BTC in its capacity, which means over $100M are ready for peer-to-peer payments on the Bitcoin blockchain network. That is 500 more BTC since June.

Figure 2: Number of addresses with 100 ETH or more

Source: Glassnode

Ethereum is leaving 2018 levels in terms of wallets holding 100 ETH or more. Over the past week, wallets holding 100 ETH or more have increased by more than 200.

DeFi

Figure 3: Top 7 DeFi Assets Weekly Performance

Source: 21Shares

Last week, two Uniswap community members put forward a new proposal aimed at creating a foundation for the blue-chip to drive protocol growth, amplify the ecosystem stakeholders, and improve the governance process. The motion is requesting a total of $74M fund and 2.5M UNI token to finance the operating budget for the next 3 years. The point of contention has been that UNI has spent roughly $7M in grants on underwhelming issues. So, a refined spending scheme is encouraged to be put in place before the community can approve this sizable sum.

A modestly quiet week within the established DeFi vertical means more focus is allocated towards upcoming exciting projects worth discussing. First was the resurgence of the redacted cartel and the announcement surrounding its V2 upgrade released yesterday.

To recap, $BTRFLY is an OlympusDAO fork that is focused on procuring governance tokens and voting power across the vertical of liquidity management protocols. The project’s bid was intended to advance protocol-owned liquidity and provide meta-governance services to other DAOs. Redacted introduced two imperative features dubbed Hidden Hand and Pirex earlier this year which drove a lot of momentum towards the project. The former is focused on building a prebuilt bribe system leveraging Convex by taking a cut of every bribe enacted through the HiddenHand system, while the latter is concerned with creating liquid wrappers that tokenize and autocompound future yields to vote-locked. The V2 upgrade should effectively complement the project with a sustainable model as it will be able to generate real-yield to the token holders by taking a cut of 50% of HH, 42.5% of Primex fees and redistributing it to them.

In the broader verse of stablecoins, Beanstalk announced they would be ‘unpausing’ the project four months after their exorbitant hack saw the bleeding of roughly $180M back in April via a flash loan attack. The protocol, which uses a credit facility instead of collateral to maintain parity with the US dollar, has submitted its new codebase to be audited by Trail of bits and Halborn. Meanwhile, the wallet in question will now be a community-run multi-sig wallet until a secure solution for on-chain governance is devised.

FRAX has presented a new proposal to honor redemptions solely on the new ETH chain rather than on any POW forks, following tether’s suit. This is noteworthy since new ETH forks can only endure and survive as long as DeFi primitives can continue to support them. The artificial liquidity that miners and entities with financial-agendas can inject will not be enough for the blockchain to subist, as DeFi projects must concurrently signal their support and extend their supporting infrastructure. Elsewise, we’ll expect to see a revival of ghost chains resembling the examples of BSV, BCH where there are billions of dollars locked in the ecosystem, but which they sit idle without any use due to the absence of a functioning DeFi ecosystem of stablecoins and basic financial primitives like DEXs, money markets and asset management protocols. In another discouraging development, Chainlink declared they would not endorse any ETHPOW forks as they want to adhere to the social consensus in only supporting the POS chain. This is important as it means an integral piece of middleware in the form of oracles servicing price feeds to power DeFi will not be present on ETHPOW. The expected result is a dysfunctioning DeFi ecosystem with improper and inaccurate price updates, which will dismay DeFi primitives from migrating over.

Binance and Paxos published the first unverified breakdown of reserves for the BUSD token, indicating the stablecoin is backed with 60.5% US Treasury bills, 4.21% cash. Reserve protocol, a platform for creating decentralized stablecoins in Latin America, released its institutional product allowing for large sum conversions (>5000$) between 5 fiat-to-crypto currencies. Finally, a new stablecoin backed by yield generating real-estate is expected to hit the markets next week. Tokenized rental payments are sent to token holders in USDR through a rebase mechanism.

Chainanalysis reported that bridge hacks have amounted to almost $2B this year alone. Smart-contract exploits last week included:

• ~8000 Solana wallets hacked as a result of slope wallet exploit, $5M lost.
• Nomad recovered $22.4M after last week’s $190M drain hack.
• A Velodrome’s team member wallet was compromised, $350K operational fund lost.

NFTs, Metaverse, and DAOs

The gaming industry has been thriving amid the risk of contagion looming around DeFi. DappRadar reported that gaming dApps reached an all-time high in July, recording 60% of all blockchain activity. On this note, Shiba Inu announced that it will release a mobile NFT game called Shiba Eternity, in partnership with PlaySide Studios. It will be available on both Apple’s App Store and Google Play Store, and will incorporate a free-to-play version as well as a play-to-earn version with compatibility with Shiboshi NFTs. Shiba Eternity is meant to contribute to the memecoin’s goal to cultivate metaverse ecosystems.

Although Meta’s earnings report didn't shine bright for its metaverse ambitions, the social media conglomerate announced its expansion plans of Instagram’s NFT integrations to over 100 countries, supporting ETH, MATIC, and FLOW. Vitalik Buterin isn’t optimistic about Meta’s venture. Although he has no doubt the metaverse will happen, Buterin doesn’t think any of the current attempts from corporates such as Meta are on to anything because it’s too early to predict users’ needs and thus anything Meta creates now will misfire.

Magic Eden has been wrestling with OpenSea this past few weeks, the most recent chess move was the Solana-based NFT marketplace’s plans to expand to Ethereum, OpenSea’s home-network. This comes a few weeks after OpenSea introduced a launchpad for minting NFTs on Solana. Moreover, Binance is set to release Binance Account Bound (BAB) used as KYC credentials to be the first non-transferable and non-financialized token that’s built on the company’s native BNB chain. Moving forward, Binance predicts that more native soulbound tokens will be created to enhance security and identity verification.

In NFT adoption this past week, we saw academic textbook publisher Pearson reveal plans to attach NFTs to its digital titles to help them eradicate the secondary market. Knowing that a Pearson book can be sold seven times in its lifetime, blockchain technology will help Pearson track the resales and get in on the revenue. More corporate adoption of NFTs and other Web3 tools:

• Gucci started accepting APE as a payment currency in collaboration with Bitpay.
• Crypto Chiliz invested $102M into Barcelona FC to help the club accelerate their Web3 adoption.

Crypto Infrastructure

Figure 4: Top 7 Infrastructure Assets Weekly Performance

Source: 21Shares

Ethereum is positioned to experience its last testnet merge as Goerli network fuses alongside Prater, its counterpart on the beacon chain. The process, expected to ensue over two phases, is poised to culminate between 10-12 August, and is the last stop before the final POS switch scheduled for September 17. The event's excitement can explain how Ethereum flipped Bitcoin in the options market for the first time. The Goerli testnet layer should also implement its post-merge execution layer upgrade on August 17, where ETH nodes which haven't transitioned to the POST upgrade will be disconnected to maintain a healthy peers list.

Chandler Guo, the influential Chinese miner who led the ETC fork back in 2016, discussed last week his intent to lead the efforts of bifurcating Ethereum into a POW fork following the merge. As miners possess around $5B in specialized hardware, it's unreasonable to think they'll simply shut-down their machines. Furthermore, as covered in the last monthly review, other L1 networks and web3 offerings can take advantage of the surplus GPU power by the mining machines. However, the much easier route will conceivably be miners plugging into the new fork and resuming business as usual.

To that end, Poloniex and MEXC will list spot tokens related to the POW fork, meanwhile, Bitmex will launch a futures contract tracking the new fork. ETHPOW is currently trading at around $130-$150 range, according to CoinMarketCap. Other exchanges such as Kucoin, Huobi, Gate, Digifinex, and OKX have signaled their potential support, but fell short of disclosing how they'll proceed to support the network over the long term. Finally, Justin Sun of Tron announced that he would also continue funding any POW forks.

Looking beyond the majors universe, we first learned that the two Solana developers - Dylan and Ian Macalinao - were responsible for inflating Solana's TVL during the last bull run in November of last year by ~$7.5B. The brothers used numerous anonymous identities that helped them forge almost 12 dApps on the Solana network, as if they were built by as many as a dozen teams. On the other hand, Near protocol revealed that a bug in their native wallet led to the leakage of sensitive details to a 3rd party earlier in the year, however, it was contained before any real harm can be done.

The L2 vertical was buzzing with excitement as Optimism announced that its major upgrade; Bedrock, is now slated for Q4. The protocol's renovation should aid in reducing withdrawal times, enable nodes to sync 50 times faster as well as pave support for future rollup-based technologies like ZK rollups. Arbitrum is also expected to implement its nitro upgrade on August 31, and resume its Odyssey program, where users are incentivized to engage with Arbitrum-based dApps and earn a potential airdrop in the future. Finally, Vitalik proposed building an ultra-secure rollup utilizing both Optimistic and ZK technologies.

Middleware-Centric:

• AAVE proposing to integrate Chainlink's Proof-of-Reserves for securing protocol's 'bridged assets'
• Pyth Oracle releases PythNet to scale price feed updates, plans on a governance token.
• Alchemy extends SuperNode infrastructure support to Polkadot.
• Chainlink price feeds went live on Metis.

Contagion-linked Entities:

• Crypto VC hashed lost +3B following Luna's collapse
• Voyager en-route to return $270M to customers, starting on August 11
• FTX US planning on launching options
• FTX winning regulatory bid to launch an exchange and clearing house service in Dubai
• Zipmex re-enabling withdrawals on select crypto
• Robinhood expected to lay off 23% of employees

News

Tornado Cash Just Got Banned in the US

What happened?

The US Department of Treasury banned Tornado Cash, a decentralized protocol used to obfuscate the trail of transactions for privacy, for facilitating the laundering of the proceeds of cybercrimes, according to the statement. The US Treasury said that Tornado Cash has been used to launder more than $7B worth of cryptoassets since it launched in 2019. That figure amounts to the total value of cryptoassets that have been sent through Tornado Cash since launch.

Why does it matter?

The move comes after the US Treasury linked the $600M+ Ronin Bridge exploit to North Korean cybercriminal Lazarus Group, which sent approximately $80.3M worth of ETH through Tornado Cash, according to blockchain analytics firm Elliptic.

Back in July, Chainalysis revealed that 10% of all funds coming from illicit addresses are sent to crypto mixers, such as Tornado Cash and Blender.io which has been recently sanctioned earlier by the US on the back of the infamous Axie Infinity hack.

Tornado Cash announced in April that it's using Chainalysis' oracle contracts to block wallet addresses sanctioned by the US. "Maintaining financial privacy is essential to preserving our freedom; however, it should not come at the cost of non-compliance," said the Tornado Cash team.

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