This Week in Crypto

Markets have entered an arguably historical week for crypto, with a few critical events upon us, like the FTX hearing and CPI data of several countries. Bitcoin and Ethereum have barely moved over the past week, with a 0.55% and 0.27% increase in returns, respectively. The biggest outlier within the Layer 1 subcategory is still Solana, down by almost 7% over the past week, followed by Avalanche and Binance, down by almost 5% each. Within major Layer 2s of scalability solutions, Boba stood out in TVL growth, increasing by almost 4% over the past week. Curve is the most negatively impacted in DeFi applications after being hurt by the depeg of Tron’s algorithmic stablecoin USDD, which makes up nearly 85% of the liquidity on Curve’s USDD/3CRV pool at the time of writing.

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

Source: 21Shares, Coingecko, DeFi Llama. Data from December 6 to 12, 2022.

Key takeaways:

• Sam Bankman-Fried arrested, ahead of FTX hearing, in the Bahamas and facing several criminal charges alongside an unsealed indictment in the United States.
• Binance faces potential regulatory scrutiny as well as skepticism over its Proof of Reserves
• Ethereum’s Shanghai upgrade likely to release in March 2023
• Polygon making moves: partners with FlipKart and Warner Music Group

Spot and Derivatives Markets

Figure 2: Total Bitcoin Liquidations

Source: Coinglass

The graph above shows the total number of Bitcoin liquidations in the futures markets on the likes of Binance, OKX, and Bybit. Over $150M of long positions and $88M of short positions were liquidated last week.

On-chain Indicators

Figure 3:

Source: Glassnode

Bitcoins held in miners’ balances have reached a 14-month low, according to data gathered by Glassnode. These levels indicate that Bitcoin miners are increasingly selling their holdings to either cover their costs unless they have already filed for bankruptcy.

Macros and Regulations

The European equities market jumped in anticipation of US inflation readings, showing that consumer prices rose 7.1% in November from a year ago, down sharply from 7.7% in October and a peak of 9.1% in June.

FTX developments: Sam Bankman-Fried (SBF) got arrested in the Bahamas over charges that include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering. Additionally, the US Department of Justice is reportedly investigating FTX for siphoning funds out of the US. New York prosecutors also launched a market manipulation probe on SBF. FTX ex-CEO was expected to appear in front of the House Committee on Financial Services investigating the collapse of FTX. With a vast corporate-restructuring experience from troubled companies including Enron, FTX’s new CEO, John Ray III, confirmed many many speculations, which include the “backdoor rumor” that alludes to the commingling of assets with FTX’s sister trading firm Alameda Research alongside the use of customers’ funds by FTX. You can watch the hearing here.

Regulators around the world continue to react to the FTX collapse. Hong Kong will apply the same rules of traditional finance to crypto exchanges in its new amendment to the Anti-Money Laundry and Terrorist Financing bill. In addition, the amendments call for a virtual asset service providers (VASPs) licensing regime. With the amendments coming to effect in June 2023, the bill could act as a stepping stone to a more extensive legislative proposal published in October, which is what many spectators have been anticipating. Titled ‘Policy Declaration on the Development of Virtual Assets,’ the proposal suggests several pilot projects to evaluate and, in turn, improve the underlying technology of these cryptoassets in question. Meanwhile, UK regulators are adding more restrictions to the anticipated Financial Services and Markets bill for crypto services from abroad. A package of guidelines being finalized by the Treasury will give the Financial Conduct Authority (FCA) the power to monitor the operations and advertising of crypto companies in the country and will also dictate the criteria through which an off-shore crypto company can be admitted - if at all. On the brighter side, Miami-based crypto payments solution Moonpay got regulatory approval from the UK.

On the institution’s front, crypto’s top-friendly bank, Signature Bank, will shrink its exposure to the market by reducing its deposits to $10B from $18B. CEO Joe DePaolo made these declarations as part of an investor conference in New York hosted by the Goldman Sachs Group last Tuesday. Goldman Sachs announced its mission to invest millions of dollars in troubled crypto companies. So far, it hasn’t been made public which companies the 153-year-old investment bank is eyeing.

Binance is currently facing scrutiny from both the community and regulators. Last month, Kraken’s CEO Jesse Powell raised questions on Binance’s proof of reserves, arguing it isn’t what the world’s largest crypto exchange claims. A few days ago, former SEC regulator John Reed Stark criticized Binance’s proof of reserves. We’ll follow this developing story closely to release new findings in our following newsletters.

Bitcoin mining: Kazakhstan issued a new law that mandates that miners can only purchase electricity from the power grid when there is a surplus and only from an auction. In addition, a ban on advertising crypto transactions will also be introduced along with special procedures for secured assets’ regulation by analogy with securities. In the US, one of the largest publicly traded Bitcoin miners, Marathon Digital, is expecting to recover $22M out of the $50M it had deposited into bankrupt Compute North.

Crypto Infrastructure

Ethereum-compatible Infrastructure: The Ethereum Foundation announced the ETH ropsten testnet will be fully shut down by the end of December as the network is now deprecated. Ropsten isn’t compatible with many of the features present in the new POS network, hence the decision to sunset the service as it no longer replicates the production-ready environment of Ethereum. The Rinkeby network will be the next in line to be halted by mid-2023. In addition, Ethereum developers have now set March 2023 as a target for ETH withdrawals to be activated. Although there’s a growing list of EIPs (Ethereum improvement proposals) pending to be implemented in the runup leading to the Shanghai upgrade, developers have agreed that they will be postponed in case of technical hurdles, as enabling withdrawals is the top priority.

In that view, recent GitHub activity has confirmed that proto-danksharding will be the next major technical milestone to tackle following the withdrawal implementation. Sharding refers to the process of splitting up the network into smaller portions to improve the efficiency of processing transactions. However, DankSharding improves on this layout by instead focusing on allocating space for ‘blobs’ of data, rather than mere transactions, which is suitable for data-hungry rollups. The mechanism would ultimately introduce what is known as data availability sampling and should help push the network’s decentralization forward, and is critical to fully realizing sharding later down the network’s roadmap. Ethereum is also becoming more resilient as it is experiencing a diversification of its client software alongside its MEV relayers. The Nethermind client market share has jumped to 10.2%, reducing the GETH’s dominance from 80% to 75%, meanwhile, UltraSoundMoney and GnosisDAO joined the MEV boost business as the two newest relayers. Finally, Phantom, the Solana-focused wallet, revealed its plan to expand its non-custodial service to the Ethereum and Polygon ecosystems. A move that echoes and signifies the importance of EVM-based networks as we head into the multichain world.

On the scalability front, BitDAO publicized a new ETH L2 chain called Mantle. The solution differs from L2s, and monolithic networks generally in that it separates the execution layer from the data availability layer along with transaction execution and settlement. The degree of separation is what allows networks to scale up with demand, all without sacrificing either their security or decentralization. The 2nd biggest DAO in the space is expected to leverage the EigenDA protocol for data availability, with 2023 set as the soft schedule for its public testnet launch. In similar news, Starknet announced their mainnet alpha was upgraded to v0.10.2, combined with revealing what is known as the 'performance roadmap' that should shed light on the steps the L2 will implement to refine the network's execution.

In similar news, Polygon continues to spearhead accelerating the adoption of blockchain technology. Flipkart, the Walmart-majority-owned e-commerce website, entered a strategic partnership with the L2 to explore commerce use cases and accelerate technology's adoption. Part of the alliance will be setting up a Blockchain-eCommerce Centre of Excellence that would scrutinize how Web3 will reshape value creation, and transform the commerce experiences for millions of users. Moreover, Jewel bank, the first digital-asset bank in Bermuda, revealed it will be releasing a fully-collateralized stablecoin pegged to the US dollar on top of the L2. The bank is to publish monthly and quarterly audits of its reserves, and will be looking to leverage the network for stablecoin-based commercial payment solutions.

Decentralized Finance

Figure 4:

Source: Coingecko, 21Shares

Ethereum Ecosystem:

• The MakerDAO community rejected a $500M proposal to invest in bonds with CoinShares. The decision was supposed to mirror the previously-accepted move taken by the blue-chip protocol to invest $1.2B of its treasury’s USDC into Coinbase prime and earn a 1.2% annual yield on its deposit. In addition, the community correspondingly hiked the annual savings yield for DAI to 1%, up from 0.01% after 72% agreed to the proposed changes. The amendment will likely transform MakerDAO into an attractive alternative to TradFi’s US dollar savings investment vehicles. Further, Maker’s community approved a new proposal to deposit $5M DAI into Compound to increase generated revenue and forge stronger relations between the industry’s blue-chips to storm the current brutal market conditions.
• Uniswap is about to enable voting on the ‘fee switch’ debate after starting the conversation in July. The proposal seeks to examine the community’s reaction to redirecting a portion (10%) of the liquidity providers earnings towards UNI holders; however, only across the three biggest DEX pools (ETH-USDT 5bp, DAI-ETH 30bp, & USDC-ETH 100bp). Although the proposal overwhelmingly received positive support, some are concerned that it might affect liquidity on the exchange as LP’s revenue could be affected, swaying them to take their capital elsewhere. Uniswap is also considering modifying its governance mechanism process as a way of reducing the friction that brings about important topics forward to a vote.
• 1inch, the infamous DEX aggregator, has released a tool to protect users against front-running attacks. Known as Rabbithole, the tool will embody a custom RPC endpoint enabling users to send their swap request transactions directly to validators, rather than have it queue at Ethereum’s public mempool. Typically, validators could reorder and re-prioritize certain transactions over others to increase their monetization on the back of MEV.

Alternative Ecosystems: The Solana ecosystem is attempting to shrug off the turmoil catalyzed by its dependency and heavy reliance on the FTX and its associated entities. For example, Maple Finance, Solana’s biggest uncollateralized lending platform, cut ties with Orthogonal Trading after concluding they misrepresented their positions and were effectively insolvent without external funding. On the bright side, Orca, Solana’s largest DEX, inked a partnership with the global payment solution stripe to enable an onramp for fiat-to-crypto conversion. Beyond Solana, TraderJoe, the leading DEX on the avalanche network, announced its intention to expand its support towards Arbitrum. The move once again echoes the conviction that Ethereum and its complementing ecosystem will have the most substantial network effects across the entire crypto verse. The protocol is expected to launch on mainnet in early 2023. Finally, Cardano is expected to welcome its first decentralized exchange to its ecosystem as Adaswap deployed on the network’s mainnet. This is critical for the ETH competitor as DEXs are the access points enabling users to participate in their embryonic DeFi and metaverse universes.

NFTs and Metaverse

Polygon is on a roll this month with partnerships, as discussed earlier in this report. Another was the network's partnership with Warner Music Group to launch a Web3 music platform that would enable artists to release music as NFTs while also serving as a marketplace displaying the broader segment of tokenized music tracks from other platforms. Finally, Polygon rolled out the exciting Starbucks web3 rewards program dubbed Odyssey. The initiative stands out as it compliments the brand's existing loyalty program rather than acting as a quick cash grab or an add-on disconnected from the business. On the lower bound, accrued points will transform into NFTs disguised under the title 'stamps'. The latter would help users unlock exceptional virtual experiences like learning how to make certain drinks themselves or gain access to special events like visiting the main Starbucks farm in Costa Rica, for instance, in the case of collecting more points.

Figure 5:

Source: Nansen

Data from blockchain analytics platform Nansen indicated that first-time and returning buyers per day in Polygon’s NFT market reached new all-time highs in December. That contrasts with the status quo in marketplaces based on Ethereum and Solana, whose users have been dropping by hundreds of thousands over the past few months.

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