Weekly Newsletter
Sep 26, 2023

Newsletter - Issue 186

Newsletter - Issue 186

This Week in Crypto

Markets entered their first all-positive week since September. Bitcoin and Ethereum are up by 3% and 9%, respectively, over the past week. Having March as a date for Ethereum’s Shanghai Upgrade, where staked ETH withdrawals are slated to begin, has boosted market sentiment, especially with protocols like Lido, which increased in returns by over a whopping 60%, as seen in Figure 1. Other outliers in last week’s rally include Optimism, which is up by nearly 32%, and Cardano, up by 25%.

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

Source: 21Shares, Coingecko, DeFi Llama

Key takeaways:

  • Coinbase, Huobi and Genesis lay off at least 20% of staff, Wyre scales back and limits withdrawals.
  • ETH core developers hoping to launch Shanghai testnet by February
  • With $6.6 billion in assets, Lido Finance surpasses MakerDAO to become the largest DeFi app
  • Solana NFT trading volume soars, despite adverse market conditions.

Spots and Derivatives Markets

Figure 2: Bitcoin Futures Open Interest Perpetual

Source: Glassnode

The current open interest perpetual futures, – is almost at levels equivalent to two years ago, right after a sharp dip before the peak of the 2021 bull market. Bitcoin was almost $40K on January 9, 2021, when the open interest was $6.3B, with the same level today, BTC trades at circa $17K. This trend may indicate that the momentum behind the movement is slowing and the direction of prices could reverse.

On-chain Indicators

Figure 3: Total Value of Staked ETH

Source: Glassnode


The amount of ETH that has been deposited to the ETH2 deposit contract has increased by 2% month-over-month to total almost $16M. Later in this report, we delve deeper into what that means to many protocols in DeFi, namely those working on liquid staking solutions.

Macro and Regulations

Significant job cuts dominated news headlines this past week. Goldman Sachs will reportedly lay off over 3,000 members of its staff on Wednesday after a cost review that would unveil financials tied to a new unit that houses the investment bank’s credit card and installment-lending business, which will record more than $2B in pre tax losses. Goldman Sachs isn’t alone in this layoff season; Amazon laid off a whopping 18K employees, the most significant job cut in the company’s history. As for the crypto industry, crypto exchanges Coinbase and Huobi announced they would downsize by 20% to weather the market downturn as investors continued to steer away from centralized crypto exchanges in the aftermath of FTX’s collapse. Similarly, crypto lender Genesis is laying off 30% of its workforce, and crypto payments company Wyre is also scaling back and limiting withdrawals to 90% of funds held in each customer’s account.

FTX in Court: Former CEO of troubled crypto exchange FTX Sam Bankman-Fried pleaded not guilty to criminal charges in the court hearing last Tuesday. This would give him more time to argue against the evidence, which is currently being collected and prepared by the prosecutors, who estimated it to be ready in four weeks. SBF’s trial is scheduled for October 2.

Regulations: Earlier this week, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) warned banks about the risks involved with crypto in a joint statement. The statement reiterated that cryptoassets in the past year have been highly volatile on the back of exposure of vulnerabilities and counts of fraud. Last week was also a melting pot for regulators around the world scurrying to finalize their long-overdue legislative frameworks regulating cryptoassets as well as tax policies while others tightened their grip on the crypto industry:

  • UK granted a crypto tax exemption, effective as of January 1, for foreigners using local services in an effort spearheaded by Prime Minister Rishi Sunak to turn the UK into a hub for the crypto industry.
  • Italy: In contrast to the UK’s move, the Italian Parliament approved the 26% capital gains tax on cryptoassets worth more than EUR 2,000. The new bill marks a breakthrough for the crypto industry that had remained unregulated in Italy until the bill legitimized it and mandated an incentive for those who comply.
  • US: The Securities and Exchange Commission (SEC) filed an objection to Binance’s acquisition of troubled crypto lender Voyager, arguing that the US arm of the world’s largest crypto exchange should not be allowed to purchase Voyager. The SEC said that Binance.US lacks sufficient means to either consummate the transaction or protect user funds against theft.
  • Morocco: In the last few days of 2022, Morocco’s central bank Bank Al-Maghrib (BAM), announced that it had finalized the country’s first crypto regulatory framework after years of outlawing the trading of cryptoassets. The bill, which is yet to be made public, will make Morocco the first North African country to legalize crypto.
  • Israel: The Israeli Securities Authority (ISA) is also ready for public comment on its crypto legal framework.

Adoption: The world witnessed more adoption outside of regulation last week, despite the slow holiday season.

  • Indonesia announced plans to launch a crypto exchange this year, right before the authority overseeing crypto shifts from the commodities agency to the Financial Services Authority (FSA), which is expected to take place in the next two years as part of a broader financial reform.
  • Australia: After beating El Salvador to it, Australia became the fourth-largest hub for Bitcoin ATMs.
  • Ukraine: One of the biggest pharmacy chains in the war-torn country has partnered with Binance Pay to streamline crypto payments.

Hong Kong is looking into launching its CBDC (e-HKD) in the form of a stablecoin supported by the government for better integration with the emerging technology that is Web3.

Crypto Infrastructure

Layer 1s:

  • Ethereum: ETH developers have agreed to set February as the soft target to launch the testnet for the shanghai upgrade. As a refresher, the latest upgrade will enable the withdrawal of ETH from the beacon chain, the most widely anticipated event since the Merge. Developers are planning to roll out the test network next month to offer an opportunity for smart-contract developers to experiment with the network’s newest features before the hopeful mainnet deployment in March.
  • Fantom: The Fantom community just approved a new proposal that should help drive the network’s developer adoption and growth throughout 2023. The proposition, dubbed the gas monetization program, will reduce the burn rate of the network from 20% to 5%, and accordingly share the saved 15% revenue with dApps that have a strong presence and consume considerable gas on top of the network. The angle here is to adopt the ‘advertisement monetization programs’ seen across web 2 and modify it to offer alternative incentives for applications bringing in the most demand for block space. This way, Fantom could galvanize builders to migrate over to the network and cut down on their operational expenditure through subsidized gas costs.
  • TON: Finally, The Open Network (TON) announced it would be venturing into the crypto storage business. Initially founded by Telegram, the now-community-driven blockchain revealed that the new storage network (TON Storage) would be built out on the scalable Proof-of-Stake network. That said, TON storage will borrow many of the principles from the P2P file-sharing mechanism that underpins torrent networks. The main differentiator is that TON storage will introduce financial incentives in token emissions to ensure that nodes are rewarded for their data storage as intended. This is a relevant development in a time where storage protocols like Filecoin and Storj have taken a beating recently due to the sizable allocation as part of the now-struggling Digital Currency Group (DCG) venture fund.

Layer 2s:

  • Optimism: The Optimism network is expected to implement the first phase of its most significant upgrade to date on the 12th of January. The L2 will activate what is known as the bedrock upgrade, a slew of technical improvements to the architecture of the rollup chain. The process will begin with migrating the Goerli testnet to the Bedrock network on Thursday. As a reminder, innovations emerging across the layer 2 scalability vertical are focused on optimistic and zk-based rollups. Optimistic rollups assume transactions are valid and offer a window for node operators to submit fraud proofs, while zk-based rollups use computed verification using zero-knowledge technology for faster-yet-intensive processing. Optimism belongs to the optimistic rollup stack. To that end, the network is scheduled to reveal its eventful pipeline of features: modularity under the umbrella of OPStack, low transaction fees, snap syncing (fast networking), reduced deposit times to under 3 mins through two-step withdrawals, and smarter state submissions. Although there are multiple components to be excited about, we at 21shares believe that the most impactful feature will be centered around modularity. The excitement behind our thesis is founded on the grounds that bedrock is a generic rollup client, and not exclusively focused on the Optimistic client. This signifies the L2 will become proof agnostic, meaning that it will be flexible to switch from processing zk-based proofs to optimistic fraud proofs as needed without any issues.

Decentralized Finance

Figure 4: Top 10 DeFi Assets Weekly Performance

Source: 21Shares, Coingecko

Ethereum Ecosystem:

  • Lido Finance: Lido Finance has eclipsed MakerDAO to become the largest DeFi project by Total Value Locked (TVL). The blue-chip liquid staking derivative (LSD) protocol has dethroned the legacy money market protocol as the vertical continues to gain momentum on the back of enthusiasm surrounding the Ethereum Shanghai upgrade. As discussed, it's becoming likely that ETH withdrawals will be enabled in March of this year as part of the next major update the network will implement. Although withdrawals will be rolled out to avoid compromising the security of the L1, the event nonetheless paves the path for further utilization of ETH beyond its role in securing cash flows through staking. Liquid staking introduces the concept of packaging staked ETH in a synthetic derivative form, that can be simultaneously used across DeFi primitives like lending, all while securing the network without cutting off users' access to their capital. The Lido finance token increased by 61.6% since last week, but it wasn't the only beneficiary as Frax, RocketPool, StakeWise and StaderLabs grew by 18.4%, 18.4%, 10.2%, 135%, respectively. Projects that are all offering liquid staking derivatives. This will be a narrative worth monitoring for this quarter as the Shanghai upgrade approaches and the locked ETH begins its gradual exodus to some of the protocols above.
  • 1inch: In the world of DEXs, 1inch has upgraded its exchange to the fusion version. Part of the improved features is allowing users to place orders within a predefined price and time range without incurring gas costs and shielding users from MEV via connecting them directly to block validators. Finally, investors will benefit from superior order matching offered through the new Dutch Auction model, where professional market makers (resolvers) execute the best route for users' swaps. To do so, resolvers are required to stake their 1inch to participate, to be able to reroute users' orders and pay gas fees on their behalf, which will be refunded back to resolvers as part of the resolver incentive program. Stakers will also be able to profit from arbitrage opportunities.

L1 Ecosystem:

  • TraderJoe: The main DEX on the Avalanche network is continuing to embrace the multichain narrative as it disclosed its expansion to BNBChain, shortly after extending its support to the Arbitrum network in December. TraderJoe is the largest exchange on Avalanche; however, it’s been struggling with declining activity on the ETH-alternative network. The DEX is taking a hint from Uniswap, who also recently introduced a new proposal to deploy on BNB and take advantage of the increasing user base on the growing L1. As seen, the move is expected to catalyze the revenue generation for the DEX, although it’ll have a strife competition with Pancake swap, who is dominating the vertical.

NFTs and Metaverse

Layoffs and Exploits: Macro effects took a direct toll on the NFTs industry, as Ethereum-based NFT marketplace SuperRare laid off a third of its workforce. Magic Eden was exploited on January 4, with over 25 fake NFTs sold on the NFT marketplace, costing around $15K in losses, which the marketplace promised to refund. The developers temporarily disabled tools and loopholes that allowed the exploit, which affected the Solana-based collections ABC and y00ts. It was also revealed that y00ts and DeGods received $3M to move to Polygon from Solana, in a move that was expected to take a profound toll on the latter, especially after the FTX debacle. However, despite current conditions, Solana’s NFT daily volumes are on the rise. At the time of writing, Solana had facilitated 33K NFT trades in the last 24 hours, while Ethereum only facilitated 4K. Moreover, the number of unique buyers on Solana is almost 3x those on Ethereum.

Fear and Adoption: Shying away from the highly speculative subsector of the crypto industry, online sports retailer Fanatics sold its 60% stake in the NFT startup Candy Digital, which raised a Series A1 a day after Fanatics’ news was reported. The round – whose amount is undisclosed – was led by Galaxy and ConsenSys Mesh, with participation from 10T Holdings and ConsenSys, among others. Square Enix (owner of the final fantasy game) to focus on ‘blockchain entertainment’ this year. Proof signed with Hollywood talent agent United Talents Agency in a partnership that would extend to the Ethereum-based NFT project Moonbirds. It is as clear as day that utility is a real issue weakening the NFT landscape. While the most robust use case for NFTs that presented itself thus far remains the tokenization of identity, entertainment use cases are yet to prove themselves to maintain the trust and loyalty of their investors.

Next Week's Calendar


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