Markets suffered from increased selling pressure this week on the back of bankruptcy fears looming over crypto bank Silvergate which has been dragged down by the FTX collapse and the recent regulatory crackdown in the US. Over the past week, Bitcoin and Ethereum dipped by 4.7% and 4%, respectively. This week's biggest winner was MakerDAO (ticker: MKR), which saw returns increase by 15%. The leading factor to MKR price action may be attributed to MakerDAO’s plans to allow users to borrow DAI against its governance token MKR. The paradox is that this yet-to-be-implemented move may cause a liquidity risk if the token drops significantly. Moreover, last month, we learned that MakerDAO registered $19M in profits in 2022. The cryptoassets that suffered the most losses last week were Boba (-14%) within scaling solutions and Cardano (-9%) among data platforms.
Figure 1: Weekly Price and TVL Performance of Major Crypto Categories
Source: CoinGecko, DefiLlama, Close Data as of March 6, 2023
Bankruptcy fears loom over crypto bank Silvergate as it discontinues its exchange network platform in what they described as a risk-based decision.
Account Abstraction arrives on Ethereum, Polygon releases web3 identification service
Uniswap releases mobile wallet app, considering an expansion to Avalanche
Magic Eden embarks on a month of “Mint Madness”, showcasing collections across Polygon, Ethereum and Solana .*
Spot and Derivatives Markets
Figure 2: Bitcoin and Ethereum Futures Annualized Rolling Basis
The futures market for Bitcoin and Ethereum is in backwardation resulting in a positive annualized yield of 3% over the past three months. Traders profit from rolling over to cheaper long-dated futures contracts vs. the spot price of both BTC and ETH. Namely, the expected future price of both assets is cheaper than the current spot price, so investors get the same quantity of the underlying assets at a cheaper cost of capital. Backwardation can occur as a result of a higher demand for BTC and ETH in the spot market than the contracts maturing in the future through the futures market. This is a testament to a spot-driven rally since the start of the year. .
Over the past year, the channel size of the Lightning network has increased by over 80%. In other words, off-chain BTC transactions can now hold almost 0.072 BTC per channel, as shown in Figure 3. Moreover, Xapo Bank, a leading Bitcoin custodian and licensed private bank, is using Lightspark to offer Lightning-based Bitcoin payments.
Macro and Regulations
The FTX collapse continues causing headwinds in the broader crypto industry as Silvergate Bank appeared to exhibit symptoms of a bankruptcy, dipping the total crypto market cap by 5%. Accused of facilitating the comingling of assets that led to the FTX fraud scandal, Silvergate has been suffering from a 40% quarterly decline in deposits and a billion dollars in net losses, according to its Q4 2022 earnings report. However, last week carried some adverse developments that set the stage for the crypto bank:
March 1: Silvergate submitted a notification of late filing to the Securities and Exchange Comission (SEC) that would delay filing its annual report on Form 10-K for the fiscal year of 2022.
March 3: Silvergate discontinued its Silvergate Exchange Network (SEN) platform that institutions used to move money to crypto exchanges.
On the same day, a US bankruptcy court ordered Silvergate to return $9.8 million deposited by BlockFi.
On the back of the recent developments, many companies such as Galaxy Digital and Coinbase have cut ties with Silvergate. LedgerX also dumped Silvergate for Signature Bank; the latter however saw Kraken wind down significant transactions due to the transfer limitations the bank imposes. Although it hasn’t been a great week for crypto banks, the silver lining is that the survivors of these regulatory crackdowns and law enforcement actions will probably have a bright future with regulatory clarity and guidance in the future.
On a brighter note, Visa’s Head of Crypto Cuy Sheffield reiterated that the payments giant remains committed to its crypto strategy, discrediting an article by Reuters. Sheffield continued to argue that his company still believes in the potential of fiat-pegged stablecoins and is eager to partner with companies building at the intersection of crypto and payments.
Figure 4: Fiat-backed stablecoin demand
Source: 21Shares, Dune Analytics
Stablecoins and CBDCs race towards adoption: GU Technologies and Japan Open Chain have started a proof-of-concept for the issuance of stablecoins on Ethereum that comply with the Japanese regulations, together with three financial institutions, according to a press release. Reserve Bank of Australia has also revealed a set of projects that will develop use cases for a digital dollar, the eAUD, during its testing phase, ranging from offline payments to bond settlement to securities trading, among others. China is already giving out discounts for those using e-CNY to purchase goods in Hong Kong. We believe the power struggle between CBDCs and stablecoin is a longstanding one since it represents the centralization conflict. The bull case here is that stablecoins as a proof-of-concept would have continued to mature beyond their central counterparts’ capacities, which is what we’re betting on as long as stablecoin issuers continue building.
Ethereum: ETH core team is planning to implement the Goerli Shanghai upgrade on March 15, after successfully updating Sepolia into the Shapella testnet. This means we should now expect withdrawals to be implemented on the ETH mainnet by mid-April. Meanwhile, Security researchers at the annual ETH Denver event announced ERC 4337, known as Account Abstraction (AA), is finally available as a smart-contract solution on top of ETH mainnet. To recap, AA offers friendly features such as 2FA authentication, gasless transactions, or even periodic payments, which allows for a user-intuitive interface analogous to modern FinTech interfaces. Although existing apps like Argent and Safe wallet have already adopted AA, introducing the feature on the main layer is crucial to allow native support for the technology.
Polygon & Eclipse: are collaborating to release a scalability solution focused on the Solana network. Known as Sealevel Virtual Machine (SVM), the solution will come as an optimistic-rollup on top of Polygon where it’d allow developers to leverage Solana's high transaction throughput environment. The compatibility will help in either recreating some of the primitives on the Polygon sidechain or driving protocols to go multichain, without having to rebuild the codebase from the ground up. The Polygon ecosystem has been rapidly growing through inking significant partnerships and onboarding many web2 conglomerates on-chain. Thus, the newfound synergy with the Solana network could reverse the exodus of developers who abandoned the blockchain after the FTX debacle.
Chainlink: introduced a new toolkit to increase connectivity between Web2 and Web3 systems. Dubbed Functions, the new platform will allow smart-contract developers to seamlessly integrate with any off-chain resource. The serverless implementation grants Web2 developers the ability to feed data to the crypto ecosystem without maintaining their oracle infrastructure. Chainlink’s product is crucial as developers can now build hybrid apps that capitalizes on the defining properties of web3, while allowing certain smart-contract actions to be triggered by offchain activities. For instance, the distribution of rewards to be triggered based on executing a certain action like sending a tweet. Web3 developers could also leverage the toolkit to open up new channels of engagement for their applications by expanding their outreach to social media applications, or to leverage services like AWS and utilize the cloud hosting platform’s data.
Pocket Network: inked a new partnership with Google Cloud and 66 Degrees. The collaboration should see the middleware node RPC provider consolidate its cloud presence on Google’s platform, reducing operational expenses while allowing Pocket’s infrastructure to scale even further. Comparably, Tencent cloud announced support for Avalanche one-click node deployment shortly after the company signed an MOU with another node provider, Ankr protocol.
Although the move should accelerate the adoption of decentralized node providers by allowing users to enjoy superior latency and connectivity powered by an enterprise-centric platform, it nevertheless increases the risk of a single point of failure. Despite the increase in the number of nodes and the diversification of their geographic distribution, node operators or validators would ultimately use a centralized cloud platform for bandwidth distribution that is prone to censorship. Giving up control of operations could also expose the privacy of node operators and users. Thus, despite how encouraging it is to see growing symbiosis between Web2 and 3 systems, the industry mustn’t lose sight of the crucial north stars like decentralization of the infrastructure, which keeps the underlying blockchain grid together.
Figure 5: Top 10 DeFi Assets Weekly Performance
Uniswap community is currently undergoing a governance discussion to determine the viability of launching on the Avalanche network using the LayerZero Bridge. In addition, Uniswap established a committee to discuss various bridging solutions. Known as a Bridge Assessment Committee, the six-member group is expected to conduct due diligence on eight bridges and three bridge-agnostic solutions. This is a pivotal step to accelerate the decision-making process when choosing the right bridge to expand the protocol's reach in the upcoming chain expansions. The decision was also made to rectify the chaos that ensued during the last governance vote on deciding which bridge solution to deploy on the BNB chain.
Finally, Uniswap revealed the curtain on their new mobile wallet application. The friendly interface will allow users to switch seamlessly between multiple networks and trade tokens and NFTs on the go. Although Apple has already rejected the foundation team's plea to list it on the App store, the wallet should help increase revenue for the protocol as it allows for cross-chain and noncustodial trading using Uniswap's underlying protocol. Similarly, Pancake swap V3 is expected to go live on BNB during the first week of April. The development comes at a crucial time when the Uniswap V3 license is about to expire, while the exchange hasn't launched on BNB yet. This leaves a gap for Pancake Swap to continue dominating the alternative L1 as the Uniswap license enters the public domain.
Aave: is holding a governance discussion to determine the validity of deploying on Polygon’s upcoming zkEVM network. Although the protocol has been live on Polygon zkEVM testnet since mid-2022, Aave hopes to launch an MVP as soon as Polygon’s mainnet goes live to have a strategic first-mover advantage while offering a limited implementation of the protocol. To that end, Aave’s revenue has been steadily increasing over the past five months, so it is reassuring that the protocol continues to expand to more chains to amplify its presence across the smart-contract ecosystem and cultivate profits. That said, it’s encouraging to see DeFi blue-chip protocols racing to expand to Polygon as the network will rely on critical service providers to power up its financial industry.
*Figure 6: Aave Monthly Revenue (share of interest + liquidation fees) vs *Earnings (revenue - token incentives)
NFTs and Metaverse
The future of Web3 is zero-knowledge proof: With a year under development, Polygon’s zero-knowledge (ZK) ID solution came to the light. The Polygon ID service uses ZK proofs that use cryptographic techniques to allow users to verify their identity online without having to give up sensitive data or risk having them stored on third parties. There’s over a dozen Polygon-based crypto and NFT projects such as The Sandbox, Kaleido, Fractal and Collab.Land, who are already building using Polygon ID hoping to integrate decentralized identity into their Web3-native applications. that comes with a developer toolkit. This toolkit comprises of four tools:
Wallet App, using the iden3 protocol and Circom ZK toolkit.
Figure 7: NFT Marketplaces Volume Market Shares
Source: 21shares on Dune Analytics
Marketplaces continue to incentivize users: Opensea successfully upgraded its NFT marketplace to Seaport 1.4 that supports listing of multiple NFTs with a single signature. On the other hand, Magic Eden has embarked with its users on a month full of free gaming NFT mints, with 13 projects preparing to launch on the platform. “Mint Madness" is intended to showcase collections across Polygon, Ethereum and Solana. There will also be a 20K MATIC prize pool for the top 10 traders of the marketplace’s Polygon mints.
More adoption from traditional finance:: Deloitte and Sinclair Broadcast Group said they'll be launching a new metaverse sports fan community experience leveraging the fan base of Epic Games' Unreal Engine which is a 3D creation tool that brings robust experiences to life in real time. Visa also announced this year’s cohort of its Visa Creator Program, which consisted of NFT entrepreneurs, which is another sign of how icons from the world of traditional finance continue to position themselves as the grownups in the room. This phenomenon poses a double-edged weapon, as it could benefit the ecosystem on the back of TradFi’s experience, but could also compromise the independence of the industry.