October 2023
Wake me up when September ends?
Reality check on the status of Ethereum network – one year after “The Merge”:
In September 2023, Ethereum celebrated the one-year anniversary of a monumental shift—the successful transition from proof-of-work to proof-of-stake (PoS). This transition, known as the Merge, held great promise for the future of blockchain technology. Let’s delve into the expectations set a year ago and analyze the current reality.
1. Anticipation of a Strong ETH Rally:
- Initial expectations hinted at a significant rally for ETH in comparison to BTC, particularly around the time of the Merge. However, the actual ETH to BTC ratio declined from just under 0.08 to 0.06 over the course of the year.
- This decline could be attributed to market dynamics and the market’s anticipation of SEC approval for a BTC ETF, while the possibility of a spot ETH ETF seemed more distant.
2. Trade Volumes and PoS Impact:
- Throughout the past year, trade volumes for ETH remained lackluster, showcasing a decline in comparison to top 30 altcoins. Despite this, the transition to PoS has been marked as successful, evident in the growth of Lido Staked ETH (stETH) holders.
- Liquid staking derivatives have gained popularity, offering a convenient method for users to access ETH staking rewards.
3. Lido Dominance and Decentralization:
- Lido, as the largest validator pool, raised concerns about centralization. It accounts for a significant portion (30.6%) of the total active validator pool, raising questions regarding security and centralization risks.
- However, Lido’s structure includes multiple staking operators, mitigating centralization concerns and operating under defined governance mechanisms.
4. Validator Profitability and Monetary Policy:
- The increasing number of validators impacted individual yields, as revenues are now shared among a larger pool of validators. Ethereum’s monetary policy, influenced by validator earnings and the base fee burn mechanism introduced in EIP-1559, is a crucial factor.
- Despite a deflationary trend post-Merge, recent low user activity on the network is nudging it toward inflationary dynamics.
5. Ethereum’s Evolution and Network Activity:
- Beyond the Merge, Ethereum is on a trajectory of continuous evolution. It aspires to enhance economic security and ultimately serve billions through decentralized applications.
- Despite a slight decrease in daily active addresses compared to the previous year, Ethereum maintains a robust stablecoin ecosystem, handling significant transactions such as $3B of USDC transfers on the network in a week.
The Merge was a substantial milestone, setting the stage for Ethereum’s ongoing evolution and future development. However, its aspirations extend beyond the Merge, aiming for widespread adoption and extensive utilization of decentralized applications, demonstrating the network’s resilience and adaptability.
Tokenomy Research Team
The Financial Accounting Standards Board, a U.S. regulating body that sets general accounting practices, has approved new rules to allow companies to report their crypto holdings at fair market value. The rules will be published by the end of 2023 and become active in 2025, but companies can apply the rules early, Bloomberg Law reported. Wrapped tokens are exempt from the new rules.
Previously firms had to use impairment value for their crypto holdings but now fair market value is accepted. The big winners will be firms that are holding crypto as treasury. Whilst this will not be a catalyst for immediate further institutional participation, this is the type of structural change that has a positive impact on the medium and long term.
Key financial market infrastructure players, the DTCC, Clearstream and Euroclear, published a paper outlining how they can help the securities industry embrace digital assets and the benefits of adopting DLT. While recognizing that DLT offers major benefits, they highlight the current fragmentation challenges around liquidity and standards as well as a lack of scalability. And they believe they can help with coordination.
The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have issued regulatory recommendations to respond to crypto-asset-related policies. IMF and FSB discourage countries from an outright ban but instead suggest comprehensive regulatory and policy oversight. As the policymakers write: “Restrictions should not substitute for robust macroeconomic policies, credible institutional frameworks, and comprehensive regulation and oversight, which are the first line of defense against the macroeconomic and financial risks posed by crypto-assets”. This comprehensive regulatory and policy framework is positive and exactly what the crypto ecosystem has been pushing for years.
The Bank for International Settlements (BIS) wants countries to set up clear and updated legal frameworks that support the deployment of CBDCs. BIS chief Agustín Carstens gave policy recommendations for jurisdictions working on these issues and warned that outdated legal frameworks in different jurisdictions could hinder the development of CBDCs. BIS also released a report, concluding its CBDC pilot which tested the cross-border trading and settlement of CBDCs between financial institutions, using innovations derived from DeFi. BIS said that elements of DeFi could form “a new generation of financial market infrastructures.”
Franklin Templeton has joined fellow asset managers Fidelity and BlackRock filed an application to issue a U.S. exchange-traded fund that invests directly in Bitcoin.
Once the application has approved, the California-based firm, which oversees more than US$1.4 trillion in assets, plans to use Coinbase Global as custodian for the fund’s Bitcoin holdings and Bank of New York Mellon for cash.
ARK Invest and 21Shares file with the SEC for a spot Ether ETF. The filing is the latest in a recent wave of applications from asset managers seeking approval for spot crypto funds. Ark and 21Shares were an early mover when it came to filing for a spot bitcoin ETF, which the SEC moved to delay a decision on last month. The pair last month also applied for a fund that would invest in bitcoin and ether futures.
Digital currency investment company Grayscale has filed with the U.S. SEC for a new Ether futures ETF. This news comes after Grayscale scored a major, though partial, victory against the SEC last month in its efforts to convert its over-the-counter Grayscale Bitcoin Trust (GBTC) into a listed spot Bitcoin ETF.
In the last week of September, the U.S. SEC moved to delay a decision on the proposed Global X and ARK 21Shares Bitcoin ETFs to 21 Nov this year and 10 Jan next year respectively. The SEC has begun considering applications for spot crypto ETFs from Franklin Templeton and Hashdex, while announcing delays in decisions in approving VanEck’s and ARK’s ether ETF applications. The Commission has frequently delayed decisions, looking to use the entire 240 days. Later the same week, the SEC said it is instituting additional proceedings to determine whether the proposed Valkyrie Bitcoin Fund ETF should be approved or disapproved. Similar proposed funds from BlackRock, Bitwise and Invesco were also delayed.
J.P. Morgan says “deposit tokens” could trade on DeFi network like stablecoins.
Surging interest and continued advancements in blockchain underscore the necessity for blockchain-based “cash equivalents,” the bank said alongside consulting firm Oliver Wyman in a recent joint study. J.P. Morgan concluded that bank-issued deposit tokens are much safer than stablecoins for major institutions looking to transfer value across chains.
Citigroup debuted a token service that’s part of a broader push to offer digital assets to institutional clients. The product—known as Citi Token Services—will transform customers’ deposits into digital tokens that can be sent instantly anywhere in the world. The service is housed in the firm’s treasury and trade solutions division, which has so far focused on using it to improve cash-management and trade-finance capabilities.
Deutsche Bank plans to hold crypto on behalf of institutional clients. Deutsche Bank has partnered with Swiss crypto firm Taurus to provide custody services for institutional clients’ cryptocurrencies and tokenised assets. The partnership means Deutsche Bank will, for the first time, be able to hold a limited number of cryptocurrencies for its clients, as well as tokenised versions of traditional financial assets.
Nomura’s digital assets subsidiary Laser Digital has introduced a new fund providing BTC exposure to institutional investors. The Bitcoin Adoption Fund will provide long-only exposure and will be the first in a range of such digital asset investment products offered by Laser Digital.
Visa is expanding its stablecoin settlement capabilities by tapping USDC stablecoin and the Solana blockchain, in a bid to improve cross-border settlement. Visa has also started pilot programs with merchant acquirers Worldpay and Nuvei, in which their clients may now choose USDC settlement instead of receiving fiat.
Google Cloud has added support for 11 additional blockchains into its BigQuery analytics service. These networks are Avalanche, Arbitrum, Cronos, Fantom, Near, Optimism, Polkadot, Polygon, Tron and the test networks Polygon Mumbai and Ethereum Goerli. Users can now make intricate on-chain queries, such as assessing the number of NFTs minted or contrasting transaction fees across these chains. In 2018, Google Cloud launched its blockchain data services in BigQuery — aiming to grant developers access to on-chain data from Bitcoin and Ethereum.
MicroStrategy adds to its bitcoin coffers with purchases totalling ~$150 million. MicroStrategy, one of the largest bitcoin holders, bought 5,445 bitcoins for ~$147.3 million USD, at an average price around $27,053 USD. The purchases were made between August 1 and September 24. The company said it was considering buying even more.
Grab, a super-app popular in Southeast Asia, has incorporated Web3 services whereby users can now set up a Web3 wallet, win blockchain-based rewards, pay with NFTs, and more. In June 2023, Grab signed a pilot study with the Monetary Authority of Singapore surrounding the use of CBDCs, tokenized bank deposits, and stablecoins. Grab, along with Amazon and Southeast Asian financial services firm Fazz, has also tested escrow arrangements for a new digital asset-based payment system called Purpose Bound Money.
Coinbase will integrate the layer-2 payment protocol Lightning Network. Coinbase CEO Brian Armstrong said in a tweet that “Bitcoin is the most important asset in crypto, and [Lightening] will enable faster and cheaper Bitcoin transactions for our users…but it will take some time to integrate, so please be patient”.
- Summary of Token2049 Singapore. This report by Bullish highlights the key panels and takeaways from the Token2049 conference held in Singapore this month.
- Are we there yet? This thought piece by Arthur Hayes explores the routine question investors are asking in the never-ending search for the next bull market.
- One year after the “Merge”. September 2023 marks the one year anniversary of the landmark upgrade of the Ethereum network. CoinMetrics tell you in this paper whether the Proof-of-Stake network has been effective. Kaiko Research also provides another viewpoint with data analytics and charts.
- Bitcoin Post-Halving 2024. Bitcoin experiences halvings once every four years with the next one happening in 2024. This short piece dives into this phenomenon focusing on the supply dynamics, network security and potential impacts of the Bitcoin ETF.
- Contact us to start building crypto wealth and securing your financial health!
If you want to continue receiving the Crypto Investor Briefing, please click here to subscribe.
Crypto Investor Briefing is a Tokenomy newsletter—the content is for informational purposes only. You should not construe any such information or material as legal, tax, investment, or financial advice.
