This Week in Crypto

• Crypto Recovers As U.S. Elections Excitement Escalates 
• Realizing the “Internet of Blockchains” Vision with Polygon 2.0

Crypto Recovers As U.S. Elections Excitement Escalates

U.S. inflation cooled in June, with the Consumer Price Index (CPI) decreasing by 0.1% and the annual rate at 3%. Following this, Fed Chair Jerome Powell indicated that while they won’t wait for inflation to hit 2%, more confidence is needed before cutting rates. The CME FedWatch tool now shows a 90% probability of a 25-bps rate cut in September. Meanwhile, the excitement around the U.S. presidential elections has been the main market driver, overshadowing rate-cut hopes. On July 21, President Joe Biden announced he’d drop out of the elections, sparking a moderate rally in the crypto market.

On the other side of the aisle, Donald Trump has been turning heads with a series of moves deemed positive by the crypto market, the latest was naming JD Vance as a vice presidential nominee. When running for Senator in 2021, Vance disclosed he held $100K worth of Bitcoin. Additionally, Trump’s VP running mate has also been a big champion for crypto-friendly legislation as the Senator of Ohio, at times even defending decentralized protocols against the Securities and Exchanges Commission. After voicing his allegiance with the crypto industry and promising policies in its favor, it’s without a doubt that markets are excited about the prospects of Trump’s presidency, and the derivatives market confirms that. As shown in Figure 1, the Futures Open Interest (OI) on centralized exchanges picked up by 19% over the past week.

Figure 1 – Bitcoin Futures Open Interest 

Source: Glassnode

Between July 14 and 21, Options OI increased by 28%, Options OI has surged by 28%, with more traders expecting prices to rise, as the put/call ratio stood at 0.45. Options traders are preparing for some heightened market movements; Trump is scheduled to speak on July 27 on the final day of the Bitcoin Conference in Nashville. There have been speculations that he could announce holding Bitcoin as a strategic reserve asset in his presidency. That is due to Bitcoin’s predetermined monetary policy with a fixed supply, bolstered by the fact that the U.S. government already holds 0.83% of Bitcoin’s circulating supply. 

What else can we expect this week? Most importantly, the Core Personal Consumption Expenditure (PCE) will be released on Friday and will provide insights into consumer spending behavior. This will be crucial as PCE is a key indicator that influences the Fed’s outlook on inflation.

Finally, the SEC has approved ETH Spot ETFs for trading in the US. With over eight regulated products now available, investors have more options to get exposure to the second-largest crypto asset by market cap. This approval enhances the credibility, acceptance, and confidence in the digital asset industry, potentially directing significant inflows into ETH— expected to be around 20% of what BTC ETFs have secured at best. Moreover, this development is expected to boost interest in the Ethereum ecosystem's application layer, which includes DeFi primitives and a variety of decentralized applications that form the next generation of the internet-native permissionless economy. On their first trading day, spot Ethereum ETFs collectively registered $1.1 billion in total value traded, nearly 20% of the volume recorded on the inaugural trading day of BTC ETFs in January, amounting to $4.4B.

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Realizing the “Internet of Blockchains” Vision with Polygon 2.0

Polygon is set to initiate its token migration, transitioning from MATIC to POL on September 4, 2024. This pivotal move follows months of discussions surrounding the Polygon 2.0 upgrade, which transforms the network from a basic Ethereum scaling side-chain into a versatile, interoperable network of scaling solutions. A major aspect of this upgrade is the creation of an ecosystem of interconnected networks utilizing Zero-Knowledge technology, with Polygon acting as the central layer connecting them. Additionally, the new architecture introduces an AggLayer, which offers a unified liquidity layer across all networks developed using Polygon's Chain Development Kit (CDK). Check out our previous coverage here to have a better understanding of AggLayer.

To prepare for Polygon 2.0, the network’s foundation announced that MATIC will get upgraded to POL last October. However, the timeline for this migration remained unclear until last week. With the recent announcement, September 4 is the target date. This upgrade will see POL become the gas currency for interacting with the ecosystem, akin to ETH, as well as the staking token for users contributing to the validation of Polygon and its associated CDK-based chains. According to the foundation’s plan, MATIC on Polygon POS will be converted to POL, combined with staked MATIC on Ethereum mainnet, which will also be converted into POL. Thus, we expect to see a surge in the total percentage of converted tokens, which will jump from the current estimate of around 0.5%, as seen below, up to 50% following September 4.

Figure 2 – The Migration Progress of MATIC to POL Conversion.

Source: 21co at Dune

In that view, POL will serve as a hyperproductive token, enhancing its functionality beyond merely securing a single network. It will also act as a re-staking token, validating the security of multiple networks. This expanded role will enable holders to engage in various capacities within the network, allowing them to earn diverse rewards linked to different services. For example, POL will play a key role within the AggLayer, although the specific nature of its involvement is yet to be determined, pending a community governance vote. Consequently, rewards may be tied to the security validation of all networks within the Polygon ecosystem in conjunction with the operations of the AggLayer.

What stands out, though, is the long-term strategy for POL. The foundation highlighted the potential for the token to facilitate block and ZK-proof generation and participation in data availability committees (DAC). This innovative approach could serve as a valuable blueprint for other scaling solutions, demonstrating how to unlock greater utility. For instance, consider Arbitrum and Optimism; the tokens for both networks have sparked controversy due to their high valuations, especially as they’re primarily limited as governance tokens. However, if they were to adopt Polygon’s proposed model, we might see both networks allow their tokens to be staked. This approach could foster greater community participation in the centralized sequencer operations, allowing anyone who stakes their tokens to take part in the process. This not only decentralizes a vital aspect of the network's infrastructure but also mitigates the risk of a single point of failure.

Next Week’s Calendar

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