Issue 167: More TradFi Workforce Joining Crypto Firms, NFTs Authenticating Car Parts, and More!

This Week in Crypto

The Federal Reserve is rolling up its sleeves as another big US inflation number looms. Other countries expecting large inflation rates as well include Canada, New Zealand, and South Korea. US inflation has had a ripple effect on equity markets in Europe as well with Stoxx 600 index plunging for two consecutive days over the past week. The ripple effect didn’t shy away from the crypto market, however the market cap continues to move sideways, up 0.5% week over week as contagion uncerntainty has not yet settled.

Figure 1: US inflation climbing to a four-decade high

Source: Bloomberg

Key takeaways

• Binance in Spain
• Bitcoin showing signs of accumulation
• Celsius starts paying its debts
• Lamborghini uses NFTs to authenticate car parts
• Three Arrows Capital contagion leaves Voyager bankrupt

Macro, Regulations; Spot, and Derivatives Markets

On Thursday, Russia’s President Vladimir Putin said they’re just getting started in Ukraine while saying that they’re still open for peace talks, which are getting more difficult with the size of damage caused in the aftermath. So far, allegedly more than 14,000 have been killed, and at least four cities have been completely destroyed. US President Joe Biden is set to meet with the Israeli prime minister and the Saudi Crown Prince on his first trip to the Middle East, to solidify allies in the region to help fill in the gap that the war has opened in terms of energy resources.

Unlike its inflation rate, the US job market is showing stronger job growth than expected and an unemployment rate near a five-decade low. On this note, more people from traditional finance are leaving their jobs for crypto companies. The most recent move was from three JPMorgan executives who joined Algorand, Digital Currency Group, and the crypto-focused investment firm Pantera Capital.

Binance’s CEO Changpeng Zhao met with leaders in Senegal and Ivory Coast as part of Zhao’s initiative to champion the adoption of crypto in Africa, saying that the continent is primed for crypto adoption, with not more than 20% of the population banked. Binance has also been strategically growing its legal and compliance team in order to make its ambitions a reality. Moon Tech, Binance’s subsidiary in Spain, got granted registration as a virtual asset services provider by the country's central bank.

Voyager’s filing for bankruptcy has rung some alarm bells; the Federal Deposit Insurance Corporation is investigating the company’s insurance claims. India’s law enforcement on the other hand is probing crypto exchanges for foreign exchange violations after the rupee dropped 7% against the US dollar since January. Some regulations on the table over the past week include:

• The US Treasury published a framework for international engagement on digital assets.
• Her Majesty’s Revenue and Customs is asking for input from investors, professionals and organizations involved in DeFi on the taxation of cryptoasset loans and staking.
• The European Central Bank is inviting experts to technical talks about the digital euro project.

On-chain Indicators

Some signs of accumulation are appearing on Bitcoin’s on-chain indicators, which include the market value to realized value (MVRV) Z-score and moving average as shown in Figure 2.

Figure 2: Bitcoin MVRV Z-Score shows signs of accumulation

Source: Glassnode

The MVRV Z-score measures the deviation of market value from realized value and is another indication of undervaluation. The MVRV turned negative in mid-June; an MVRV Z-score below zero has historically marked bear market lows, while a reading above seven has marked major bull market tops.

DeFi

The crypto contagion continues, with Voyager filing for bankruptcy on the back of a $650M loan defaulted by Three Arrows Capital, a crypto hedge fund that was ordered to liquidate on June 27. Others, however, powered through this past week despite some hurdles. Celsius reclaimed $172M collateral from Aave and Compound by paying down $95M to the DeFi platforms. Celsius also paid down $41M to Maker on July 7, freeing up its $440M collateral. A day later, Tether announced it has liquidated its overcollateralized BTC loan to Celsius with “no losses” to the stablecoin issuer

Aave proposed to its community a decentralized, algorithmic, yield-generating stablecoin, GHO, whose role is to enhance its lending protocol. If approved, the introduction of GHO would make stablecoin borrowing on the Aave Protocol more competitive, provide more optionality for stablecoin users and generate additional revenue for the Aave DAO by sending 100% of interest payments on GHO borrows to the DAO.

Stablecoins also gained some institutional adoption this past week. The EU-regulated payment bank Banking Circle added USDC onto its payment rails, with Coinbase as one of the bank’s liquidity providers. Banking Circle is fully licenced yet free from the legacy systems that can make traditional business banking slow and expensive.

MakerDAO called for a vote last week on a proposal to provide a $100M DAI Vault to Huntingdon Valley Bank, a 151-year-old lender in Pennsylvania with $500M in assets. The poll closed on July 7, with the community voting in favor of the proposal, with a 87.24% voting yes. The proposal is the latest move in MakerDAO’s pivot to embrace real-world assets (RWAs), with the project seeking to diversify its exposure beyond overcollateralized loans taken out against digital assets.

In a bid to prioritize transparency and decentralization, Tornado Cash Classic made its UI open source. Any public contributor could review the code and make a pull request on the project’s GitHub to enhance the design of the decentralized mixer protocol.

NFTs, Metaverse, and DAOs

A fake job ad on LinkedIn turned out to be the culprit behind the Ronin exploit, costing Axie Infinity $540M back in March. It all happened when a senior engineer downloaded the fake job offer in PDF; little did they know that the file contained spyware that essentially took over four out of nine validators on the Ronin network.

In fact, a report published last week by blockchain security firm Certik identified social media as a ‘major Web3 pain point’ as phishing attacks increased by 170% in Q2, most of which happened on social media platforms lacking verification of their users, such as Discord and Telegram.

In a $32M Series A led by Animoca and Samsung Next, Planetarium Labs is setting its sales to engage its community to develop open-source games and participate in the governance of the Web3 game company.

On the other hand, the realm of NFT marketplaces saw some developments in the past week, which include:

• Reddit is launching an NFT marketplace for avatars on Polygon.
• Sudoswap introduced sudoAMM where users can gradually buy or sell NFTs, provide liquidity and trade with a lower fee.
• Gamestop finally launched its long-awaited NFT marketplace built on Ethereum and Loopring, a layer 2 scaling solution.

Last week was also a testament to the plethora of use cases Web3 tools can offer. A Lamborghini-backed GT racing team partnered with NFT platform Go2NFT to launch a program that certifies racing car parts. They’re also looking into expanding the NFT certification program to official merchandise and other products. This is a use case our team has been looking forwards to, and we’re expecting it to be replicated across other industries.

Last but not least, activists turned to Web3 tools to fight for reproductive rights on the back of the reversal of Roe v. Wade. A DAO that surfaced over the past week is UnicornDAO, launched in March 2021 to become dedicated to collecting and incubating NFTs created by female, non-binary, and LGBTQ+ artists on Web3. UnicornDAO created the following:

• Proof of Protest, an NFT collection launched by UnicornDAO on Polygon’s Lens Protocol
• LegalAbortion.eth, a Web3 Ethereum wallet that any NFT creator, decentralized application or decentralized finance protocol can use to donate crypto.
• Endaoment’s Protect Reproductive Rights fund is the ultimate destination for all funds collected.

Crypto Infrastructure

The contagion of Three Arrows Capital (3AC) continues to extend between crypto infrastructure layers. The default impact on the crypto exchange, Blockchain.com is approximately $270M. According to their CEO, the exchange is still solvent and liquid. However, another crypto exchange Voyager, which has loaned $650M unsecured debt to 3AC, has filed for bankruptcy and voluntarily delist its common share from the Toronto Stock Exchange.

The largest centralized exchange, Binance has introduced controversial zero-fee trading for 13 Bitcoin-Stablecoin spot trading pairs. However, it has incurred potential wash trading on the platform as there was unusual volume. Wash traders could use this opportunity to attain a higher VIP tier on Binance to gain more privileges. Therefore, Binance has later excluded the zero-fee Bitcoin trading pairs from VIP calculations.

Ethereum will officially transition to Proof-of-Stake after The Merge. As of the latest development, The merge has successfully launched on Sepolia testnet. The last testnet before the official merge will be on Görli. Meanwhile, Ethereum layer-2 solution, Polygon has been expanding rapidly. 48 projects have migrated from Terra to Polygon. Polygon’s Zero-Knowledge(ZK) Rollup solution, Polygon Hermez, will also roll out Ethereum Virtual Machine(EVM) compatibility so that developers can easily migrate their projects to Polygon Hermez.

There are other developments and updates from various crypto entities:

• Opera integrates Coin98 for Web3 accessibility
• Crypto exchange Bitstamp to charge 10 euro inactive accounts a fee
• Russian citizens or residents are banned from accessing BitMEX within EU
• Crypto Lender Vauld has disclosed a shortfall of $70 million Link
• Coinflex update the deficit from $47M to $84M

Weekly Returns

The returns of the top five cryptoassets over the last week were as follows — BTC (-0.94%), ETH (-3.2%), BNB (-2.07%), ADA(-4.68%), XRP (-3.29%).

Media Coverage

The insights gathered by the research team of 21Shares has been making waves in the media last week. In light of our last analyst call, our very own Director of Research Eliezer Ndinga got featured on The Block, you can read the full article here. To tune in on our next analyst call happening tomorrow at 4pm CET/10am EST, register here.

On another note, Research Analyst Tom Wan’s Dune Dashboard tracking 3AC and Celsius wallets was featured multiple times in the past week. You can read one report by Crypto News here and watch to this Bankless episode where the dashboard was featured.

News - Bitcoin Core Developer Scales Back His Maintenance Role

What happened?

A key player in the Bitcoin ecosystem, Peter Wuille, is scaling back his contributions to Bitcoin Core, the primary implementation of the Bitcoin software that connects to the blockchain. Given both his influence in the Bitcoin community and his role at Chaincode Labs, Wuille clarified that he will continue contributing code to the project.

Why does it matter?

Bitcoin Core is where open-source developers provide vital research, peer review, testing and documentation. Since 2011, Wuille has made thousands of contributions to Bitcoin Core:

• Bitcoin Improvement Proposal (BIP) 32, which introduced seed phrases for storing and recovering private keys more easily.
• Segregated Witness (SegWit), which provided a new, efficient way of storing data in blocks.
• Taproot (BIPs 340, 341 and 342), which provided developers with a valuable set of tools to integrate new features that will improve privacy, scalability and security.