21Shares Monthly Review

This Month in Crypto: Executive Summary

Resistance did not go unnoticed against April’s regulatory headwinds. In fact, Bitcoin exhibited some investor appetite following the failure of another US bank, First Republic Bank (FRB), which JP Morgan acquired. Bitcoin and Ethereum increased by almost 3% over the past week. In addition, Bitcoin increased a whopping 15.6% in assets under management, or total value locked (TVL), possibly due to the rapid development of the network, which has witnessed an all-time high inching closer to 3 million NFT inscriptions. As shown in the figure below, the biggest winners of last month’s rally are Cardano (21.5% in TVL) within the settlement layers commonly referred to as Layer 1s, Arbitrum (1.15% in TVL) within Ethereum’s scalability solutions referred to as Layer 2s, and finally MakerDAO (1.35% in returns) within the realm of DeFi which saw the sharpest decline in April in comparison to the two other crypto sectors.

Figure 1: Price and TVL Development of Major Crypto Sectors in April

Source: 21Shares, Coingecko, DeFi Llama. Data as of Apr 30, 2023.

Key takeaways from this report:

ETH withdrawals are enabled, Avalanche introduces institutional-client-focused subnet
Tokenization continues to prove to be Crypto’s killer use case
NFT inscriptions on the Bitcoin network have soared to new record highs, surpassing 2.5M, soaring the TVL on the network by almost 16% in April.

Spot and Derivatives

Figure 2: Bitcoin Liquidations

Source: Coinglass

April saw the largest liquidations since February, reaching a maximum of $246M and $262M in short and long positions, respectively. April saw a rollercoaster of market reactions as the industry was initially spooked on the back of a false alarm triggered by the Arkham Intelligence data platform indicating that MT Gox claimants were moving large sums of dormant BTC on the 16th of April, triggering a wave of long liquidations. Bitcoin then aggressively reacted to the news surrounding the failure of First Republic Bank by soaring 7% the following week, a move reminiscent of Crypto’s reaction to the now-defunct SVB back in March.

On-chain Indicators

Figure 3: Ethereum Deposits and Withdrawals

Source: Hildobby / Dune Analytics

Contrary to the speculation leading to the Shapella upgrade, which enabled withdrawals for the Ethereum network, users have been predominantly un-staking their rewards rather than their entire principal staked amount, as shown above. This echoes our belief that stakers are long-term believers of the Ethereum network, and as such, enabling withdrawals should merely be a non-event for them. In other words, users will be keen on withdrawing their rewards to unlock capital. Even so, they might re-stake it through the variety of liquid-staking protocols to use the idle capital across the DeFi ecosystem rather than exiting the Ethereum network completely.

Macro and Regulations

Easing inflation: US CPI data indicate that inflation eased for the ninth consecutive month, falling 6% from February. Moreover, the flight to Bitcoin continues from March as a second-order effect of the banking crisis in the U.S. Addresses with 1 Bitcoin or less added increased from 914K to over 1M since the collapse of FTX alongside the banking debacle via Glassnode.

Is Bitcoin mining becoming greener? Research suggests that more than 50% of off-grid mining is powered by hydroelectric power. The research conducted by Daniel Batten, founder CH4Capital, suggests that Bitcoin mining consumes 38% less fossil fuel than electric vehicles. The research includes off-grid Bitcoin mining, which is not covered by the Cambridge Center for Alternative Finance, the primary source used for Bitcoin mining energy consumption. The Bitcoin network hash rate is on the rise, up almost 40% year to date.

Europe and Hong Kong said their final word on crypto. The EU’s landmark legislation, “Markets in Crypto Assets” (MiCA), passed into law and is scheduled to be effective next year. MiCA has been widely celebrated within the crypto community, especially when the parliament dropped the controversial provision mandating a ban on proof-of-work mining. The legislation lays out a group of licensing regimes that would help regulate and safeguard the crypto industry in the 27 member states in a manner that would mitigate meltdowns like Terra Luna and FTX. On the other hand, Hong Kong declared cryptoassets as digital properties, an exercise deemed heavier in other jurisdictions. The US remains divided on the verdict ruling cryptoassets as a commodity or security.

Crypto in Court: Crypto exchanges have been battling for clear regulations while playing it by the rules. Kraken withdrew a significant portion of its staked ETH as part of the settlement with the Securities and Exchange Commission (SEC), which ordered the world’s third-largest crypto exchange to discontinue its staking-as-a-service program back in February. Only a day before the EU parliament passed the MiCA framework, the Central Bank of Ireland granted Kraken the authorization to become a virtual asset service provider (VASP). Last month, the exchange filed a pre-registration undertaking with the Ontario Securities Commission to become a Restricted Dealer across Canada, despite its adversary regulations.

Also wrestling with the SEC, Coinbase has secured a license from Bermuda and is considering launching an offshore derivatives exchange soon. The second-largest crypto exchange filed a narrow action in the US Circuit Court to compel the SEC to respond “yes or no” to a rulemaking petition they filed last July asking them to provide regulatory guidance for the crypto industry. Coinbase is taking it upon itself to continue driving the commodity vs. security debate on behalf of an entire industry. At 21shares, we believe this is the right way to reach sound, clear regulations that would protect investors while encouraging innovation.

Crypto Infrastructure

Smart-contract platforms

Ethereum: The Shapella upgrade was executed successfully on April 12, enabling users to withdraw their staked Ether after ~2.5 years and marking the complete transition to a fully-fledged proof-of-stake network. The major upgrade was a success for Ethereum, considering users' subsequent ability to exit their validator's position, withdraw their rewards, and even re-stake without significant disturbances.

Worth mentioning that Kraken is accountable for a significant portion, constituting 48% or 603K of the total ETH out of the 1.97M ETH withdrawn, which shows the exchange's compliance with the SEC request to shut down its staking offering for US customers. We have also yet to see the impact of Lido, as the staking provider is slated to activate its withdrawals by the second week of May. Another positive development is the influx of deposits (>400K ETH) led by staking providers like staked.us, stakefish, P2P.org, and Coinbase, who mainly cater to institutional players. This is encouraging as it demonstrates that sizable players are now willing to participate in the Ethereum economy after the Shanghai upgrade has addressed the liquidity issues. Check out our dashboard on staking for real-time updates on withdrawals and deposits. Finally, the Ethereum core development team will now focus on improving scalability as part of its next major undertaking on the Ethereum roadmap, known as Proto dank-sharing (EIP 4844), making it cheaper to use L2 networks like Optimism and Arbitrum, and Polygon.

Figure 4: Ethereum Withdrawals Statistics

Source: Token.unlocks

Similarly, the Cambridge Centre for Alternative Finance demonstrated that Ethereum’s energy consumption level post-merge now matches the energy produced by a raspberry. In contrast, Proof-Of-Work Ethereum’s energy was comparable to the London Block Tower. This is excellent for the network as it continues garnering the interest of financial and governmental institutions while becoming ESG conscious, as the recent developments around tokenization have highlighted the rising interest in blockchain as infrastructure.

Avalanche: Ava Labs introduced Evergreen subnets, a new feature on the Avalanche network to accelerate its adoption by financial institutions. This tool enables the creation of permissioned networks that meet the specific requirements of institutions while still benefiting from the security of a public blockchain. Institutions can set up their private networks while still being anchored to the broader Avalanche network for scalability, network liquidity, and interoperability on the back of the Avalanche Warm Messaging system. For example, Cumberland is already experimenting with the network to build the "spruce" testnet for executing foreign exchange and interest rate swaps and planning test tokenized equity and credit issuance if preliminary tests yield positive results. The trend of subnet adoption is evident as Avalanche's active addresses hit a six-month high in April.

Figure 5: Avalanche Subnets Daily Active Addresses

Source: Avalanche Subnet Explorer

Solana: The Solana Saga phone has finally arrived. The device runs on the Android operating system and has several Web 3 integrations that abstract the complexity of dealing with native-blockchain features. For instance, private keys are now stored internally in a secure hardware environment called the seed vault, linked to the device's biometric signatures. The vault's integration with the phone's Web 3 dedicated app store allows users to sign transactions like swapping tokens or mining NFTs using the device's fingerprint sensor. In addition, the phone's camera allows for innovative features such as converting pictures into NFTs instantaneously. Although there'll be some expected user experience glitches initially, the product is a constructive step in the right direction as it helps people forget about the complexities of the underlying blockchain technology and focus instead on its benefits.

Finally, Solana Labs announced that a ChatGPT-based plugin would start rolling out soon, tailored to their blockchain. The chatbot will help users query on-chain balances, purchase NFTs, and transfer tokens. Leveraging AI to help accelerate the onboarding of users helps reduce the complexities for beginners, so this is definitely a step in the right direction for the Ethereum competitor.

Scalability Platforms

Google Cloud and Polygon Labs forged a strategic alliance aimed at supporting the adoption of core Polygon protocols, including PoS sidechain, Supernets, and the zkEVM scaling solutions through the use of the giant’s Cloud infrastructure and developer tools. To simplify launching applications across Polygon, Google Cloud is set to provide its fully managed node hosting service, Blockchain Node Engine, to the Polygon ecosystem and expand the range of cloud services on offer. Polygon also released its zkEVM bridge to help in transferring DeFi and NFT tokens from the Ethereum mainnet onto its newly launched rollup solution.

Optimism: A16z is launching a client software for the Optimism network. Dubbed Magi, the roll-up conesus client will be built using the Rust programming language to help attract a broader base of software developers compared to the existing solo solution, op-node, written using the Go programming language. Client diversification is crucial as it progresses decentralization across the node infrastructure layer, diminishing the single points of failure across the Ethereum ecosystem. This is a worthy development as it proves that institutional adoption takes different forms, not just participation in early seed investment to help bootstrap capital for emerging projects. In the case of Optimism, A16Z instead contributed directly to the ecosystem to increase its decentralization and make it more robust by introducing the new client software. The scaling solution race is one of the key themes to monitor this year as it significantly improves the user experience on-chain, especially as the real-world tokenization of assets arrives, among other exciting use cases.

Decentralized Finance

Figure 6: Monthly Performance of Top 10 DeFi Assets

Source: Coingecko, 21shares.

Stablecoins

USDC: Circle, the issuer behind the second largest fiat-collateralized stablecoin USDC, announced Cross-Chain Transfer Protocol (CCTP). The interoperability technology will enable users to natively transfer their USDC from one network to another without encountering the issues inherent in traditional bridges. Mainly, CCTP will alleviate the need for lock-and-mint bridges, which raises many security concerns as the bridge becomes a honeypot for hackers, and replace it with the burn-and-mint technique. Specifically, the protocol would burn USDC on the originating chain and create a new unit on the destination chain. In addition, the technology will be driven by the availability of native USDC across the several blockchains that Circle originally supported to deploy a native version of its stablecoin on, and is designed to address the issues of fragmented liquidity that arise from having multiple unofficial versions of bridged USDC found across dozen networks.

Real-World-Assets

Former Gemini officials unveiled OpenEden, an ETH-based smart-contract vault managed by a regulated entity in Singapore that enables exposure to US treasury bills. Users can deposit USDC on the platform in exchange for the tokenized certificate in the form of TBILL tokens that can be traded and transferred on the secondary market without having to pass through traditional intermediaries. Comparably, Maple Finance revealed its cash management vault for investing in 1M US treasury bills. The offering is designed for HNWI and web3 DAOs, to simplify access to treasury yield with one institutional participant, Lenders. Room40, to be the sole lender and thus reduce the counterparty risks.

Ondo Finance, the company behind the OUSG token facilitating exposure to US treasury, announced OMMF; an Ethereum-based stablecoin that generates yield for its holders based on investments in low-risk money market funds backed by Blackrock and Pimco ETFs. OMMF will be exclusively available to qualified investors and can only be traded amongst KYC-approved and whitelisted token holders. Since many companies are now experimenting with tokenizing a wide range of assets, Citi professed in its report that it anticipates the tokenization markets to reach a $4T valuation by 2030, with private equities to be leading the way, which is slowly proving that tokenization might be the killer use case that accelerates the adoption of blockchain technology. The products are yet another testament to how blockchain-based tokenization is aiding in reducing costs, increasing efficiency, democratizing access to critical instruments of the traditional financial world, and offering heightened transparency into the underlying assets.

Franklin Templeton has integrated its U.S. Government Money Market Fund on top of the Polygon blockchain to improve operational efficiency and expand its fund distribution while enhancing security and reducing costs. The decision allows the investment company to bring more value to shareholders by moving beyond the fund's debut on the Stellar network in 2021 by tapping into Ethereum's $260 billion market. Each fund share is represented by a BENJI token, allowing token holders to access the money market fund in digital wallets. The announcement marks the first US-registered mutual fund to use a public blockchain for processing transactions and recording share ownership. It is again a testament to how tokenization is helping to rewire the global financial system by amplifying its efficiency while democratizing its accessibility.

Ethereum ecosystem

The Uniswap community has voted to deploy the DEX on Polygon’s newest scalability solution, the zkEVM network. The new integration should help drive the growth of the TVL on Polygon, which has been lagging behind its counterpart zkSync Era which has seen close to a 200% increase since its launch, although both went live roughly at the same time, as demonstrated below. Even though users have been moving funds to zkSync to speculate on receiving a future airdrop which has propelled the surge in user activity, Uniswap’s presence nevertheless attracts vast swaths of capital due to its capital efficiency and its battle-tested smart contracts.

Figure 7: zkSync Era versus Polygon zkEVM AUM Growth

Source: 21Shares on Dune

Comparatively, Uniswap outpaced Coinbase’s volume for the second month following the systemic banking crisis in mid-March, which took the Silicon Valley Bank, Signature, and Silvergate under. The divergence in volume can be explained by users’ fears around the US regulatory crackdown, combined with the impact of the banking crisis that might jeopardize the financial well-being of exchanges catering preliminary to US customers. Thus, users are favoring non-custodial solutions that help them retain ownership of their assets. Finally, Uniswap’s mobile wallet app went live on the Apple store. The application is now available for users to trade on the Ethereum, Polygon, Arbitrum, and Optimism networks globally. Uniswap’s mobile launch is crucial at a time when more than 80% of the social media usage is done on mobile devices, especially as Metamask and other vital DeFi protocols are beginning to launch their mobile-centric applications.

Metaverse and NFTs

Figure 8: NFT Inscriptions on Bitcoin

Source: @ilemi on Dune Analytics

Bitcoin inscriptions gain a new sensation: NFT inscriptions on the Bitcoin network have soared to new record highs, surpassing 2.5M, soaring the TVL on the network by almost 16% in April. As seen in Figure 9, text inscriptions continued to surge in dominance in April, which was not the case in February which saw a monopoly of image inscriptions. This month also witnessed the first time inscriptions amounted to 223K in just one day, April 29. It is anticipated that inscriptions will pile up even more in May, given Stacks’ hard fork and upgrade expected to simplify the experiences of users and developers alike, with the special feature of supporting NFT airdrops to Bitcoin wallets.

Real-world application of NFTs meets TradFi adoption: In addition to Mastercard’s efforts in standardizing cross-chain transactions between major Layer 1s, the payment giant is also launching NFTs designed to support musicians leveraging Web 3. The Mastercard Music Pass NFT is free to mint and developed in partnership with Polygon, the Ethereum scaling solution. It serves as a digital collectible granting artists access to the Mastercard Artist Accelerator Program. Liquidity is still an issue in the realm of NFTs, not to mention the high gas fees that Polygon aims to solve, and utility has been stuck in the jpeg corner. At 21shares, we’re thrilled to see icons of traditional finance leverage Web 3 to support musicians, which also frames a great utility for this emerging technology.