Web3 Watch

Stablecoins in the US: Fed sees stablecoins as a form of money

In updates from the US, the Fed sees stablecoins as a form of money that should be handled on a federal level, rather than on a state level. 

Maxine Waters, a House of Representatives Financial Services Committee’s ranking member, asked for Powell’s reaction to the Republican-originated proposed stablecoin bill, which would be the first crypto legislation in the US if passed. The bill would create 58 different licenses, 2 of which would be federally approved, while the remaining to be issued by states, territories and other jurisdictions.

Powell responded, “We do see payment stablecoins as a form of money, […] and we believe that it would be appropriate to have quite a robust federal role in what happens in stablecoin going forward […] Allowing a lot of private money creation at the state level would be a mistake.”

Although this is positive for stablecoins in the US in light of the recent enforcements by the SEC, it is important to note that Powell’s and the Fed’s view is contrary to that of the SEC’s (Gensler) and the CFTC’s (Behnam), with each commission viewing that stablecoins may be a security and commodity, respectively. As such, we may not be totally out of the woods with respect to regulatory clarity of stablecoins in the US just yet. 

Bit by Bit: Spot Bitcoin ETF applications 

In signs that Bitcoin might be on its way to becoming a traditional asset rather than an alternative one, BlackRock submitted an application for a spot BTC ETF, with other other asset management firms following suit. Such signs of interest in BTC are extremely positive for the asset, with the price of BTC reaching 30k levels, as shared in our recent Market Update.

Unlike its futures counterparts, spot BTC ETFs do not require rebalancing and are immune from contango and negative carry. Hence, approving spot BTC ETFs would open the floodgates for capital inflow for BTC, creating massive price appreciation. As much as we hope for a manipulation-free venue that would be palatable to the SEC for trading such ETFs, we should also tamper our expectations, given the SEC’s long history of rejecting spot BTC ETF applications.  

Robinhood and the delisting of coins

Following SEC lawsuits against Binance and Coinbase, Robinhood is seeking to delist ADA, MATIC and SOL on 27 June. Users would be able to withdraw these assets before the delisting date, while any customers with holdings of these assets at the time of removal, would have their assets automatically sold on the market.

This did not have a negative impact on overall exchange balances, which instead, surged over the past two days.

Chart 1: Robinhood Exchange Balances (Arkham Intelligence)

However, MATIC holdings on Robinhood over the past week, have dropped from 43.63m to 32.03m (-26.57%), which highlights some positive views of holders who wish to hold , rather than selling or letting the exchange liquidate their long positions (Table below). 

At the most extreme case, as of 23 June, this leaves about 21.46m USD of sell pressure of the token on 27 June. The cases for ADA and SOL are unclear to us for now.

Table 1: MATIC Holdings and Flows on Robinhood (Arkham Intelligence)

Binance bides their time and expands DeFi efforts

On June 18, the SEC and Binance.US struck a temporary court-ordered agreement to limit access to customer funds to Binance.US employees only, and repatriate US customer funds onshore. The SEC’s temporary restraining order and freezing of assets request was not granted, and Binance.US was allowed to continue operating. 

In the meantime, Binance has joined the L2 wars, by launching a testnet of opBNB, an EVM-compatible L2 network, utilizing Optimism’s OP stack (hence, optimistic rollups). 

This could be seen as a response to Coinbase’s BASE network, which is also an EVM-compatible L2 network built using the OP stack, and with a similar go-to-market strategy of leveraging their existing user base on the CeFi side, to flow into their L2. 

Compared to its L1, BNB Smart Chain, opBNB will have twice the TPS (4000 vs 2000) and lower transaction costs of up to ~20x ($0.005 vs $0.109 per transaction). 

Uniswap launches v4

Uniswap recently announced its v4 and shared of things to come, on a Bankless livestream. They updated on:

• Customizability: Before, v3 pools were constrained by “rules” such as the “compulsory” implementation of price oracles for every swap, resulting in gas costs. With v4 introducing hooks, anyone can build and choose a particular hook for their particular pool, allowing users to implement new features and modify parameters for their pool.
• Cost and process efficiency: The introduction of Singleton contracts centralizes tools in a single smart contract and reduces the need for duplication of code across many different smart contracts. This combats fragmented liquidity across pools and improves routing,  reducing gas costs by ~99%. Flash accounting also allows users to execute any amount of transaction types/orders across all pools, improving efficiency and flexibility when routing across different pools. 

We expect these innovations will take Automated Market Maker (AMM) design to the next level, and solidify Uniswap’s status as the dominant DEX in DeFi, for now.

ETH developers mull an increased maximum validator limit

ETH developers are considering a proposal to raise the max validator limit from 32 to 2048 ETH, with minimum ETH staked to a validator to remain at 32 ETH.

With 32 ETH  the current minimum and maximum stake for a validator, this has caused a huge amount of active validators (600k) and validators in queue (90k). Michael Neuder, an ETH Foundation researcher, has stated that while the current validator cap promotes decentralization, it inadvertently leads to an inflation of the validator set size. 

Slowing down the expansion of the active validator set would improve Ethereum’s efficiency in terms of finality within a single Ethereum slot. It would also alleviate the load and complexity from larger node operators, through managing fewer, but higher stake validators. 

However, a risk from this is potentially higher penalties for slashing. This proposed increased cap would also make auto-compounding of validator rewards possible, allowing validators to earn more from their staked ETH, instead of redirecting their rewards elsewhere to generate staking yield. 

Arbitrum launches Orbit, joins the (customizable) fray

In the game of customizable chains, Arbitrum joins the fray with the launch of Orbit, alongside Avalanche’s subnets, Polygon’s supernets, and Cosmos’ Zones. With Orbit, Offchain Labs now allows anyone to create and customize their own L3 chain in one click. 

Similar to other solutions, developers can define their own governance protocols, privacy, permissions and fee tokenomics with Orbit chains. Like Avalanche subnets, Arbitrum Orbit chains can be customized to use any token for gas fees. 

On first glance, this could come across as negative news for $ARB. However, Orbit chains would pay fees in ETH to Arbitrum One or Nova, which may in turn flow back into $ARB.

 Polygon Labs’ ‘Wikipedia’ for (blockchain) use cases

In an effort to encourage dialogue in favor of positive regulation for mass adoption, Polygon has launched “The Value Prop” – a database hosting ~39 use cases and over 300 applications, to highlight the benefits and problems that blockchain can solve. 

Polygon has also taken an open approach, inviting other chains to add examples to the database. According to Coindesk, the use cases are categorized under seven different verticals – education, security & risk management, social impact & sustainability, finance, business & marketing, governance and information technology.  

Launch of Eigenlayer Stage-1 on Mainnet

Earlier in mid-June, Eigenlayer announced the launch of its Stage-1 on Ethereum Mainnet, which was sooner than we had expected. This allows ETH stakers to restake in Eigenlayer, by either (i) depositing their LSD tokens into the Eigenlayer contracts, or (ii) creating an Eigenpod and setting their Beacon chain withdrawal credentials to their Eigenpod address. 

We mentioned Eigenlayer in our first-ever Web3 Watch as something to keep tabs on, given that the launch of Eigenlayer could positively impact ETH and its respective LSD protocols, as more ETH holders would seek to either stake their ETH to the beacon chain or with a liquid staking protocol, and then restake it to Eigenlayer. This makes ETH relatively more deflationary, as more ETH (and now its liquid staking derivatives) get “locked up” via staking and restaking.  

We will continue to watch and provide updates on the progress of LSD protocols, specifically those that Eigenlayer has integrated such as Lido, Rocketpool and Coinbase, relative to other non-integrated liquid staking protocols.

On the other hand, it is always prudent to recognise and evaluate whether positive performances of such tokens are driven idiosyncratically with their narratives or just due overall market performance. As with the recent breakout in majors, thin liquidity and over-aggressive selling in some altcoins prior, helped in their outperformance against BTC.

LSDfi is on a trip!

We also previously wrote that recent Ethereum upgrades, tied with the launch of Eigenlayer, would not only be positive for liquid staking protocols, but also LSDfi. LSDfi opens up yield opportunities for LSD token holders, borrow against LSD tokens speculation/hedging against LSD token yield, LSD indices, etc.

Chart 2: LSDfi TVL by Protocol (Dune – @defimochi)

Since March 2023 (just before the Shapella upgrade), the TVL across LSDfi protocols has increased from ~50m to over 400m today (~8x increase). The impact of the launch of Eigenlayer’s Stage-1 on LSDfi remains to be seen, but we expect that it would be positive as well.