#14 The Context: Can DeFi solve inflation (and football)?

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Our latest collation includes a look at NFT comebacks, the state of government regulation/embrace of all things crypto, and a couple of spaces where crypto believes it could make the real world better. (Whether they’re right remains to be seen.)

As usual, a disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and offers some context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).

Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.

[tl;dr]

• How one NFT project that looked doomed may be about to arise, and how stolen crypto doesn’t always mean unrecoverable crypto

• More regulatory uncertainty, leaving opportunities for some and frustration for others

• A look at two projects where crypto is hooking up with the real world, via inflation and sports

[NFT comebacks]

In crypto land, nothing is ever never.

• **Pudgy Penguins** NFTs are hoping to make a comeback: The story of the rise, fall, and possible rise again, involves lots of failed promises, a contentious ouster of its founders by a group of holders calling themselves The Huddle, chaos, a bidding war followed by a long-running takeover saga that looks like it has finally ended. So Pudgy Penguins are back, but are being careful about promises. (Story authors: Olga Kharif of Bloomberg and Tracy Wang of CoinDesk)

• And the Axie Infinity hack, which saw $600 million of funds drain out of the play-to-earn crypto game, may take some time to be resolved: Axie's owner said recovering the crypto could take two years. This is another peculiarity of crypto that is sometimes hard to get one's head around. While you can be as pseudonymous as you want, the transparency (and permanence) of transactions makes it hard to cash out ill-gotten gains into old-fashioned dollar bills without being noticed. This analysis of the hack by Merkle Science shows that much of the crypto— $466 million's worth—is still sitting in one wallet: 0x098b716b8aaf21512996dc57eb0615e2383e2f96. So getting that back depends on what the owner of that address does next. (Story author: Kristine Servando of Bloomberg; Also check out Reading (and Watching) below. We’ve written about Axie in The Context’s #10 and #12)

  Here are some other recovery tales:

  • Hackers give it back: Poly Network hack: Nearly all of $600 million in crypto returned

  • Calling in the Feds: Bitfinex Cryptocurrency Linked to 2016 Hack Surges 59% After Fund Recovery

  • Not everything ends neatly: Mt. Gox may return Bitcoin worth over $6 billion

[Regulation etc]

• IMF: It’s taking a while for regulators to get their heads around crypto, largely because few countries want to snuff out a major source of VC funds and innovation. On the other hand, crypto still carries a bad smell for many. The International Monetary Fund has never been a big fan, I think it’s fair to say, and so it’s probably not surprising to hear an IMF study conclude that crypto use is more prevalent in corrupt countries, according to Bloomberg. And that's a fair summation of the paper, although the authors themselves acknowledge their sample size is small, and while they advocate “regulating crypto usage—for example, by requiring intermediaries to implement know-your-customer procedures", they also call for “better data to understand the dynamics and the key driving factors behind crypto adoption" (something the IMF or World Bank should probably be thinking about doing), before acknowledging this is an area that may solve some major problems: “Meanwhile," it concludes, “work should continue in using the technologies underlying crypto assets to realize the potential benefits to financial inclusion and the efficiency of governments." (The paper itself is here. Story author: Allyson Versprille of Bloomberg)

• U.S.: In the absence of agreement in the U.S. over measures, stablecoins have become a focus of U.S. policy makers' attention, according to the WSJ. This is likely to be a litmus test of whether the U.S. needs new regulations for crypto, or whether existing frameworks might be enough. (Story author: Andrew Duehren of *The Wall Street Journal and this from* NextAdvisor with TIME.) Meanwhile state capitols are taking advantage of the delay to pass their own crypto-friendly bills, according to The New York Times: “The effort is part of an emerging national strategy by the crypto industry, in the absence so far of comprehensive federal regulatory demands, to work state by state to engineer a more friendly legal system." (Story authors: Eric Lipton and David Yaffe-Bellany of the NYT) (We’ve looked at U.S. regulators in The Context’s #9 and #12)

• India: Elsewhere a lack of clarity can end up in confusion. In India “regulatory heat” has forced Coinbase to halt UPI payments after only three days, according to India's Economic Times. Coinbase pulled the option after the National Payments Corporation of India (NPCI) which oversees the Unified Payments Interface, said it was not aware of any crypto exchange using UPI. Banks have subsequently stopped accounts facilitating crypto-related payments, although crypto exchanges still allow UPI-based transactions on their apps. (Story author: Apoorva Mittal of the Economic Times)

• EU: An EU law, if passed, would require EU crypto exchanges to collect and verify information about so-called ‘unhosted' wallet users. Not everyone is happy. What the new rule boils down to, according to Canadian blogger JP Koning, is that “if you have an account at an exchange like Coinbase, and you send some crypto off of the exchange to an unhosted wallet (i.e. a self-custody wallet or personal wallet), then Coinbase will have to verify the European owner of that unhosted wallet and store their information."

• Singapore: Has Singapore lost its allure as world-class crypto-capital? In Singapore Ponders What Crypto-Friendly Means, Bloomberg explores what Singapore actually wants out of its DeFi door mat. “In short, a Goldilocks crypto landscape, where companies are welcome to develop products and services that benefit Singapore, without the nuisance of retail investors getting burned. A noble aim, but is it achievable when some rival crypto hubs are willing to settle for less?” (Story author: Joanna Ossinger)

[Crypto and the real world]

• Inflation Can DeFi create a more credible, independent index of inflation? While indices like the U.S.’s CPI are based on surveys of basket of goods, services and housing rents, details of the mechanics are largely hidden from view. That, the argument goes, leaves it vulnerable to government manipulation, while others question whether the way the CPI is determined is itself not an accurate measure of inflation — either because it lags behind real prices, or it is measuring the wrong thing. DeFi's supporters feel it's better equipped to build a censorship-resistant inflation index: such indices would be transparent, closed to tampering, and not subject to any bias. Truflation is one; another is Frax Finance (note: Frax is a client of YAP Global).

• Sports Can DeFi bring tangible value to the sports world? US cryptocurrency investors WAGMI United have taken over an English football club called Crawley Town from League Two, the game's fourth tier. The investors, headed by sports gambling analyst Preston Johnson and co-founder Eben Smith, a trader who has moved from derivatives to NFTs, had intended to take over Bradford City, but a fan backlash scuppered the plan. Sports and crypto have long been bedfellows: sports teams and players last year started raising money by selling tokens and NFTs to fans, and crypto companies have sought to lure sports fans into crypto by extensive advertising and sponsorship. Some players have accepted payments in Bitcoin, while one DAO, The Krause House, is planning to buy an NBA franchise.

Tidbits

• UPS to enter the metaverse with virtual retail shipping services. Whether it's a sign of reaching critical mass, or shark-jumping, one of the world's biggest couriers of physical objects has apparently filed trademark applications designed for the metaverse, covering crypto-collectibles, NFT-backed multimedia, virtual retail shipping and delivery, virtual clothing, packages, vehicles, airplanes, and sports collectibles, marketplaces for digital goods and NFT backed media and retail stores featuring virtual goods, according to Michael Kondoudis, a trademark lawyer.

• Is the so-called Merge, a software upgrade to Ethereum that would change the network’s method of recording transactions from the energy-intensive Proof of Work to Proof of Stake, finally about to happen? At the beginning of the week developers said they had tested the software and it had been "a huge success”, according to Olga Kharif of Bloomberg. A later story by Jialiang David Pan says the upgrade won’t happen in June, but some months after. Some more details of the process here: Ethereum Layer 2 Networks Hit 'Critical Mass' as The Merge Approaches (We’ve looked at Ethereum in The Context #3 and #11)

Reading (and Watching)

• Bloomberg Businessweek takes a closer look at Jack Dorsey and how Twitter’s founder “Is Buying Into Crypto Obsession” as he appeared at the Bitcoin 2021 conference in Miami: “Dorsey had lots to say about Bitcoin—in fact, a lot more than he had to say about either Twitter or Square, his payments company.” (Story author: Kurt Wagner)

• CBS' 60 Minutes takes a look at Bitcoin's embrace by an El Salvador beachtown called El Zonte, where it’s used as a true peer-to-peer currency. It's a fair look, going deeper than a lot of the coverage we've been a bit rude about before. It also explores the positives and negatives of a true social experiment, a real effort to use crypto for good. (Story by Sharyn Alfonsi of CBS News). If you can't catch the 60 Minutes piece, here's a detailed summary from ATF News. (We’ve looked at El Salvador in The Context’s #3 and #4)

• Andy Greenberg of Wired has been working on a book about the hunt for the criminal masterminds of the cryptocurrency world. An excerpt from the book, due to be published in November, explores how crypto detectives took down the web’s biggest child abuse site.

This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Ruby Wu, Roslyn Tear, and Becky Corbel. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.