Hi there, hope you've all had a good week. This week we offer an update on the ripples from the crash, especially its two main “villains”, Three Arrows Capital and Celsius. But is there a broader context to this, one where crypto adoption has quietly grown, and regulation may not be as drastic — at least in some jurisdictions — as feared? Mining is also facing challenges, but its own economics make figuring out where it may go a harder proposition.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased 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).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Roslyn Tear, Ruby Wu, Sam O'Donohoe, Joey Woo and Becky Corbel for their contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Ripples from 3AC, Celsius, cast a shadow over DeFi, but are we missing the point?
Is DeFi facing more regulatory heat, but does it have more friends than it realises?
Crypto mining cannot escape the fallout, but it faces other challenges too
[More fallout from the crypto crash - and beyond]
Repercussions continue to roil the industry, most recently with DeFiance Capital announcing it had been 'materially affected' by the liquidation of Three Arrows Capital. Crypto lender Genesis has also acknowledged it lent $2.36 billion to 3AC. Celsius, for its part, has outlined the next steps in its bankruptcy proceedings. David Gerard has chronicled, in his inimitable style, developments, including the FT revelation that a company called EquitiesFirst was the mysterious debtor to Celsius, to the tune of $439 million. It's a rabbit hole that will take some time to map, and may make for unpleasant reading, all of which is likely to cast a wintry pallor over DeFi for some time. Documents and interviews with former employees indicate that issues had plagued Celsius years before their bankruptcy.
NFT marketplace OpenSea, for example, has lain off about 20 percent of its staff according to Richard Lawler of The Verge. Skybridge, investment firm of former Trump spokesman Anthony Scaramucci has halted withdrawals in one fund, citing falls in both stock and crypto valuations, according to Katherine Burton and Nishant Kumar of Bloomberg. And crypto exchange Gemini is launching another round of staff cuts to control costs, according to Zeynep Geylan of CryptoSlate. Crypto funding is also falling, according to Chris Metinko of Crunchbase News, who wrote that investment in VC-backed crypto companies fell from a record $12.5 billion invested in the first half of 2021 to about $9.3 billion invested through the first six months of this year, citing Crunchbase data.
This downbeat view of 2022 thus far, however, may conceal some trends that, in the long run, may be more significant. Crypto adoption, argues Australia’s Apollo Capital, has actually been growing, with the total number of wallet addresses across Bitcoin and Ethereum networks continuing to grow, and their daily active addresses remaining steady, with the total cumulative number of addresses for both assets on the rise. “Also, transaction volumes in their native assets BTC and ETH are on average more significant than the values we witnessed last year.”
[Regulation or not?]
While there have been lots of furrowed brows in the wake of the collapse and ensuing Winter, the reality is that, so far, the expected regulatory crackdowns, inquisitions and investigations have yet to materialise, or at least to materialise in the mass expected. A thread by Nischal Shetty of Shardeum listed some 10 U.S. crypto-friendly states, and there are hopes that a stablecoin bill currently in Congress may not force all issuers to be banks, according to Jesse Hamilton of CoinDesk. Democrats on the House Financial Services Committee have been working on requirements that may not be as restrictive as the Treasury Department and financial regulators had requested.
Indeed, it could be argued that a ‘light regulatory touch’ is the popular note du jour, despite the wintry scene. The Australian central bank governor told G20 financial officials that privately issued but regulated digital currencies have benefits, according to Reuters' Alun John. They might even be better than central bank digital currencies, or CBDCs, Phillip Lowe said. At the same discussion, the Hong Kong Monetary Authority (HKMA) chief said greater scrutiny of such tokens could also help reduce risks from DeFi projects. And a paper issued in the past week or so by the European Central Bank, entitled Decentralised finance – a new unregulated non-bank system, while calling for international coordination over DeFi, concluded on a neutral note that “regulation could fuel further institutional interest and growth or could negatively affect the viability of the business model if DeFi advantages are negated.”
At the same time, there are critics who blame a regulatory light touch for much of the damage caused to ordinary investors. “It wasn’t due to bureaucratic incompetence but an explicit choice to let the public fall into harm’s way,” writes crypto critic Stephen Diehl. He focuses his guns on Jay Clayton, chairman of the SEC under President Trump, and Gary Gensler, chairman of the SEC under President Biden, arguing that “[b]oth men have done enormous harm to the public by legitimising and allowing crypto investment schemes to run wild through markets with no regulatory oversight, which is their job.” Compounding this, according to Molly White, is misleading data from the industry itself, where "market caps" and notional value “serve to legitimize cryptocurrency as though it is a much bigger industry than in reality, with far more actual money floating around than there really is.” Misleading data and stories, she says, “encourage more people to put their real money into the system—something it desperately needs—not realizing that they may be exchanging it for “gains” on a screen that can never be realized.”
Some countries believe things have gone far enough. Some steps are small: The Dutch central bank fined Binance €3.3 million for operating without proper registration, and India seems to be inching towards a more inhospitable environment, with its central bank calling for a cryptocurrency ban. But other moves imply something more draconian: The Reserve Bank of India has previously called cryptocurrencies a "clear danger" and "designed to bypass the financial system and all its controls,” according to Laura Dobberstein of The Register. This steady drumbeat is having an effect: the country’s Internet Association is dissolving its subcommittee dedicated to promoting crypto, arguing "in light of the fact that a resolution of the regulatory environment for the industry is still very uncertain and that the association would like to utilize its limited resources for other emerging digital sectors."
[Mining faces its own challenges]
Mining — the process of verifying transactions and adding blocks to a chain in Proof of Work cryptocurrencies (including Bitcoin and, for now, Ethereum) — is undergoing its own crisis.
Miners sold 14K Bitcoin worth $300M on July 15, according to Zeynep Geylan of CryptoSlate. This was the largest sale since January, partly because bearish Bitcoin prices don't compensate for the energy spent mining. Celsius had its own mining subsidiary which had announced plans to go public in May and was one of the largest operations in terms of current and future deployments according to a Compass Mining blog post by Anthony John Power. Celsius began selling off its dedicated equipment in late June. Indeed, the decline in miners' profitability and selloffs like Celsius' are pushing down the prices of the GPU chips that miners use, with prices dropping some 10-15% each month this year, according to Jarred Walton of Tom's Hardware. In “The GPU Deluge Begins”, he chronicles how the market faces a glut similar to 2018, and shows that almost certainly many Ethereum miners lost money over the past two years. (These pieces are a few weeks old but definitely worth a read.)
This comes at the same time as regulators and legislators are looking more closely at mining. In the U.S., where Bitcoin mining has gravitated to after a crackdown in China, six Democratic legislators have taken a dim view of mining operations' assessment of their facilities and emissions. They have now called for a crackdown, according to The Register, demanding miners be pushed to reveal more data about their operations, particularly their carbon footprint. Sweden's energy minister has gone further, saying he prefers other industries over mining, according to David Thomas of BeInCrypto.
[Tidbits]
Polygon has been selected to participate in Disney’s 2022 Accelerator Program, illustrating how traditional and mainstream companies are dipping into the metaverse using crypto companies like Polygon as a bridge. Elsewhere Otherside Metaverse demo kicks off with 4,500 participants "running around a large, immersive space." NFT landowners, known as voyagers, have snapped up (digital) land in the space, suggesting there is still plenty of interest in metaverses, gamefi and NFTs.
Merge: For many the big Merge, when Ethereum moves from a Proof of Work to Proof of Stake consensus algorithm, has already begun, according to CoinDesk, despite September being cited as a tentative date for the much-delayed transition. Ether has rallied since the announcement, hitting highs it hasn't seen for a month. But a short-term horizon misses the bigger point, says The Daily Gwei's Anthony Sassano: that once the transition is complete, the amount of newly minted ETH will fall by up to 90%. “This is a structural shift in the flows of ETH as an asset - we are going from millions of dollars worth of freshly mined ETH being force-sold each day to basically 0 sell pressure (since withdrawals of staked ETH and rewards aren’t enabled at the time of The Merge)." There's more here:
Cybersecurity: Blockchain software company ConsenSys is set to tokenize smart contract and security auditing services, according to Gareth Jenkinson of Cointelegraph. TURN, its nonfungible token (NFT) tokenizes the labour powering these auditing services and allows the open market to price them appropriately.
[Events]
The talk of the town this week is EthCC, held in Paris between the 19th and 21st of July. The conference comes amidst market turmoil but as MacKenzie Sigalos of CNBC summarises, “the vibe on the ground at EthCC is overwhelmingly positive, with most people excited that a bear market translates to no grifters because there’s no fast, easy profit to be made.”
As media partners of the event, the YAP Global team are on the ground hustling, connecting and running in between the myriad of talks and events taking place (you can catch the livestreams for Thursday here and if you want to read our daily wrap-up reports for the key highlights then give us a shout). For anyone in Paris, come to say hi at the YAP booth and look out for our wrap-up reports to catch the highlights.
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: “Liquid Staking” by Sam O’Donohoe.
As the Merge slowly yet steadily approaches its estimated launch date, there is palpable excitement amongst the Ethereum community at the prospect of liquid staking.
Ethereum’s transition to a Proof-of-Stake network will enable users to validate transactions by staking a minimum of 32ETH, with which they can earn yield and additional rewards. The problem is that staking is an expensive process and requires technical know-how. Most users do not hold 32ETH in their wallets. And for those who do, many do not have the commitment to embark on such a technical endeavour.
Liquid staking is a solution that democratises blockchain participation by allowing users to stake their ETH without having to match the required threshold. Through the use of smart contracts, users can place any amount of ETH into a shared liquidity pool which will amass to 32ETH, rather than the traditional staking process of providing a singular allotment. A node operator is then assigned to the liquidity pool and given the responsibility of validating transactions, with the rewards being shared out to every contributor. As evidenced by the name, liquid staking is also advantageous as it provides users with the autonomy to stake and retract their ETH as and when they please.
Liquid staking is a quintessentially DeFi concept which promises to change the way that users contribute to Proof-of-Stake blockchains.
More reading: