#31 The Context: Who wins, and loses, from the Merge?
ETH and BTC rally, but not everyone is dancing in the street
Hi there, hope you had a good week. This week we collect together governments’ moves with regard to crypto, including regulatory moves but also initiatives, including issuing digital currencies of their own.
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, Becky Corbel and Joey Woo for their contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Governments are slowly getting smarter about DeFi, but there's still plenty of confusion, uncertainty and doubt over who regulates, and how, including how, for example, sanctions on a decentralised mixing protocol might be implemented.
The Merge is nearly upon us, and not everyone is sanguine about the transition
Updates on the Crash and its after-effects, which may be smaller by now, but still reach further than many might have expected.
[Tornadoes and sanction-busting: regulators struggle with crypto]
Governments still don’t know what to do with crypto, but they are making some headway. The U.S. seems to have decided which agency will be responsible for DeFi, and the Treasury has taken what may be its first action against a decentralised protocol.
Investigations: US Treasury sanctions cryptocurrency mixer Tornado Cash, accusing it of laundering more than $455 million for North Korea's hackers, writes The Block's Kollen Post. The regulator has added Tornado Cash and 44 associated Ethereum and USDC wallets to its Specially Designated Nationals list. Kollen says “it may well be the first example of a US sanction targeting a DeFi operator,” because Blender.io, the mixer the Treasury's Office of Foreign Asset Control sanctioned in May, is not a decentralized protocol. What's less clear is how this sanction might work. So far the most noticeable impact has been for a co-founder to be kicked off GitHub, and infrastructure services like Infura and Alchemy blocking users from accessing Tornado Cash, according to the Crypto Briefing's Chris Williams. And the limitation on what can and can’t be done to stop activity was well demonstrated by someone trolling Ethereum celebs by sending them ETH from Tornado Cash.
The FTC, meanwhile, is investigating the BitMart Exchange over a December hack, which led to consumer losses of up to $200 million. It’s the first known probe into crypto markets, according to Leah Nylen of Bloomberg.
Oversight: A US Senate bill will give the Commodity Futures Trading Commission market oversight, but doesn't say how much, according to Jesse Hamilton of CoinDesk. It's the third bill designed to make the CFTC primary regulator of crypto spot markets, according to Kevin Helms of Bitcoin News. The CTFC is already exerting some oversight: It banned crypto and fiat currency exchange PredictIt from taking bets on US elections according to Jet Encila of Bitcoinist.com. But the sense is that the Regulation Bill needs more work, according to Fran Velasquez of CoinDesk.
CBDCs: Nepal may be joining the ranks of countries issuing Central Bank Digital Currencies, according to Wahid Pessarlay of BeInCrypto, who is doing a great job covering CBDCs. Australia has also announced a trial to evaluate usage of CBDC, to measure what economic benefits might accrue, he reported.
Crackdowns: India has frozen the assets of Binance-linked WazirX (Reuters) only for Binance and WazirX to disagree over who owns the exchange.
Beyond reach: Twitch’s gambling boom is luring gamers into crypto casinos, frustrating regulators, according to Bloomberg's Cecilia D'Anastasio.
Sanctions: Iran made its first import order using cryptocurrency, according to a semi-official news agency reported by Reuters’. The move could enable the Islamic Republic to circumvent U.S. sanctions which have crippled the economy.
Taxes: Japan is losing crypto entrepreneurs because of its high taxes, according to Takashi Nakamichi of Bloomberg.
[The Merge is good for ETH but not everyone is dancing]
Ethereum's final proof-of-stake 'test merge' went live on Goerli, according to Vishal Chawla of The Block. What will happen when the Merge goes live? The Merge will convert Ethereum into a Proof-of-Stake-based blockchain from a Proof-of-Work one. The shift will in theory make smart contracts and dApps faster and more affordable. But that’s only part of the story:
Losers: of course, the miners who process the Proof-of-Work transactions are not happy they're going to be shut out, and their pushback suggests Ethereum offshoots are coming, according to Olga Kharif of Bloomberg.
Such forks have precedent, but not many examples of successful ones, at least after the initial buzz and windfall for holders of the forked coin, but for miners, there aren't a lot of choices, and if companies end up supporting one it could find traction.
Justin Sun, the founder of Tron, says that while he supports the Merge, he also believes Proof-of-Work is an ‘essential' part of Ethereum; his exchange, Poloniex, has said it would support potential forks.
There is anxiety that the Merge may create a lot of volatility, according to Lucas Campbell. His conclusion after a lengthy analysis: “The Merge is going to happen, Ethereum will shift to PoS as intended, and everything is going to be alright. There might just be a little chaos that ensues for a brief moment.”
It doesn't seem to be bothering Vitalik Buterin who said any migration by miners wouldn't slow the Merge.
Crypto critic Amy Castor looks at the economics of Bitcoin mining, though oddly, given the timing, doesn't look at the problem facing Ethereum miners.
Winners: Ethereum-focused funds are enjoying the moment, with institutions flocking to Ethereum for 7 straight weeks as the Merge nears, according to Brayden Lindrea of Cointelegraph.
ZK-Rollups are likely to be the main Layer 2 solution for Ethereum, says Vitalik Buterin. ZK-Rollups are meant to scale Ethereum by moving some of the computation off of the Ethereum blockchain, while not compromising security. The other main option are Optimistic Rollups, which Buterin said are effectively slower, writes Vishal Chawla of The Block.
Indeed, even JPMorgan analysts believe that the Merge may help crypto find a floor to the bear market, according to Chris Williams of Crypto Briefing.
[The crash is still spitting aftershocks and wisdom]
So where are we in the Big Crash? As above, some think it’s all over. But aftershocks continue to ripple through DeFi, and gradually we are learning more about the dramatis personae involved.
Voyager, which froze accounts when it filed for bankruptcy, will begin processing cash withdrawals next week, according to The Block's Aislinn Keely. Voyager suffered massive losses from the failure of crypto hedge-fund Three Arrows Capital (3AC) and the broader crypto meltdown. CNBC also explore the relationships between Sam Bankman-Fried's crypto firms and Voyager Digital spar, playing out in the bankruptcy court.
The Wall Street Journal has profiled Celsius CEO Alex Mashinsky: Public records and interviews with people who know Mr Mashinsky paint a picture of a brash, confident serial entrepreneur with a constant stream of big ideas. Some of his companies have been more successful than others, but they often had a common thread: Mr Mashinsky frequently left them under tense circumstances.
The fallout hasn't stopped falling out quite yet: Singapore-based Hodlnaut has halted withdrawals, according to Shraddha Sharma of BeInCrypto. Although the company says it is working to "find the best way to protect our users' long-term interests”, it has withdrawn its license application related to regulated digital payment tokens (DPT). Hodlnaut was one of Celsius Network's institutional clients (PDF).
It’s easy to forget the ripples the crash has made beyond crypto and DeFi. TaskUs, which provides moderating and customer services to companies, including crypto, found that while 15% of its revenue came from crypto in the first quarter, that proportion is expected to fall to 5% by the fourth quarter. Analysts William Blair expects this segment to be stagnant next year too.
Coinbase isn't going to be pushed into the black by its deal with BlackRock, according to the FT's Lex column. The exchange can’t escape the Crash, and its own overreach, so easily.
[Tidbits]
[Reading]
Noah Smith explores some economic misconceptions of the crypto world.
[Events]
Coinfest Asia | August 25th & 26th, 2022 | Bali, Indonesia
Cryptocon Global | August 26th, 2022 | Scottsdale, Arizona, USA
The Science of Blockchain Conference 2022 | August 29th - 31st, 2022 | Stanford, California, USA
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘DAO’ by Mia Grodsky.
Last week an organization called MoonDAO made headlines for sending a viral YouTuber to space. This isn’t the first time that a collective group with the “DAO” appendage has made the news and this viral term, first defined in the Ethereum Whitepaper, is slowly inserting itself into mainstream culture.
A Decentralized Autonomous Organization (DAO) is a member-owned community without centralized leadership.
DAOs are a safe way to collaborate with strangers (or anonymous/pseudonymous players) to build an organization, a product, a service, or rally support to commit funds to a specific cause.
The backbone of a DAO is its smart contract which defines the rules of the organization and manages the group's treasury. Once the smart contract is live on the blockchain, no one can change the rules except by a vote. Because the rules are embedded into the code, no managers are needed, thus removing bureaucracy and hierarchy.
DAO members typically receive voting power in the form of the DAOs governance token, but DAOs also exist without a token and voting rights are given in DAO shares.
There are many categories of DAOs including Service DAOs, Investment DAOs, Protocol DAOs, Fundraising/Charity DAOs, and more.
Bitcoin is generally considered to be the first fully functional DAO, as it is an example of a DAO which is truly autonomous and self-sustaining and does not require voting or membership for it to exist.