#34 The Context: A chip glut, bulking up and picking cherries
Regulatory fragmentation is confusing a consolidating industry
This week has been a mostly quiet one. We’ve pulled together two apparent trends: a gradual consolidation in some parts of DeFi as the well-heeled look for bargains, while the regulatory landscape moves in the opposite direction, with governments cherry-picking the bits of crypto they like and don’t like and regulating accordingly. Another interesting trend is how the fallout of the recent crash and ongoing bear market will affect aspects of DeFi: what will mature, and what will disappear?
The usual disclaimer: This newsletter is 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 doesn’t contain any deliberate promotion of the space or 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, Delon Chan, Becky Corbel and Joey Woo for your contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Some big players are buying up smaller ones, in a wave of crypto consolidation
Regulators are cherry-picking the DeFi universe, frustrating efforts at a consensus
Some players are rethinking their vision of crypto, questioning even the Merge
[Consolidation: The brave and well-funded are bulking up]
Bloomberg reported that Sam Bankman-Fried’s FTX and Alameda were merging their VC Funds, as part of a move to consolidate SBF's empire. SBF later said that it wasn't true: he launched FTX Ventures as a new fund. (Stories: Brandy Betz of CoinDesk and Hannah Miller of Bloomberg)
Singapore state investor Temasek is leading a $100 million funding for crypto investor Animoca, which is “seeking to take advantage of the crypto downturn to buy up stakes in industry players and digital tokens”, according to its co-founder Yat Sien. (Story by Hannah Miller and Zheping Huang of Bloomberg)
Hardware always has a tale to tell: in this case, it’s the chips that power mining rigs. There’s now a glut of them, according to Ars Technica, forcing down prices. The manufacturer, Nvidia, is coy about how much the glut is down to crypto miners moving or being forced to move on. The soon-to-happen Merge may also have an impact, as Ethereum moves to a consensus protocol that doesn't require computer farms and huge amounts of electricity. (Story: Andrew Cunningham)
[Fragmentation: Regulations are going in the other direction]
At the country level, are we seeing a bifurcation of crypto adoption, depending on what it’s used for? On the one hand, Brian Armstrong, CEO of Coinbase, sees an emerging consensus among regulators which he says will drive much greater adoption. But on the ground the complexity of crypto is creating an uneven landscape, where countries are cherry-picking what flavour of crypto they will allow (and actively encourage):
**Iran** has formally approved the use of crypto for trading and imports, a few weeks after making its first import order using cryptocurrency (Story: Michael Grullon of Watcher Guru). At the same time, Iran and Russia, the country it is likely to be doing most business with using this mechanism, have both cracked down on the use of crypto domestically, including mining.
In Afghanistan, meanwhile, a Taliban crackdown on crypto has put a stop to its growing use for transferring funds from family abroad to those still in Afghanistan. In Context #11 we reported on how crypto has also been used domestically to disburse salaries and store savings. (Story: Wahid Pessarlay of Cointelegraph )
In those jurisdictions where crypto is more about financial innovation to decentralise, governments are realising that their regulations need to be more focused. The central bank of South Korea has called for ICOs to be institutionalized in a new crypto law. But the call is focused not on restricting ICOs -- which were effectively banned in 2017 -- but to make regulations more effective, and to help develop the local DeFi market. (Story: Danny Park of Forkast)
In Brazil, the government sees crypto, or at least parts of it, as a way to promote financial inclusion. Brazil’s largest private bank, Itaú, has been selected by the country’s central bank to develop a DeFi liquidity pool, along with other DeFi measures. The goal is to create a platform for the tokenisation and trading of tradfi and crypto assets. (Story: Rodrigo Tolotti of InfoMoney, translated into English here.)
Singapore meanwhile is increasingly frustrated that retail investors seem 'irrationally oblivious’ to crypto risks and is planning tougher rules to cope. On the one hand, it really doesn't want locals to get involved in crypto, it doesn't want to dent (yet, anyway) its aspirations to be a global hub. The seminar its central banker spoke at was called “Yes to digital asset innovation, no to cryptocurrency speculation." (Story by Anshuman Daga and Yantoultra Ngui of Reuters. More coverage of Ravin Menon's speech here)
These reactions, and the legislation that will likely follow, will only further limit DeFi, many fear, with some arguing that siloed regulatory efforts would be unlikely to help bring oversight. industry (Story: Lachlan Keller of Forkast)
It certainly is creating confusion. In Europe, the crypto lobby is trying to push back on newly approved EU regulations that might end up blocking US Dollar stablecoins. (Story: Tiago Varzim of Blockworks)
And in the U.S., states are filling the temporary void left by slow federal response. California’s Assembly, for example, has passed a bill which requires some crypto companies, including exchanges, to obtain a license to operate. The Blockchain Association, an industry trade group, said the bill would “create shortsighted and unhelpful restrictions that would impede crypto innovators’ ability to operate and push many out of the state.” (Story: Sam Reynolds of CoinDesk)
For those countries considering a more thorough embrace of crypto, there’s the cautionary tale of El Salvador, where Rolling Stone asks: Will This Be the First Country Bankrupted by Crypto? It's not yet clear whether it was Bitcoin that caused the crash, as “with El Salvador’s funding sources drying up, the Bitcoin implementation almost feels like a diversion for a country heading deeper into a political and economic crisis.” (Story by Daniel Alvarenga of Rolling Stone)
[A rethink for some in crypto — even for the Merge]
This schizophrenic approach to crypto is perhaps unsurprising when the world of DeFi itself is not quite sure where it’s going. The recent bear market has only accentuated that:
NFTs, once the darling of crypto, have seen “massive declines in daily volume”, according to a piece in Cointelegraph which used data from DappRadar to report that the world's largest NFT marketplace, OpenSea, had turned into an NFT ghost-town after volume plunged 99% in 90 days. The problem, the piece concluded, is not NFTs themselves, but the bearish market for Ethereum, the currency in which many NFTs are priced. (Story: Yashu Gola of Cointelegraph)
Part of this is a lack of confidence on the part of investors. A lack of transparency is making them nervous about whether their funds are safe. Understandably: Tether, for example, says that an audit is still months away, despite promising one back in 2017. (Story: Jean Eaglesham and Vicky Ge Huang of The Wall Street Journal)
The crash has opened up the space for a more inclusive discussion of the potential uses and benefits of blockchain, and the protocols and philosophies behind it, such as the recent FWB Fest in Idyllwild, dubbed crypto's Woodstock (Story: Taylor Lorenz of The Washington Post)
Hopes are high that Ethereum’s Merge, which we’ve covered extensively, will itself usher in a new era of cheap, faster transactions and new use cases. But at the same time, there’s anxiety, explored in this New York Times piece which concluded "the risks are profound. Even by crypto standards, the process is almost ludicrously complicated.” (Story: David Yaffe-Bellany)
The bear market has also dashed any immediate hopes that crypto would be a hedge against inflation. But this will happen eventually, argues Jarek Hirniak of Generation Lambda, just not yet. The point, he argues, is that cryptocurrencies currently fail as an inflation hedge during times of high volatility and market uncertainty. What's needed is a more mature community. “As cryptocurrencies evolve," he writes, “they’ll become an effective bulwark during these downturns too.”
[Tidbits]
Coinbase, whose CEO called most politics a 'distraction', launches voter registration tool. The piece quotes chief policy officer Faryar Shirzad as saying it was part of an initiative aimed at giving the crypto community “tools to participate in the critical policy discussions happening across the United States.” (Story: Turner Wright of Cointelegraph)
A self-described whistleblower has accused Ava Labs, the company behind the Avalanche blockchain of conspiring with a law firm to collect confidential information of rival companies via class action lawsuits. Ava Labs founder Emin Gün Sirer has dismissed the allegations as “conspiracy theory nonsense”. (Story: Omkar Godbole of CoinDesk)
[Reading]
A thoughtful look at the Metaverse from Antony Lewis, whose pieces are always worth a read: “Will there be one winning virtual world, with many different continents/areas/venues for different use cases? Not likely. “
[Events]
ETHWarsaw | September 1st - 4th, 2022 | Warsaw, Poland
Blockchain Rio Festival | September 1st - 4th, 2022 | Rio De Janeiro, Brazil
MCON | September 6th - 9th, 2022 | Denver, Colorado, USA
Meta Week | September 11th - 14th 2022 | Dubai, UAE
Salt | September 12th - 14th 2022 | Manhattan, New York, USA
Berlin Blockchain Week | September 12th - 18th 2022 | Berlin, Germany
Dappcon 2022 | September 12th - 14th 2022 | Berlin, Germany
Digital Asset Summit | September 13th - 14th 2022 | New York City, New York, USA
EthSafari | September 18th - 24th 2022 | Nairobi & Kilifi, Kenya
Messari Mainnet NYC | September 21st - 23rd 2022 | New York City, New York, USA
DeFi Live | September 22st - 23rd 2022 | London, UK
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘NFTs’ by Celina Chu.
Non-fungible tokens (NFTs) are verifiable representations of digital goods on a blockchain. They use blockchain’s distributed ledger technology to authenticate, track and verify ownership.
Each NFT has its own unique transaction hash, making it non-replicable and an irrefutable proof of ownership. Due to its unique and non-interchangeable properties, it can act as a certificate of authenticity that lives forever on the blockchain.
NFTs first gained momentum when viral meme faces started getting minted as NFTs to circumvent the issue of free distribution and commercial use without attribution. In the art world, NFTs have been a game changer for digital artists who are able to track the provenance and monetary value of their work. Purchasing an NFT enables users to go from being online renters to online owners, giving users exclusive digital ownership although the creator may retain that asset in its tangible form such as a physical painting that has been digitised.
Looking beyond the art world, there has been an increase in commercial adoption of NFT technology being applied in outside industries. NFTs can build up a brand’s identity, community and customer loyalty, revolutionising brand-to-customer engagements. For instance, publishing giant Pearson utilises NFTs to track digital sales and capture any lost profit in the secondary market.
NFTs have been criticised as a volatile asset of dubious value; only time will determine who is right.