#36 The Context: Beyond the Merge
Ethereum’s upgrade finally goes ahead, but leaves a lot of questions in its wake
Hi, all, this week’s news is dominated by The Merge, and so we dedicated much of this week’s newsletter to it, including throwing things forward a bit. We leave space, however, for a couple of curve balls that might interest those of you looking for less obvious topics to explore. One is about identity — the way we authenticate ourselves — and whether crypto is ahead or behind the move for a system that’s interoperable. We also ask which way the river is flowing when it comes to TradFi and DeFi. Or put another way: which is the dog and which is the tail, when it comes to DeFi?
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 Ruby Wu, Joey Woo, Sam O’Donohoe, Delon Chan, Becky Corbel and Ewan Brewster for their contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Ethereum’s long-promised upgrade, the Merge, has happened. What next?
The race is on to define a standard for identity credentials. Is DeFi in the running?
Traditional finance is embracing both DeFi and the return of prodigal offspring looking for work amidst the Crypto Winter
[The Merge]
The Merge has happened. Here’s the latest: Ethereum activates The Merge as it shifts to proof of stake (Story by Mike Truppa of The Block)
Guides on the Merge:
Here's a good breakdown of what is behind the Merge, and post-Merge launch plans. Today in DeFi also has a thread on Twitter.
The FT does a good job of putting things in context, asking whether the Merge is a blockchain revolution or just more hype.
A longer paper called Mapping Out The Merge from Coin Metrics does a great job if you're looking for deeper, more technical insights.
Trading: Crypto traders are hedging against disappointment, probably also factoring in that all the good news about the Merge has already been priced in.
Big boys’ interest: Google considered the event so significant it rushed through an 'Easter Egg' on its search engine to count down to the transition from proof of work to proof of stake. It's also a reminder that Google has been touting its web3 credentials via blockchain infrastructure services used, it says, by Nansen, Dapper Labs and Solana. (Amazon's AWS is popular too, though sometimes the relationships come unstuck: Shiba Inu's AWS credentials were leaked on a public repository, according to Anand Prakash, founder of PingSafe, a cloud security platform.)
Gaining respectability? The Merge matters for everyone in crypto wrote Decrypt, making the point that a White House report on crypto and energy use appeared to praise Ethereum. And the Merge could also drive up institutional adoption, according to Bank of America, since many institutional investors were barred from buying tokens that ran on proof of work mechanisms, as well as the appeal of staking and validating versus the old, more risky, lending and borrowing of Ethereum-based assets. Wisdom Tree, which launched a physically backed Ether fund in Europe last year, agrees, saying the Merge ‘completely changes’ Ether’s investment case for institutions.
Short-term issues: Investors who have staked ETH will face a liquidity risk as a side effect of the upgrade, (Stories by Olga Kharif of Bloomberg)
Implications
for other coins: Bitcoin will likely face pressure to clean house on its energy use; and other coins which have presented themselves as energy killers, will lose that part of their value proposition.
for Ethereum: there’s anxiety that the Merge has so many expectations built in that it will inevitably disappoint: Slow transactions and high fees will continue, raising questions about its usefulness for web3, and there are even technical doubts about it. Even if it does, the Merge will, in the words of the FT, "be gradual, more like the sun coming up than switching on a light."
What’s next: Ethereum's development roadmap extends far beyond The Merge. Get Ready for the 'Surge, Verge, Purge, and Splurge', with the 'Sharding' and 'Verkle Tress' being the following features on Ethereum's roadmap to maximise the blockchain's scalability.
(Stories by André Beganski, Kate Irwin, Jason Nelson, Mat Di Salvo and Daniel Roberts of Decrypt; Scott Chipolina of the Financial Times; Muyao Shen and Vildana Hajric of Bloomberg; Ben Strack of Blockworks;
[Interoperability or bust]
A big push both inside and outside crypto has been to better manage identity. It was hoped that COVID might help prod this along, as countries open up and need to see and share people’s vaccination and immunity record. Some ideas, including using blockchain technology, were mooted, but it didn’t really happen.
Instead, we’re seeing evidence that others are picking up the slack. Apple’s collaboration with Homeland Security, which has been going since 2019, but was only reported on recently, yields patents for Apple in several fields, including using a mobile identity credential (MIC) for companies to assess an individual when opening an account for holding or trading cryptocurrencies. Given the widespread use of Apple Wallet, it's not hard to imagine where Apple hopes to go with this.
Similarly, the Linux Foundation, which had been involved in the COVID identity movement, is also planning to collaborate on supporting interoperability across digital wallets, via a body called the OpenWallet Foundation. While its press release makes no mention of cryptocurrencies, it does mention the Metaverse and one of the partners in the OpenWallet Foundation project, David Treat of Accenture, leads the company's catchily named Global Metaverse Continuum Business Group & Blockchain group.
With regulatory regimes like the EU pushing for interoperability the key battle will be between giants like Apple, which want to keep all this action in-house, and the broader industry, which would prefer open standards, and know they have regulatory support. Crypto won’t be far behind; wallets are seeing significant investor interest, with Pantera Capital investing in the Near protocol-based wallet Sender, and Omni, a non-custodial wallet, raising an $11 million seed round at a $50 million valuation.
It’s worth keeping an eye on other ways to perfect identity, especially using blockchain tech. Seven blockchain firms have joined a consortium for vehicle identity
(Stories by Channa Beck of Coinseek; Paul Sawers of TechCrunch; Jason Mikula of Fintech Business Weekly)
[Which way is the river running?]
Despite the downturn, the trend of traditional finance showing increasing interest in, and committing funds to learning about DeFi has remained relatively constant. Here are some interesting stories which illustrate and extend that idea — and suggest that this may be the key area of growth for the rest of the decade:
Private equity funds are trying to lure high-net-worth individuals (as opposed to institutions or the ultra-rich) with new products and ways for them to pool their funds. Buyout firm KKR has made part of its private equity fund available on the Avalanche public blockchain in a partnership with Securitize. Those qualified can sign up to invest in the KKR healthcare fund via what will essentially be a tokenised feeder fund. (Story by Miriam Gottfried of The Wall Street Journal)
The market for such tokenisation of assets is going to explode, according to Boston Consulting Group, which estimates it to reach $16 trillion by 2030. Financial institution messaging system SWIFT is piloting a blockchain project aimed at curbing inefficiency. (Story by Katherine Doherty of Bloomberg)
There may be more of this, as financial institutions lure back crypto developers in the midst of the crypto (and Silicon Valley) winter. According to the FT Wall St jobs are hot again as tech and crypto sectors lay off staff. (Story by Nicholas Megaw of Financial Times)
[Regulatory corner]
Terraform Co-Founder Do Kwon faces an arrest warrant in South Korea, and authorities have sought to revoke his passport. A court in Seoul issued a warrant for Do Kwon and five others on allegations that include violations of the nation’s capital markets law. All six are apparently in Singapore. (Stories by Hooyeon Kim of Bloomberg)
The U.S. securities regulator will set up a new crypto filings office to provide "greater and more specialised support."
The brother of an ex-Coinbase manager has pleaded guilty to insider trading, in what may be the first insider trading case involving crypto. (Story by Luc Cohen of Reuters)
India's Enforcement Directorate has apparently unfrozen the bank account of WazirX, a crypto exchange which has been frozen as part of an investigation into alleged fraud on instant loan apps. Many of the firms under investigation had used the WazirX platform. (Story by Amitoj Singh of CoinDesk)
The U.S. is still going after North Korea, with the Feds freezing $30m in cryptocurrency allegedly stolen from Axie Infinity. (Story by Jeff Burt of The Register)
[Tidbits]
Remember the sceptics’ conference we mentioned a few weeks back? It happened, and Ben Munster of Decrypt was there, inside the world's first no-coiner conference. Here's a more sympathetic summary of the Crypto Policy Symposium 2022, including videos from one of the organisers.
Starbucks is using Polygon for its 'Starbucks Odyssey’ customer loyalty program. (And, yes, it does mention NFTs in its promotional bumf. Indeed, there's plenty of funding still for NFT- and gaming-related companies, which jumped 66% from July to August. That said, there's still plenty of hostility over NFTs, this time from fans of David Bowie, when his estate mulled an NFT to raise money for charity. (It wasn't the charity that annoyed them, it was the idea of using NFTs, just to be clear.)
[Events]
EthSafari | September 18th - 24th 2022 | Nairobi & Kilifi, Kenya
Messari Mainnet NYC | September 21st - 23rd 2022 | New York City, New York, USA
DeFi Live | September 22nd - 23rd 2022 | London, UK
EthSantiago | September 22nd - 23rd 2022 | Santiago, Chile
ETH HCMC | September 23rd 2022 | Ho Chi Minh City, Vietnam - Look out for the YAP Team on the ground!
BUIDL Asia HCMC | September 24th 2022 | Ho Chi Minh City, Vietnam - Look out for the YAP Team on the ground!
Asia Crypto Week | September 26rd - October 2nd 2022 | Singapore, Singapore
Cosmoverse Medellin | September 26th - 28th 2022 | Medellin, Colombia - Look out for the YAP Team on the ground!
Converge ‘22 | September 27th - 30th 2022 | San Francisco, California, USA
Token2049 Singapore | September 28th - 29th 2022 | Singapore, Singapore - Look out for the YAP Team on the ground!
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘Interoperability’ by Ewan Brewster
Interoperability can be defined as a product’s ability to interact with different systems. A familiar example would be email i.e. someone with a Gmail account can seamlessly send and receive emails to someone with a Yahoo account. With regards to web3, interoperability refers to blockchains’ ability to see and transfer information between one another; however, we still have a long way to go for this to become a seamless operation. Currently, certain wallets aren’t compatible with certain blockchains and currencies cannot be transferred from one blockchain to another without the cumbersome and risky processes that bridging can pose.
We can currently think of blockchains as islands with their own currencies and assets that are naturally siloed from one another. As we develop technologically, it will be possible for these blockchains to become more interconnected. Of course, different blockchains have their own functionalities and many of them are finding new ways to promote interoperability but they are still in development and will take some time for the innovations necessary for true interoperability to surface.
Interoperability is fundamental to improving the user experience of blockchain technology and with user experience being one of the major obstacles in the way of its wider adoption, one cannot understate the importance of working towards better interoperability within blockchains.
More reading: