#38 The Context: Ethereum miners in a hole

The Merge has pushed mining companies off a cliff

Hi, another week without major news, but plenty of interesting stories and angles out there. Ethereum miners have nowhere to go, while Bitcoin miners may have plenty of work but data shows that they may find their greenish credentials increasingly under question. Crypto patents are going to come in for some interesting attention courtesy of a lawsuit. And regulators need to start thinking about whether making it easy for crypto companies to build their headquarters in your jurisdiction is such a good idea.

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, Sam O’Donohoe, Ewan Brewster, Becky Corbel, Joey Woo and Delon Chan for contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.

[tl;dr]

• Ethereum miners have dug themselves a hole post-Merge

• Crypto patents under the spotlight as Coinbase faces lawsuit

• Regulators continue to send mixed signals, even from within one entity

[Merge: for miners, a cliff]

Ethereum’s Merge shifts from proof of work to proof of stake, meaning there’s no more opportunities for miners. And the consequences of that are becoming painfully clear:

• More than 80% of Ethereum miners have pulled the plug, according to data from 2miners, a website tracking the hash rate of proof of work networks. Data shows that many miners are opting to turn off their hardware after soaring hash rates rendering many networks supporting EtHash miners unprofitable. (Story by Samuel Haig of The Defiant)

• Coin Metrics' State of the Network shows there are few alternatives. Mining Ethereum Classic makes them just $5.7M in revenue in the ten days since The Merge (against over $20M each day for ETH pre-Merge). The reality is that GPU miners have very few options these days other than reflecting on the halcyon days of ETH mining.

• Nvidia, one of the main suppliers of GPU chips, are facing a reckoning as entire mining operations, built with thousands of Nvidia GPUs, become worthless overnight. Bitcoin is almost exclusively mined on custom-designed chips, so there's no respite there. This is particularly bad timing for Nvidia, writes Stratechery's Ben Thompson, given that the pandemic buying spree ended just as the company’s attempt to catch up on demand for its 3000-series of chips were coming to fruition. (It looks like Nvidia's solution may be to go up market, which may free up other players to compete on price, according to Tobias Mann of The Register.)

• While there may be sympathy for miners, it’s a good thing for the planet. As if to underline this, fresh research suggests that Bitcoin mining's sustainable electricity mix may be declining. Cambridge University's Centre for Alternative Finance's (CCAF) found that emissions intensity for 2021 was 506.71 gCO2e/kWh, compared to 491.24 in 2020. Data for this year is so far only available up to January, so no conclusions can yet be drawn for 2022 for the time being. Bitcoin miners are still expanding operations, and investing in new equipment. But times are hard: Data from the Coin Metrics report cited above indicate that the Q3 losses suffered is thinning the herd. China-based Bitcoin mining pool Poolin, for example, notified users earlier this month that it was pausing all transfers, flash trades or withdrawals, sparking a mass exodus. (Story by Jamie Crawley of CoinDesk)

[Regulations, regulators and self-regulation]

Regulators are still uncertain what to do with crypto, and actions they do take are not always unanimous. The result may be more confusion, but also a chance for the industry to self-regulate.

• California's version of New York’s BitLicense Bill has been vetoed by Gov. Gavin Newsom. BitLicense is a business license for digital currency activities in New York that's issued by the state's Department of Financial Services. A California version would have created a licensing regime for anyone seeking to facilitate crypto transactions, similar to how money transmissions are overseen by the state's Money Transmission Act. It was one of eight bills Newsom vetoed, saying it would be "premature" to create a licensing regime without considering feedback, while dangling the possibility of future federal legislation or regulations. (Story by Nikhilesh De of CoinDesk)

• The mood is clearly towards using existing enforcement mechanisms for now. California and seven other states have hit crypto lender Nexo with enforcement actions calling the company’s Earn Interest Product an unregistered security (Nexo is a client). California’s Department of Financial Protection and Innovation (DFPI) said Nexo’s interest rates of up to 36% are “significantly higher than the rate on short-term, investment-grade, fixed-income securities or bank savings accounts.” (Story by Stacy Elliott of Decrypt)

• But not every crackdown is supported, even internally. When the U.S. Commodity Futures Trading Commission took action against a DAO, one of its own commissioners cried foul. On Sept. 22, the regulator alleged in a lawsuit that a DAO called Ooki DAO engaged in activities that only regulated entities called futures commission merchants (FCM) can perform. But one commissioner Summer Mersinger broke ranks with her five fellow commissioners and said the action wasn’t supported by the Commodity Exchange Act, the law that regulates derivatives issuance, and amounted “regulation by enforcement.” (Story by Owen Fernau of The Defiant)

• One of the thorniest problems in crypto is supposedly it strong point — immutable data and (usually) immutable trades. But should the latter be tweaked to allow reversible transactions in the case of hacks and other unfortunate incidents? Is it even technically doable? An academic proposal to make Ethereum transactions reversible has divided the community. The Stanford team believe it may hold the key to making cryptocurrencies more protected from hackers. Many in the crypto community vehemently opposed allowing transactions to be reversed in any circumstances. (Story by Samuel Haig of The Defiant)

• And then there’s the growing problem of regulating and policing across borders. Indian forex authorities are probing a gaming payment firm Coda for unauthorised deductions from users’ accounts and possibly corrupting the young. The regulators allege that Coda’s Singapore arm (and the parent company of its Indian operations) is a conduct to remit funds outside India. (Story by Laura Dobberstein of The Register)

[Latent patents]

Can crypto innovation be patented, and if so, who is going to win? One case may be worth watching.

• In a rare move, crypto exchange Coinbase has been sued for patent infringement. Behind the lawsuit is Reggie Middleton, who has two patents to his name and heads a company called Veritaseum, which launched the Ultra Coin. Veritaseum alleges the crypto exchange has infringed on a patent used for some of its blockchain infrastructure, and the company is seeking at least $350 million in damages.(Story by Michael Bellusci of CoinDesk)

• Patents in crypto are in a state of limbo, as a case between a ‘defensive’ alliance -- the Crypto Open Patent Alliance (COPA) formed to “encourage the adoption and advancement of cryptocurrency technologies and to remove patents as a barrier to growth and innovation.” Its nemesis is Craig Wright, who has claimed he is the author of the Bitcoin white paper, and the two are currently locked in a legal dispute that may only go to trial in 2024. Companies connected to Wright have filed dozens of blockchain related patents.

• That’s not the only weird thing about blockchain patents. China, it turns out, accounts for 84% of all blockchain patent applications, but only a limited number have been approved. (This is not wholly unusual: while only 19% of China's applications were approved, U.S. companies weren't much better, having only 26% approved.) (Story by Prashant Jha of Cointelegraph)

• No question, though, that the legal side of business is becoming more important as bigger and more experienced players enter the space. Disney, for example, is seeking a corporate lawyer for ‘emerging technologies’, including NFTs. The company has filed a patent for a “virtual-world simulator,” referring to a potential theme-park metaverse. According to the patent application, Disney’s possible foray into the Metaverse could involve visitors to their theme parks using mobile phones to generate and project personalized 3D effects onto nearby physical spaces, such as walls and other objects. (Stories by Stephen Katte and Keira Wright of Cointelegraph)

[CBDCs: after you, please]

We’ve tried to keep tabs on central bank-issued currencies here, simply because they seem the most likely bridge between TradFi and DeFi, given stablecoins’ current travails. Here’s a quick update. Bottom line is a feeling that everyone is waiting for someone, or something, else to make the first move.

• Australia is pushing ahead with its planes, announcing the country’s CBDC pilot should be completed by mid-2023. The plan, according to the Reserve Bank of Australia (RBA), is to research the use cases for a CBDC in Australia and try it out in an experiment using Quorum, an enterprise-grade, private variant of Ethereum. (Story by Mat Di Salvo of Decrypt)

• The European Central Bank is preparing for broad digital currency adoption 'scenario' exploring options for integrating decentralized ledger technology (DLT, or blockchain) into existing payment settlement systems. But there is no appetite for the ECB to be a first-mover in the space, instead monitoring how widely stablecoins and central bank digital currencies take hold. If stablecoins and central bank digital currencies become more widely adopted, the ECB will look at creating bridges between existing European real-time payments systems or its own digital euro, said Panetta. (Story by Inbar Preiss of The Block)

• A former IMF official said he believes CBDCs need to function offline to gain mass adoption. John Kiff said that he believes that CBDCs need to function offline, pointing to ‘old’ technology in the form of stored-value cards from the 1990s, which were introduced in the 1990s. He was pointing to examples like the 1993 decision by the Bank of Finland to launch the Avant card, designed to store offline payments using a custom-made card reader device. The National Westminster Bank rolled out a stored-value payment platform called Mondex in 1995, which is now part of MasterCard Worldwide. (Story by Cynthia Chung of CryptoSlate)

[Tidbits]

• An Interpol ‘Red Notice’ has now been issued for Do Kwon in response to charges he faces in South Korea related to the collapse of the Terra ecosystem. Last we heard from Do Kwon he says he wasn't on the run.

• Walmart enters the metaverse with Roblox, featuring a blimp that drops toys, a music festival with hot artists, a bunch of different games, and a store of virtual merchandise, or “verch,” which matches what customers may find in Walmart’s stores and on its website.

• Bank of America believes stablecoin flows to crypto exchanges bode well for the market. Stablecoins flowing into exchanges touched $490 million—a 58% seven-day increase and the third consecutive week of inflows.

• FTX has won its bid to buy crypto lender Voyager Digital's assets. FTX was bidding against Wave Financial, a digital-asset investment firm. Voyager Digital filed for bankruptcy in July.

• China has arrested 93 people suspected of laundering 40 billion yuan via crypto. The criminal group had been operating since 2018, but was only investigated after the director of the County Public Security Bureau, Liu Xialong, was defrauded of 7.8 million yuan (not the best person to target, you'd imagine). The group allegedly converted the funds obtained from gambling and fraud into cryptocurrencies before laundering them into U.S. dollars.

• Molly White spots a stream of crypto executives stepping down: from Genesis, Kraken, Celsius, and FTX.

• Another nugget from Molly: front-running bots, which run ahead of transactions, are becoming a menace, but may also contain the seeds of their own destruction: an MEV (maximal extractable value) bot earned over $1 million in profit, and then lost almost $1.5 million in hack an hour later.

[Reading]

• A few days old, but this is definitely worth a read: Young Lebanese driving crypto 'revolution' after banks go bust. (Story by Timour Azhari of Thomson Reuters)

• CoinMarketCap and Spartan Labs have teamed up to do a very good State of the DeFi Industry Report. Combine it with an excellent analysis by Chris Skinner and you’re good to go.

[DeFi Definitions]

An occasional segment exploring one particular aspect of DeFi.

This Week: “Privacy Coins” by Murial Wang

Privacy and security are often described as two ends of the spectrum. The crypto industry, known for being open-source and transparent, has seemingly found a balance of privacy and security through zero-knowledge technologies and assets like privacy coins.

Privacy coins are anonymised tokens allowing confidential transactions and data security to occur on a public blockchain.

Monero and Zcash are two of the most well-known privacy coins. Depending on the location and specific tokens, privacy coins adopt varying strategies to keep transactions classified and users incognito.

In the past few months, privacy coins were in the headlines for OFAC’s sanction announcement due to their association with alleged bad actors, crimes, and regulation-evading activities. All of which resulted in some delistings.

While often on the receiving end of bad press, privacy coins allow individuals and businesses to conduct untraceable transactions and secure data information like donations towards a public cause.