Welcome back! It hasn’t been the busiest week for crypto, but we have highlighted three stories to keep an eye on as we move into Q2: the Ethereum upgrade, the state of VC funding, and the EU’s upcoming vote on a regulatory framework for crypto.
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. 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).
[tl;dr]
Ethereum has finally launched the long-anticipated Shanghai upgrade, bringing staking withdrawals to the network
Crypto VC deals were up at the end of Q1 ‘23, but overall funding was down
The European Union is ready to vote on a regulatory framework for crypto
[You Say ‘Shanghai’, I Say ‘Shapella’ 🎤]
With this week’s Shanghai and Capella upgrades (Shapella for short), Ethereum now allows staking withdrawals.
Why is that important? Last year, Ethereum transitioned from proof of work to proof of stake. This change meant that users could secure the network and validate transactions by locking up, or “staking” their ether. Since staking began on Ethereum, users have locked up about 18 million ETH ($35 billion) and have earned about 5% interest as rewards. The catch? They haven’t been able to withdraw any of those funds.
A new industry arose to accommodate those who wanted to tap into their funds: liquid staking. These third-party services take a percentage of any ETH rewards that stakers earn. But recent SEC actions have put the legality of such staking services in doubt.
The question now that the Shapella upgrade has gone live is: What happens next?
What Crypto Media Said 💬: “Since The Merge, ether staking has been a one-way system. You can stake ether, but you can't withdraw it,” wrote Vishal Chawla for The Block. “Shapella's goal is to fix this and enable validators and users to unstake their ether on the network.”
In the run-up to Shapella, the big winner has been Bitcoin, said CoinDesk’s Omkar Godbole. BTC has risen to its highest share of the total crypto market cap since July 2021 while ETH has stagnated. He noted that investors weren’t sure where the price should be due in part to “concerns tokens unlocked after the upgrade will flood the market and regulatory issues.”
What Traditional Outlets Said 🗞️: “Expect to witness a flood of ETH into the market,” Robert Stevens predicted in Fortune. But he noted the network will only allow up to 43,200 ETH to be withdrawn each day, mitigating the chances for an exodus.
Either way, said Bloomberg’s Olga Kharif, allowing withdrawals “may ultimately make ether a more attractive investment, beckoning retail investors and institutional investors looking for yield. But much will also depend on regulators’ views of the cryptocurrency and staking.”
[VC Deals Up in Q1 🔝, Funding Amount Down]
Q1 ended on March 31. So how are things looking? According to a new report from Galaxy Digital, venture capital firms inked 439 deals in the first quarter of 2023, a 20% increase from Q4 2022. However, overall funding was down slightly to $2.4 billion.
What Reporters Said 💬: “Companies involved in Web3, NFTs, DAOs, metaverse and the gaming subsector scored the most deals,” summarized Blockworks reporter Shalini Nagarajan. “Meanwhile, companies tied to trading, exchange, investing and lending raised the majority of venture funding ($538 million).”
What Analysts Said 🔎: “Crypto-focused venture capital investors are trucking along in their work,” wrote TechCrunch senior crypto reporter Jacquelyn Melinek on March 31 (before the Galaxy report was released). “Many remain confident in their investing strategies despite an enervated first-quarter market for crypto startup fundraising. Others are noticing a sharper decline in investing pace.”
What’s true in crypto is true about the tech sector full stop, advised Crunchbase News senior data editor Gené Teare. She pointed to figures showing that global VC funding fell from a year prior while remaining static from the previous quarter: “The reset in 2022 has deepened across all funding stages quarter over quarter and year over year — outside of the blips from a few multibillion-dollar, late-stage financings.”
“The stark contrast from the year-ago quarter is unsurprising,” said Melinek. “The crypto world was in a different place back then. FTX, for example, was still a prominent crypto exchange and raised a $400 million round, bringing its total capital raised to $2 billion and giving the company a valuation of $32 billion at the time.”
What VCs Said 🗞️: a16z, which has the largest crypto fund of any VC firm, released its State of Crypto 2023 report. It laid out why it sees opportunity despite any downturn: “We believe recent setbacks underscore the failure of opaque, centralized systems in contrast to the resilience of decentralized infrastructure. We believe decentralized computing platforms can also counter the trend of power consolidating into the hands of a few giant tech corporations. The internet needs web3. Those who understand this will fight for the future of these technologies.”
[EU to Vote on Crypto Regs 🇪🇺]
The European Parliament will vote on regulations known as Markets in Crypto Assets (MiCA) next week. If it passes, the European Union’s 27 member states will have 18 months to implement the reforms, which focus on crypto asset service providers — firms that provide trading, custody, marketing, or other crypto-related services. EU securities regulator ESMA would be charged with setting guidelines for applying the law.
What Reporters Said 💬: Decrypt’s Alys Key provided a deep dive into the proposed rules, highlighting several requirements. First, public offerings will require a white paper and risk disclosures. Stablecoin issuers, meanwhile, must keep a segregated reserve to back up their assets. Central bank digital currencies, like the proposed digital euro, are exempt. Said Key: “Observers have long noted that MiCA’s origins, as a response to Facebook’s now-defunct Diem (formally called Libra) project, are rooted in fears of a non-government currency making headway in the region.”
What Columnists Said 🗞️: The move toward MiCA comes as the US fights a “regulatory turf war” that has American companies stuck in the middle, said Joel Khalili of Wired. While the SEC and CFTC argue over who should regulate the industry, the EU is moving forward “and countries like Japan and the UAE have also moved quickly.” The US, he said, “lags behind.”
What the Industry Said ⚙️: Linda Jeng, Chief Global Regulatory Officer for the Crypto Council for Innovation, suggested in a Forbes editorial that MiCA’s passage provides the regulatory clarification that crypto companies want, even if it isn’t perfect: “It is no surprise that Circle recently announced the opening of a new European headquarters in France. MiCA may also attract more crypto companies and independent developers to both Lisbon and Berlin as well, which have quickly grown into major hubs for crypto developers.”
[Tidbits]
FTX and its debtors released their first report over the weekend as they look to recoup losses post-bankruptcy filing. CEO John J. Ray III wrote: “FTX Group was tightly controlled by a small group of individuals who falsely claimed to manage FTX Group responsibly, but in fact showed little interest in instituting oversight or implementing an appropriate control framework.”
Gemini co-founders Tyler and Cameron Winklevoss recently loaned their crypto exchange $100 million, according to anonymous sources cited by Bloomberg’s Hannah Miller, Vildana Hajric, and Olga Kharif.
[Tweet of the week]
https://twitter.com/lore37_/status/1646096303569395718
[Events]
ETH Global Tokyo Hackathon | April 14th - 16th 2023 | Tokyo, Japan
EthereumZurich | April 14th - 16th 2023 | Zurich, Switzerland
LionHack | April 14th - 16th 2023 | New York, NY, USA
Sui Builder House | April 14th - 16th 2023 | Hong Kong, SAR
EthCapeTown | April 19th - 23rd 2023 | Cape Town, South Africa
Sol.Ladies Build Hacker House | April 20th - 24th 2023 | Austin, TX, USA
TechCrunch Early Stage | April 20th 2023 | Boston, MA, USA
MIT Bitcoin Hackathon | April 21st - 23rd 2023 | Cambridge, MA, USA
ETHTaipei (Hackathon + Conference) | April 21st - 25th 2023 | Taipei, Taiwan
Consensus | April 26th - 28th 2023 | Austin, TX, USA - Look out for our YAP Team members on the ground!
[DeFi Definitions]
A new occasional segment exploring one particular aspect of DeFi.
This week “Web3” by Delon Chan.
Web3 represents the next stage of the internet, characterized by decentralization and individual control over data and privacy. It's the next evolution from the centralized characteristics of Web 2.0.
Initially, there was Web 1.0 — the era of static web pages (e.g., plain HTML sites). You could view the internet, but you couldn't interact with it. Web 2.0 followed, introducing interactive and social experiences (e.g. Facebook) that reshaped the internet. While Web2 connected billions of people, it concentrated power in the hands of a few tech giants, raising concerns about privacy, data ownership, and censorship.
Web3 aims to address these challenges by embracing decentralization (e.g. DeFi platforms like Uniswap or NFT marketplaces like OpenSea). Unlike Web2's centralized control, Web3 is built, operated, and owned by its users, returning power to individuals. By leveraging blockchain technology, Web3 guarantees individual control over data and promotes secure, open access to online interactions without the need for trusted intermediaries.
Web3 emerges as a beacon of hope for a more democratic and transparent landscape. By embracing Web3, we pave the way for a brighter, more connected future where technology serves humanity rather than the other way around.
The team: founder Samantha Yap and consulting editor Jeff Benson, Sam O'Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
This newsletter is prepared by YAP Global, an international P.R. Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.