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September’s Stellar Crypto Standouts

The Digital Investor

Introduction

As we bid farewell to August, a month that kept the global economy on its toes, it’s time to dissect the pivotal developments that have set the stage for what’s to come in the world of finance and cryptocurrency. This comprehensive recap delves into the macroeconomic landscape and cryptocurrency markets, where seismic shifts are unfolding.

The month of August brought macroeconomic revelations, signalling a distinct lack of rate hikes on the horizon for the Federal Reserve. Fed Chair Jerome Powell made it clear that future monetary policy decisions will pivot firmly on data-driven insights. While this may seem like good news for the U.S. economy, a closer look reveals a market divide, with a select group of tech giants, particularly those pioneering artificial intelligence, steering the 2023 market rally.

However, amidst the optimism in the U.S., there are international ripples to consider. China’s economic data sent shockwaves through global equities, prompting many giants to reconsider their positions in the world’s second-largest economy. Yet, by the end of August, China unveiled a range of measures aimed at rejuvenating its economic prowess, setting the stage for potential shifts in the global economic landscape.

In the cryptocurrency realm, August brought its own set of challenges and opportunities. Bitcoin faced an 11.6% decline, setting the stage for a historically turbulent September — a month that has consistently seen negative returns for the cryptocurrency. However, this year’s September comes with unique factors and uncertainties, notably the eagerly awaited spot Bitcoin ETF decisions that could reshape the crypto landscape.

Macroeconomics

August’s macro data sent a clear message: no rate hike looms on the horizon for the upcoming Federal Reserve meeting. Powell, the man at the helm, underscored that future Fed actions will pivot squarely on data. The good news? The Fed’s outlook shines with a distinct absence of recessionary clouds over the U.S. economy.

Yet, a closer look at the U.S. market reveals a fissure. Market breadth wanes as only a handful of companies hold the reins, propelling the overall market higher. Tech companies, especially those championing the realm of artificial intelligence, have orchestrated the entire 2023 rally.

Meanwhile, the macro data streaming out of China cast shadows over global equity markets in August ’23. China’s economic prowess, once formidable, has dwindled post-Covid, prompting several global giants to pivot away from its shores. However, towards the end of August ’23, the Chinese government unveiled a slew of measures designed to revitalize its economic vitality.

Shifting our gaze back to the U.S., there’s another glimmer of hope. S&P forward earnings show a promising uptick following a prolonged hiatus that lasted nearly a year. In the grand tapestry of the U.S. economy, stability reigns supreme, with inflation tracking in line with market projections.

High yields in the U.S. have left a modest imprint on wage growth, and it appears that lofty interest rates in the nation may persist longer than market pundits had initially foreseen, buoyed by the continued strength of the U.S. job market.

Lastly, a noteworthy reversal: after months of 2-year yields eclipsing their 10-year counterparts, the 10-year yields have surged considerably ahead. This rise in 10-year yields is generally seen as a positive signal for the economy and risk assets, indicating renewed confidence in the future.

Bitcoin

August witnessed a decline of 11.6% in the crypto markets, with Bitcoin emerging as the most resilient coin, experiencing only an 11% drop among the following coins. Notably, LTC (Litecoin), Synthetic (SNX), and Apecoin (APE) took a more substantial hit. During this period, Bitcoin’s dominance slipped from 50.5% to 49.1%, trading just below USD 26,000 at the time of writing.

September has dawned, and its significance lies in the historical trend of negative monthly returns for Bitcoin in this particular month. Since 2016, every September has seen Bitcoin face negative returns, with September 2019 recording a notable 13% drawdown. Given Bitcoin’s pervasive influence over the entire crypto market, such adverse movements tend to ripple across the ecosystem.

This trend isn’t unique to crypto; it’s a phenomenon known as the September Effect, which has impacted various markets for nearly a century. The root cause of this anomaly remains elusive, but some theories point to traders returning from summer holidays and opting to lock in profits before the autumn season.

For crypto, the potential September Effect this year is further complicated by many crypto-specific factors that could either push the market lower or elevate it. Most notably, the spotlight is on the recently delayed spot Bitcoin ETF applications, which hold the power to reshape the landscape.

Bitcoin achieved record-breaking daily transactions in Q2, surpassing 680,000 in a single day. This surge was primarily fuelled by two factors: Ordinals, an NFT protocol on the Bitcoin blockchain, and inscriptions, which involve embedding data, such as images, within the Bitcoin blockchain. This quarter witnessed the emergence of noteworthy Bitcoin NFT projects like Bitcoin Rocks, Ordinal Punks, TwelveFold, and Taproot Wizards. Bitcoin outperformed Polygon and Solana in NFT volume during May and June.

On the regulatory front, the U.S. Securities and Exchange Commission (SEC) has pushed the decision on spot Bitcoin exchange-traded fund (ETF) applications filed by notable entities, including BlackRock, WisdomTree, Invesco Galaxy, Wise Origin, VanEck, Bitwise, and Valkyrie Digital Assets, to October. This news sent Bitcoin’s price tumbling by 4.1% within 24 hours, settling at USD 26,100.

These ETF applications represent a significant milestone in the cryptocurrency space, as they have the potential to open the door for greater retail investment in Bitcoin while simplifying the process for investors who wish to avoid the complexities of setting up wallets or directly purchasing Bitcoin.

The SEC’s stance on these applications is a point of contention, as the regulatory body denied all spot bitcoin ETF applications, emphasizing that the applicants needed to prove their capability to protect investors from market manipulation. The Grayscale ruling, which ordered a review of the application, has injected fresh momentum into the debate, potentially reshaping the path forward for spot Bitcoin ETFs. While this ruling doesn’t guarantee approval, it does provide substantial support for spot ETF applications, offering a glimmer of hope for the industry.

The SEC may delay decisions further, but the pressure to establish clear and consistent regulations is mounting, suggesting a possible shift in the SEC’s stance. If BlackRock’s ETF application successfully paves the way for this new asset class and product, it could trigger a substantial transformation in the cryptocurrency market. Grayscale’s Bitcoin Trust (GBTC), which holds over 600,000 Bitcoins, saw a remarkable surge in trading volume following the positive developments, halved its discount to NAV from roughly 40% in June to 19% in September.

The immediate market response was unmistakable, with Bitcoin’s price surging by 8%, signalling optimism and potentially heralding a new era in regulatory momentum. Coinbase, the proposed custodian for Fidelity and BlackRock’s ETFs, also enjoyed a significant boost, with its value spiking by 16%. The potential approval of a spot ETF could usher in billions of dollars in inflows, offering a substantial reward for Coinbase’s resilience.

With a maximum 240-day window available to the SEC to delay crypto ETF applications, some firms could wait until March 2024 to hear decisions on filings made in July 2023. Interestingly, there’s an intriguing signal in the market as well. The skew in 25 delta options for BTC options expiring in March leans towards the “call” side, indicating that traders are generally optimistic about the SEC’s approval of BTC ETF filings.

Ethereum

Ethereum’s total fees surged by 111% in the past six months, resulting in an 86% boost in net income. The implementation of EIP 1559 on August 5, 2021, initiated the ETH burn, consuming 3.58 million ETH so far, equivalent to 3% of the total token supply.

Remarkably, Ethereum’s latest milestone, the Shapella upgrade, also known as “The Merge,” was flawlessly executed without inciting the dreaded ETH selloff, a topic we explored in detail in our earlier piece, “The Shapella Upgrade.”

The Ethereum Ecosystem, including L2s, portrays a robust and expanding network, while Ethereum’s standalone operating metrics indicate a network in stagnation. L2s play a pivotal role in fuelling Ethereum’s growth, and the upcoming implementation of EIP-4844 is poised to impact both L2s and Ethereum significantly. For a concise explanation of EIP-4844, you can refer here.

Currently, 20.4% of the ETH supply is staked, with an 84% year-over-year increase and a 27.6% quarter-over-quarter growth rate. Nevertheless, the growth in staked ETH has shown signs of deceleration in sequential terms. In the period leading up to and following Shapella, the monthly increment in staked ETH declined, with approximately 1.8 million ETH staked in April, 4 million in May, 2.2 million in June, 1.8 million in July, and 1.24 million in August.

L2s

The growth in Daily Active Users (DAUs) on Ethereum has remained stagnant since 2021. The number of DAUs within the Ethereum Ecosystem has approximately doubled from 400,000 to 1,000,000 in the past year (see chart 1). However, this growth may not necessarily signify an increase in individuals interacting within the Ethereum Ecosystem. More likely, a subset of Ethereum DAUs has also become DAUs of Ethereum L2s.

It’s important to note that Polygon PoS figures are not factored into the Ethereum Ecosystem, as Polygon PoS operates as an Ethereum sidechain. Over time, Polygon PoS users may migrate to the Polygon zkEVM chain, which could benefit the Ethereum Ecosystem. There are 400,000 DAUs on Polygon PoS, surpassing Ethereum’s 300,000 DAUs. However, it’s unlikely that Ethereum’s DAUs will double upon migration, as a significant number of Polygon PoS DAUs likely overlap with Ethereum DAUs.

DAUs across the Ethereum Ecosystem also conduct more transactions with the advent of L2s. The average daily transactions on Ethereum have hovered around 1 million since the second half of 2020, with Ethereum’s transaction capacity capped at approximately 3 million per day. L2s have collectively introduced an additional 3 million average daily transactions, resulting in a nearly fourfold increase in total transactions within the Ethereum Ecosystem over the past year (see chart 2). For every Ethereum transaction, three transactions are taking place on L2s.

Solana

Solana, the blockchain ecosystem known for its speed and scalability, has recently made waves across the crypto industry. Solana Pay, a decentralized payment protocol developed by Solana Labs, has seamlessly integrated with Shopify, an e-commerce giant responsible for 10% of total U.S. e-commerce and USD 444 billion worth of global economic activity.

This integration is set to revolutionize the world of e-commerce by providing millions of businesses on the Shopify platform with an innovative payment solution. Solana Pay, launched in February 2022, operates on top of Solana’s blockchain, and its initial payment option for this integration is USDC, the second largest stablecoin with a market capitalization of USD 25.9 billion.

Josh Fried, responsible for business development and partnerships at the Solana Foundation, emphasized that the choice of USDC was intentional. Most merchants are likely more inclined to accept a payment option closely tied to the U.S. dollar, and USDC is known for its higher level of regulation compared to many altcoins. However, Fried indicated that the protocol remains open to adding cryptocurrencies like SOL and BONK to its payment options in the future.

Maker’s New Home

Solana’s recent developments go beyond e-commerce integration. Rune Christensen, the co-founder of Maker, has proposed moving to Solana, which has sent shockwaves through the crypto community.

In a surprising twist, Ethereum’s co-founder, Vitalik Buterin, liquidated his remaining 500 MKR tokens for USD 580,000 in response to MakerDAO’s potential shift to a Solana fork called NewChain. MakerDAO’s DAI stablecoin ranks third among USD-pegged stablecoins with a supply of USD 3.9 billion, trailing behind Tether’s towering USD 82.9 billion supply.

Rune Christensen, MakerDAO’s co-founder and CEO, voiced his endorsement of the Solana ecosystem. He cited its technical prowess, resilience following the FTX incident, and successful forks like Pyth Network as driving factors for his preference.

Points Program

Solana’s journey takes another intriguing turn with the emergence of points programs in the DeFi sector. These programs, pioneered by MarginFi, generate user activity akin to traditional airdrops. MarginFi’s TVL has nearly quadrupled in just two weeks thanks to its innovative program, which rewards users for lending and borrowing activities. The trend is catching on, with protocols like Cypher and Zeta adopting similar points programs. It’s a development that could signal the dawn of a Solana DeFi summer.

Solana is also experiencing notable advancements in the Maximum Extractable Value (MEV) arena, with a surge in daily MEV. Jito, the force behind Solana’s Flashbots, is diligently enhancing MEV infrastructure, while Helius is quietly shipping developer tools to improve the developer experience. Neon has also recently launched, introducing the Ethereum Virtual Machine to Solana.

Polygon

Polygon Labs has unveiled a critical component of its Polygon 2.0 vision, the Polygon Chain Development Kit (CDK). This release marks a pivotal step forward, building upon the foundation laid by its predecessors, Polygon Edge and Supernets. The CDK is an open-source development framework designed to facilitate the launch of Zero Knowledge-Layer Two chains and the transition of existing L1s to L2s. Its core attributes are centred around customizability, interoperability, and the integration of Z.K. technology.

Polygon’s foray into the CDK arena underscores the rising narrative of modular rollup ecosystems constructed upon shared infrastructures. Prominent players in this arena include Optimism Superchain, Arbitrum Orbit, zkSync Hyperchain, and Starknet L3s, each pursuing unique approaches to capture value.

For instance, Arbitrum, zkSync, and Starknet prioritize using their general-purpose L2s as settlement layers for L3s. On the other hand, Optimism takes a distinct path by sidestepping limiting business licenses, avoiding mandatory token staking, and settling fees. Instead, it embraces a Retroactive Public Goods Funding (RPGF) model and optional shared sequencer design.

In contrast, Polygon’s approach distinguishes itself by placing its validators in more robust roles within the ecosystem to capture value. These validators are pivotal in securing the network’s interoperability, staking, and potentially decentralized sequencers, pending community approval. Validators must stake POL, which can serve multiple roles concurrently, similar to EigenLayer restaking. As more L2s integrate into the ecosystem, the interop layer takes on a heavier load of proofs, resulting in increased fees for validators and POL stakers.

However, for Polygon 2.0 to achieve its goals, attracting developers to construct projects with the CDK is imperative. Immutable has recently introduced the Immutable zkEVM testnet, developed using the CDK, adding to the growing list of protocols adopting this solution. These efforts contribute significantly to Polygon’s value accrual and long-term sustainability.

We’ll delve into other Layer 1 solutions in our upcoming articles to maintain brevity.

Decentralized Finance

In the digital asset ecosystem realm, one phenomenon stands out as a true game-changer: decentralized finance, or DeFi. Over the years, it has evolved into a transformative force, leveraging blockchain’s unique properties and conventional financial principles to birth various financial innovations. This burgeoning sector, still in its infancy, has ushered in a host of financial services, encompassing the issuance, lending, trading, and management of not only crypto-assets but also real-world assets.

According to the latest data, the Total Value Locked (TVL) in DeFi stands at a substantial USD 38 billion, albeit witnessing a recent 10% dip in just one month. Notably, a significant chunk of this capital, a substantial USD 14 billion, equivalent to 36% of the total DeFi TVL, is locked in Lido Finance.

Aerodrome

Emerging on the DeFi horizon like a meteoric star is a new protocol – Aerodrome. Launched on Coinbase’s Base blockchain on August 28, this decentralized exchange has achieved a remarkable feat in just three days. Aerodrome’s total value locked skyrocketed to over USD 200 million, leaving stalwarts like Uniswap and Compound trailing in its wake, securing the top position among DeFi protocols on Base.

The linchpin of Aerodrome’s triumph lies in its incentive system, known in DeFi circles as ve(3,3). Initially conceived and tested by the prolific DeFi luminary Andre Cronje, this intricate mechanism offers a level of complexity rarely seen in the crypto space.

Uniswap

A recent legal victory for the DeFi realm came in the form of a New York court’s classification of leading cryptocurrencies, ether (ETH) and bitcoin (BTC), as “commodities.” This ruling came in conjunction with the dismissal of a proposed class action lawsuit against the prominent decentralized crypto exchange, Uniswap, in a filing made on 1st September.

The lawsuit, filed in April 2022 by a group of investors against Uniswap and its creator Hayden Adams, alleged that the DeFi platform had violated U.S. securities laws. It was accused of failing to register as an exchange or broker-dealer while offering and soliciting securities on an unregistered exchange. The suit aimed to hold Uniswap responsible for investor losses stemming from “scam tokens” issued and traded on the platform, including Ethereum (ERC-20) tokens like EthereumMax (EMAX), Bezoge (BEZOGE), and Alphawolf Finance (AWF).

However, the court’s decision to dismiss the lawsuit before it reached trial stated that the actual defendants in this case were the issuers of the “scam tokens,” not Uniswap. In a noteworthy departure from the Securities and Exchange Commission (SEC) Chief Gary Gensler’s stance, the court explicitly labelled ETH as a commodity. It declined to stretch federal securities laws to encompass the allegations against Uniswap.

The decentralized nature of the Uniswap Protocol made it impossible to identify the issuers of these “scam tokens,” rendering them “unknown and unknowable” in the eyes of Judge Katherine Polk Failla of the Southern District of New York. Consequently, no “identifiable defendant” existed in the case, as stated in the court’s opinion following the order.

Faced with the absence of “actual issuers” of the “scam tokens,” the plaintiffs argued that Uniswap had facilitated the contentious trades by providing a marketplace and facilities for exchanging securities, all in exchange for a transaction fee. However, the court rejected this argument, likening it to holding applications like Venmo or Zelle liable for facilitating illicit fund transfers. Ultimately, the court concluded that the investors’ concerns should be addressed by Congress, citing the absence of relevant regulation.

In another development, Chainlink’s Cross-Chain Interoperability Protocol (CCIP) has gone live on multiple blockchains, including Avalanche, Ethereum, Optimism, and Polygon. This groundbreaking protocol empowers developers to seamlessly send arbitrary messages and tokens across any supported chain. Two major DeFi protocols, Aave and Synthetix, have already begun harnessing the potential of CCIP. The protocol’s functionality relies on multiple sets of decentralized oracle networks collaborating to transfer data and tokens across chains securely.

Tokenized Real World Assets (RWAs)

Welcome to the year of Tokenized RWAs, where the tokenized asset sector is making its resounding debut. It’s a year that has witnessed the participation of behemoths like Franklin Templeton (F.T.), managing assets worth over USD 1 trillion, and nimble startups like Ondo Finance. Together, they have ventured into tokenized U.S. treasuries, collectively issuing a staggering USD 600 million and counting.

Remarkably, nearly half of all tokenized treasury products find their home on the Stellar blockchain, with the remaining half on Ethereum. Delving deeper into the tokenized treasuries landscape, a “yield curve” plot unveils intriguing insights. Most tokenized treasuries exhibit a short duration, hovering around 0.25 years. Yet, two notable outliers extend further along the curve, spanning almost two years. The distribution of these data points closely mirrors the conventional U.S. Treasuries yield curve, albeit factoring in the nuances of blockchain risk.

Visa and Account Abstraction

In a significant development, Visa unveiled an experimental solution last month, aiming to revolutionize the crypto user experience. This innovative solution allows users to pay on-chain gas fees with a Visa card, marking a pivotal step in account abstraction.

For those less familiar with account abstraction, it’s a concept that has garnered immense attention within the crypto community. Essentially, it empowers assets to be securely held within smart contracts rather than relying on externally owned accounts. This shift opens up possibilities, including defining social recovery rules, enabling gas payment in alternative tokens, facilitating third-party gas payments, and streamlining transaction signing processes.

The crypto community faces a recurring challenge: the cumbersome onboarding process. Users often find themselves compelled to navigate centralized exchanges, create accounts, acquire specific gas tokens, and transfer them to wallets before engaging in on-chain activities. Visa’s solution upends this ordeal, potentially eliminating the need for purchasing gas tokens via a CEX. Notably, Visa is exploring options for users to pay gas fees in tokens like USDC rather than native gas tokens. This development extends beyond individual users; it holds profound implications for institutions. Visa’s solution also offers a streamlined alternative by seamlessly integrating with corporate cards.

Conclusion

Bitcoin’s fate intertwines with pending spot ETF decisions, possibly coinciding with the next Bitcoin Halving. Ethereum’s trajectory remains steady, with the broader blockchain ecosystem continuing to evolve. Solana’s integration with Shopify and its DeFi’s resilience highlight its potential, while Polygon’s CDK and Chainlink’s CCIP signify ongoing blockchain innovation.

Decentralized finance thrives, with Total Value Locked figures and legal wins shaping the sector. Tokenized real-world assets mark the maturation of crypto, with Visa’s involvement pointing towards broader mainstream adoption driven by traditional financial players. These developments collectively paint a dynamic picture of the crypto and macroeconomic landscapes, offering opportunities and challenges in the months ahead.

Ultimately, account abstraction, improved user experiences, and practical consumer applications are key to crypto’s mainstream adoption. The active involvement of traditional financial giants in advancing these initiatives signals a promising future for crypto accessibility.

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Authors

Yves Longchamp

Head of Research AMINA Bank AG

Sonali Gupta

Senior Research Analyst AMINA India

Rishabh Nagar

Research Analyst AMINA India

Anirudh Shreevatsa

Research Analyst AMINA India

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