Weekly Alpha Leak🚰: Stablecoin Drama Continues, USDC Holders See Funds Frozen 😵
Week of August 6 - 12, 2022
How quickly the turntables! Just a couple of weeks ago everyone was fudding Tether and scrambling to get into USDC. Now a Tornado Sanctions Storm is dampening everyone’s mood!
TL;DR:
The U.S. Treasury Department sanctioned Tornado Cash resulting in multiple firms blacklisting associated wallets, prominently USDC
Speculation runs wild over whether an ETH PoW fork will have any value post-Merge and how speculators can profit
“Real Yield” - generated from actual protocol revenue vs token emissions has been gaining traction
SudoSwap - offering an innovative new NFT AMM has been generating interest among the NFT and crypto native scene
Data: Tornado Cash TVL decreased, Liquid staking platforms continued to see an influx of money, Ethereum rollups continued to see the strongest money inflows, Avalanche saw a new all-time high in daily transactions
TradFi: The lower-than-expected inflation rate reported boosted asset prices across the board, with huge gains seen in sectors underperforming in recent weeks, however, there is downside potential that may catch some market participants off-guard
DeFi: Amidst the uncertainty surrounding centralized stablecoins, LUSD has caught a lot of attention recently due to its unique structure
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⛓ Crypto Highlights of the Week ⛓
Tornado Cash Blacklist Sanctions Cause a Privacy Storm 🌪
This week, in a continuing trend of encroaching regulation and oversight of the crypto space, the U.S. Treasury Department barred all U.S. persons from using Tornado Cash, alleging its use in laundering stolen crypto funds by North Korean hackers poses a “national security threat”.
To refresh, Tornado Cash is a virtual currency mixer which “mixes” its users' coins together so the actions of individuals are hard to track. In many cases it’s used by scammers and fraudsters to cover their tracks but it is at its core meant for privacy in a landscape where the blockchain makes all on-chain activities public to everyone.
These blacklist sanctions are allegedly done in the name of preventing crime and preventing funding terrorism but it has resparked debate over the issue of privacy in the cryptocurrency space. Virtual currency mixers like tornado cash are not inherently used for illicit activities and many users who used it for privacy reasons are currently facing the consequences of these sanctions.
We saw examples of these repercussions this week when:
Circle froze the USDC funds in Tornado Cash's sanctioned wallets, as well as the GitHub accounts of the Tornado Cash team and other developers being suspended
Rune Christensen, co-founder of MakerDAO, stated that the DAI stablecoin could exit its USD peg by converting $3.5B USDC reserve to ETH, due to the freezing of USDC funds in Tornado Cash wallets following the sanctions. DAI is currently backed 60% by USDC
Adding to the fray, crypto API and node infrastructure providers Infura and Alchemy were the latest centralized entities to blacklist the US Treasury-sanctioned crypto mixer Tornado Cash. Infura has been known to block access to crypto services in accordance with US sanctions like it’s done before in Iran and Venezuela
Jokingly, we also saw an anonymous user send ETH from Tornado Cash to prominent figures following the blacklist sanctions, presumably to get these accounts blacklisted and stir up trouble
We saw dYdX accounts flagged by a compliance provider and blocked because a certain portion of wallet funds were associated at some time with Tornado Cash. The team clarified they made adjustments to unban certain accounts and will continue to make efforts to limit flagging
DeFi platform Oasis.app says that sanctioned addresses will no longer be able to access the application in order to comply with the relevant laws and regulations
A 29-year-old developer, suspected of being involved in the sanctioned Tornado Cash protocol, was arrested in Amsterdam so far
The fundamental ethos of crypto such as decentralization and “code is law” are obviously not shared by governments and at the end of the day, most people should know that if you want to play in the big leagues and go mainstream, you're going to have to deal with big regulation that comes along with it. This week was just a taste of the regulatory side effects we can expect to see more of in the months and years to come. The battlefield is set, the initial salvos have been fired and the development of the privacy narrative as well as government sanctions and regulations are something we’ll be keeping an eye on.
ETH PoW vs ETH PoS Battle Royale ⚔️
We continue inching towards the Merge with a now tentative scheduled date of September 15, and the narrative around which exchanges will list and support a potential proof-of-work fork is heating up. Where will Ethereum’s miners go when they can’t mine on Ethereum any more? That’s the $19B question. The assets on the old proof-of-work chain and the new proof-of-stake chain will basically be "duplicated" on different chains and the question is - will the old assets on the proof-of-work chain retain any value? We don’t know yet but speculators are busy wondering if there will be an opportunity to profit from this because if forked ETH has some value, then people will naturally want to capture that value.
As we look for signs for whether this forked asset will have any value, let’s observe how key players in the space are positioning themselves:
Prominent Chinese Ethereum miner Chandler Guo has launched a campaign to hard fork the Ethereum blockchain with many miners favoring some version of this plan. Miners hold enough sway to give this narrative some life
So far we’ve seen three crypto exchanges announce that they will allow traders to speculate on tokens for the anticipated Ethereum proof of work fork. Spot exchanges Poloniex and MEXC have listed tokens tied to a possible miner-led fork of Ethereum and BitMEX announced a futures derivative product
Tether officially confirmed its support behind Ethereum’s upcoming Merge upgrade and switch to a Proof-of-Stake consensus mechanism
The issuer of USDC, Circle intends to fully and solely support the Ethereum proof-of-stake chain post-merge
Binance will support The Merge and will evaluate the support for distribution and withdrawal of the forked tokens. All forked tokens will go through the same strict listing review process
DeBank: “Ethereum is now becoming the most prospective chain for Web3 applications. A hard fork would bring a big disaster for the entire Web3 ecosystem. Therefore team will NOT support any forked chains during Ethereum's PoS merge transition”
The Chainlink protocol will not support forked versions of the Ethereum blockchain, including PoW forks
The “Real Yield” Narrative is Getting Real 💰
Finally, a healthy narrative is gaining some traction! The story of real yield starts with the origins of “fake yield” which arose from unsustainable yield farming, liquidity mining, and emissions of a protocol’s native token to mercenary farmers to incentivize protocol use in the early days of DeFi. This necessary evil was originally required due to the fact that DeFi protocols require liquidity - it’s their lifeblood. How to get that liquidity? In the early days of DeFi, protocols found the solution to attracting users was to bootstrap liquidity through liquidity mining programs. Unfortunately this led to “fake yield” which was reliant on native token emissions and the resulting sell pressure from mercenary farmers which negatively impacted the price action of several DeFi protocols.
Real Yield, on the other hand, is derived from actual revenue generated by a protocol as opposed to revenue derived from token emissions. If this takes root, protocols will be forced to design healthy and sustainable tokenomics and can no longer rely on emitting an inflationary token. Instead, they have to build and continuously improve a product that users actually use in order to generate revenue. Want to check out which protocols are generating the most total and protocol revenue? Check out Token Terminal but keep in mind that revenue does not equal profit! What we are interested in is protocols which are naturally by design able to generate revenue which can flow to token holders and help better sustain a token’s price. The development of this type of narrative will result in healthy token designs and protocols as we begin a move away from vaporware and towards efficient markets.
NFT Meta Resurgence - SudoSwap - AMM for NFTs 🖼
There is currently a narrative forming amongst crypto degens and NFT heads around SudoSwap, a new NFT Automated Market Maker which is quickly gaining traction. It can be thought of as Uniswap for NFTs. It’s essentially an NFT exchange competitor that utilizes an AMM vs an orderbook and it’s causing quite the stir due to its innovative design. Although it isn’t without its drawbacks, one being that it doesn't pay royalties to creators, which may make some creators reluctant to use the platform. Sudo works with liquidity pools where you add liquidity in the form of NFTs or ETH and the benefits of Sudo includes earning trading fees, placing limit buy/sell orders, allowing for instant liquidity for buying/selling and being fully on-chain (no centralized orderbook).
We’ve seen daily NFT trade volume and trades on sudoAMM recently reach an all time high
There is speculation that XMON holders, the token for the XMON NFT project, will be eligible for an airdrop - which accounts for the recent rise in XMON’s price and we’re currently also seeing users creating and interacting with the protocol’s pools for a potential future airdrop opportunity.
What we are currently seeing is a self reinforcing loop where "liquidity -> trading volume -> legitimacy -> liquidity" creates a flywheel. When Uniswap first launched, it breathed life into DeFi and the question now is if we will see a similar resurgence into the NFT scene with this innovative model? This one is worth keeping an eye on and interacting with the protocol. Enough attention is currently focused on this area that if some resurgence in the NFT space emerges, it’s reasonable that this area will hold potential.
This Week’s Top Daily Bullets 💊
Investment manager BlackRock, which has $10T under management, has launched a private trust offering US-based institutional clients exposure to spot Bitcoin.
Messari plans to raise fresh financing at a $300M valuation, roughly a year after Messari raised a $21M round
Redacted v2 launch - transition from a bond-centric, dilutive token model to a model focused on producing real yield for rlBTRFLY holders
The GameStop wallet is now fully integrated with Immutable X L2 protocol
Theta Networks will issue Galaxy NFTs as part of new drive to offer Samsung users an innovative consumer experience, including access to virtual events via ThetaPass
Injective, a DeFi-focused layer 1 blockchain, raised a $40M round in a private token sale led by Jump Crypto
These are just our top six bullets, want more? Check out our daily newsletter:
Scammy Sh*t 💩
Indian law enforcement accuses WazirX exchange of aiding in laundering of $130M
Elliptic Connect, a blockchain data analytics firm, claimed that Alameda Research-owned RenVM allowed $540M to be laundered through its cross-chain bridge. RenVM replied it was “impossible to launder any assets”
Mark Cuban, the billionaire entrepreneur, is facing a class-action lawsuit over his promotions of the bankrupt crypto brokerage firm Voyager Digital
📊 Crypto Market Data Highlights of the Week 📊
✍️ From our special guest contributor: Patrick Scott from Dynamo DeFi
Tornado Cash TVL decreased 14.7% this week as sanctions caused users to withdraw funds.
Liquid staking platforms continued to see an influx of money this week as the Ethereum Merge approaches. Over the past month, the TVL on Lido and Rocket Pool has grown 55.2% and 82.2%.
Ethereum rollups continued to see the strongest money inflows of any chains. Optimism, Arbitrum, and Metis saw their TVL grow 46.1%, 14.7%, and 11.5% respectively.
Avalanche saw a new all-time high in daily transactions. On August 11th, all Avalanche subnets combined processed 1.68M transactions.
🏢 TradFi Highlights of the Week 🏢
✍️ From our special guest contributor: Romano - @RNR_0
The lower-than-expected inflation rate reported boosted asset prices across the board, with huge gains seen in sectors underperforming in recent weeks.
In the financial markets, a lower-than-expected inflation rate often leads to a rally in asset prices. That is because investors feel that lower inflation will lead to higher corporate profits and better economic growth.
In addition, a lower inflation rate makes it easier for the Federal Reserve to keep interest rates low, which is generally good for the stock market.
We saw strong gains in sectors that have been underperforming in recent weeks. That suggests that a good portion of the move was due to "short-covering," as investors who had bet on further declines in asset prices rushed to close their "short positions."
However, let's not celebrate too early.
There is downside potential that may catch some market participants off-guard. After all, prices have unexpectedly started to rise again. That is because market participants are "short-covering", which means that they had bet on asset prices going down by shorting the market and are only buying back in.
That buying pressure pushes prices higher in the short term, but if prices start to fall again, these investors will be forced to sell at a loss. That mechanic can create a downward price spiral, leading to significant losses for investors
Topics covered this week in the full article include:
Is the FED serious about fighting inflation, or are they full of shit?
Oil and inflation
Commodity trading advisors (CTAs)
Are the institutions slowly coming?
SPX500 option market & dealer positioning
Option contracts
SudoSwap
ETHW
Federal Reserve (Fed) tightening cycle
King dollar, the great short for 2023?
VIX
Goldman Sachs: Too early for the market to be trading a full Fed pivot
Bear market rallies
Read the full article here.
🏦 DeFi Highlight of the Week 🏦
✍️ From our special guest contributor: Thor Hartvigsen - @ThorHartvigsen
LUSD & Liquity
Just a few days ago Circle blacklisted and froze wallets sanctioned by the US treasury for using Tornado Cash. While stablecoins are at the heart of the blockchain industry this event has shown some of the inherent downsides of centralized stablecoins. An interesting and decentralized alternative LUSD has caught a lot of attention recently due to its unique structure. To describe LUSD & Liquity in short:
Liquity is the decentralized borrowing platform behind LUSD. They allow for 0% interest loans paid in LUSD against ETH as collateral. LUSD is a crypto-backed stablecoin backed by ETH only with a minimum collateral ratio of 110%.
LUSD vs DAI:
Minimum collateral ratio: 110% vs 150%. This combined with zero interest loans makes LUSD far more scalable and capital efficient
Crypto backing: 100% ETH vs a basket where 45% is USDC. This makes LUSD far more decentralized than DAI.
LUSD can be minted by creating a trove on one of the front-ends like [defisaver.com] and providing ETH as collateral LUSD. Users can deposit their borrowed LUSD into the so called stability pool and earn yield as reward. This helps making sure that the LUSD supply is backed and further acts as a liquidation defence mechanism. Users share the liquidation premium while further being incentized through LQTY rewards. This adds up to a yield of over 50% currently coming from sustainable sources (#RealYield).
Read more about Liquity and LUSD in the full article here.
The crypto space is a wild and fast paced, evolving landscape - however one filled with recurring themes and trends. The point of this newsletter is to highlight the story of crypto - as it's told over time. The board, the players, and the game itself. Follow along as we catalog and organize the chaos.
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