🔮 Weekly Attestations #11

Last week we checked off another milestone as the Ethereum network successfully completed its Shanghai update (coined Shapella), marking the project's latest major upgrade following Ethereum’s transition to Proof-of-Stake (a.k.a The Merge). Although the upgrade consists of a few key Ethereum Improvement Proposals (EIPs) the ability to withdraw staked ETH was particularly in focus. Despite a “ bug” in the code, the upgrade was successful leading to optimism from both institutional and retail investors. In other news, headlines were predominantly focused on Arbitrum and its pain since publicly releasing its token, Ordinal volume, a16z’s latest crypto report, and an increasingly volatile regulatory landscape.

Token Specific News

ETH Partied Like It’s 1999: Shapella Time

• As of April 14th, the Shapella update has gone live, marking a significant milestone in Ethereum's roadmap and the end of Ethereum’s transition to Proof of Stake. Shapella is a term that blends Shanghai and Capella, the upgrades that happened simultaneously. The update has unlocked staked Ether ( $34 Billion to be exact) and has paved the way for new features, including the ability to unstake Ether. Within that, Ethereum rewards worth over $2 billion will be liquid in first five days after Shapella. Community members have celebrated the update and congratulated the developers of the network. Ethereum co-founder Vitalik Buterin said that the network is now in a " really good place," with the hardest and fastest parts of the Ethereum protocol's transition now complete. The update is expected to onboard more institutional investors to Ethereum. Freddy Zwanzger, Ethereum ecosystem lead at Blockdaemon, foresees more interest in ETH staking opportunities from larger investors since there's a clear withdrawal option in place now. Blockchain analytics firm Glassnode expects that even though the Shapella update will unlock staked ETH, less than 1% are planning to sell. The update has also led to a surge in gross staking deposits, hitting $198.7 million, or 94,800 ETH, over the past 24 hours. Kraken leads the way in ether's unstaking parade, accounting for 62% of the exit queue. The number of validators in the exit queue has exceeded 15,000, according to Parsec Finance. Kraken's dominance in the unstaking queue is unsurprising given its legal issues with the US Securities and Exchange Commission (SEC). In February, the SEC found Kraken's staking offerings, but not those of its competitors, to be unregistered securities. See similar: Ethereum Validators Withdraw $620M ETH in Less Than 2 Days. See similar: Crypto Analysts Split on Ether Market Trends After Ethereum’s Shanghai Upgrade

Source: Nansen

Dissecting MEV: The Problem of Relays

• Relays are a crucial but centralized and unprofitable mechanism in Ethereum's infrastructure, playing a key role in supporting MEV (maximum extractable value). They absorb a large amount of traffic from builders by sending select blocks to validators. However, only 11 relays power the Ethereum network, and the MEV-Boost network is highly dependent on them. Matt Cutler, CEO and co-founder of Blocknative, explains that there is no economic incentive for operating relays, yet their work drives tremendous value to the entire network. He argues that there is a need to encourage more teams to participate as relays and to develop their own relays to encourage diversity. However, monetizing relays could inadvertently increase fragility in the system. Some participants might choose to circumvent relays to save on costs, and monetizing relays may drive away certain parties. Bell Curve podcast co-host Hasu suggests that instead, the relay system should be viewed as a "public good." See similar: $25M MEV Exploit Teaches a Valuable Lesson About Relay Providers

Real-World Tokenization Is Surging As TradFi Grows More Receptive to Blockchain

• Blockchain-based tokenization of real-world assets (RWA) is gaining traction among major financial service firms and other big brands, with many industry watchers upbeat about the trend in 2023. Tokenization of RWA puts ownership of tangible assets such as stocks and bonds on the blockchain, offering the convenience of buying and selling these assets around the clock because the transactions do not involve traditional brokers. Although this concept isn’t new, over the past few months, a number of large banks and other companies have begun using the process. JPMorgan executed the first live trade using tokenized versions of the yen and the Singapore dollar on the Polygon blockchain. Hong Kong's central bank offered an inaugural $100 million tokenized green bond, and Credit Agricole CIB and SEB agreed to develop a blockchain-based platform for digital bonds. Tokenized real-world assets also account for fractional ownerships more efficiently and generate faster settlement times. The speed and efficiency "give buying power to smaller investors" and provide better accessibility "for those who don't have a significant amount of investment funds," according to Bob Ras, co-founder of the exchange and digital asset ecosystem Sologenic.

ARB-itrary governance?: How Tokenholder Rejection Led to Governance Improvements

• Despite initial concerns about ARB's governance power, the rejection of AIP-1 by tokenholders resulted in enhancements in transparency and clarity in protocol design, highlighting their ability to influence the protocol. The tokenomics of ARB enable the DAO to control significant aspects of the Arbitrum One and Nova networks, including upgradeability, the DAO treasury, and token inflation. The protocol generates cash flows for the treasury through sequencer profits and maximal extractable value, creating value for the token, albeit not distributed to the tokenholders. Among the two major Layer-2 (L2) solutions, Arbitrum outperforms Optimism across all critical metrics. Currently, ARB trades at a discount to OP across all valuation multiples.

a16z Unveils New Crypto Index That Shows Adoption Outpacing Price Performance

• Andreessen Horowitz's web3 investment arm, a16z Crypto, has launched a new " State of Crypto" index and report, which takes into account various adoption and innovation parameters, including active developers, academic research mentions, and volumes across decentralized exchanges. While bitcoin's price has dropped by 55% from its 2021 highs, a16z's index fell by 25%. The number of active developers has declined by 25%, while the number of transactions across blockchains declined by only 10%. Despite the decline in some parameters, a16z argues that the crypto market remains robust, pointing to the "radical acceleration" of Ethereum scaling solutions and zero-knowledge systems. Some of the other core finidngs: The number of active crypto addresses hit an all-time high; Layer 2s make up ~7% of all Ethereum fees, up from 1.5% a year ago; The Merge brought Ethereum’s energy consumption down; The U.S. may not be a Web3 leader.

Source: a16z

Ordinal Inscriptions Surpass 1 Million Mark

• The number of Ordinal inscriptions has surpassed 1 million as the NFT trend continues. 169.85 BTC worth $4.7 million has been collected in fees by miners since the trend began, according to Dune Analytics data. Six different Ordinal inscription marketplaces have seen an aggregate total volume of $19.31 million, with 53,124 trades executed by 18,462 unique traders, according to the same data. Ordinals Wallet is the leader in unique users by market, followed by Ordswap. The milestone of 1 million Ordinal inscriptions has been reached as a new way of minting arbitrary content to the Bitcoin blockchain called Bitcoin Stamps has gained traction. The project, launched by Twitter user Mike in Space, has seen increased adoption. On the Litecoin blockchain, there are 224,054 Litecoin-based Ordinal inscriptions since the idea was ported over to Litecoin. See similar: According to data from Dune, cumulative borrowing against NFTs has surpassed $1 billion. The amount represents the dollar value of borrowing activity across various NFT liquidity providers, including NFTfi, BendDAO and newcomers such as Paraspace. Decreased volatility, liquidation insurance and peer-to-peer lending options have all been cited as factors driving interest. Lenders use the loans to improve liquidity of NFT assets, and users look for ways to unlock the value of their assets without selling them. The number of cumulative users has surpassed 40,000.

Source: DUNE

Crypto Exchange Bitget Starts $100M Asia-Focused Web3 Fund

• Crypto exchange Bitget has started a $100 million fund to support Web3 startups, with a focus on building the Web3 environment. The fund is self-funded by Bitget, which has adequate cash flow thanks to its steady development and fast-growing business. The move comes as East Asian countries such as Hong Kong and Japan are promoting the development of Web3 and easing crypto regulations. Bitget had previously invested $30 million in BitKeep, a decentralized multi-chain wallet.

Burns Like Wasabi

• SushiSwap, the Ethereum-based decentralized exchange, suffered a $3.3m hack over the weekend due to a bug in its RouterProcessor2 contract. A single user's account was targeted, and the victim had granted RouterProcessor2 access to their funds. SushiSwap CTO Matthew Lilley said the firm was all hands on deck, identifying all affected addresses and had removed the exposure to RouterProcessor2 from the front end. He added that there was no risk with using Sushi Protocol and the UI. Last year, SushiSwap avoided a hack worth $350m. As of a few days ago, SushiSwap has announced plans to recover funds lost in a weekend exploit. The platform is establishing an opt-in claims process and will manage claims on a case-by-case basis. The company has also created a "whitehat contract" for claimants whose funds were taken by a security team. SushiSwap is seeking to raise a legal defense fund after receiving a subpoena from the SEC. "Head chef" Jared Grey said the team was "cooperating" with the SEC. See similar: Hacker Robs Crypto Exchange Bitrue of $23M in Ethereum, SHIB, Other Assets. See similar: 7,000 MetaMask Users Targeted in Security Breach, ConsenSys Says. See similar: Uniswap Wallet Goes Live on iOS After Apple App Store Challenges

Source: PeckShield Inc. Twitter

Regulation

Japand and Hong Kong Make a Run at Web3

• Japan's ruling Liberal Democratic Party's Web3 project team has published a white paper containing proposals to boost the crypto industry in the country. The recommendations aim to create a more friendly environment for crypto after companies began leaving for other jurisdictions due to heavy tax burdens. The white paper suggests that Japan should demonstrate leadership at the Group of Seven summit this year, where crypto will be discussed, and clarify its leading position on technology-neutral and responsible innovation. Among the proposals is a tax exemption for companies holding tokens issued by other firms that aren't going to be traded short-term, and self-assessments to allow investors to carry over losses for three years. The paper also recommends creating a DAO law based on Japan's godo kaisha and making changes to regulations under the Companies Act and the Financial Instruments and Exchange Act. Other suggestions include establishing a process for stablecoin registration, developing proposals for yen-backed stablecoins and issuing crypto visas to skilled workers. See similar: Hong Kong's Financial Secretary Paul Chan has confirmed the city's commitment to promoting Web3 and crypto adoption despite recent market volatility and regulatory crackdowns. Web3 has been identified as one of three major focus areas for promoting high-quality development in Hong Kong, and the government has pledged to spend HK$ 50 million (US$ 6.4 million) to accelerate the development of the Web3 ecosystem in Hong Kong through a government-run incubator known as Cyberport. The city plans to adopt a strategy of "proper supervision" and "promoting development" to ensure the crypto industry develops in a sustainable and responsible manner.

SEC Poised to Increase its Scrutiny of Decentralized Finance Exchanges

• The US Securities and Exchange Commission (SEC) has clarified that existing exchange rules apply to decentralized finance (DeFi), formally asserting its jurisdiction over activities it sees as falling under traditional definitions of securities trading. This could signal increased scrutiny of DeFi from the regulatory agency, which has so far focused more on centralized crypto firms. DeFi projects that bring together multiple buyers and sellers for the trading of assets, including non-firms and structured projects, could be considered securities exchanges and subject to civil charges if they fail to register as national securities exchanges or broker-dealers in the US.

On Mining and Energy

• According to Jaime Leverton, CEO of Canadian Bitcoin miner Hut 8, Bitcoin's energy consumption is a double-edged sword, with its power usage creating accountability. Leverton said that Bitcoin's transparency around energy use isn't shared by the traditional financial system. She added that the latest report from the Bitcoin Mining Council found that around 60% of the power used by its members, who represent nearly all of the Bitcoin mining industry globally, came from a sustainable power mix, which is different from other industries that aren't transparent about their energy use. Leverton argued that the value versus energy critique hasn't historically been applied to other forms of technology with the same scrutiny, overlooking the potential that Bitcoin has to offer financial services to the globe's unbanked population. See similar: Arkansas has passed a bill, known as the Arkansas Data Centers Act of 2023, that aims to establish guidelines for Bitcoin miners and protect them from discriminatory regulations and taxes. The bill also defines certain terms related to digital asset mining and seeks to protect individuals engaged in cryptocurrency mining from their homes. The legislation now awaits Governor Sarah Huckabee Sanders' signature. Arkansas has also offered $10,000 worth of Bitcoin to attract remote tech professionals to move to the region.

Source: digiconomist

Binance Continues to Strugle

• Binance.US is facing difficulties in securing banking relationships. It was using Silvergate and Signature Bank until both banks collapsed last month. The exchange has been rejected by at least one bank due to concerns over regulatory risks, while other banks are still considering whether to provide services. The challenges for Binance.US come amid heightened regulatory scrutiny of the broader cryptocurrency industry. The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have ramped up their scrutiny of the sector, and Binance Holdings, the parent company of Binance.US, has faced regulatory pressure from several other countries. The exchange has been banned from operating in several countries, including the UK, Japan, and Italy, due to concerns over its compliance with local regulations. As a result, some USD deposit services like Apple Pay and Google Pay will be temporarily unavailable for users. It’s also interesting to note that Binance.US wasn’t the only crypto firm affected by the Signature & Silvergate banking problems, but it’s one of the last ones to find a solution Coinbase has Cross River Bank. Kraken is starting its own bank. And most other crypto companies have found other banking partners.

DOJ Loves (to seize) Crypto

• Last week, the U.S. Department of Justice seized around $112 million worth of cryptocurrency linked to a popular crypto scam known as “pig butchering”. The scam works through direct messages on social media or dating apps where scammers use elaborate storylines to gain the trust of victims into believing they are in a romantic or close personal relationship. Once the trust is established, the scammer will introduce the victims to fake websites and mobile apps that display portfolios with large returns. The scammer will then convince the victims to invest, and once the money is deposited into the fake app, it disappears. Crypto fraud like pig butchering is booming, with a rise of 183% in losses reaching about $2.6 billion last year. The report warns people to be careful when dealing with online contacts and never to give away money without proper due diligence. See similar: The U.S. Securities and Exchange Commission is hiring general attorneys for its Crypto Asset and Cyber Unit in New York, Washington, D.C., and San Francisco, as the agency continues to crack down on the crypto industry under Chairman Gary Gensler. The attorneys will investigate "crypto asset securities," develop litigation plans, and draft legal documents for the unit, which has doubled in size since its inception. The job posting specifies that compensation for the positions will range between $140,000 and $260,000 depending on the location.

The Week in Charts

Amount of ETH Staked Continues to Increase

Source: The Tie

Net ETH Deposits Flip Green

Source: The Tie

ETH Stakers Are Predominantly in the Money

Source: The Tie

3-Month T-Bill Above 5% for the First Time in 16 Years

The Probability of a 25 Bps Hike on May 3 Is Now ~90%

The Week in Trends

Sector Performance Breakdown (7d trend)

Source: Messari

Top 7d Gainers/Losers (Market Cap >$100M)

Source: Messari

Trending 7d Protocol Fees (Market Cap > $50M)

Source: Token Terminal

Trending 7d Protocol Earnings (Market Cap > $50M)

Source: Token Terminal

Trending 7d Daily Active Users (Daily Active Users > 1,000)

Source: Token Terminal

Other Domestic Regulation Updates

• 8 New Findings About FTX From Exchange’s New Management
• Alameda-linked Ren Protocol Transfers $13M in Bitcoin to FTX Debtors
• Wyoming Defends Its Crypto Charter Framework in Custodia Lawsuit
• Twitter could be added as a defendant to an alleged market manipulation lawsuit targeting its owner, Elon Musk
• Blockchain Association Doubles Down on Backing Tornado Cash in Lawsuit
• Spain’s Crypto Tax Warnings Mirror Broader Effort in US, UK
• Former OneCoin Executive Can Be Sentenced on $4B Global Loss, Judge Rules
• Justin Sun Reportedly Issued Summons in SEC Lawsuit
• Republican Reps Slam Gensler for ‘Failed’ Rulemaking Agenda
• BitPay To Pay $1M to New York’s Financial Services Department

Other International Regulation Updates

• EU’s MiCA Vote Likely Delayed by One Day Without Further Changes
• Hong Kong’s Largest Digital Bank to Service Crypto Exchanges
• G7 Plans To Help Developing Economies Explore CBDCs
• Spain’s Crypto Tax Warnings Mirror Broader Effort in US, UK
• Using Crypto for Crime? Australia Will Give You a Harsher Sentence
• Singapore Banks, Police Working on Guidelines for Vetting Crypto Clients
• Brazil’s Biggest Investment Bank Launches Dollar-Backed Stablecoin
• PostFinance and Sygnum Bank to Offer Swiss Customers Crypto
• Bank of England Targets 30-Strong CBDC Team
• Japan Legislative Subcommittee Approves Web3 Framework Whitepaper
• Hong Kong Financial Secretary Pushes for Web3 Adoption

Pain & Gain

Pain

• SushiSwap Smart Contract Bug Exploited in $3.3 Million Theft
• South Korean crypto exchange GDAC reports $13 million loss in 'hot wallet' hack
• DOJ Claims Google’s Search Engine 'Monopoly' Stifled AI Innovation: Report
• Ethereum’s Shapella Upgrade Went Through Despite ‘Ridiculous Bug’

Gain

• Fidelity, Bank of America’s Indirect Exposure to Bitcoin Through MicroStrategy
• Dorsey and Saylor’s Bitcoin Strategy Is Paying Off
• CryptoGPT Made Headlines Yesterday Because… Errrr… Hmmm
• Gaming Hardware Giant Razer Launches Web3 Incubator
• Bruce Lee Enters Web3, Starting With Open Edition NFT From Pplpleasr
• Reddit Deploys Gen 3 NFT Avatar Contracts on Polygon
• Inside LayerZero's $120M Series B Raise