🔮 Weekly Attestations #7

Notes from the team:

• We are at the DC Blockchain Summit today. Let us know if you are in town!

• MJL's CIO, Marcus Leanos, was recently featured on the Real Maxime Podcast to discuss digital assets, our unique fundamental strategy, and our team's origin story. Check it out!

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Last week we covered the slew of commercial banks losing " Everything Everywhere All at Once". This week, we're returning to our normally scheduled service – digital asset insights. Despite volatility in traditional markets, decentralized markets regained strength as traders ran to decentralized assets for safe harbor. The cryptocurrency market cap surpassed the $1 trillion mark again as uncertainty continues to rip through centralized systems, spurring the arranged marriage of Credit Suise and UBS. This coincided with a joint statement from the Federal Reserve, US Treasury, and FDIC declaring that depositors of Silicon Valley Bank and Signature Bank would be able to access their funds on Monday. Bitcoin, Ethereum, and top-30 coins, including Cardano, Polygon, Solana, Litecoin, Avalanche, and Filecoin, were up by more than 10% on the week.

In part driven by the recent collapse of centralized entities, Tether's market capitalization has increased to almost $75 billion, the highest level since May 2022, making it almost twice as large as the world's second-largest stablecoin, USD Coin (USDC). USDT's growing dominance has been fueled by investors increasingly opting for Tether over USDC following the latter's depegging from the dollar in the latest banking crisis. DeFi platforms, Curve Finance, and Uniswap, have seen a surge in trading volumes due to the chaotic markets, with Curve hitting $6.03 billion in trading volume, and Uniswap's WETH-USDC pool reaching $8.8 billion. LPs on both platforms have earned significant fees, with Uniswap's WETH-USDC and USDT-USDC pools being the most profitable. That said, Bitcoin's recent surge above $26,000 has fueled narratives that BTC is decoupling from traditional risk assets like stocks.

"We are in this world where everyone is talking about how we need to save banks from crypto. And right now we need to save crypto from the banks." – Jeremy Allaire, CEO of Circle

Token Specific News

Close to Shanghai, ETH's next milestone portmanteau

• Ethereum core developers have set April 12 as the expected release date for the Shanghai-Capella upgrade, known as Shapella, on the Ethereum mainnet. The upgrade includes Ethereum Improvement Proposal (EIP) 4895, which aims to enable validator staking withdrawals on the main network. This critical function was not introduced during Ethereum's switch to a proof-of-stake consensus in September 2020 to ensure a safe transition. The upgrade also includes three additional improvements aimed at optimizing gas costs for certain activities. The final dress rehearsal for the Shapella upgrade was executed on the Goerli test network on March 15. Despite a delay caused by some validators running older versions of clients, the testnet was successfully resolved, allowing Goerli users to withdraw staked ether from the testnet's Beacon Chain. According to Tim Beiko of the Ethereum Foundation, low validator participation during the Goerli testnet upgrade is not expected to be an issue when the Shapella upgrade is deployed on Ethereum's mainnet. Analysts predict that activating withdrawals will drive a sharp increase in staking adoption as users become free to enter and exit staking positions at any time.The Shapella upgrade is a combination of the execution layer (Shanghai) with the consensus layer (Capella), which will allow validators to withdraw their locked-up ether from the network. This upgrade is a much-anticipated economic unlock for validators that will reduce the gas cost applied to earning fees. Tooling and user interfaces are receiving last-minute bug fixes to ensure optimal user experience. Documentation is also being reviewed to provide solid guidance for stakers.

Gone in a Flash [loan]; How Euler lost $200mm in a Flash Loan Exploit

• Decentralized finance (DeFi) platform Euler Finance has been exploited for approximately $196.9 million in a flash loan attack, according to audit platform BlockSec. The attacker took $8.7 million in DAI, $18.5 million in Wrapped Bitcoin (WBTC), $135.8 million in Staked Ethereum (stETH), and $33.8 million in Circle's USD stablecoin USDC. Euler Finance is a borrowing and lending platform for cryptocurrencies, allowing users to earn interest for adding various assets to the protocol. The project's total value locked (TVL) was $237.9 million prior to the attack. Euler's native token EUL has plummeted 50% in the last hour. Euler Finance is a platform where users transact with eTokens and dTokens, representing collateral and debt respectively. The hack occurred due to a liquidity issue in the DonateToReserve function of the eToken. The hacker used a front-running MEV bot and a personal wallet to receive most of the funds. They received initial funding from Tornado Cash and borrowed $30 million in DAI from Aave. By leveraging Euler’s borrowing capabilities, they were able to borrow 10 times the original deposited amount. After the hack, the hacker moved some of the funds back to Tornado Cash. Advanced investigative techniques are needed to trace the funds further. The protocol has offered a $1 million bounty for information leading to the arrest and return of funds stolen in a flash loan attack earlier this week, but the reward will not be offered if the hacker returns nearly all of the stolen funds within 24 hours.
• Flash loan attacks are a type of DeFi attack where a hacker takes out a flash loan, a type of uncollateralized loan, from a lending protocol and uses it to manipulate the market in their favor. Flash loans are unsecured loans that allow users to borrow instantly and easily without any limit on the amount, provided that they can pay back the loan in the same transaction. Flash loan attackers manipulate the market using various tactics while still abiding by the blockchain's rules. While flash loans themselves are not the problem, a fundamental vulnerability exists within the smart contract for an attack to happen, according to Ren Yu Kong, a Blockworks Research analyst. Hugh Karp, the founder of smart contract insurance company Nexus Mutual, said the real problem is whether humans can create secure software without defects. Better insurance primitives and coverage, as well as more audits to cover soft exploits, are among the solutions proposed to prevent further attacks.

Stacking Buzzwords: When Crypto meets AI

• Cryptocurrency investors have been attempting to capitalize on the recent success of OpenAI's ChatGPT platform (which definitley didn't write this newsletter). Tokens powering Fetch.AI and Singularity both surged by over 20% overnight in February as buyers attempted to link the emerging markets of artificial intelligence and cryptocurrency. Further, Tron has launched a $100mm AI development fund, encouraging developers to create dApps on the network using AI tools. Bosch and the Fetch.AI Foundation have also launched a similar fund to bridge the two technologies.
• However, to fully integrate AI as a tool for Web3, it needs to be verifiable, transparent and traceable. Space and Time, a Web3-native data platform, has rolled out a unique protocol called Proof of SQL to verify incoming data to ensure AI is trained on accurate and trustworthy data. Microsoft's investment in OpenAI has also allowed the company to enjoy unique access to AI, including the cloud computing service Azure, which is now seeking to bridge Web2 and Web3 datasets. Space and Time has partnered with Azure to help developers access, manage and perform analytics on blockchain-native data and feed verifiable data into AI models for training. Although AI is a valuable tool, it should not be considered a universal solution and is best used to assist humans in certain situations.
• See similar: Microsoft announced its plan to integrate artificial intelligence to its Microsoft 365 productivity tools. The AI "Co-pilot" will enable users to edit, summarize, create, and compare documents, and transcribe meeting notes during a Skype call, among other things. The announcement follows Google's recent introduction of AI-powered features to its productivity tools and OpenAI's unveiling of its next-generation model, GPT-4. Crossing into the on-chain world... Microsoft is reportedly testing an Ethereum-based Web3 wallet for its Edge browser that allows users to send and receive digital assets and NFTs, partnering with Consensys to provide a swap feature for ETH, DAI, UNI, USDC, and USDT, in a non-custodial manner, with a built-in news section for industry updates and decentralized app connectivity, all with the aim of simplifying the onboarding process for new users and potentially gaining an upper hand against rival Google Chrome.

Blockchain IRL

• BlackRock CEO Touts Tokenization, Warns US ‘Lagging’ in Innovation: BlackRock CEO Larry Fink has highlighted the lack of financial innovation in developed markets such as the US, with faster and more efficient payments being implemented in countries like India, Brazil, and parts of Africa. Fink believes that the asset management industry has yet to fully utilise promising digital asset technologies, such as the tokenisation of assets, which could drive efficiencies in capital markets and improve cost and access for investors. BlackRock is exploring the digital assets ecosystem, with a focus on aspects that would drive the most value to clients, such as permissioned blockchains and tokenisation of stocks and bonds. Fink has previously expressed interest in asset tokenisation, despite acknowledging the need for regulation in the market.
• Bitfinex Offers Crypto Crude Oil Swaps With Up To 100x Tether Leverage: Bitfinex's derivatives platform has launched perpetual contracts for three global commodities, namely UK crude oil, palladium and platinum. The move is unusual for a cryptocurrency exchange, which does not commonly offer global commodity indexes for trading. Bitfinex's platform already offers more than 60 crypto perpetuals, and these new contracts will allow traders to use Tether tokens to trade around the clock, using up to 100x leverage. The exchange said it expects interest in the commodities, particularly among professional investors seeking to take directional positions or hedge risk.
• Mastercard, Visa Ink Fresh Crypto Debit Cards With Web3 Startups: Mastercard and Visa are partnering with crypto companies to gain access to new sources of revenue, while crypto firms get access to a global payment network. Mastercard and Binance have already launched a prepaid crypto card in Brazil, Bit2Me has launched a Mastercard-powered debit card in Spain, Bitso has launched a Mastercard debit card in Mexico, and Bybit has announced the launch of a ByBit Card in Europe and the UK. Gate Group, which operates crypto exchange Gate.io, has also revealed the launch of a Gate debit card in partnership with Visa. Mastercard and Visa have both denied recent reports that they are pausing efforts to establish new crypto-related partnerships.
• Fidelity Crypto quietly went live, giving millions of retail customers access to bitcoin, ether: Fidelity Digital Assets has opened access to its Fidelity Crypto platform for retail customers, allowing millions of users to trade bitcoin and ether commission-free. The platform was previously restricted to a waitlist, but all waitlist users now have access. The firm will charge a spread of no more than 1%, and withdrawals are not yet enabled on the platform. Fidelity Digital Assets, which has 37.1 million total retail accounts, has acted earlier than most peers in the US in offering crypto to retail clients. The launch coincided with an increasingly hot regulatory environment in the US.
• Meta Will End Support for NFTs: Meta, the parent company of Instagram and Facebook, is winding down its integration of non-fungible tokens (NFT) on its platforms to focus on other ways to support creators, people, and businesses. Meta will continue to work with NFT and Web3 content creators who leverage its suite of tools to help them grow their community. Meta began testing its Digital Collectibles feature in May 2022 and opened up support for the feature in September. The company allowed a small group of U.S. creators to mint and sell NFTs on the Polygon blockchain directly from its platforms.

A long awaited airdrop

• Ethereum scaling solution Arbitrum is launching its native ARB token, which will allow holders to vote and propose any changes to the platform. The optimistic rollup solution moves network activity off the Ethereum mainnet to lower gas costs, and holds over 55% of the layer-2 market by money. The distribution of the token is set to begin next week, and users will be able to nominate delegates to help steer the direction of the project. Individual user addresses will enjoy 11.6% of the entire token supply, with another 1.1% going to other projects built on Arbitrum.

Regulation

Who (what) is to blame?

• The New York Department of Financial Services has denied that its possession of Signature Bank over the weekend had anything to do with the bank's crypto dealings. The NYDFS handed over control of Signature to the FDIC because of concerns over the bank's business operations and ability to meet client needs. Former Rep. Barney Frank had previously claimed that the NYDFS targeted Signature to make its opinions on crypto clear. While SVB has had a number of crypto firms as clients in recent years, the bank's solvency has been hindered by the dramatic rise in government-backed securities yield, and it has also been affected by misallocations of capital to projects that are detached from the real world. Therefore, the failure of SVB will impact digital asset players, especially considering the number of venture firms that make crypto investments that banked with SVB, but it does not attribute the bank's collapse to the crypto industry. Conversly and similarly, Silvergate Bank's decision to wind down its operations and liquidate the bank has led to a debate over whether or not crypto is to blame. While some politicians like Elizabeth Warren and Sherrod Brown have raised concerns about the risks associated with crypto, others like Marcus Sotiriou and Sheila Warren argue that Silvergate's collapse was not a crypto-related problem. Sotiriou said that the bank's demise was due to its lack of capital resulting from a bank run, while Warren highlighted the issue of concentration risks. The debate also reflects concerns about US politicians' stance towards the crypto industry and the potential for crypto firms to move offshore.

Coming full Circle

• Circle, the issuer of the USDC stablecoin, has issued a statement in which it pledged to " stand behind USDC and cover any shortfall" that may be caused by the depegging of the stablecoin, following the collapse of Silicon Valley Bank (SVB), which held $3.3bn of Circle's reserves. Circle stated that if the entirety of the amount held in SVB is not returned, the company would use its own funds to cover the shortfall, adding that if necessary, it would seek external capital to do so. USDC has lost its peg in the wake of the collapse of SVB, dropping to a low of $0.87, but at the time of writing was approaching parity, at $0.97. Circle said that all transfers initiated before the bank's collapse should be covered by the FDIC policy. The company has said it holds $9.7bn in cash, mostly with BNY Mellon, while $1bn is held at Customers Bank, and it has not specified the extent of its exposure to Signature Bank. The Boston-headquartered company also said it was starting to partner with a new institution, Cross River Bank, as its commercial banking service for producing and redeeming USDC.

The CFTC names members to committee that will oversee digital assets

• Former White House official Carole House has been appointed as the new chairwoman and Ari Redboard, from blockchain analysis company TRM Labs, as vice chairman of the Commodity Futures Trading Commission's Technology Advisory Committee. The committee has been newly constituted and is being sponsored by Commissioner Christy Goldsmith Romero, who highlighted the need for technology experts to advise the commission on protecting markets from cyber attacks, responsible development of digital assets, and understanding emerging technologies such as artificial intelligence.

Gensler sticks to his guns

• Gary Gensler, the Chairman of the US Securities and Exchange Commission (SEC), has again suggested that tokens using staking mechanisms could fall under securities laws. Speaking to reporters after an SEC vote on 16 March, Gensler stated that investors buying tokens underpinned by a proof-of-stake consensus mechanism anticipate a return, and as such could be considered securities. He advised o perators and intermediaries to come into compliance. The suggestion came after the Commodity Futures Trading Commission chairman, Rostin Behnam, said that he believed ether was a commodity, and should be regulated by the CFTC. Gensler has said that bitcoin is a commodity but has been reluctant to relinquish control over other cryptocurrencies, and has argued that most existing cryptocurrencies are securities. Last month, the SEC undertook its first staking-as-a-service enforcement action, and settled with Kraken. The New York Attorney General has also claimed that ether is an unregistered security in a lawsuit filed against KuCoin.
• See similar: The New York State Attorney General has filed a lawsuit against KuCoin, alleging that the crypto exchange is violating securities laws by offering tokens, including Ether, that meet the definition of a security without registering with the attorney general’s office. The lawsuit argues that Ether is considered a security under the Martin Act, a New York anti-fraud law. This is the first time a regulator has claimed in court that Ether is a security. The attorney general is seeking a court order to stop KuCoin from operating in New York and to implement geo-blocking based on IP addresses and GPS locations.

Grayscale Win Over SEC Might Not Change Much

• Crypto fund manager Grayscale Investment's case against the SEC has argued that the agency's approval of ETFs investing in CME-traded bitcoin futures, but not proposed ETPs that invest in bitcoin directly, is discriminatory. The DC Circuit Court of Appeals has been asked to review the SEC's denial of Grayscale Bitcoin Trust's conversion to an ETF, which is a very narrow scope. If Grayscale wins, the company is anticipating a final decision by Q4. However, a win could mean only that the courts tell the SEC its denial is insufficient, and the agency could potentially deny GBTC's conversion and other spot bitcoin ETF applications via different reasoning. Analysts believe that a favorable decision for Grayscale could reset the spot bitcoin ETF denial and spur a slew of refilings. The SEC has rejected several spot bitcoin ETF submissions in recent years, including one from Valkyrie, and analysts believe that high crypto market volatility has further dimmed the possibility of a spot bitcoin ETF approval.

Other Domestic Regulation Updates

• DOJ Investigating TerraUSD Over Stablecoin Collapse
• Coinbase, Paxos Disclose Exposure to Failed Signature Bank
• US Federal Reserve Setting Up Squad of Crypto Specialist
• Proposed US Budget Would Close Wash Sale Tax Loophole, Impose 30% Excise Tax on Mining
• FDIC Seeks To Sell Signature Bank: Crypto Business and All

Other International Regulation Updates

• India Extends Money Laundering Rules, Penalties to Crypto
• India’s Crypto Industry Finally Sees Lawmakers Engaging
• European Parliament passes EU digital wallet legislation
• HSBC agrees to buy SVB’s U.K. unit for 1 British pound

Pain & Gain

Pain

• Anchorage Digital Layoffs Follow Bear Market, NFT Trends
• Moody’s Eyes US Bank Downgrade While Crypto Stays Same — For Now

Gain

• Yes, There is Still Crypto Funding
• Binance Will Convert $1B Worth of BUSD Stablecoin to Bitcoin, Ether, BNB, and Other Tokens
• Fortnite’s Epic Has ‘Close to 20’ Crypto Games in Store Pipeline
• Uniswap v3 Launches On BNB Chain After Months of Infighting
• Ethereum Now Featured Twice in Crypto Top 10 — Thanks to Lido
• Synthetix Perpetual Volumes Hit Record $200M As Optimism Incentives Near
• How Centrifuge Is Making DeFi Impactful With Real-World Assets
• Filecoin becomes a blockchain platform compatible with Ethereum apps

The Week in Charts

Bitcoin Dominance reaches highest level since June 2022

USDC Regains Peg

M2 Inflection

A Useful Guide

Adjusted Tier 1 Leverage Ratios

Bank Failures 2001-2023

The Week in Trends

Sector Performance Breakdown (7d trend)

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

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

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

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