Market
The Fed left interest rate unchanged in their September FOMC meeting this week but conveyed an unambiguously hawkish “higher-for-longer” message. As of September 22, The futures market is pricing in approximately a 43% change of at least one rate hike by the end of this year.
BTC held up well compared to other risky assets in the past week, while ETH experienced a similar magnitude of decline as the equities market.
Source: Koyfin, 9/23/2023
BTC and ETH spot and futures monthly exchange trading volumes are at their lowest level in a year. Despite the thin volumes, Coinbase research mentioned the liquidation of the FTX token portfolio is unlikely to impact the market, as the initial sales is limited to $50 million per week.
Interestingly the BTC and ETH implied vol started to decline last week while the VIX began to increase. This indicates that the market is expecting more volatility ahead in the equities market.
While BTC and ETH experienced low volatility and small movements last month, a few blue-chip names showed notable activity. According to Messari, there are 35 digital assets with over $1B circulating market cap and more than $1M average 30-day real trading volume. The lending sector, represented by MKR, had the best return in the 30-day and YTD periods, driven by the RWA initiative and its DAI Savings Rate effort. Scaling solutions, represented by OP, ARB, MATIC and MNT, were not doing well last month despite the L2 narratives. OP lost most of its Q1 rally related to the Base announcement and has converged to ETH performance YTD, while ARB has sold off approximately 35% since the token listing on Coinbase in March.
Source: Messari, 9/23/2022
CeFi Update
The Ninth Global Blockchain Summit in Shanghai, organized by China’s crypto OG Wanxiang Blockchain Labs took place last week, following the success of TOKEN2049. Feng Xiao, the CEO of Wan Xiang, delivered an insightful closing speech, explaining how Hong Kong’s virtual asset policy could help it regain ground as the international financial center. This involves the following four steps:
Build an active secondary market to facilitate digital asset trading.
Establish a primary market supporting the issuance of digital assets.
Grow service providers to support primary and secondary market efforts.
Attract Web3 talents to build in Hong Kong.
Similar to how the stock market facilitates economic growth by supplying capital to enterprises, a healthy financial market that supports trading and capital raising for Web3 projects is crucial for long-term success. The policy also aims to bring clarity to the definition of security tokens vs. non-security tokens, which will be regulated differently but by the same entity (Securities and Futures Commission). It’s certainly frustrating to witness other regions embracing digital assets and developing supportive policies, while the US remains entangled in a political quagmire. Without clarity on how to raise money and run a compliant business in crypto, it’s challenging for builders to continue innovating in the US.
While Web3 companies grapple with finding compliant ways to grow their businesses, Web2 companies are capitalizing on opportunities created by blockchain. Google cloud recently added 11 additional blockchains to public data sets on BigQuery, their data analytics service. Users can now query on-chain data on 19 chains. More notably, Google has entered the oracle business by becoming the default oracle provider for LayerZero, an interoperability protocol.
The dilemma stems from using a centralized oracle, conflicting with decentralization principles, while trusting Google for secure handling of these tasks. One could take this one step further and argue Ethereum is not fully decentralized as about 30% of its nodes are running on AWS. We believe it's a delicate choice that every Web3 company must navigate in order to strike the right balance between security, efficiency, and decentralization. Web2 could serve as Web3's training wheels, providing a stepping stone until they achieve the necessary efficiency and scale for a more decentralized approach.
DeFi Update
This week’s notable development on the infrastructure front is Eclipse, a general-purpose L2 that has introduced a novel way of implementing the modular chain thesis on their mainnet through a “take the best of all worlds” approach. They’ve incorporated Solana’s SVM as the execution module, Celestia as the Data Availability module, RISC Zero for fraud proofs, and Ethereum for settlement. Eclipse acknowledged SVM’s scalability advantage in parallel processing over Ethereum’s single thread approach, while aiming to benefit from Ethereum’s security and network effect. Eclipse’s implementation offers a fresh approach to address Ethereum’s UI issue: by amalgamating the latest developments in various infrastructure layers into a blockchain that remains EVM compatible.
The mainnet is anticipated to go live by year-end. While the approach seems remarkably promising, it’s still uncertain whether they can attract users and if the solution will prove to be robust and efficient. Since Eclipse is using SVM for an execution environment rather than the Solana blockchain, the SOL token won’t benefit directly from this use case. However, we don’t see it as bearish for SOL yet, given that this assembly approach is unproven and could introduce additional development complexity. This underscores the advantage of Solana’s tech stack. For apps that prefer a monolithic approach, SOL could still be a better choice.
Other alternative Layer-1 systems are also catching up by addressing their constraints. Polkadot recently announced an upgrade to increase their parachain limit from 100 to potentially supporting 1000 chains, aiming to tackle their scalability issue. Similarly, Cosmos is conducting research to overhaul the ATOM tokenomics, aiming to bring value and alignment to developers and token holders.
Trends to watch - interest paying stablecoin
While the crypto community eagerly anticipates the arrival of true killer apps, it is often overlooked that we may already have one - stablecoins. If properly designed, they can serve as the onramp from fiat to crypto and integrate the global payment system onto the blockchain. There are currently two challenges in stablecoin design:
Peg stability
Interest paying capability
Mountain protocol launched an interest-paying stablecoin, USDM, on the Ethereum mainnet last week, aiming to address these two challenges. They have adopted a compliant approach to ensure peg stability by obtaining a Digital Asset Business license from the Bermuda Monetary Authority. Following similar reserve guidelines as Circle, they go one step further by putting the reserves in a bankruptcy remote SPV and hiring a third-party manager to oversee the reserve fund. They distribute interests earned on the reserve assets to stablecoin holders through a rebase mechanism, akin to Lido’s stETH. Holders of UDSM will automatically earn daily rewards without needing to deposit the stablecoins with any specific entity or deploy them into other yield generation protocols.
USDM essentially functions as a high-yield checking account. Compared against the three largest stablecoins, it has better compliance mechanisms than USDT and USDC to ensure the pegging, has higher capital efficiency than DAI and pays interest automatically. Unfortunately, it currently blocks US users due to US regulations. Nonetheless, we believe this represents a good example of stablecoin design, and hopefully, the US Stablecoin Bill would allow issuers to do the same.
Top Gainers and Losers
IMX has a big rally this week driven by South Korean traders where the IMX-KRW pair accounts for 20% of the global trading activity. Chainlink also had a good rally as their active user addresses picked up and as the market evaluates their SWIFT partnership.
Top 100 MCAP Winners
Immutable (+15.95%)
Chainlink (+15.37%)
Curve (+8.95%)
AAVE (+6.72%)
Zilliqa (+6.07%)
Top 100 MCAP Losers
Gala (-9.53%)
ThorChain (-8,88%)
Kava (-8.52%)
Synthetix (-8.03%)
Klaytn (-7.24%)
About Decentral Park
Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.
Decentral Park applies a principled digital asset investment strategy and partners with founders to enable their token-based decentralized networks to scale globally.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.