Market
Quite an eventful week for both the macro and crypto. Friday’s Non-Farm Payroll number showed that the US added an estimated 336,000 jobs in September, nearly doubling the consensus estimation. Good news? Perhaps, as the economy perseveres despite rate hikes. However this might be bad news for risky assets, as the Fed now has more reason to stay hawkish.
The much-anticipated ETH futures ETF was finally launched this Tuesday - six of them, to be exact. However, none of them have gathered the same amount of flows as when the first BTC futures ETF (BITO) was launched. They appear to be more like a normal new ETF launch. Is it bad news? Not necessarily. Recall BITO was launched at the height of the bull market when BTC was trading at an ATH above $60,000. Not this time when crypto is not out of the woods yet. The silver lining is that the SEC is granting approval for multiple issuers all at once (thanks to the concerns about a government shutdown). Now we have 12 active BTC spot ETFs in the race, and there is a possibility that the SEC might approve some of them altogether. In fact, SEC has commented on the S-1 filings of a few issuers, which breaks the pattern from before, as they never commented on S-1s before they comment on the 19b-4s. Bitwise and VanEck are both optimistic of a spot BTC launch by late 2023 or early 2024, which could reignite interest and pressure on BTC performance.
With both the good and bad news, BTC has rallied approximately 2.5% this week, reflecting the optimism on the spot ETF launch and BTC’s inflation-hedging capability, while ETH sold off 1.5%, reflecting market’s disappointment on the futures ETF flows and concern on further monetary tightening.
The monetary policy and the fiscal policy seem to be at odds with each other as Federal spending keeps rising while the Fed tries to put the break on. In fact, total US debt has just crossed the $33 trillion mark, the highest in history. Given 2024 is an election year, it is hard to expect significant tightening moves from the fiscal policy side, which could put pressure on the Fed again to keep the high rate for longer.
CeFi Update
After Judge Torres ruled in July that Ripple’s programmatic sales of XRP to retail customers were not securities in the SEC vs. Ripple case, she rejected SEC’s bid for an interlocutory appeal again on October 3rd. While this doesn’t necessarily lead to a Ripple win, SEC cannot appeal until after the trial date set in April 2024. Judge Torres did mention that her previous victory judgment on XRP’s non-security status cannot be cited as precedent unless the facts of a new case align precisely with those of the Ripple case. Unfortunately, we still have to evaluate digital assets on a case by case basis, without clear guidance from the SEC or changes in the legislation.
October 13 will mark the end of the 45-day period for SEC to review the court’s ruling on their lawsuit against Grayscale. SEC could appeal, which will either take the case to the supreme court, or request an “en ban” panel of the Court of Appeals to revisit the ruling. Either is unlikely, or they may choose not to appeal, in which case the court is expected to issue an order detailing next steps. SEC could still reject Grayscale’s spot ETF application based on other reasons but their response could shed light on the fate, or at least the timeline, of BTC spot ETF launches.
Digital IDs on blockchain are becoming a reality in Brazil and Argentina. Three states in Brazil will issue identification documents on-chain through a private blockchain developed by Serpro, Brazil’s national data processing service. The entire country should be able to issue identity documents through blockchain technology by Nov. 6. Starting in October, Buenos Aires residents can also access identity documents such as birth certificates through a digital ID protocol called QuarkID, using zkSync Era as the anchor blockchain. Both countries recognize the efficiency and security benefits of bringing identity data on chain. Argentina’s approach also demonstrates the power of ZK proof in preserving privacy and verifiability.
DeFi Update
Quite a few exciting developments are happening in the infrastructure space. Celestia, the first modular data availability layer launched its TIA token via a 6% genesis airdrop last week, indicating a over $2.0 billion valuation in pre-token futures market. According to Messari, Celestia needs 2-10X the current roll-up DA demand to justify a valuation ratio that’s matching the current L2 networks. We think that’s an over optimistic assumption, given Ethereum’s Dencun upgrade will cut its own DA cost drastically, reducing the burden to find cheaper DA solutions. Additionally, developments in scaling solutions such as ZK could further reduce L2s’ data needs. Celetia is also facing competition from other DA solutions such as EigenLayer and Polygon Avail. The good news is competition will further drive down the cost of using the blockchain, making it more compelling for real world businesses to develop applications on the blockchain.
Optimism’s much awaited fraud proof was finally launched on the testnet last week. While the OP stack has gained fast TVL growth this year, its fraud proof technology is still under development. Without fraudproof, users need to trust the Block Proposer to submit correct L1 state roots, similar to driving a car without a spare tire. Given the centralized status of the block proposer currently, it might not pose a significant risk. In fact, Arbitrum’s fraudproof has not been used since its launch in August 2021. However, as L2 technology advances and becomes more decentralized, a robust fraudproof system is definitely needed. The product prioritizations of OP shows the typical tradeoff between speed to market and technology perfection for startups. While fraudproof is a basic security feature required for the roll-up, speed and cost are more important for initial adoption.
Similar to Optimism, we observe the tradeoff between speed to market and technical perfection in Solana, with multiple network outages since its launch. Solana has made technology strides to improve network resilience. Firedancer, the new Solana client that can drastically scale the chain, is also expected to go to testnet by EOY. Interestingly, even Solana’s Nakamoto Coefficient has recently exceeded that of Ethereum, according to Solana's recent validator health report, indicating it might not be as centralized as people often accused it of being.
Trends to Watch
The competitive landscape in the blockchain infrastructure is quickly evolving as different chains try to optimize their growth path. There are three trends happening currently:
Ethereum leading the “general use” modular blockchain with the most trusted security layer and thriving developments of multiple scalability solutions on other layers.
Solana leading the “general use” monolithic blockchain with its higher throughput and ability to localize fees through parallel processing.
Alt L1 chains optimizing around specific use cases or becoming app-specific roll ups on Ethereum to compete for higher market share in a narrower market. Recent developments include Stellar’s integration with Moneygram for payments, Cello migrating to Ethereum L2 and Astar’s partnership with Sony on gaming.
Applications with self-sustaining networks and high demand for customization can develop their own appchain or rollup. Notable examples include dYdX becoming a Cosmos appchain and Axie Infinity developing their own Ronin chain.
It’s a great time to develop applications on the blockchain with many infrastructure choices. You can start with a roll-up with great developer support to test your PMF thesis, then graduate to your own appchain if there are enough users to sustain network security. On the infrastructure side, although Ethereum’s bandwidth restricts its ability to scale, its network effect and associated liquidity create a strong moat. Users and interoperability solutions would be the ultimate winners as the technical details of the blockchain can be abstracted away, enabling frictionless value exchange across different blockchain implementations.
Top Gainers and Losers
Top 100 MCAP Winners
Trust Wallet Token (+29.84%)
Render (+17.19%)
Bitcoin SV (+11.92%)
Avalanche (+11.85%)
Solana (+8.81%)
Top 100 MCAP Losers
Apecoin (-12.74%)
Pepe (-12.57%)
Curve (-10.34%)
Thorchain (-10.11%)
Lido (-9.71%)
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.www.reuters.com/technology/vaneck-launches-etf-tied-ether-futures-2023-10-02/