Market
Happy Thanksgiving, everyone! Many crypto investors are likely enjoying a good appetite at the Thanksgiving table in light of the Binance-DOJ settlement on November 21st. This marks the resolution of the most significant hanging over the crypto market. With Binance holding approximately 50% of the market share in spot trading volume and a dominant position in perp futures, any disruptive event could have had a substantial impact. Concerns were raised that Binance might follow the footsteps of FTX.
The charges primarily revolve around Binance's failure to comply with AML and KYC policies. Fortunately, no fraud has been uncovered, and CEO CZ has been cooperative. By agreeing to pay $4.3B fines, plead guilty and completely exiting the US market, Binance can continue its operations.
The market reaction to the news has been orderly. Binance has experienced an outflow of ~$1.7B, which falls within the normal range seen over the past year. The BNB token saw a more than 8% decline within 24 hours of the news but recovered by the end of the week, ending down less than 5%. It’s still too early to determine the settlement’s impact on the overall liquidity of the market, but there is no doubt Binance’s operations and reserves will be under closer scrutiny.
Source: DeFiLlama, Binance USD Flows
The broader market welcomed the news, as the potential systematic risk of a Binance collapse has been eliminated. Many view this as bullish for the market , seeing the largest crypto exchange finding a compliant way to continue its operations outside of the US. However, more clarity is still needed on how US crypto exchanges can legitimately conduct their business, especially as the SEC's lawsuit against Kraken and Coinbase persists.
The central issue remains whether any of the digital assets listed on these exchanges are considered securities, potentially categorizing the exchanges as unregistered securities exchanges. Without a clear legislation framework on how digital assets are treated, it is expected that the SEC will continue to use Howey Test to evaluate each digital asset on a case-by-case basis and hold exchanges accountable for listing any tokens deemed as securities. This suggests a prolonged battle between the SEC, crypto exchange, and protocols in the US. Unfortunately, for projects lacking resources comparable to Coinbase or Ripple, exiting the US market may be the most straightforward decision.
BTC briefly exceeded $38000 last Friday, reaching the ATH level considered resistant before hitting $40000. Crypto-related stocks appear to be bigger winners compared to the spot market following the Binance settlement. COIN, MARA and RIOT all rallied around 15% last week, indicating mainstream investors’ confidence in the crypto market.
Source: Koyfin
The next major regulatory event the market is eagerly awaiting is the approval of the BTC spot ETF, which could happen anytime between now and January 10th, the deadline for the first ETF filing by ARK. Blackrock has joined ARK in discussions with SEC to push back against their preference of cash creation/redemption. In the worst case scenario, even if ARK is denied in January, there are a wave of issuers with mid-March deadlines, and at least one of them has the cash creation/redemption mechanism. We expect BTC spot ETF approval to occur in Q1 2023; coupled with the April BTC halving narrative, this could fuel more mainstream capital into the crypto market.
DeFi Trends to Watch
The animal spirit seems to be back in crypto. One sign is how quickly capital is willing to flow into a newly launched L2 with no dApps, purely because of the financial incentive. Yes, I’m referring to Blast. Since its launch on November 21, it has gained $500M TVL in merely four days. In contrast, It took almost 2 months for Base, the fastest growing L2 launched by Coinbase, to reach that level of TVL, despite strong support from Coinbase and their clients. Blast has done a few things right to attract the TVL:
Offering staking yield on ETH and Stablecoins that are bridged to Blast - this eliminates the opportunity cost for the token holders to bridge their tokens over.
Offering a multi-level marketing scheme and promise for future airdrops to build the network effect quickly.
Synergy between Blast and Blur: Blast is founded by Packman, the founder of Blur as a L2 to support the NFT exchange. Packman has successfully used token incentives to bootstrap Blur’s growth to overtake OpenSea as the largest NFT marketplace.
Note that the yield offered by Blast is supported by ETH staking yield or stablecoin interest rather than through any token inflation or playing sophisticated DeFi lego. We think the narrative they created around the “L2 that pays native yield” is also a form of smart marketing. However, there are no applications built on Blast and there is no information on when Blur will move to Blast. Once tokens are bridged to Blast, they cannot be withdrawn until mainnet launch in February 2024. Also, there are concerns about the multisig wallet holding the fund only requiring 3 out of 5 signatures. Still, it’s surprising to see so much capital flowing so quickly into Blast, thanks to strong financial incentives, smart marketing and rising risk appetite in crypto.
Blast’s rise to stardom also highlights the intense competition in the L2 space. For example, shortly after Polygon proposed to be the L2 for the ApeCoin DAO, Optimism co-founder pitched to the community on why ApeCoin should be using the Optimism superchain. The TVL market share of Arbitrum and Optimism has stabilized around 55% and 25% in Q3, while Polygon CDK has been growing market share from 0.6% to 1.2%.
According to L2Beat, there are 32 different L2s on Ethereum with different rollup and data storage implementations. In the meantime, they are still not competitive enough vs. a few other L1s until the Data Availability solutions and ZK technology mature. While dApps value the security and liquidity in the Ethereum ecosystem, the fragmented nature of L2s and high performance needs have driven some of them to other chains, such as dYdX moving to its own App Chain and Render moving to Solana. We think Ethereum has established the Lindy effect as the most secure settlement layer, and the modular chain architecture enables users to customize their own tradeoff between decentralization and scalability. The roadmap for a high-performance Ethereum is laid, but it may take a long time to get there. In the meantime, we think dApps will more likely be the winner in this cycle, as they will be the main driver for revenue growth and user acquisition, and they have negotiation power when it comes to chain choices. High-performance chains that are battle-tested, like Solana, could also be the winner, at least over the short to medium term, as they attract dApps to build on them and grow the network effect.
Top 7d Gainers and Losers
Top 100 MCAP Winners
Blur (+73.09%)
STEPN (+35.76%)
Mina (+31.33%)
Klaytn (+29.89%)
ApeCoin (+26.00%)
Top 100 MCAP Losers
Celestia (-18.92%)
ORDI (-9.65%)
THORChain (-9.51%)
Matic (-6.80%)
XDC Network (-5.86%)
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.