DeFi Research News May 2024

Stablecoins Update

Let’s explore May 2024 developments & innovations of stablecoins in the crypto market.

PayPal Expands PYUSD to Solana

PayPal’s stablecoin, PYUSD, initially launched on the Ethereum blockchain, has now made its debut on Solana. Why? Solana’s faster and cheaper transaction capabilities address some of the scalability issues faced on Ethereum. With only around 8,600 holders and a market cap of just under $400 million, PYUSD is relatively modest compared to giants like Circle’s USDC and Tether’s USDT. However, the integration with Solana introduces new compliance and programmability features through the chain’s “Token Extensions” standards, which could enhance PYUSD’s appeal in the retail payments sector. PayPal’s ambition is clear: achieving at least 1000 transactions per second with transaction costs in the pennies, making PYUSD a more viable option for everyday use.

Liquity’s BOLD Approach to DeFi Lending

Liquity, a decentralized finance lending platform, is set to launch an upgraded protocol, Liquity V2, which introduces a novel stablecoin called BOLD. Unlike traditional stablecoins, BOLD allows borrowers to set their own borrowing rates. Whaaaat? Scheduled for a late third-quarter launch, BOLD will coexist with Liquity’s existing LUSD stablecoin, utilizing liquid staking ETH derivatives as collateral. This approach could help Liquity stand out in a crowded DeFi market, especially as new yield-earning strategies continue to emerge. Good for us at Coinchange where we are always building new risk-managed strategies to improve your yield in DeFi.

Coins.ph Pilots PHPC in the Philippines

The Philippines’ central bank has approved Coins.ph to pilot a Philippine Peso-backed stablecoin, PHPC. Wow! They can now integrate the stablecoin into remittance platforms, catering to one of the world’s largest remittance markets. The pilot, conducted under the BSP’s Regulatory Sandbox Framework, will assess the stablecoin’s real-world benefits and its impact on the financial ecosystem. With the country’s remittance market valued at $12 billion, the successful implementation of PHPC could streamline cross-border transactions and provide a more stable financial tool for overseas Filipino workers and their families. We did mention this in our Stablecoin Research Report last year, and will soon be publishing an updated version next week.

Circle Shifts Legal Home to the U.S. Ahead of IPO

Circle, the issuer of USDC, the second-largest stablecoin, has filed to relocate its legal base from Ireland to the U.S. First all crypto companies were trying to go off-shore, and now that the political tone has changed in favor of crypto, including Trump promising to make innovation in crypto happen in the US, the companies are rethinking their off-shore strategy. Don’t forget, Circle has a planned initial public offering (IPO) this year. With a market cap of approximately $33 billion, USDC is a significant player in the stablecoin space. Circle’s decision to domicile in the U.S. could enhance regulatory oversight and investor confidence as the company prepares for its public listing.

Visa’s Stablecoin Transaction Volume Analysis

A recent report by Visa and Allium Labs revealed that less than 10% of stablecoin transaction volumes are organic, originating from genuine users. Out of $2.2 trillion in total transactions in April, only $149 billion were considered “organic payments activity.”. So who are the other 90%? Bots and large-scale traders in the stablecoin market!

Of course the crypto community wouldn’t let Visa make such claims. This report on stablecoin transactions has sparked debate regarding its methodology and conclusions. Currently the main use-cases of stablecoins are trading and centralized exchange activities. Stablecoins have found a clear product-market fit, especially in developing economies where they provide a hedge against inflation and capital controls. Therefore, while Visa’s findings offer some interesting insights, they may not fully capture the multifaceted role of stablecoins in the crypto ecosystem.

Tether’s Investment in Bitdeer

Tether, the issuer of the world’s largest stablecoin, USDT, has invested $100 million in bitcoin miner Bitdeer, with an option to purchase an additional $50 million in shares. Bitdeer plans to use the proceeds to expand its data centers and develop ASIC-based mining rigs. Tether founder is aggressively diversifying his company’s investments including some non-crypto ones.

Bitcoin in May 2024: Institutional Adoption, Milestones, and Market Dynamics

Institutional Embrace of Bitcoin

Wisconsin’s Pension Fund Embraces Bitcoin ETFs

Wisconsin’s state pension fund invested $160 million in Bitcoin ETFs managed by BlackRock and Grayscale. Even traditionally risk-averse institutions are starting to see the potential of Bitcoin as a long-term investment. So far over 500 institutional investors revealed allocations into these ETFs in the first quarter alone. The involvement of a state pension fund is particularly noteworthy given the sector’s cautious nature, potentially paving the way for other pension funds to follow suit.

NYSE Plans Bitcoin Options

The New York Stock Exchange (NYSE) announced plans to list options tracking the CoinDesk Bitcoin Price Index (XBX), marking another major traditional finance entity’s foray into the cryptocurrency space. This will provide a liquid and transparent risk-management tool for investors, further integrating Bitcoin into the mainstream financial ecosystem. The NYSE’s entry is anticipated to offer a more accessible onramp for both institutions and individual investors into Bitcoin derivatives.

Strategic Investments and Market Movements

Babylon Raises $70M for Bitcoin Staking

Babylon, a Bitcoin staking project, secured $70 million in a funding round led by Paradigm, with contributions from Polychain Capital and Bullish. Wasn’t the Bitcoin community touting POW and hating Ethereum for offering Staking? Well, haters gonna hate and builders gonna build. Babylon wants to enhance the utility of Bitcoin by offering it as a staking asset, allowing proof-of-stake chains to leverage the vast reserves of Bitcoin for funding. unlock the potential of idle Bitcoin holdings, providing yield opportunities for holders. Sounds familiar, doesn’t it? That’s because Coinchange already does that!

BlackRock’s Dominance in Bitcoin ETFs

BlackRock’s IBIT has become the largest spot Bitcoin ETF in the U.S., surpassing Grayscale’s GBTC. This shift followed a $102 million inflow into IBIT, which now holds nearly $20 billion in Bitcoin. The surge in IBIT’s popularity reflects a growing bullish sentiment in the crypto market, bolstered by recent approvals for Ether ETFs and renewed political support for cryptocurrencies in the U.S. Don’t mess with Pappa BlackRock.

Coinchange’s Bitcoin Halving Report

Coinchange published a comprehensive report on the 2024 Bitcoin Halving, examining its impact on miners and the broader market. The halving event, which reduced block rewards from 6.25 to 3.125 bitcoins, poses challenges for miners, particularly those with higher operational costs. The report suggests strategies for miners to adapt, including adopting energy-efficient technologies and exploring new business models. It highlights the potential for increased transaction fees as a new revenue stream, underscoring the evolving economic landscape of Bitcoin mining. Read your free copy here.

Medical Device Maker Semler Scientific Invests in Bitcoin

Semler Scientific made headlines by investing $40 million in Bitcoin, purchasing 581 bitcoins for its treasury. This strategic move sent the company’s stock price soaring by 25%. Welcome to the volatility of crypto where 25% swings are a commonplace. This surely strengthens Bitcoin’s appeal as a hedge against inflation and a safe haven amid global instability. The company’s chairman highlighted Bitcoin’s unique characteristics as a scarce and resilient digital asset, comparable to gold but with greater potential for growth.

Celebrating Bitcoin Pizza Day

Bitcoin Pizza Day, celebrated on May 22, commemorates the first known commercial transaction using Bitcoin. In 2010, Laszlo Hanyecz famously spent 10,000 bitcoins on two pizzas, a transaction now worth nearly $700 million. Beyond this historic purchase, Hanyecz made significant contributions to Bitcoin’s development, including translating Satoshi Nakamoto’s code for Apple’s OS and pioneering the use of GPUs for Bitcoin mining. At Coinchange we ate Seniore’s pizza (Calgary) that day but the pizza was so tasty that we forgot to take pictures.

Ethereum in May 2024

May 2024 has been a monumental month for Ethereum, so let’s dive right into the biggest news for the month.

BlackRock’s Ethereum ETF Moves Forward

Pappa BlackRock made headlines by amending its S-1 form for a proposed spot ether (ETH) exchange-traded fund (ETF). The updated filing revealed a “Seed Capital Investor” purchasing 400,000 shares, totaling a $10 million net asset value. Bloomberg analyst Eric Balchunas suggested that the ETF could launch by the end of June, following the SEC’s approval of several ether ETFs. Whoa! From Ethereum being at the verge of being called a security to sudden approval of spot ETFs! BlackRock’s bitcoin ETF has already seen considerable success, becoming the largest publicly traded bitcoin fund globally.

BlackRock, Grayscale, and Bitwise, among others, filed amended 19b-4 forms with the SEC, removing provisions for staking ether to avoid regulatory roadblocks. Staking, which involves locking cryptocurrencies to support blockchain operations and earn rewards, was seen as a potential obstacle for regulatory approval. By excluding staking, these firms aim to streamline the approval process for their spot ether ETFs.

Ethereum Meme Coins Surge on ETF Optimism

The approval of ether ETF filings has also led to a surge in Ethereum ecosystem tokens, notably PEPE and MOG. These meme coins hit record highs as traders viewed them as high-beta bets linked to the broader Ethereum ecosystem. Trading volumes for PEPE skyrocketed to $1.8 billion, reflecting increased market activity. The memelords just need a reason to buy meme coins.

Vitalik Buterin’s Swift Response to Wallet Controversy

Vitalik recently proposed EIP-7702 as an alternative to the controversial EIP-3074, which aimed to improve Ethereum wallets. This new proposal was crafted in just 22 minutes and has garnered positive feedback from the community. EIP-3074 was initially designed to enhance Ethereum wallets by allowing certain functions to be controlled by smart contracts, as part of the upcoming Pectra hard fork. However, it faced criticism for its incompatibility with existing standards like ERC-4337, which has been in place since early 2023. EIP-7702 offers a novel transaction type that allows externally owned accounts (EOAs), which are typical Ethereum addresses controlled by private keys, to temporarily function as smart contract wallets during transactions. This temporary state ends once the transaction is completed, reverting the EOAs to their original form. This method avoids the introduction of new opcodes and minimizes disruption, leveraging existing wallet code and transaction frameworks. The guy invented Ethereum. He surely knows a thing or two.

Ether.Fi Soars Amid ETF Approval Anticipation

Restaking protocol Ether.Fi experienced significant growth, with total value locked (TVL) reaching $5.4 billion, driven by nearly $1 billion in new deposits. The anticipation of ether ETF approvals has bolstered investor interest in restaking strategies, which offer additional yields on staked ether. Ether.Fi’s success reflects broader market optimism and highlights the evolving financial products within the Ethereum ecosystem. The protocol’s native token, ETHFI, also saw a 41% price increase, outperforming major indices and reinforcing the bullish sentiment.

SEC’s Abrupt Approval of ETH ETFs: Political and Market Implications

The SEC’s sudden approval of ether ETFs (19b-4 has been approved, S1 still pending) has raised questions about the motivations behind the decision. Does it suggest that the SEC may no longer view unstaked ETH as a security? This might further encourage institutional participation but will it worsen the percentage of staked ETH? June will be an interesting month to see what’s next in the ETH Spot ETF saga.

DeFi Updates

Key DeFi Stats for April:

Image: DefiLlama

In May, the TVL increased slightly in dollar terms from around $86B to $107B for the whole DeFi market. DEX 30day volumes have gone up to $140B last month which is a healthy but not frothy level.

Here are the top DeFi projects based on Total Value Locked (TVL):

Ether.fi is a new entrant in the top 5 rankings partly due to people piling in on the news of ETH spot ETFs.

Source: Token Terminal. TVL of top protocols as of May 4th 2024.

A look at the top DeFi protocols based on the fees generated

Let’s look at the top 5 DeFi/NFT protocols/ecosystems with the most fees generated over 30 days, which generally translates to the most active protocols. In some cases, the protocols take a % of the fee as revenues (eg. Lido Finance) in other cases its distributed almost entirely to the Liquidity Providers Stakeholders (eg. Uniswap Liquidity Providers) hence their revenue varies based on such parameters.

Here are the top 5 protocols for the month of April in terms of Fees generated:

Image by Coinchange, data sourced from DeFillama

The four of the top five from April and still the top 5 in May. However, Nuri Exchange (an AMM on Scroll) scored #4 making it a new entrant.

Macro View

Domestic liquidity reached a low point around mid-April during tax season but has improved somewhat since then. The main components influencing this include the Federal Reserve’s balance sheet, reverse repos, and the Treasury general account. The Fed’s balance sheet continues to decrease, which negatively affects liquidity, though the pace of this reduction will slow in June. Reverse repos have remained flat, keeping their impact neutral. The Treasury general account, which peaked at $941 billion during tax season, has decreased to $725 billion, adding some liquidity back into the financial system and aligning with long-term expectations.

Regarding bank liquidity, banks were heavily leveraged with low liquidity before the global financial crisis. Various policy measures during and after the crisis re-capitalized them and mandated higher capital and liquidity levels. Whenever the Fed reduces system-wide liquidity through quantitative tightening, it stops when liquidity issues arise in banks or Treasury securities. In September 2019, a liquidity problem in the repo market prompted the Fed to provide emergency support and resume balance sheet growth. A similar situation occurred in March 2023, affecting regional banks, leading to the Fed and Treasury introducing the Bank Term Funding Program to stabilize liquidity.

For the next several months, liquidity is expected to remain rangebound. However, if the Treasury increases T-bill issuance, it could pull more liquidity from reverse repos back into the system. In 2025, two significant catalysts for liquidity are anticipated: the New York Fed projects its balance sheet to start increasing, and the debt ceiling limit, currently suspended, will be reinstated in January 2025, potentially leading to another debt ceiling battle. Such battles could force the Treasury to drain its cash balance into the financial system to continue paying bills without issuing new debt.

Global liquidity has been in a rangebound state for two years, influenced by global money supply growth and the dollar’s strength relative to other major currencies. This metric hit a low in late 2022 when the dollar index spiked, leading U.S. domestic liquidity to stabilize. Global liquidity is expected to increase by 2025, with a potential earlier breakout in 2024 if the dollar index declines. The dollar index’s movement depends on the U.S. economy’s strength, inflation measures, and market expectations of interest rate changes. While the dollar index’s direction for 2024 remains uncertain, it is expected to weaken when the Fed’s balance sheet starts to rise again around 2025.

Regulations Update

FIT21 Bill Passed the House

The FIT21 bill, formally known as the Financial Innovation and Technology for the 21st Century Act, is a recent piece of legislation passed by the U.S. House of Representatives aimed at establishing a comprehensive regulatory framework for digital assets and cryptocurrencies.

1. Regulatory Clarity: It clearly delineates the roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over digital assets. The CFTC would have greater authority over digital assets deemed to be commodities, while the SEC would maintain oversight over securities

2. Decentralization Test: The bill introduces a “decentralization test” to determine whether a digital asset is sufficiently decentralized to be considered a commodity, which could exempt it from SEC oversight. This test includes criteria such as no single entity having control over the blockchain

3. Consumer Protections and Innovation: It provides a framework that seeks to protect consumers while fostering innovation in the crypto space by offering regulatory clarity and reducing the risk of litigation for crypto companies

The bill passed the House with significant bipartisan support, indicating a strong desire among lawmakers to bring more structure and clarity to the digital asset industry. However, it faces opposition from some quarters, including SEC Chair Gary Gensler, who argues that it could undermine investor protections by creating regulatory gaps

The FIT21 bill now moves to the Senate, where its future remains uncertain. If it passes the Senate and is signed into law, it would be huuuuuuuuge!

SAB 121 Bill: Before and After

Before:

Regulatory Requirement: SAB 121, introduced by the SEC in 2022, required banks and other financial institutions holding cryptocurrencies on behalf of clients to list these assets as liabilities on their balance sheets. This rule was unique to crypto assets and did not apply to traditional assets like securities. This requirement discouraged banks from offering crypto custody services, as it imposed additional financial and regulatory burdens. It created a barrier for traditional financial institutions to enter the crypto space, limiting consumer access to regulated crypto custody solutions. The rule faced significant criticism from various stakeholders, including some SEC commissioners, who argued that it unfairly targeted crypto assets and hindered financial innovation. Critics contended that it was an example of regulatory overreach that stifled the development of the crypto industry  .

After:

House and Senate Reversal: In 2024, both the U.S. House of Representatives and the Senate passed resolutions to overturn SAB 121. This bipartisan effort aimed to remove the unique burdens placed on banks by the SEC’s bulletin, thereby encouraging more financial institutions to offer crypto custody services. Despite the congressional approval, President Biden indicated his intention to veto the resolution, arguing that overturning SAB 121 would undermine the SEC’s ability to protect investors and maintain financial stability within the crypto markets. If the resolution successfully overcomes a potential presidential veto, it would signify a shift towards a more favorable regulatory environment for crypto assets, potentially leading to increased involvement of traditional financial institutions in the crypto market and greater consumer access to regulated crypto custody options.

DOJ’s MEV Lawsuit

The U.S. Department of Justice charged two brothers with exploiting Ethereum’s maximal extractable value (MEV) protocols, marking the first such legal action. The brothers allegedly manipulated MEV bots to extract $25 million through fraudulent transactions. As expected, this case has sparked debate within the Ethereum community, with some viewing it as a necessary step to curb unethical practices, while others argue it highlights the challenges of regulating decentralized systems.

Capital Raises in April 2024

Source: ICO Analytics

1. Farcaster:

• Round: Series A
• Raised: $150M
• Project Category: Ethereum Ecosystem, Social Network
• Investors: Paradigm, a16zcrypto, HAUN, and three more investors

Comment: Farcaster is a promising project within the Ethereum ecosystem, focusing on creating a social network. It has strong backing with substantial funds raised, indicating high investor confidence. The involvement of reputable investors like Paradigm and a16zcrypto adds credibility and potential for future growth.

2. Aethir (ATH):

• Round: Public sale
• Raised: $123M
• Project Category: AI, Arbitrum Ecosystem, DePIN, Infrastructure
• Investors: Not listed specifically

Comment: Aethir is targeting the AI and blockchain intersection, leveraging the Arbitrum ecosystem and infrastructure aspects. The significant amount raised in its public sale suggests strong public interest and potential utility.

3. Babylon:

• Round: Unknown
• Raised: $70M
• Project Category: Bitcoin Ecosystem, Staking
• Investors: Paradigm, Polychain Capital, Bullish, and 27 more investors

Comment: Babylon is entrenched in the Bitcoin ecosystem, focusing on staking. It has raised substantial funds and has a wide array of investors, indicating broad interest and support. This diversity in investors can provide a solid foundation for scalability and innovation within its niche.

4. Sophon (SOPH):

• Round: Public sale
• Raised: $60M
• Project Category: Blockchain, L2, Zero-knowledge
• Investors: Not listed specifically

Comment: Sophon operates in the blockchain space with a focus on Layer 2 and zero-knowledge technologies, crucial for scalability and privacy. The $60M raised in the public sale reflects strong interest, but the lack of detailed investor information might require further due diligence for potential backers.

5. Securitize:

• Round: Unknown
• Raised: $47M
• Project Category: Asset Management, Finance/Banking, Security
• Investors: BlackRock, Hamilton Lane, and 4 more investors

Comment: Securitize is positioned in asset management and finance/banking, with a focus on security. The involvement of heavyweight investors like BlackRock and Hamilton Lane underscores the project’s potential and credibility.

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