Stay Informed: DeFi Research News July 2023

Quotes of the Month

“Instead of investing in gold as a hedge against inflation, a hedge against the onerous problems of any one country, or the devaluation of your currency whatever country you’re in – let’s be clear, bitcoin is an international asset, it’s not based on any one currency and so it can represent an asset that people can play as an alternative.” 
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– Blackrock CEO Larry Fink in his July 5th Fox Business news interview. 

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“The Ripple case is a monumental development in establishing that a token is separate and distinct from an investment contract it may or may not be part of. Now, let’s make it law.” 

– Majority Whip Tom Emmers (R – MN) in a tweet.

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DeFi TVL Updates

Key DeFi Stats for July:

In July, the TVL slightly dropped in dollars terms from around $45 Billion to $40.8 Billion for the whole DeFi market. DEX 30day volumes have significantly dropped in dollars terms from $73B in May to $60B in June to now $48.9B in July. Stablecoin market cap stayed flat at $126B with the top two USDT ($83B) and USDC ($27B) accounting for about 85% of the total market cap.

Lido Finance is continuing to rule the #1 spot since January this year from the long-term king of TVL, MakerDAO. Its TVL stands at an impressive ~$14B. MakerDAO and AAVE kept fighting for #2 and #3 spot with close to $5.5B. Curve and Uniswap kept exchanging #4 and #5 spot with around $3.5B. 

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Macro View

The State Of The US Economy

The liquidity situation within the United States remains stagnant. Over the past few months, equities have become notably pricey, fueled by a considerable amount of enthusiasm despite sluggish economic indicators and limited liquidity. The dollar index has been consistently declining since autumn 2022, which typically has a positive impact on both domestic and global liquidity. In summary, the macroeconomic landscape is relatively uneventful. Therefore, this month, we should shift our attention to other sections of the report.

Regulations Update

While we might have to wait for years to uncover the conclusions of the SEC cases against Coinbase and Binance, there are some juicy short-term cases that investors should definitely keep their eyes on. Get your popcorn, folks and let’s dive into the regulatory update for July 2023! 

Kraken vs SEC

The federal court ordered Kraken, the cryptocurrency exchange, to hand over some info about their users to the IRS. The info includes stuff like users' names, birthdates, taxpayer IDs, home addresses, and even some blockchain addresses and transaction stuff if the user did transactions over 20 grand in a year. But, not all the IRS requests got approved by the court.

According to CoinDesk, Judge Joseph Spero said no to the IRS when they asked for more info like employment details, net worth, and where the money came from. The court rejected those requests because they were too much for what the IRS needed.

Understanding the Ripple (XRP) vs SEC Court Case “Victory”

Our Research Analyst, Pratik Wagh wrote an article on Linkedin about the XRP vs SEC legal battle. You can read the full article here but here’s the tl;dr. Back in December 2020, the SEC accused Ripple Labs of conducting an unregistered securities offering by selling its cryptocurrency, XRP. The recent verdict held that Ripple Labs did not violate federal securities law by selling XRP on public exchanges. However, it was found that Ripple did violate securities laws by selling XRP to sophisticated investors (you know, like those hedge fund hotshots). In other words, the judge ruled that XRP is considered a security for big-ticket institutional sales but not for your regular Joe public sales. 

While the recent ruling paints some of the picture, it does not necessarily mark the end of Ripple's legal challenges or the broader discussion about cryptocurrency regulation. The SEC might take another shot at it with the Second Circuit. So keep your popcorn ready as this XRP saga isn’t over yet. 

The Lummis-Gillibrand Crypto Bill, Round-2

On Jul 12, 2023 Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) reintroduced their landmark crypto bill, building upon the 2022 version. It is a 274 page document and here are the key points to watch: 

• It grants the CFTC increased regulatory powers over cryptocurrency markets, including crypto trading, money laundering, and exchange interactions with decentralized finance protocols.
• The bill will require a mandatory proof of reserves for stablecoin issuers, mandatory registration for U.S. crypto exchanges, and stablecoin issuance limited to banks or credit unions. The legislation likewise bans “rehypothecation” for crypto lending.
• It cites the European Union’s Markets in Crypto Assets (MiCA) Regulation as a potential model. 
• The bill requires crypto asset companies to provide detailed disclosures on the risks and opportunities associated with crypto assets, including advertising standards, plain language requirements for customer agreements, and guidelines on dealing with forks and airdrops.
• Finally the bill allocates $1.3 billion over five years to Federal agencies for the implementation of sound policies related to crypto assets.

This represents another significant step forward in establishing crypto regulation in the United States.

Former Security Engineer Arrested for Hacking DEX Smart Contract

This is the first criminal case involving an attack on a smart contract operated by decentralized exchange! The U.S. Department of Justice(DoJ) charged Shakeeb Ahmed with wire fraud and money laundering in connection with his attack on a decentralized cryptocurrency exchange. He exploited a vulnerability in one of the Crypto Exchange’s smart contracts by inserting fake pricing data to fraudulently cause that smart contract to generate approximately $9 million dollars’ worth of inflated fees. Apparently he used flash loans. This was carried out back in July 2022. Ahmed allegedly reached out to the developers and offered to return some of the funds, but to keep for himself $1.5 million, on the condition that the exchange would not report the attack to law enforcement. Well, we now know that didn’t work out for him. This is a progress in the so-called wild-west as hackers used to believe that the pseudonymity on the blockchain made them immune from legal action. 

CFTC Is Discussing DeFi 

On July 18, the Commodities Futures Trading Commission (CFTC) held a meeting with Technology Advisory Committee (TAC) to discuss existing “regulatory issues for DeFi”. The TAC Meeting featured the following topics: 1) Enforcement Case Study: Ooki DAO, 2) Extent of Decentralization and Models of Governance in DeFi, and 3) Stability and Security Challenges and Regulatory Implications for Crypto. 

Institutional Update

Microsoft Partners with Axelar

Axelar and Microsoft announced a partnership for better integration of Web3 & traditional internet systems. The partnership will explore ways public blockchains can help secure trust and speed integration of artificial intelligence (AI) in mainstream use cases. Axelar's blockchain data integration and interoperability solutions will be available to Microsoft customers via Azure Marketplace, the software discovery & integration platform used by Microsoft's thousands of cloud computing infrastructure customers. In a tweet they mentioned "With Microsoft, we are now also able to explore the possibility for other new frontiers in Web3, such as blockchain-enabled Open AI services and the integration of AI in future Web3 applications.”

Findings from PWC’s Global Crypto Hedge Fund Report 

PWC released its 5th Annual Global Crypto Hedge Fund Report (2023) in July and here are the key findings: 

• The number of traditional hedge funds investing in crypto-assets fell down from 37% last year to 29%. But, no traditional hedge fund plans to decrease exposure in 2023. 
• 23% of traditional hedge funds are reassessing their crypto strategy due to the regulatory environment in the US; 12% of crypto hedge funds are considering relocating from the US to crypto-friendly jurisdictions. 
• 93% of crypto hedge funds expect the market capitalisation of crypto-assets to be higher at the end of 2023 than 2022.
• 31% of traditional hedge funds view tokenization as the biggest opportunity in 2023; 25% of traditional hedge funds – including those not currently invested in crypto – say they are exploring tokenization

And while we are talking about Tokenization, Coinchange Research Team, comprising Jerome Ostorero and Pratik Wagh, has written a 40 page research report titled, “Institutional DeFi in 2023, Regenerative Finance (ReFi): fostering adoption through blockchain innovation” This report has been co-authored by real-estate investor Nick Halaris, individuals from Securrency, Toucan Protocol, Goldfinch, RWA.xyz and reviewed by individuals from RealT and Polygon. 

This Coinchange Research report delves into the emerging paradigm of Institutional Decentralized Finance (DeFi), Regenerative Finance (ReFi) - its applications, implications, challenges, RWA Tokenization and the infrastructure enabling its rise. 

Capital Raises in July

• Flashbots raised $60M in July with Paradigm being the lead investor.
• Futureverse which an infrastructure play on the metaverse, AI and Gaming using blockchain technology raised $54M in July. 
• RISC Zero provides blockchain infrastructure for Zero Knowledge Proofs and they raised $40M in series A. Previously they have raised $12M in Aug 2022 for their seed round. 
• Cosmic Wire is a Web 3.0 Infrastructure provider enabling others to build seamlessly in the blockchain ecosystem. They raised $30M in July led by Polygon and Solana Foundation. 
• Hi Dollar is a Web3 payments app offering online financial services and is registered and licensed in Estonia FIU. 

Bottom line is that out of the $214M raised by the top 5 deals, only $30M is towards an end-user application that doesn’t require blockchain knowledge. It is interesting to see that most of the money invested in the infrastructure level. 

Other Noteworthy News/Events in July

Coinchange Attended the ETH CC and DeFi Security Summit in Paris

Our Head of Research, Jerome Ostorero attended the DeFi Security Summit followed by the ETH CC in Paris. We had Jerome on our AMA Podcast discussing his experience at these conferences which is an absolute MUST watch if you want to gain insights on the latest trends in DeFi space. We talk about Zero-Knowledge, Account Abstraction, Artificial Intelligence, DeFI Security Tools, Regenerative Finance and a lot of new product announcements! 

Coinchange Published New Research Report

The Coinchange Research Team, comprising Jerome Ostorero and Pratik Wagh, has written a 40 page research report titled, “Institutional DeFi in 2023, Regenerative Finance (ReFi): fostering adoption through blockchain innovation” This report has been co-authored by real-estate investor Nick Halaris, individuals from Securrency, Toucan Protocol, Goldfinch, RWA.xyz and reviewed by individuals from RealT and Polygon. 

This Coinchange Research report delves into the emerging paradigm of Institutional Decentralized Finance (DeFi), Regenerative Finance (ReFi) - its applications, implications, challenges, RWA Tokenization and the infrastructure enabling its rise. The entire report can be read here.

FedNow Launched (Will this Kill Crypto?)

FedNow is a new payment service created by the Fed that lets banks send and receive money anytime, all year long. It just launched last week, and people wonder whether this will affect the 24/7/365 instantaneous settlement promised by blockchains. Adjunct Professor at Columbia Business School, Omid Malekan argues that it won’t eliminate the need for crypto. 

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At the heart of it this is just a payments rail validated by the FED, that does instantaneous settlements, without offering interoperability globally (which is terrible), without offering programmable dollars (which is a good sign) and without any additional fraud protection, that a blockchain based payment system could offer. So, to all our crypto believers,  don’t be fed up by this move. 

On-Chain Metrics & Data

Bitcoin Update

Price update

Recently, bitcoin’s monthly MACD has turned positive as well. The price is above the 10-month moving average, and the moving average has an upward slope. 

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Greg Cipolaro, Global Head of Research at NYDIG published a great article on the performance of BTC compared to the other asset classes. Bitcoin’s positive price momentum continued into 2Q, with bitcoin up 6.8% on the quarter and up 83.6% year to date. 

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Not to downplay the fact that the other "risk-on" asset classes, such as equities, have had an exceptional year thus far, but have been unable to match the pace set by bitcoin.

Wondering what decides price for the rest of the year? This image below sums it up:

The fuel is going to be an ETF approval. But before you expect the SEC to approve the Blackrock Bitcoin ETF, keep an eye out for the upcoming Ark 21Shares Bitcoin ETF, which has a clear-cut deadline for the SEC to either approve, deny, or postpone its decision on the application - August 13th is the date to watch.

Standard Chartered Raises Bitcoin Forecast To $120,000

The 800B dollar giant is forecasting that the value of Bitcoin could reach $120,000 by the end of 2024. This upward revision comes as the bank acknowledges the potential for miners to hold a larger share of the newly minted Bitcoin supply. Their anticipation of the price increase, is based on two main factors: Miners will reduce their selling and the upcoming 2024 BTC Halving. Combined together they set the stage for BTC to reach up to $120k. 

BTC Lightning Network Gives AI Bots Ability to Transact in Bitcoin

The two engineers behind this project, Olaoluwa Osuntokun and Michael Levin announced on July 6th that Lightning Labs is launching a suite of tools that will enable AI Large Language Models (LLMs) to hold, receive and send Bitccoin via the Lightning Network. 

Ethereum update

Ethereum had one of the largest conferences called ETHCC Paris. Coinchange Head of Research, Jerome Ostorero attended the conference. There was a lot of action to unpack so we recorded an AMA video for our audience, which you can check out here. 

The price of Ethereum stayed relatively unchanged for the month of July. However there were several key event that happened in the ecosystem: 

• ETH continues to be deflationary. 

• Celo, a regenerative finance (ReFi) focussed standalone blockchain is proposing to transition as a layer 2 on the Ethereum network. 
• Coinbase’s new layer-2 blockchain Base attracts around $68 million in ETH, over $200 million in trading volumes and more transactions than popular networks such as Arbitrum! And Base isn’t even live yet to the public and currently only allows one way funds flow. 
• Curve, the stablecoin based protocol built on Ethereum, is currently undergoing a hack as of July 30th. Full details are unknown at this time however, this debacle triggered a transaction frenzy and sent ethereum MEV rewards skyrocketing to an all time high of over 6,000 ETH ($11M worth), the most ever for a single day.

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

And finally 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 July in terms of Fees generated:

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Lido and Uniswap continue to occupy #1 and #2 spots. Convex regained its #3 spot in July pushing GMX to#5 and AAVE came in at #4. Lido has been the most profitable protocol with a net earnings of $5.4m up $0.6m from last month.

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