A monthly review of what's happening in the crypto markets enriched with institutional research on the most important topics in the industry in cooperation with the Swiss digital asset specialist, 21Shares AG.
Despite a regulatory crackdown on unregistered securities in the US, the total crypto markets remained headwind-resistant throughout February with a slight decline of nearly 2%. The resistance came primarily on the back of “Ordinals”, a Bitcoin-native protocol enabling minting NFTs on the Bitcoin blockchain for the first time, which boosted the network’s assets by 4.61% over the past month. In addition, Ethereum’s testnet that simulated token withdrawals on February 7 increased ETH’s assets under management by ~9% over the past month as shown below.
The outperformers of last month’s rally were Optimism (21.34%) and Lido (41.56%); factors mainly driving these returns include Coinbase’s own scaling solution dubbed “Base” being built on Optimism and it was also known that Founder of Tron, Justin Sun staked 200K ETH via Lido. February’s biggest loser was Avalanche, which declined by 15.10% on the back of a decline in daily activity on the network.
Crypto regulation tightens
Almost a year following the collapse of Terra Luna, the Securities and Exchanges Commission (SEC) charged Terraform Labs – the company behind Terra's UST algorithmic stablecoin – and its CEO, Do Kown, with defrauding investors. That comes hand-in-hand with the agency’s hawkish crackdown on unregistered securities in the crypto industry. In an interview with New York magazine, the SEC’s chairperson Gary Gensler reiterated that pretty much every sort of crypto transaction already falls under the SEC’s jurisdiction, with the exceptions of spot transactions in Bitcoin and the purchase of any goods or services with cryptoassets. The chairperson, who was under fire for the SEC’s sluggish enforcement during the FTX debacle, revealed that his agency has all the legal tools it needs for law enforcement. February was a demonstration of this claim:
- February 9: Kraken settled with the SEC for $30M and suspended its staking as a service program.
- February 13: Paxos announced it would halt issuing BUSD in response to a Well’s notice sent to Paxos by the SEC and an order issued by the New York Department of Financial Services.
Regulators worldwide continued scurrying to consolidate legislation to regulate the crypto industry further and warn banks from the volatility of this asset class. Namely, the European Central Bank instructed banks within its jurisdiction to self-impose the BTC cap (1.25% of their T1 capital) before the Basel Committee’s proposal goes into effect. EU banks would have to place the maximum possible risk weight on crypto assets under a draft law published by the European Parliament on February 9. On the other side of the globe, Hong Kong has been calculating the repercussions of a U-turn on its adversary policy banning crypto, in contrast with regulators in the US.
Crypto infrastructure constantly developing
On February 7, the Zhejiang testnet successfully simulated staked ETH withdrawals. Zhejiang is the first of three testnets in the final pre-launch sequence before the Shanghai upgrade is activated. On February 10, Ethereum core developers named February 28 as the target date for launching the Sepolia testnet. After Seoplia, Goerli – the most critical public Ethereum testnet – will be the final step before staked ETH withdrawals are enabled on the Ethereum mainnet. Although the Shanghai upgrade contains several features, its most anticipated one is allowing withdrawals. Full withdrawals will be available for "exited" validators, whereas partial withdrawals will be available for active validator balances above 32 ETH. As of today, core developers expect Shanghai to occur in mid-March.
BNB published its technical roadmap for 2023, focused on five key areas of growth, including scalability solutions, smarter wallets and increasing the validator size.BNB's roadmap is a significant endeavor as it helps the network adopt some of the vital scalability features shaping the rising growth of L2s, such as the rollup technology with its two subset classes. The developments will be crucial for BNB to protect its market positioning and remain competitive against networks like Optimism, Polygon, zkSync and Arbitrum.
The Optimism foundation proposed a major protocol upgrade dubbed collective bedrock for its scalability solution. The upgrade will offer cheaper transaction cost, and reduce deposit times. Most excitingly, the upgrade will implement modularity at the protocol level, separating the main OpStack into three layers: execution, settlement, and consensus. The remodeling should enhance the network’s performance in the process.
Decentralized stablecoin market becomes competitive
Stablecoins are arguably the most significant innovation that has come out of DeFi thus far. Ironically, the three top stablecoins by market cap (USDT, USDC, and BUSD) are all centralized. Combined, they represent more than 90% of the stablecoin market, which stands at ~$137 billion.
In this regard, GHO is an exciting development not only for Aave but the broader DeFi ecosystem. Beyond boosting the usage of Aave, it will be interesting to see if GHO can gain market share on the centralized incumbents, especially given the stance that US regulators have taken in February. However, given the LUNA-UST debacle from last year, decentralized stablecoins may have to rebuild their vertical brand and continue to be battle-tested in the coming years. Thus far, DAI is the only decentralized stablecoin that has endured several cycles, although it has a tiny market share compared to centralized players.
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Blur overtakes OpenSea as leading NFT marketplace
Amid reports of a potential raise for the company at a billion-dollar valuation, NFT marketplace Blur airdropped its token BLUR to reward active NFT traders retroactively. The BLUR token has a total supply of 3 billion tokens, 12% of which were claimable by users on February 14. As of February 20, BLUR was trading at $1.20, valuing the airdropped tokens at more than $430 million.
In response, OpenSea announced they will move to a 0% fee scheme temporarily, as well as to a minimum 0.5% creator earnings model for all collections without on-chain enforcement, allowing sellers to pay more. OpenSea will also update the "operator filter" to allow sales using NFT marketplaces with the same policies, which include Blur. Given the volatile nature of this space as it stands, it is a common mistake to make predictions on a lagging indicator such as price. Fundamentals are the only leading indicator, especially in the NFTs industry, and innovation in this space is the strongest indicator of which marketspace will thrive.