Artisan – #17 Weekly: Dec 26 – Jan 1

2022 year-end review, narratives for 2023, DeFi monopolies, BNB Beacon Chain’s new staking model, Bitcoin mining hashrate plunges…

🤔 Analysis & Thoughts

Blockworks: 2022 year-end review (Read more)

• Contagion in 2022 began with the collapse of Terra and spread to major CeFi players such as 3AC, BlockFi, Celsius, FTX/Alameda, and most recently DCG.
• Ethereum’s successful transition to proof-of-stake consensus, “The Merge”, marked perhaps one of the biggest events throughout crypto’s nascent lifespan
• Ethereum Layer-2’s saw significant adoption throughout the back half of 2022; a trend we expect will continue over the course of 2023.
• The ‘Alt-Layer-1’ trade faced significant headwinds in Q3 and Q4 as a result of CeFi insolvencies, an abundance of block space paired with declining demand, and the rise of Ethereum L2 communities.
• The Cosmos ‘app-specific blockchain’ thesis grew stronger with the ATOM 2.0 whitepaper’s unveiling, the announcement of Circle chain, and dYdX’s imminent move from StarkEX to Cosmos.

Emerging narratives for 2023 (Read more) 

• BTC/ETH as a reserve asset and/or global payment medium: even a small central bank allocation to BTC or ETH would be material and would likely lead to other exporting states following suit.
• NFTs meet IP: NFTs will expand beyond the art space and become a go-to method of tokenizing IP. The opportunity here is significant.
• Web3 begins to hit its stride: we are beginning to see a number of genuinely useful ‘real world’ platforms emerge. The material traction is probably 12+ months out, with serious user adoption probably 2-5 years away.
• Gaming: we expect material adoption once genuinely popular triple A games begin to emerge, most likely in 2023/4.

The case for SQL for onchain data (Read more)

• If someone wants to come up with some useful query after the contract was deployed, they would have to rewrite the contract, do an audit and deploy and upgrade – which is a risk within itself.
• Although the blockchain is a special type of Database that stores its own transactions in an append-only chain, we lost much of the Database component in them because of the implementation of efficient execution environments to scale them.
• A blockchain with a SQL execution engine allows any shared database today can be onboarded to Web3 and start benefiting from all of blockchain’s properties such as security, finance, etc.
• By bridging the gap between Web2 <-> Web3 technologies we can on-board the entire existing Internet infrastructure.

5 predictions of the Ethereum ecosystem in 2023 (Read more)

• The unwinding of FTX positions and pervasive bad debt to continue to negatively impact the cryptocurrency markets, but 2023 is the year when cryptocurrencies transition from speculative investments to core components of a society built around Web3.
• Eigen Layer will offer the most dramatic change to how decentralized networks are built since the initial introduction of Ethereum in 2015.
• Blob transactions aren’t going to be the magical fix to Ethereum scalability until modularity is reached and reaching modularity will come with considerable technical hurdles and delays.
• Zero-knowledge (ZK) rollups will not gain significant traction in 2023 due to their lack of production readiness (such as VMs and the proving times of proofs) and inability to achieve sufficient decentralization.
• Layer 3s will be the true competitor to Cosmos since L3s will retain a certain extent of Ethereum security, increase speed and scalability, and allow the Dapps to be customized toward specific use cases.

ETH staking custody, management, and correlation risks (Read more)

• Ethereum staking penalties purposefully disincentivize the centralization of stake.
• Still, the majority of staked ETH is represented by just a handful of staking-as-a-service providers.
• While this may seem concerning, it’s important to consider additional nuances when evaluating ETH staking decentralization.
• Decentralized stake management is crucial to ensure that no single entity can impact the network. However, at present, infrastructure concentration may pose the greatest threat to Ethereum.

Why Crypto payments haven’t gone mainstream (Read more)

• Web2 solutions such as Venmo, PayPal, Zelle, Apple Pay, G Pay, etc are good enough for day-to-day transfers.
• Legacy systems don’t accept crypto yet, partly due to unclear regulations
• Crypto payments may complicate tax reporting.
• Although merchants stand to gain 2-3% by avoiding credit card transactions, tax complications and regulatory uncertainty also make it impractical for merchants to accept crypto.

Avraham Eisenberg’s arrest is bearish for DeFi (Read more)

• It might deter further attacks, but the whole point of these protocols is that they need to be robust against such attacks in a pvp environment.
• If this goes to trial, it will necessarily deal with many threshold regulatory issues for DeFi – including whether regulation of perps/swaps is extends to smart-contract based incentive systems that do not involve legal agreements/promises.
• You do *not* want such threshold issues being decided for the first time in the context of trying to hold someone responsible for a $100M exploit in a criminal trial.
• Avi’s arrest & these theories of liability becoming established will make whitehats’ jobs much harder and riskier–unfortunately unlike with classic pentesting, consent cannot make market manipulation legal.

Defi is a game of monopolies (Read more)

• MakerDAO holds most of the capital in the CDP (Collateralized Debt Position) category with 75% TVL market share.
• Aave holds a huge portion of the capital in the Lending category with 30% TVL market share.
• Uniswap’s dominance over DEX liquidity is relatively lower at 20% but the protocol commands 40% of the daily trading volume on DEXs.
• Lido has 66% TVL market share in the Liquid staking category.

There will be an increase in DeFi asset management (Read more)

• In 2023, liquidity and leverage will move on-chain to avoid the risk posed by centralized custodians, a risk that was driven home repeatedly this year.
• The best asset managers will be on-chain as well, and likely choose crypto native platforms.
• Centralized parties aren’t able to offer flexible design spaces for their asset managers nor can they integrate with the latest DeFi products as quickly
• End users are tired of putting their money in opaque and/or illiquid vehicles and getting screwed over. They value visibility into the system like the sources of the yield, on-chain reserves, amount of leverage, etc.

Impermanent loss analysis on Uniswap LP reveals 55% of ETH-USDC positions beat holding ETH  (Read more)

• 55% of closed ETH-USDC 0.05% positions beat HODL whereas 40% lost against HODL.
• ETH-USDC positions have a Goldilocks problem where ranges being too tight leads to losing a lot. Too wide and you just don’t profit enough over HODL
• For ETH-WBTC, 48% of closed positions beat HODL whereas 40% lost to HODL.
• Keeping a ETH-WBTC position open 6+ months very consistently (>80%) beat HODL when including fees.

The flippening of value accrual from protocols to apps (Read more)

• Over time, protocols can lose their ability to accrue the most value over time to Web 3 native apps through appchains or superapps.
• Successful applications with loyal user bases also seek to capture value themselves and have greater control over how to best serve their users.
• Among others, AAVE seems to be attempting to build a superapp in which social meets finance, where the marriage of the two can be a strong moat.
• Demand for blockspace is what drives protocol value capture, and the user endpoint – the superapp – dictates where and what that demand looks like.

🌍 Layer-1 / Layer-2/Infrastructure

Ethereum Foundation team releases research & development roundup (read more here)

• This roundup series focuses on EF-supported teams whose members are working to grow and improve Ethereum as a whole. Included in this edition are updates from many teams highlighted in the previous report, and other new and rotating groups.

BNB Beacon Chain testnet to have a hard fork Einstein on January 2nd and 12th, to introduce new Staking mechanism  (Read more)

• BEP159 introduces a permissionless validator election mechanism and brings the staking economy onto Beacon Chain.
• Anyone can stake their BNB to become a validator candidate or delegate their BNB to the validator candidates they trust.

Cardano: Slow and steady scales the chain (Read more)

• Cardano is one of the largest smart contract networks, with billions in market cap and millions of holders.
• Following the Alonzo hard fork, smart contract development has increased and produced a variety of new DeFi protocols.
• The eUTXO accounting model enables native token transfers, scalability, and decentralization.
• Sidechains and Layer-2s such as Hydra aim to scale the network even further.
• Cardano has stayed true to its methodical, deliberate, and sometimes slow approach to development, prioritizing sustainability over speed.

Octopus Network: Core team refactoring for Octopus 2.0 (Read more)

• To adapt to the market conditions, the team is moving forward with the Voluntary Separation Program.
• To date, roughly 40% of the members (12 of 30) will leave the core team through the program. The remaining team members will accept a 20% salary cut, and the team token incentive will be suspended indefinitely.

Lens protocol announced the first Developer Preview release of the official Lens SDK (Read more) 

• The Lens SDK allows developers to integrate with the Lens Protocol in seconds and gives them full control over the UX of their app.

Lens protocol announced the first DeBitcoin mining hashrate plunges more than 30% amid America’s big winter storm (Read more)

• The hashrate of the Bitcoin network dropped to 155 EH/s from 230 EH/s.
• The ongoing blizzard has created a unique set of challenges for bitcoin miners in the US.

Lens protocol announced the first Developer Preview release of the official Lens SDK (Read more) 

• With Live Watch, you can easily monitor the circulating supply of each chain in real time.
• You can also view the scheduled supply of the token and compare it to the actual circulating supply.

💰 DeFi / CeFi

MicroStrategy Increases Bitcoin Holdings by 2,500 and Now Holds 132,500 BTC (Read more)

• As of 12/27/22 MicroStrategy holds ~132,500 bitcoin acquired for ~$4.03 billion at an average price of ~$30,397 per bitcoin.

Trader Joe is live on Arbitrum One amid the trend to move to multiple chains (Read more)

• Trader Joe is officially live on Arbitrum, bringing the innovative and highly efficient concentrated liquidity AMM ‘Liquidity Book’ to the Arbitrum One Ecosystem.
• This move signifies a new trend in crypto protocols launching on multiple chains in the hopes of growing their user bases.

Defillama builds a tool for showing onchain liquidity (Read more)

• It shows you how much liquidity is there on-chain for any token, eg showing how much would need to be dumped to drive price down 10%, 20%.
• The website is live at defillama.com/liquidity.

Aave to release a public testnet beginning of January including V3 (Read more)

• According to Stani Kulechov, GHO internal testnet is going well, and they will take a break now and release a public testnet beginning of January including V3 Aave market for Ethereum.

The 1inch Network releases a major upgrade, Fusion (Read more)

• Fusion is a major upgrade centered around the 1inch Swap Engine.
• The 1inch Swap Engine facilitates Fusion mode, which empowers DeFi users to place orders with a specified price and time range, paying no network fees. Meanwhile, the upgrade also contains major improvements to security, as well as updated staking contracts and tokenomics.

Timeless Finance announces Uniswap Price-out-of-range Oracle (Read more)

• It is a flashloan-proof way of determining if a Uniswap v3 position is currently in-range or out-of-range.
• The oracle is open & permissionless, meaning anyone can take such recordings and the result will be usable by everyone.

Alameda Research wallets swap several crypto tokens for bitcoin (Read more)

• Wallets linked to Alameda Research have sold several crypto tokens.
• These swaps happened barely days after Sam Bankman-Fried posted bail.

Hacked funds returned to Defrost Finance (Read more)

• The hacker involved in the V1 hack has returned the funds, which will soon be claimable by the owners.
• The entire operation will be managed transparently using a new contract, allowing the addresses of affected users to claim their fair share.

Debank introduces a feature to tag sybil accounts (Read more)

• Debank tags sybil accounts which are available on the address page, and users can update it per their judgement.
• If the owner of the address believes that DeBank has tagged a wrong label, he/she can submit a complaint at any time and the complaint record and result will also be transparent and visible to all users.

Streamflow, Solana’s token distribution platform, has launched on the Aptos blockchain (Read more)

• Aptos-native users and teams can now supercharge their token distribution using Streamflow.

🖼️ NFT / 🎮 Gaming / 🎭 Metaverse

Yuga Labs dominates most expensive NFT sales of 2022 (Read more)

• Most of the top NFT sales this year are from Yuga Labs collections.
• Sales of NFTs with rare traits have meant there are some outliers, but most purchases were made toward the beginning of the year.

Pudgy Penguins NFTs break All-Time Highs (Read more)

• The collection’s revival this year comes under new ownership as Penguin holders ousted the NFT’s founders in January.
• Pudgy Penguins CEO Luca Schnetzler told the Financial Times that the project is returning some profits to token holders even as other NFTs have seen their value collapse. It’s been making deals to produce cuddly toys and children’s books based on its NFTs.

Solana NFTs are planning multi-chain deployments:  DeGods to Ethereum and y00ts to Polygon (Read more)

• DeGods will officially bridge to Ethereum in Q1 of 2023. The bridge is not the destination.
• y00ts will officially bridge to Polygon in Q1 2023. In the meantime, the team will be releasing a more formal roadmap for y00ts: Season 2 in January.

NFT marketplace OpenSea confirms ban on Cuban artists (Read more)

• OpenSea says it’s enforcing U.S. policy by booting from its NFT marketplace Cuban and other NFT artists from sanctioned countries.

Blur will enforce a minimum royalty on immutable collections (Read more)

• Blur decides to update its royalty policy, and enforces a minimum royalty on immutable collections.
• In light of this, Blur will start by enforcing a minimum royalty of 0.5% on immutable collections. We will increase the minimum over time as we observe the effects of each increase (0.5% to start, then 1%, 1.5%, 2%, etc).

🏢 Institutional Adoption / DAO / RWA

Fidelity files for metaverse trademarks in latest crypto push (Read more)

• Fidelity has filed three U.S. trademark applications to provide services in the metaverse and other virtual worlds in its latest step into the realm of digital assets.

🧑🏻‍⚖️ Regulations

Japan mulls reversing ban on foreign-issued stablecoins (Read more)

• Japan’s Financial Services Agency (FSA) has announced a draft system and guidelines for the circulation of stablecoins whose value is tied to legal currencies such as the U.S. dollar.
• The new framework will be applied in conjunction with the revised Payment Services Act coming into force in 2023, allowing domestic distributors to handle foreign-issued stablecoins on the condition that they maintain sufficient collateral.

US probes how $372 million vanished in hack after FTX bankruptcy (Read more)

• The Department of Justice has launched a criminal probe into the stolen assets that is separate from the fraud case against FTX co-founder Sam Bankman-Fried, according to a person familiar with the case.

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