#10 NFTs (WTF?), regulation, scalability and games

The reasons behind paying millions for JPGs, the SEC gets serious against DeFi and lending, and gaming turns upside down.

Welcome to issue #10. We are Carbono, a crypto consultancy, and fund managers at Abacus Carbono. Carbono Insights is where we help people get acquainted and updated on crypto from its many angles. We would love to hear your comments. Write us at team@carbono.com or find us on Twitter: we are @carbono_com, @raulmarcosl and @miguelatcarbono

DO NFTs make sense at all? TL;DR, oh yes.

Would you pay $3.9M to be the official owner of this image? Not a print, not a painting...this exact image. Right-click → save, and anyone has it on their computer...but only you are the actual owner.

Would you pay $3.3M for this?

Or $270k for this?

Most people's first reaction to NFTs is disbelief. Obviously. But most people don't invest in art regularly. For those involved in the industry of art and collections, NFTs make sense. They might love it, or they might hate it. But they understand it. Even those who hate it do so because they get it. They mean something to them.

Love and hate belong to the same side of the coin, and the other side is indifference.

When Sotheby's auctions Bored Apes (literally, illustrations of bored-looking monkeys), they understand what’s going on. They have been selling perfectly easy-to-copy pieces by Warhol for decades. They know art is a marketplace for unique stories, experiences, and ideas. So who cares if they are made of paint, bronze, ink, or pixels?

It's been a long time since art stopped being about raw talent and technical prowess. Especially when it behaves like a product within a market, its added value is sending a message. Oftentimes that message is as simple as "I own this" Art is an asset that shares many properties with other financial products (it can be traded, exchanged for fiat, it re/devaluates...) but with the incorporated feature of conveying prestige to its owner, thanks to its intellectual significance.

NFTs so far is foreign to traditional investors. They are the flexing ground for crypto holders. A natural destination for capital generated within the frontiers of digital currencies that don't want to leave the space but wants to do something special. NFTs are crypto native, and therefore there are some new characteristics it displays that are not to be taken lightly.

"I own this" is still the prevailing message. And ownership gets a brand new meaning when the piece you own can be showcased publicly to a global audience through social media avatars and other bragging websites. But there is another significant message crypto is constantly sending. It says, "we are not like you" Every time someone resentfully says, "I don't get it," crypto giggles and goes, "I know."

Don't underestimate the power of passive-aggressive humor in crypto. It is a billion-dollar industry. Just take Dogecoin as an example.

This zombie belongs to the original collection of 10,000 cryptopunks minted in 2017 by Larvalabs. It's not even the most expensive! Punk #7523 was sold for $11.8M, but this was on the news more recently.

Cryptopunks will probably go down in history as the first crypto native art piece-slash-collectible to get mainstream attention. Jay Z, Steve Aoki, Logan Paul... have one. They were the first real NFTs to get traction. Punks already belong to the history books, and crypto inhabitants have a special place in their hearts for them as a symbol of identity. Hear this: $3.9M is a bargain.

This is a Fidenza. Fidenza is a collection of algorithmically generated pieces created by artist Tyler Hobbs. There are only 999 Fidenzas, all of unquestionable aesthetic value. It looks like adults' art, but with a crypto twist. Machine-generated, unique, beautiful, tradeable,..." and you don't get it."

This is the first-ever NFT minted on FTX. It was created by its founder, Sam Bankman-Fried, and probably took him less than 10 seconds to produce it. Sam is one of the most charismatic leaders in crypto industries, and his company, FTX, is an example of ambition and good execution. FTX is a centralized exchange valued at $18B as per its last investment round. It recently launched a brand new NFT platform, and that TEST jpg was the first piece ever to be created and launched on it.

Sam Bankman-Fried is one of the world's youngest billionaires. He's smart, innovative, and articulate. You can find him interacting with users on Twitter every day and often being interviewed on the TV or niche podcast. He's "one of us,” and he is most likely going to make it.

When people buy NFTs, they are purchasing a statement and a piece of history. A future piece of valuable memorabilia. It is not only a .jpg file in their computer, an annotation in their wallet, or their Twitter avatar. It is an investment in a cultural revolution, a statement of endorsement, a hilarious joke on old-fashioned folk...and who knows? It might pay for their dream house not far from now.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. 🏛️Regulation | SEC goes after Coinbase

The SEC has taken two relevant steps in its approach to crypto recently: they requested information from Uniswap Labs about how investors use the exchange and how it is marketed, and they communicated to Coinbase its intention to sue the company over its lending activities.

The two moves seem quite different in nature. The information request from Uniswap Labs does not point at any wrongdoing on the company's side and looks more like an attempt from the SEC to understand the workings of DeFi better. Uniswap Labs is the team of developers in charge of the frontend of Uniswap, the leading DeFi protocol in daily volume traded. That theoretical separation of responsibilities is precisely what the SEC seems to be trying to figure out. And, after Gary Gensler's (SEC chairman) latest remarks, the request for information has a threatening aftertaste to the whole sector of DeFi.

The move on Coinbase is much more aggressive. The SEC has sent a note warning of an upcoming lawsuit related to Coinbase's lending services. Coinbase has always been on the compliant side of things. Brian Armstrong (the company founder) expressed his rejection of the SEC's course of action. In his opinion, this looks like a display of power following a political turf war. The SEC never intended to provide clarity and chose the hard way.

Look….we're committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we are also happy to follow that (it's nice if you actually enforce it evenly across the industry equally btw).

But in this case they are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators.

Read the whole thread here:

2. 📜 Smart Contracts | Cardano, under the looking glass

Cardano belongs to the second generation of smart contract platforms. Cardano's founder and spiritual leader, Charles Hoskinson, belonged to the original team of Ethereum founders. He entered the project in 2013 but was requested to leave in 2014.

"Hoskinson wanted to accept venture capital and create a for-profit entity with a more formal governing structure. Buterin wanted to keep Ethereum a nonprofit organization with an open-source, decentralized governance. A Fight Over Ethereum Led A Cofounder To Even Greater Crypto Wealth (article from 2018)

Hoskinson and company started developing Cardano in 2015 and launched it in 2017. It is a Proof of Stake blockchain whose native cryptocurrency, ADA, is currently the third in market cap after BTC and ETH. And finally, after many, many years, it is about to launch its smart contract capabilities, with an upcoming update on September 12th.

Cardano is a divisive topic.

Friends say Cardano is here to solve Ethereum's scalability problems.

Foes say Cardano is a marketing stunt that has gone on for too long.

Friends say Cardano critics are generally Ethereum maximalists scared of competition.

Foes say Cardano is a bubble the size of $91B, about to explode, and wonder where all that money will land.

Developers have already been messing around with the upcoming update technology on the testnet, and things don't look too promising. One particular design decision seems to be at the center of the debate. In its current form, Cardano can only handle one single transaction per block, which would make DeFi on Cardano SciFi.

Friends say there are easy and effective workarounds, and you will soon see.

Foes say it's no time to look for workarounds; they should be here already and are eager to see Cardano finally play the game.

3. 🕹️ Gaming | Loot, a paradigm shift in crypto gaming

Sometimes innovation happens most unpredictably. Loot was born serendipitously can become a sensation in a record amount of time. Regardless of where the future takes it, its rapid growth to stardom already tells a story of how things can be done differently.

What is Loot?

Loot was an experiment born from the side of the brain of Vine co-founder Don Hoffman.

Hoffman launched a smart contract with 6,000 "bags" containing a list of virtual items, minted as NFTs. They look extremely underwhelming and do nothing more than exist.

“Loot is the unfiltered, uncensorable building block for stories, experiences, games, and more, in the hands of the community, at no cost,” its website describes. Crypto’s latest trend is to play games before they’re even built (The Block Crypto)

But the bags are free and open for use. Just like the internet, just like crypto. Anyone can grab this initial seed and turn it into whatever their imagination can come up with. Developers have already started creating character designs, games, spinoffs...

This is the first time we see a gaming product marketed in pieces and expecting the community to build the actual game.

Loot’s success could be explained by the perfect fit with some of the most outstanding features of the crypto zeitgeist: network effects, open-source philosophy, fragmentation of services, money, and fun.

Vitalik said it was NFTs what surprised him the most (more on this later). We can understand why.

4. 🚀 Technology | Layer 2 platform Arbitrum goes live

Ethereum has a scaling problem. Transactions are too slow and too expensive. And there is a whole ecosystem of initiatives, projects, and companies trying to solve that problem.

The three main vectors or improvement are:

  • Ethereum 2. The Ethereum Foundation is working hard to bring relevant updates to the protocol ASAP to multiply Ethereum's throughput.

  • Layer 1 solutions. Brand new blockchains built from scratch with scalability in their DNA. Solana, Terra, Avalanche...we spoke about them in our last newsletter because of their outstanding performance and compelling momentum.

  • Layer 2 solutions. Projects that are built on top of an existing blockchain to help them speed up.

Arbirtrum is one of the most anticipated Layer 2 solutions, and it went live recently. Arbitrum applies Optimistic Rollups: it processes transactions at a higher speed and lower cost outside of the Ethereum blockchain and then links with Ethereum to make smaller, bundled operations.

If you took money from your friends to buy tickets to a concert, and then one morning bought all the tickets at once form the booth, the booth would be Ethereum and you would be Arbitrum.

Arbitrum is taking its initial baby steps, but it is already providing services to most of the biggest names in DeFi, such as Uniswap, Sushiswap, or Balancer. A breath of fresh air in times of prominent fees.

5. 👽 Communications | Vitalik AMA

Vitalik Buterin, founder of Ethereum and one of the most respected voices in crypto space, ran an interesting Twitter experiment, using a recent feature introduced by the social platform: he launched a tweet that only people he follows on Twitter could reply to, offering to answer ANY question.

Crypto is also this. It is a system based on trust. Technology does half of the job, bringing built-in guarantees to digital relationships. But people need to walk the other half of the way. Transparency and accountability are an essential part of the game, and AMAs like this are a great example.

This strange press conference offered a glimpse into Vitalik's brains and experience: what he is proud of (EIP-1559), what he is excited about (ZK-SNARKS, a type of encryption protocol meant to help Ethereum scale in the future), what he was most surprised by (NFTs) or what he regrets (the founding team is at the top).

6. 🔷Recap | Ethereum is all around us

Ethereum has been a central part of the news cycle in one way or another during the last weeks. It is even at the center of most of the topics inside of this newsletter.

NFT summer gets hotter and hotter. This week has brought an avalanche of new developments. Bored Apes are breaking Sotheby's expectations; FTX has launched an NTF minting and trading platform; Three Arrows Capital and anonymous investor Vincent van Dough launched an NFT fund; OpenSea reached $3,4B in transaction volume, making a 10x on July's results.

If you've recently been hearing about Ethereums transaction fees, here is the explanation about what's going on.

And speaking about fees and NFT activity, EIP-1559 reached a few milestones. On September 3rd, two days before reaching a month since the rollout, Ethereum lived its first deflationary day. The NFT mania helped burn more ETH than the amount minted on that day.

Layer 1 and Layer 2 solutions are also hot these days. Cardano’s L1 and Arbitrum's L2 value propositions are making headlines these days. Scalability solutions for the Ethereum blockchain are becoming increasingly important in institutional investors' portfolios.

It’s been some hectic couple of weeks for Ethereum, and we haven't even mentioned the price rollercoaster. But let's leave that for another time.

This only goes to prove that Ethereum is at the moment the heart that pumps innovation to crypto.

If you enjoyed this issue, don’t forget to share. Carbono Insights is also available in Spanish. Share your thoughts and comments with Carbono at team@carbono.com, or through Twitter: @carbono_com, @raulmarcosl and @miguelatcarbono

#9 Ethereum competitors, institutional investors and punk owners

Layer 1 smart contract solutions are attracting attention, DeFi is trying to lure investors, VISA bought a punk.

Welcome to issue #9 of Carbono Insights. We are Carbono, and advisory firm specialized in cryptocurrency, and managers of the fund Abacus Carbono. With Carbono Insights we wish to help people get acquainted and updated on crypto from it’s many angles. We would love to hear your comments. Write us at team@carbono.com or find us on Twitter: we are @carbono_com, @raulmarcosl and @mrubio.

Sol, Luna, Terra, Cosmos…

You might have recently noticed some new names among the heroes of the week: Solana, Terra, Avalanche, Cosmos... Some of the best-performing assets in the rankings have not been the usual suspects. Side by side with NFTs, who still are on fire, we have seen a batch of projects with significant increases in valuation. The reasons for the recent surge in popularity of these assets go beyond each project's individual performance. What is the pattern behind it?

Solana, Terra, Cosmos, Avalanche, Polkadot, Near, etc...these projects have been labeled ETH Killers. They are Layer 1 smart contract platforms designed to improve some of the problems Ethereum brings, namely transaction speed and high fees.

Let’s go through what’s going on: we will review the basic terms (Layer what? Smart what?), a brief historical approach, our take on what is going on, and an attempt at predicting the future.

Let’s break down what "Layer 1 smart contract platforms" means.

Layer 1

In the decentralized ecosystem, a Layer-1 network refers to a blockchain, while a Layer-2 protocol is a third party integration that can be used in conjunction with a Layer-1 blockchain (Gemini).

Layer 1 and 2 are two different ways the industry is attempting to increase the throughput of blockchains. But, unfortunately, the number of transactions in Ethereum, Bitcoin, etcetera is still tiny compared to traditional financial vehicles.

Layer 1 solutions are brand new blockchains built with optimization in mind. In contrast, Layer 2 solutions are protocols built on top of prior blockchains that provide extra services to help make the chains more efficient.

Imagine the blockchain was like a concert ticket sale. A ticket sale done in a single booth, with payments were only available in cash, tickets printed on the spot and handed on paper...in other words, imagine we were in the 90s again. A long queue would form in front of the ticket booth, full of frustrated people blocking the streets.

A Layer 1 approach to solving the queue would consist of redesigning the ticket booth to make the queue move as quickly as possible: bigger spaces to attend two lines, more people in the booths, credit card payments, mobile phone wallet integrations...

A Layer 2 approach would be sending off credited salespeople to approach people in the queue to write down names and addresses of buyers and sell them IOUs that they would later exchange for actual tickets in the main ticket booth and send them through regular mail.

The projects that we’re looking at, like Solana, Terra, etc., belong to the category of "ticket booth designers.”

Smart contracts

Smart contracts are self-executing programs, written in code, appended to blockchains that launch blockchain-based operations when certain conditions are met. Thus, they are yet another step towards decentralization. Because of them, different parties can interact without knowing each other or relying on a third party since the terms and conditions of their relationship are transparently and immutably written in code, and they execute automatically.

Silly example: imagine you need a logo for the new business you want to open. If you could express the professional relationship between you and a hypothetical designer in a programmable sequence of steps, you could write a smart contract that would unlock payments along the way.

  • Step 1. The client and the designer sign a digital contract where the price for the final logo is established, and the timeline is defined. The agreed amount is locked in an intermediary wallet where neither the designer nor the client can touch it.

  • Step 2. The client provides a detailed description of the business activity, the design needs (a logo for a website, stationery...), and visual references.

  • Step 3. The designer provides 3 initial proposals in the established time, let's say one week. A 15% initial payment is automatically unlocked when the images are sent.

  • Step 4. If the client was unhappy, they could end the relationship and retrieve the remaining 85%. But if the delivery is satisfactory, they would accept the submission and unlock a further 15%.

  • Step 5. The client then picks one of the three proposals and provides detailed feedback in a checklist.

  • Step 6. The designer goes through the feedback and checks all the boxes

  • Step 7. The client approves the changes that were satisfactorily made and requests further changes in some others within the approved timeframe or cancels the work and parts ways. If she decides to go ahead, another 20% is unlocked, and now half of the payment is made.

  • Step 8. The designer provides a final set of changes. If the happy customer approves it by clicking a button, the rest of the payment is finalized.

The example is a tad silly because the design can be subjective and tricky. The human factor is very prevalent in the design process. This hypothesis leaves too much room for either the designer or the client to behave mischievously. But you get the point, don’t you? A logo design is not a process that can easily be broken down into steps a machine could verify. But a token exchange or a loan can be, as long as there is a tamper-proof pseudonymous ecosystem around it. And that is how DeFi was born.

Smart contract platforms: a little bit of history

Bitcoin came up with a way to transact value digitally between unknown parties. It invented programmable money, although the protocol deliberately gave it limited features to minimize issues. Ethereum took the road of programmable money and took it to the limit, giving developers maximum freedom.

Ethereum was the first generation of smart contract platforms, and then came the rest.

Soon, some other projects popped up, attempting to contest Ethereum's leadership. EOS or Tezos are two examples of the second generation of smart contract platforms. EOS raised $4BN in 2018, during the ICO craze, from investors eager to bet on the chance of beating the incumbent. Tezos was born with a Proof of Stake mining protocol that made it more energy-efficient than Ethereum. But time has gone by, and neither has been able to make a dent on Ethereums authority. EOS’ dollars were not good enough at building the culture, community, and momentum that powers Ethereum. Tezos failed, too, although nowadays, their value proposition fits better than before, as they provide a greener alternative for NFT minting and DeFi. In any case, the hottest thing in crypto at the time was ICOs, a bubble that burst soon and that didn´t necessarily require more than what Ethereum was able to provide.

Fast forward to 2020 and 2021. DeFi and NFTs are becoming industries on their own, growing in numbers, community, and headlines, consuming resources. Ethereum's flaws make it to the surface, especially when the bulls run. Axie had to build its own blockchain to run away from Ethereum's prohibitive transaction fees, and once they did, business boomed. The new value proposition from Layer 1 smart contract projects is not just measured in technical improvement: it’s measured in money, time, user experience. The third generation of smart contract platforms has made it to the center of the stage.

Solana claims to handle 65,000 transactions per second (TPS), while Bitcoin can only do 7 and Ethereum 30, and transaction fees in their blockchain are proportionately smaller. DeFi on Terra is booming thanks to their stablecoin, UST, and the DeFi projects built around it (Mirror Finance, Anchor). Avalanche recently launched a $180 million liquidity mining incentive program, and Near protocol has seen its price boost after integrating Filecoin... Every project is earning bragging rights as they deliver innovations.

What is happening?

This is 2021. Investors are increasingly savvy and increasingly hungry. Ethereum's issues are notorious, and there are reasons to believe in these Layer 1 smart contract alternatives beyond just jumping on the bandwagon. The technology is there, and the timing is much better than in 2017-2018. The virtuous cycle of projects, funds, and talent is spinning, pushing the performance of the underlying assets (SOL, LUNA, DOT...) upwards. Every new announcement made by any of these third-generation smart contract platforms attracts investors looking for the next best thing. The trend is even affecting second-generation assets, like Cardano's ADA, which still hasn't deployed actual smart contracts (ok, maybe some investors are not that savvy).

What to expect from the future?

The "ETH killer" narrative is probably another example of this sensationalist, maximalist speech some people in crypto are so fond of. While it is true that Ethereum's moats are smaller now, the project is still in excellent shape. And Ethereum might be bringing very promising improvements soon with Ethereum 2. Such a combination of technology, community, culture, exciting projects, and platforms improvements is a unique achievement. Then add history to the mix - because Ethereum has also survived and learned from successive crises, from technological to reputational- and you have an extremely solid incumbent.

Furthermore, another characteristic of these layer 1 smart contract solutions is interoperability. They are constantly building bridges that connect the different Lego pieces of the crypto economy in ways that will benefit end-users and improve the experience.

Crypto is still just a speck in the global finance ecosystem. There will be room for many actors as long as the whole industry keeps growing. And as things evolve, more specialization will be needed. Ethereum's security, Solana's speed, Cosmos' interoperability, their respective communities of developers and users, and their cultural backbones will, hopefully, all play an important role in making the benefits of crypto go mainstream.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. Corporate finance | Crypto in the balance sheet

Coinbase announced the purchase of $500M worth of crypto assets for its treasury and its commitment to using 10% of all profit (and likely a bigger percentage in the future) to continue buying in the future. At the time of the announcement, with their Q2 report warm in our hands, that 10% would mean an additional $160M on this quarter alone. The asset mix for that investment has not been disclosed, but the official blog post mentioned BTC, ETH, and DeFi tokens.

Crypto assets in balance sheets are still anecdotal from a global perspective. Coinbase's decision is one more in the list of baby steps of corporate adoption of crypto assets. There are just a few big public names: Microstrategy, which recently increased its BTC holdings by $177M, reaching $5.3B in bitcoin in its current valuation. Or Tesla, who broke the market back in April when it made its stellar purchase of $1.5B. But besides them, most are smaller native crypto companies.

Asset managers, on the other hand, are bigger bitcoin holders among institutional investors. Grayscale alone represents more than 3% of the Bitcoin supply, managing 654,600 BTC (worth $32 billion). A study by Buy Bitcoin Worldwide breaks down the institutional crypto investment.

If/When

The storyline of crypto corporate investment is probably just kicking off. If/when other companies start adopting crypto assets in their balance sheets, the upside can/will be huge. Coinbase is the first crypto native company that has made it to Wall Street, but what will happen if/when the next in line, like Circle or Gemini, do the same? And on the asset manager front, Grayscale and company are successful outliers: others may/will follow. Tesla is the first big name to invest in crypto. What can happen to BTC if/when other companies from the Fortune 500 list join them.

The institutional onboarding of companies like Microstrategy, Tesla, or Grayscale in late 2020, early 2021 had a powerful psychological effect. They opened the door for all investors eager to get in but too scared to be the first to break the ice.

2. Regulation | Decentralization as a weapon

Quick refresher: in the last days of July, Biden’s administration picked a fight with crypto. The government introduced a $2 trillion bill aimed at renewing American infrastructures, physical and digital. And in the additional provisions where legislators define where they expect to obtain the money to fund it, they pointed at crypto.

The problem was not the what but the how. The industry responded swiftly and consistently: we are ok with paying taxes, but your bill makes no sense, places excessive responsibility on the wrong people, and can kill innovation in the USA. Regulation wanted to impose fiscal reporting obligations on "brokers.” And the definition of a broker was too shallow and did not reflect the complex landscape of roles in the space. Are developers brokers? Are miners, exchanges, developers, DeFi users...brokers?. We’ll end the refresher here because this could go on forever, and there are dozens of excellent summaries (including our own).

A few weeks have gone by, and some things look clearer from a distance. Behind the apparent mess and inconsistency, there seems to be a clear intention emerging from the behavior of regulators. The Treasury Department, who was pulling strings all along, had a clear goal in mind: seize DeFi. Senator Elizabeth Warren had actively lobbied Treasury Secretary Janet Yellen.

In a letter to Treasury Secretary Janet Yellen, Warren highlighted the risks of stablecoins and DeFi: “DeFi refers to a fast-growing and highly opaque corner of the cryptocurrency market which allows users to engage in a variety of financial activities – including lending, borrowing, and trading derivatives to take on leverage – without an intermediary like a bank. Given that participants and project developers may remain anonymous, DeFi could present particularly severe financial stability risks.” Crypto Laws, Lobbying & Activism: The Time Has Come For DeFi to Get Serious About D.C

And the behavior seems consistent with other declarations from government officials: Gary Gensler, SEC chairman, has also spoken overtly about the need to regulate DeFi.

It makes sense. These are hard times to be a regulator. Decentralization must look scary to them. Yet, the same process that eliminates the need for trust between parties blurs lines and dilutes responsibility. How do you arrest a protocol? How do you ban a borderless, disembodied project made of lines of code? How do you chase a remote team with bank accounts and teams that cross frontiers as easily as the wind? And while you fail to regulate, a whole financial system is being built without your supervision (or interference).

3. Gaming | Play-to-earn

Getting paid for playing video games has been every kid's dream since 1990 and an actual thing for a lucky few YouTubers and streamers in the last decade. Today, gaming is a real income source for thousands of people, especially in Southeastern Asia and South America, thanks mainly to Axie Infinity.

The gaming business has done nothing but grow in the last decades, devouring larger and larger chunks of people's attention and leisure time and challenging more traditional sectors like movies or sports. Gaming business models have evolved too at high speed, from buying the actual physical games to everything that can happen in Steam to all kinds of in-game purchases. And then there's that grey area where gaming meets gambling (i.e., loot boxes) or where people build a black market of in-game assets.

Crypto economy is providing the infrastructure that allows all of these activities and business models to play out in the same place, in a frictionless, usable way. And it has added a secret ingredient: wealth distribution. Users can now earn tokens inside a game and, without leaving the ecosystem, convert them into money they can spend. Play-to-earn is a reality. Probably not the rosy dream people first think of when they hear the expression (the one where you just get free money for having fun), but certainly a great evolutionary step in the progress of the metaverse.

"Right now, there is a largely untapped economic opportunity in emerging markets to provide jobs by building a virtual economy in the digital world,” says Andreessen Horowitz in the blog post where they announced their $4.6M investment in Yield Guild Games. Calling the opportunities surrounding play-to-earn a virtual economy is not far-fetched. Gaming companies that want to tap into the new wave need to learn how to succeed as fintech companies, social networks, consumer platforms, as well as game developers.

4. KYC | Binance

Binance recently incorporated KYC requirements for all users of its platform. KYC stands for Know Your Customer and is a process of identity verification that regulators demand from many service providers, especially in the financial sector, to prevent crimes like money laundering. Binance had historically stayed in character as an outsider to the system and eluded KYC, at least partially. But in recent times, regulatory pressure motivated some internal policy changes. For example, until a few months ago, users could withdraw up to 2BTC (~$80,000) without providing any personal identification. The amount was reduced to 0.06 Bitcoin (BTC) per day in late July, worth roughly $2,400 when Binance established the threshold. Today that amount has gone all the way down to zero, and users will have to provide valid identification if they want to operate on the platform at all.

Binance has been a never-ending source of news in the last months. Countries take turns to ban some of their activities, bank after bank lay barriers to prevent their users from purchasing crypto; high executives walk in and out of the company attempting to take the wheel in the current regulatory turmoil. Founder Changpeng Zhao has clearly expressed his intention to cooperate with the authorities and turn Binance into a fully respectable, compliant platform, but many doubt that they will be able to meet the regulator’s requirements. Binance's changes are writing the roadmap of the current requirements from regulators to centralized exchanges.

5. NFTs | VISA buys a CryptoPunk

CryptoPunks are the most well-known and valued NFTs. The latest notorious purchase of one of them didn’t come from an anonymous hoarder, a celebrity like JayZ, Gary Vee, or other famous people with a consonant instead of a surname. Instead, it was a company, and none other than VISA.

A credit card company acquired a pixeled jpg for $150,000. Why?

"First and foremost, we wanted to learn,” says Cuy Sheffield, VISA’s in-house crypto expert, in the blog post where VISA explains the move.

Enabling secure commerce is what we do — we’re the network working for everyone — and that extends to new forms of digital commerce that unlock access. So, it’s not surprising that we’re thinking deeply about this space and how we can apply our expertise in enabling seamless and secure digital payments to make NFT-commerce accessible and useable for buyers and sellers. (...) Looking ahead, we’re working on some new concepts and partnerships that support NFT buyers, sellers, and creators. We look forward to sharing more in the months ahead.

It’s fun to think that VISA had to buy ETH to purchase their punk.

Following the sale, punks had a busy day. 90 punks were sold in just an hour. VISA's purchase might be a historic moment for the company, but it also sends a powerful signal about the punks themselves. They are probably becoming the safest possible investment in this corner of digital art because they are writing NFT history.

6. DeFi | Aave or Metamask for institutional investors

With Bitcoin still far from being a household name in corporate treasuries and fund portfolios, another train is already leaving the station. The Q2 Market Observations report by the custody company Genesis points out that from late 2020 to the end of Q2, 2021, Bitcoin’s dominance in market cap has declined from over 70% to under 45%, with ETH and DeFi tokens more than doubling their price.

Traditional financial institutions that adopt the DeFi train earlier will most likely enjoy the first-mover advantage we saw with those who embraced Bitcoin during its earliest years. The future of finance is DeFi, and institutional investors must not miss the train twice in less than two decades. Why institutional investors cannot afford to ignore DeFi

DeFi allows early adopters to obtain returns on their capital that outperform traditional finance's yields through decentralized protocols and platforms such as Uniswap, Aave, or Compound, and products and services like loans, liquidity mining, or staking.

Aave recently announced the up-and-coming launch of Aave Arc. their gateway DeFi service branch for institutional investors. Aave is an open-source and non-custodial protocol to earn interest on deposits and borrow assets. Metamask, the crypto wallet with more than 5M monthly active users, heavily promotes its Metamask Institutional solution. Dozens of companies are warming up on the sidelines, waiting for institutional investors to be ready.

If you enjoyed this issue, don’t forget to share. Carbono Insights is also available in Spanish. Share your thoughts and comments with Carbono at team@carbono.com, or through Twitter: @carbono_com, @raulmarcosl and @mrubio.

#8 On regulatory heat, burning ETH and NFT summer

Regulators in the US have been on fire lately. So were NFTs...and especially ETH. Let us brag a little about Deflationary Blocks, our analytics tool for burned ETH

Welcome to issue #8 of Carbono Insights. We are Carbono, and advisory firm specialized in cryptocurrency, and managers of the fund Abacus Carbono. With Carbono Insights we wish to help people get acquainted or up to date with crypto and its many possible approaches.

We would love to hear your comments. Write us at team@carbono.com or find us on Twitter: we are @carbono_com@raulmarcosl and @mrubio

US Infrastructure Bill

In an unexpected turn of events, the crypto world has been immersed in political activism and lobbying after a legal battle broke out in the US. Of course, everybody knew regulation was bound to happen, but how it showed up has taken the industry by surprise.

It all started in late July. The Biden administration presented the draft for a bipartisan bill containing a plan for activating the American economy through a $1T (one trillion dollars) investment in updating the roads, highways, and digital infrastructure. The government expected some of the funds for the bill to come from taxing the under-regulated area of crypto. In their initial draft, regulators announced a projected income of $25B coming from tax compliance in the crypto sphere. According to the draft, “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets” would be required to file tax information reports similar to those for securities brokers. The breadth and ambiguity of the definition of broker made the bill unworkable.

The draft revealed the lack of understanding of crypto coming from the halls of Washington. The superficial choice of words failed to capture the complexity of an industry that is redefining the way we understand companies, corporations, stakeholders, and employer/employee relations... The regulation of the innovative tour de force that is crypto was defined in an annex's fine print. The reaction was swift; the crypto industry fought back.

It was never a matter of money. Many outstanding figures were quick to point out that regulation was expected and desired by the industry too. The word "broker" was the main source of disagreement.

“The broad, confusing language leaves open a door for almost any entity within the cryptocurrency ecosystem to be considered a “broker”—including software developers and cryptocurrency startups that aren’t custodying or controlling assets on behalf of their users. It could even potentially implicate miners, those who confirm and verify blockchain transactions. The mandate to collect names, addresses, and transactions of customers means almost every company even tangentially related to cryptocurrency may suddenly be forced to surveil their users.” The Cryptocurrency Surveillance Provision Buried in the Infrastructure Bill is a Disaster for Digital Privacy.

This degree of surveillance over the industry was perceived as an invitation to flee. The American crypto ecosystem pointed out that this bill could severely impair the country's opportunity to adopt, let alone lead, this historic innovation.

According to the definition of the word broker, software developers, crypto miners, node operators, and other stakeholders were considered brokers and were commanded with the surveillance and reporting of the activity of users. A task so far away from their usual activity that they would have to go out of their way to develop new mechanisms to invade user privacy, defying the basic ethos of crypto.

Expressed in memes, the language of the internet:

Some Senators joined forces with the crypto industry. Ron Wyden, Pat Toomey, and Cynthia Lummis proposed an amendment that pleased crypto. It suggested defining with precision which actors would be considered brokers. . But then, a wild trio of opposing Senators appeared. Rob Portman, Kyrsten Sinema, and Mark Warner produced an alternative amendment that only exempted proof-of-work miners from the reporting requirements. A slight improvement over the original draft, but much worse than Wyden, Tommey, and Cynthia's suggestion. Nevertheless, this proposal was unofficially endorsed by the White House in a position that some have understood as a first attempt to put a leash around DeFi.

The thriller is still unfolding. In its last episode, the second amendment has been the one to move forward, to the disappointment of the crypto community.

There's still hope, and there will definitely be more chapters following the convoluted lifecycle of a bill. The whole process was narrated beautifully from the inside by some insiders like Jerry Brito, Jake Chervinsky, or Kristin Smith, who acted as lobbyists for the industry's interests.

But the most relevant conclusions of this incident are to be extracted from the bigger picture. The infrastructure bill was a call to arms to the crypto industry, and the response surprised everyone. And we mean everyone. Crypto insiders watched with amazement and excitement how an industry that has lived in the margins of mainstream society was able to monopolize the debate around a $1T infrastructure bill sponsored by the president of the USA. This was not just a bunch of nerds and outlaws screaming, "leave us alone!". This was the coordinated response of a trillion-dollar innovative industry fueled by a solid, shared culture. Crypto mobilized quickly, massively, and stayed on message.

It makes sense. We're talking about millions of people who communicate globally and in real-time through Twitter, Telegram, Discord... and work in an environment whose focus is to achieve consensus through common interest and to design incentives thoroughly and transparently.

Crypto is something else. Inherited terms like broker do not easily define it. It does not fit seamlessly in traditional structures, like party politics or borders. The worst possible outcome envisioned by American crypto entrepreneurs was never the possibility of watching the industry die but to imagine it flourishing somewhere else and having to decide whether to choose between their passion or their country.

And one last, but very relevant, "by the way": the market did not react all of this time. Bitcoin, Ethereum, NFTs, DeFi, stablecoins...they all went on with their lives.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. ETHEREUM | DEFLATIONARY BLOCKS

EIP-1559 finally went live on August 5th. For those who need an explanation, but don't have time to read a whole, magnificent post about it, here's a tweet-sized refresher.

Ok, almost tweet-sized. But to be fair, EIP-1559 is quite a complex matter. We are talking about an update that is bringing deflationary features to Ethereum. Since August 5th, every new block is burning ETH. Every transaction, from Mary, sending ETH to John, to Uniswap settling massive coin exchanges to Axies changing hands, triggers the destruction of ETH. Sometimes more, sometimes less. Sometimes so much that there is more ETH burned in a block than ETH generated through block rewards. Every time this happens, the total supply of ETH shrinks a little bit, making every single remaining ETH slightly more valuable.

At Carbono, we wanted to understand the implications a little better. EIP-1559 created a new category of blocks: deflationary blocks. Those where the amount of ETH burnt is higher than the block reward of 2ETH, and therefore reduce the supply of ETH. We were left wondering what the rate of deflationary blocks looked like. How many have happened already? At what pace? Is that pace increasing? What blocks are burning more ETH?

Carbono's own Al went a little crazy and built a site in carbono.com/deflationary-blocks, and now we can see the evolution of things in real-time

  • We've been able to learn, for example, that so far, around 2% of the blocks mined are deflationary, and the amount of ETH burnt is 30% of the ETH mined.

  • This means that, in the end, we can consider that the block reward has dropped from 2ETH to 1.3ETH

  • The maximum fee burnt in one block was 49.74ETH (over $150k), in the middle of an NFT minting spree.

  • And we have been able to see what the improved UX EIP-1559 looks like. Since the hard fork, the base fee changes in less abrupt, more predictable ways. You can see the curve it creates in the middle of an activity increase (black lines are the 2ETH block reward + miner tips; the orange line is the burnt base fee)

2. REGULATION | SECURITIES EXCHANGE COMMISSION

Regulation also approached crypto from a more predictable angle. In the latest weeks, the chairman of the SEC, Gary Gensler, has been actively expressing his intention to make cryptocurrencies a safe market for all types of investors.

Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West. Remarks Before the Aspen Security Forum

This is both a bull and a bear sign: regulation is desired by the industry that expects more and more people to approach and benefit from the clarity and security it provides. But regulation also needs to operate with precision if it wants to preserve the pace of innovation.

According to reports, Gensler has several areas of crypto on his radar.

These include matters concerning token offerings, decentralized finance (DeFi) and stablecoins. Other focus points for Gensler’s SEC are custody, exchange-traded funds (ETF) and lending platforms.SEC Chair wants robust crypto regulatory regime for the US

The SEC's activity can be felt in recent events, like the pressure on Binance or the recent fine to Poloniex. Gensler's position seems to be consistent with his employers'. Through its Secretary of Treasury, Janet Yellen, the Biden administration is becoming increasingly vocal against the lack of control over the industry. Regulation is coming.

3. SECURITY | POLY NETWORK'S RECORD-BREAKING HACK

Do you want to know how fast things move in crypto?

On Tuesday, the largest DeFi hack to date took place. The victim was Poly Network, a not very well-known multi-chain decentralized exchange that made this desperate announcement on Twitter, admitting the hack.

We soon learned the hacker had lifted more than $600M. News spread like wildfire on Twitter. According to REKT news, we were witnessing the gold medalist of DeFi hacks, making a 10x on the next in line.

By Wednesday, the hacker had already given back half of the loot. By Thursday, more than half. On Friday, the hacker had reportedly given back most of the stolen money, and he had rejected a $500K tip.

During the time in the middle, Twitter was on fire. Before the first token was retrieved, there we could already access:

  • In-depth post mortem analyses (I, II,...) revealing the mistakes that allowed the hack to happen. TL;DR, multi-chain technology is very complicated, plus Poly made poor decisions. The hacker exploited "a vulnerability between contract calls."

  • The interpretations from opinion leaders, like Binance's CEO or investors, explaining what this hack says about the overall sector. TL;DR, Nascent areas, like multi-chain DeFi, still need time to mature. Crypto elders are not surprised by exploits; neither are institutional investors, who are wary of approaching the fringes of DeFi.

  • The report of a blockchain security firm that claimed to have tracked down the attacker, including email address, IP information, and device fingerprint.

  • A self-interview by the perpetrator written in the comment block of a transaction. Genius. TL;DR, he did it for fun. He will give everything back.

Security and regulations have been mentioned in the past as the main hurdles for institutional investors to enter the space. This hack and the subsequent PR are probably bad omens for those not interested in scratching more than the surface. But for those willing to read between the lines, this is a story of trailblazers facing challenges (Poly Network's multi-chain solutions inhabit the frontline of DeFi) and a community behaving in ways never seen before. How many cases have you seen of thieves giving back half a billion-dollar loots while his thoughts and methods are cheerfully shared on Twitter?

4. HUMAN RESOURCES | CRYPTO'S HIRING SPREE

In the world of on-chain metrics, big investment, and bigger data, there are some reliable signals of the course of the industry that are more qualitative. Hiring is one of them.

One of the consequences of the recent flood of venture capital into the crypto sphere has been an inflow of talent. Native crypto companies are hiring by the hundreds, especially in the short-supplied market of developers. Not to mention the recruiting spree caused by the ghost of regulation yet to come, which is funneling professionals from the legal and political sphere.

But now, hiring is also happening outside the boundaries of crypto-first companies. We recently saw how the mere listing of a job position for a blockchain expert at Amazon triggered rumors with enormous financial implications. Other financial companies, like PayPal or JPMorgan, are also adding experts to their payrolls, like sailors loading their ships with the necessary gear for a long journey.

5. NFT | SUMMER SEASON

You might remember July was a golden month for NFTs. OpenSea reached record revenues. At the same time, they announced an investment round led by Andreessen Horowitz that turned them into a unicorn. Axie Infinity was the flavor of the month. It had managed to keep growing despite the downward inertia coming from Bitcoin and proved excellent health in all possible KPIs, from players to transactions, to revenue.

Well, August is showing no sign of slowing down.

It was the month for the resurrection of Cryptopunks. The creatures from Larvalabs are, by the time of this writing, reaching $180M in sales in August, already above the $135M of July. In one single week, some notorious punk sales, including one from marketing superstar Gary Vaynerchuck made the news and pushed the sales from adjacent NFT projects.

It's been the month of Kutcher and Kunis's (eventful) launch of Stoner Cats, an animated series where users need to purchase an NFT if they want to watch.

The general optimism dragged classic projects like Bored Apes Yacht Club, a hybrid between avatar and metaverse NFTs, or Art Blocks, the home of generative art NFTs.

NFT is a unique category of assets. It has shown certain independence from the evolution of other investment trends. It is closer to retail investment and private consumption, less liquid, less reliant on hard math, more prone to fads...We are clearly in the middle of NFT summer, with sales booming among the crypto community, especially in its form as collectibles (Cryptopunks, Meebits, Penguins…), although the current pace of new launches seems unsustainable in the long run.

6. ON-CHAIN METRICS | SUPPLY SHOCK

One of the predictors of the price bounce we recently witnessed was the supply shock signs visible in on-chain metrics. A supply shock is the sudden change of supply in an asset that leads to a change in price.

Crypto has its own ways of attempting to predict the way assets will move by analyzing blockchain data. Three examples of signals (credits to Willy Woo) that are a proxy to the intent of investors are:

  • Exchange supply. The movement of funds between self-custody solutions and exchanges indicates an intention to withdraw or lock assets, resulting in a reduced supply.

  • Liquidity supply. Investors (or at least their addresses) can be classified as long-term or speculative based on their history of buying and selling. Thus, assets in hodlers' hands are less likely to be available for purchase.

  • Long Term Holder supply. A similar metric but approached from a different angle. Coins that haven't moved in a long time are unlikely to become liquid.

These and other metrics are the way of quantifying, and therefore attempting to predict investor behavior.

If you enjoyed this issue, don’t forget to share. Carbono Insights is also available in Spanish. Share your thoughts and comments with Carbono at team@carbono.com, or through Twitter: @carbono_com, @raulmarcosl and @mrubio

#7 A summary of Q2, the guy from Tesla, the guy from Twitter and Uniswap

Elon Musk, Jack Dorsey, Uniswap and Circle are all featured twice in this issue, where there's also room for traditional finance (JPMorgan) and tech.

Welcome to issue #7 of Carbono Insights. We are Carbono, and advisory firm specialized in cryptocurrency, and managers of the fund Abacus Carbono. With Carbono Insights we wish to help people get acquainted or up to date with crypto and its many possible approaches.

We would love to hear your comments. Write us at team@carbono.com or find us on Twitter: we are @carbono_com, @raulmarcosl and @mrubio

In the last months, there has been a debate about whether crypto was going through a hiccup in the bull market or we were actually entering bearish times. The following text is an adaptation of our Quarterly Report we sent to Abacus Carbono's investors with our take on what has been going on in the last quarter, edited with updated new information.

TL;DR: we believe psychology has been playing a major role. Chinese ban on crypto mining and trading caused a wave of FUD and short-term selling pressure (from miners, weak hands, speculators...) that indeed shook the system. But on-chain analysis, financial fundamentals, and the corporate and entrepreneurial landscape showed signals of a solid and growing industry. So far, it looks like we are going through the weeks where the price starts to dance in tune with the fundamentals.

During the second quarter of 2021, the crypto markets went from continuing the euphoric bull run initiated in early 2021, to a state of uncertain sideways movement, to what looks like a return to bullish behavior. Bitcoin and Ethereum reached their all-time highs in April and May, respectively, and then lost over 45% of their valuation, with bitcoin even dropping below the psychological threshold of $30,000 on the week of July 19th. Finally, Sunday 25th brought a much-awaited increase that started validating the bullish hypothesis.

It is hard to call a bear or a bull market in a market as new and as volatile as crypto. Traditional definitions don't apply, and there are no similar assets to compare them with. So when it comes to putting a nametag on the trends, it all boils down to opinions, conjectures, comparisons with past behaviors, and estimations.

During the previous quarter, we witnessed some unseen events in the crypto space. Crypto is reaching new levels of mainstream attention, institutional investment, regulation, and public scrutiny. So it is no surprise that each step forward is met with new challenges.

What happened this past quarter that made things so uncertain?

The tipping point happened when Elon Musk backed down from his decision of taking bitcoin as payment for Tesla in mid-May, claiming environmental concerns. It was the first blow to the industry after Tesla's position on bitcoin -including the purchase of $1.5B for its treasury- had led to an unprecedented level of trust from corporate and institutional investors.

Then regulatory movements from the Chinese government kept the downwards pressure on crypto. Also, in May, the Chinese government called for a severe crackdown on bitcoin mining and trading. The Chinese position set off what has been dubbed "the great mining migration," an exodus of Chinese miners who held more than 50% of Bitcoin's mining power. Following the doubts injected in the markets by Musk's declarations, the technological distress pushed crypto further down.

At the same time, some regulatory pressure came from the US and the EU, which increased their scrutiny on the market. Balanced, reasonable regulation is likely to bring more trust in the system, but the timing of the intervention from regulators had a deterrent effect on investors more than the opposite.

The selling pressure and the cascading liquidations of overleveraged traders, affected by the general emotional state of the market, seemed to explain the downward curve that ensued.

In the meantime, on-chain metrics and financial fundamentals showed signs that contradicted this trend. Structurally we were in the middle of a bull market. User growth in the Bitcoin network was in a parabolic climb that was not reflected by price, as it has always been in the past. Dormancy (the age of coins transacting between investors) signaled that coins were moving from speculators to long term investors, more prone to holding on to their investments, and therefore stopping the price drop; and exchange flows (the movement of crypto between exchanges and cold wallets, indicating the intention of investors to trade or hold) were also showing a bullish behavior.

Beyond on-chain metrics, there were also abundant indicators of good health. Capital investment in crypto ventures showed a positive trend, with investments ramping up to over $17 billion this year (according to Bloomberg). The upcoming IPO from Circle's IPO (the company behind the stablecoin USDC) and the recent investment rounds of the exchange FTX, with an $18B valuation, or the NFT marketplace Open Sea, which reached unicorn status, were relevant examples of optimism and long term trust from startup investors. On June 24th, Andreessen Horowitz, a leading Silicon Valley VC, announced a $2,2B crypto fund. Venture capital was certainly bullish.

Some technological advances in the roadmaps of Bitcoin and Ethereum were also showing favorable signs. EIP 1559, Ethereum's change in fee structure, finally had a launch date -August 4th-and promised potentially deflationary features to ETH. And the greater transparency and efficiency provided by Bitcoin's implementation of Taproot, the first upgrade in four years, was also expected to bring further innovation into the space.

DeFi, stablecoins, and NFTs kept growing regardless of the price variations. Axie became crypto-gaming's first huge success story. DeFi was showing great numbers, even though they were also affected by the price drops.  Decentralized exchanges have experienced a 117x increase year-over-year and an 83% increase since Q1. Around $60B are locked in DeFi protocols after getting close to $90B in May.

Where are we now

Crypto is so hectic the above analysis already looks old. Prices have gone up again. The times of hesitation from the last months seem to have vanished away in a matter of days, even overcoming significant setbacks, like the regulatory pressure on Binance. We had spent weeks looking at charts, wondering why things were not moving in the direction the data pointed. Now we're looking at the same charts asking where this ride will take us.

Nevertheless, we must not forget that, besides price, things have not fundamentally changed in the last weeks. On the contrary, the foundations of crypto keep getting stronger. The increasing pressure from regulators is probably the most uncertain news. We desire the best possible regulation, but we also understand reaching sensible regulation is a long and likely bumpy journey. In all other aspects, the news is generally positive. The entrepreneurial landscape attracts increasing amounts of capital and talent; users are entering the space in growing numbers. Plus, we believe the great Chinese exodus is great news for power distribution and sustainability in the long term.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. DeFi | Uniswap delists tokenized securities

Uniswap Labs recently announced that some tokens would cease to be available for trade on their website. The measure was explained by the company as a voluntary reaction to the "evolving regulatory landscape" after the warning from the SEC chairman, who claimed stock tokens need to be supervised by the authorities.

Stock tokens, or tokenized stocks, are blockchain-based copies of Wall Street stocks. These assets have been at the center of the recent worldwide chase scene against Binance, which ended up with the exchange ceasing to offer them too.

The decision from Uniswap Labs disappointed DeFi fans. The unilateral decision to withdraw certain tokens from the website is perceived as proof that DeFi is not as "De" as many expected, as long as one central authority has this amount of power. The community reacted with impotence and anger, pointing out that a token-based governance system supposedly binds Uniswap.

But, as many have pointed out, Uniswap Labs and Uniswap are not the same thing.

Uniswap Labs is indeed a centralized company, with owners, employees, and salaries. They are in charge of maintaining the frontend for Uniswap, but not the smart contract Decentralized Finance protocol. And that frontend is where the tokenized stock is no longer available. "The protocol did not delist anything." Uniswap's press release repeats that argument over and over. Users can still trade tokenized securities if they interact directly with smart contracts, or through other frontends or aggregators, like Matcha or 1inch.

Nevertheless, the decision leaves many questions in the air. Decentralization and regulation still need to find the right balance.

2. Legacy finance | JPMorgan opens crypto to their investors

JPMorgan's $630B wealth management division is now open to crypto trading. In an ironic twist of events, the bank, led by Jamie Dimon, one of the most vocal bitcoin critics, is also one of the first major US banks to allow its traders to invest in digital assets.

Here is the timeline of a selection of Jamie Dimon's public statements.

To be fair, Dimon has admitted this was his personal opinion. This is a quote from his latest declarations in May.

My own personal advice is to people to stay away from it. That does not mean the clients don't want it. This goes back to how you run a business. I don't smoke marihuana, but if you make it nationally legal, I'm not going to stop people from banking it. I don't tell people how to spend their money.

But they are definitely miles away from what he said in September 2017 about what he would do if he found out JPMorgan traders were working with bitcoin:

"I'd fire them in a second. For two reasons: It's against our rules, and they're stupid. And both are dangerous."

JPMorgan's acceptance is quite a milestone but comes with some caveats:

  • The bank only authorizes advisors to process orders if they come from clients, but it doesn't allow them to present their own crypto-based funds

  • JPMorgan customers can get indirect exposure. They won't be able to purchase crypto, but instead, they can invest in four Grayscale investment products and one from Osprey.

Nevertheless, the fact that one of the most important banks in the world is taking more and more baby steps towards increasing the exposure of traditional investors to crypto is undeniable good news.

3. Technology | Layer 2 kicks off

Uniswap recently completed the launch of their latest version, V3, on the Optimism network. Born in 2018 and with over $5B locked in assets, Uniswap is currently the leading platform in DeFi. The beginning of the operations on Optimism can be considered the inauguration of the advent of Layer 2.

Layer 2, the general concept, is the compendium of solutions developed to relieve Ethereum's main chain. The congestion generated by the increasing use of the Ethereum blockchain has led to increased waiting times and fees that have raised some concerns. A slow, expensive network is not the revolution of finance we expected.

Optimism (AKA Optmistic Ethereum, or OΞ) puts all transaction data on-chain but runs computation off-chain.

Optimism gives near-instant transactions for a low cost. Instead of paying $20 for trades on Uniswap, you pay <$1. Instead of waiting 2-3 minutes for transactions to confirm on-chain…you don’t have to wait at all. A Guide to Uniswap on Optimism - Bankless

4. Elon | The ₿ Word

The Crypto Council for Innovation recently gathered Jack Dorsey and Elon Musk under the same virtual roof to discuss Bitcoin. The organization, which comprises Coinbase, Fidelity Digital Assets, Paradigm, and Square, among other crypto companies, aims to deliver the message of transformational finance, and The ₿ Word is one of its main weapons. Jack Dorsey, Twitter and Square founder and Bitcoin evangelist, invited Musk over weeks ago through Twitter to speak about their differences in opinion.

The event, which also included Ark Invest's Cathie Wood, was a Zoom conversation that left us with not many new insights but an aftertaste of reconciliation and optimism. During the talk, Musk opened the door to the possibility of Tesla going back to accepting Bitcoin as payment. One of the side effects of the Chinese miner exodus is a new and potentially cleaner energy mix.

“I want to do a little more due diligence to confirm that the percentage of renewable energy usage is most likely at or above 50% and that there is a trend toward increasing that number. If so, Tesla will most likely resume accepting bitcoin.”. Elon Musk

He also revealed that Space X, and not only Tesla, owns Bitcoin. And that he himself owns "a bit of Ethereum and Doge as well." Who knows what "a bit" means for one of the richest men in the world.

5. Dorsey wants to create Bitcoin DeFi

The main difference between Bitcoin and Ethereum lies in smart contracts. While Bitcoin was conceived as a digital currency, Ethereum is a platform meant to be the infrastructure for any initiative that wants to run on a blockchain. We expressed it in these terms in a former newsletter when explaining ETH and BTC and the difference between the tokens and their blockchains:

Let's try a metaphor: if Bitcoin with a capital B is the railroad where bitcoin runs like a train, Ethereum would be some sort of railroad company. A weird kind of railroad company that owns a railway network, runs trains, and allows anybody to put their own trains on them and create a business out of it. Any entrepreneur can create their own initiative and make it run on Ethereum, and Ethereum will charge for maintaining the network in Ether.

Well, it looks like Jack Dorsey wants to make Bitcoin more Ethereum-ish.

Check out the name TBD because it will be relevant in a few lines.

Dorsey, Twitter, and Square messianic-looking founder is a Bitcoin evangelist and also a maximalist. He has repeatedly claimed that bitcoin should ultimately become the native currency of the internet and has positioned his payments company, Square, to be at the front and center of this goal.

In a recent tweet, Dorsey announced the joint venture by Square, Seller, Cash App, and Tidal to develop an open-source infrastructure to allow decentralized finance services on Bitcoin, which is what Ethereum does. According to DeFi Prime, 80% of DeFi projects run on Ethereum smart contracts.

Although Bitcoin's technology allows for executing programs similar to Ethereum's smart contracts, the development is much harder in practice, plus Bitcoin lacks the tools and development community who can solve this.

Jack seems to be quite serious about it. In the recent The B Word event, his title showed TBD. While many understood this was a mishap by the organization, it wasn't. So is TBD now bigger than Square and Twitter in Jack's heart?

6. Concept | Stablecoins 101

You might have heard that there was a Working Group on Financial Markets in the US, comprised of the most relevant financial institutions, meeting to discuss “the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security.”

You might have heard that Circle is the next company to make it to Wall Street, following Coinbase's steps, and that Circle's main asset is the management of the stablecoin, USDC.

You might have heard that Tether, the company behind the number one stablecoin in market cap, USDT, might be facing an update in an old criminal prosecution case for bank fraud (Tether disputes the claims, BTW)

You might have heard that there's already more than $100B circulating in stablecoins, which is already quite a significant value, even in traditional finance standards.

You might have heard stablecoins as one of crypto's most interesting inventions, together with DeFi or NFTs. We will soon be covering stablecoins in-depth in a future issue of Carbono Insights, but for the moment, here's a small Stablecoins 101 that will hopefully help you navigate that information easily.

Stablecoins are bound to become one of crypto's Trojan horses. They were designed to address volatility, probably the number one concern about crypto expressed by regular users. A stablecoin is a type of cryptocurrency whose value is tied to an outside asset, i.e., the US dollar, and therefore has a price that remains -you guessed it- stable. This makes them ideal for taking advantage of crypto's virtues, such as transaction costs and speed, while avoiding its flaws, such as price unpredictability.

Governments around the world are looking at stablecoins with mixed feelings. On the one hand, they are the inspiration for central bank-issued digital currencies. But on the other, they are one major threat to financial centralization and control.

If you enjoyed this issue, don’t forget to share. Carbono Insights is also available in Spanish. Share your thoughts and comments with Carbono at team@carbono.com, or through Twitter: @carbono_com, @raulmarcosl and @mrubio

#6 EIP 1559, inflation, Binance and little monsters

Burning money never got anybody so excited. Today we explain why EIP 1559 is a software update people can't wait to see happen. Good boys (Circle), bad boys (Binance) and some potato shaped monsters.

EIP 1559

Can you imagine being excited about a software update? The Ethereum community is. The London hard fork is a much-awaited upgrade that finally has a release date after a lot of time and discussion. It will happen on August 4th, in block 12,965,000 (because time in the blockchain is measured in blocks).

Nobody would ever celebrate if a big international bank updates its technical capabilities, but the technology design equals the design of incentives in crypto. And incentives are what keep the community working together. Updates are big news.

The London hard fork will include the much-awaited Ethereum Improvement Plan number 1559, or EIP 1559. EIP 1559 started as a proposal to improve the user experience by avoiding excessive waiting times for transactions. However, the subsequent debates and proposals brought features to EIP 1559 that have ended up turning it into a de facto proposition for a new monetary policy within Ethereum. And that is what has the community excited.

EIP 1559 changes Ethereum's fee market mechanism. From a first-price auction system, where the highest bidder wins, to a more predictable fixed price sale (with a couple of interesting side features)

Every new block written in the Ethereum blockchain is (and will be until August 4th) preceded by an auction. The highest bidders get their operations included in the block, and miners receive the money from those bids. First-price auctions are prone to errors, inefficiencies, and a worse user experience. Users can find themselves often underestimating costs and seeing their transactions delayed or overestimating them and paying more than they should.

Consensys compares it to Uber or Lyft rides. Imagine taking a ride was auction-based. How would you even calculate how much to pay? In crypto, it's wallets that aid users by estimating reasonable fee prices. But they are just that, estimations, and this creates mistakes and friction in the system.

EIP 1559 solves this by establishing an initial fixed price, the basefee. Traveling from A to B should have a reasonably fixed price, and so should transactions. Users can still speed up their transactions by adding a tip to their transaction cost and thus incentivizing miners to pick their operation first. But the cost of having your operation processed will be fixed.

There are several relevant things to say about basefees.

First of all, the price is indeed variable and linked to demand, but the variations are defined in the protocol (they go up or down in fixed percentages) and are therefore predictable. Wallets will no longer guess and will therefore help users make the best decisions possible (and feel less dumb waiting for too long because their bid was too low, or because they paid too much because their bid was unnecessarily high).

Second, and most importantly, the basefee gets automatically burnt. Instead of reaching the hands of miners, the agreed ETH vanishes into the air like an unlucky Avenger. And this is where things get interesting.

Burning basefees was brought forth as a countermeasure to the hypothetical miner collusion to increase basefee price and extract even more value from users via fees. But the elimination of ETH via basefee burning has ended up being the most wanted feature in EIP 1559. Ethereum was missing its own version of one of bitcoin's key features: supply control. EIP 1559 is being considered by some as the most relevant manifestation of Ethereum's monetary policy, a mechanism to increase the value of the current circulating ETH and a possible boost for the currency's growth.

To sum things up:

What is EIP 1559?

A change in Ethereum's fee mechanism that will alter the incentive to miners, and that brings a burning mechanism that might contribute to making ETH deflationary.

What problem does EIP 1559 solve?

Improved UX. First of all, EIP 1559 makes fee calculation controlled. Basefees will be calculated by the protocol and will vary predictably.

And, as a welcomed consequence of the burning mechanism, monetary policy. Burning ETH will give deflationary powers to Ethereum. Peaks in Ethereum use will bring proportional decreases in ETH supply.

What problems does it not solve?

Many have pointed out that EIP 1559 was a solution to the problem of skyrocketing fees in Ethereum. EIP 1559 does not solve this, and transaction costs will still be highly dependent on demand, although, at least, less volatile.

Predictability and transparency might have the side effect of affecting user behavior: users might refrain from submitting operations if they see or foresee price increases.

What problems does it create?

The changes in the incentive structure have brought questions about the implications for miners, who might see their revenue decrease. Happy miners make blockchains secure, and unhappy miners could make the hard fork fail.

This outcome, nevertheless, is improbable for a bunch of reasons. To name just three of them:

  • Those users who are currently bidding higher for their transactions in the first-auction system will probably still be interested in getting their operations validated first. Tips are likely to become a relevant source of income, even if they are optional.

  • EIP 1559 might increase ETH's price. Miner revenue, calculated in dollars, can become higher thanks to EIP 1559.

  • ETH 2.0 is getting closer and closer. Ethereum has a very relevant upgrade coming up that will bring, among other revolutions, the change from Proof of Work to Proof of Stake. Are miners willing to make the system tremble when they are months away from a crucial improvement in Ethereum's history?

Oh, and another important reason to be optimistic. If users win, we all win, don't we? For all of us who are in this for the long run, user adoption is the real MVP.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. Macroeconomy | Inflation

During the last weeks, the European Central Bank changed from a vague "below but close to 2%" to a more straightforward "2%" as the EU's inflation target. The decision follows the need to speak to the markets in clearer terms, but it is also the confirmation of the consequences of the post-pandemic stimulus packages.

Meanwhile, inflation climbed more than predicted in the US, as the price index rose 5.4%, an increase unseen since 2008.

The data seems inconclusive, so there is a lot of room for opinions about what the future holds in terms of inflation. Everything depends on how big one believes the impact of the pandemic was.

Inflation is also highly concentrated in a subset of goods associated with global disruptions of the coronavirus pandemic and the surge of demand that has followed reopening in the United States. Inflation is rampant. Is it time to buy bitcoin? (Yahoo Finance)

Bitcoin has been long regarded as a hedge against inflation. It has a hard-coded monetary policy that often points at it as a safe place:

  • It has a predicted limited supply. Only 21 million bitcoin be ever mined. We are currently above the 18,7M line. And although it seems like we are getting very close to the end, the protocol has a mechanism to slow down the issuance of new bitcoin, the halving, that will extend the supply of new coins until 2140. But the supply growth is totally predictable and guarantees a scarcity that explains the interest it generates as a store of value.

  • Bitcoin is disconnected from any country's currency or economy. While this is also one of the most used arguments used by critics to bash Bitcoin, it is also a reason it is perceived as a haven. Bitcoin is less affected by the ups and downs of financial policy.

2. Regulation | Chasing Binance

Last Wednesday, Binance turned four. Founded in 2017 and headquartered... somewhere, Binance is the largest crypto exchange by daily trading volume. In our last newsletter, we already discussed the UK's Financial Conduct Authority "sort of" ban over Binance's activity in the country. Ever since the FCA delivered its warning, news has kept pouring in. First, it was Barclays, then Santander, stopping payments from UK accounts to Binance. Then the Italian financial authority followed the UK's steps and issued a similar warning to its citizens. Lithuania, Hong Kong...Not the happiest birthday.

Binance has always been comfortable playing Tom and Jerry. The company's history is full of plane tickets, ever since they exited China in a rush back in 2017. Japan, Malta, and the Cayman Islands were some of the destinations. And, over the years, subsidiary companies (like Binance US or Binance SG) blossomed to help Binance stay on the dark side of the moon.

Some companies, like Coinbase or Circle, have made playing safe a part of their value proposition. Binance belongs to that other group of companies that decided not to wait for regulators to clearly understand what was going on before growing aggressively. The latest events are probably the consequence.

"Compliance is a journey,” said Changpeng Zhao, CEO of Binance. And in the last months, Zhao has gathered a fellowship of high-profile compliance experts, hired directly from the same regulators Binance is dancing with.

Binance has grown very quickly and we haven't always got everything exactly right, but we are learning and improving every day. A Letter from Our CEO: Reflecting on Progress and the Road Ahead

Binance is a very attractive target for regulators. An industry leader living on the edge. There's probably no other solution for both parts than meeting somewhere in the middle.

3. Wall Street | Circle IPO

Hesitant investors have yet another chance to dip their feet in crypto while keeping some distance. After Coinbase's IPO in April, another crypto-native company is about to cross the road and make it into Wall Street, opening the doors to those who want to try crypto without leaving their comfort zones.

Circle was founded in 2013, making it truly venerable by crypto standards. But the company spent many years wandering the desert in search of a defining purpose: it has at various times dabbled with Bitcoin, with non-crypto payments, and with crypto exchanges. Starting in 2018, Circle seems to have truly found its calling with the USDC stablecoin. What investors need to know about Circle’s listing (Coindesk)

USDC is a stablecoin: a type of cryptocurrency whose value is pegged to another asset class in order to stabilize its price. Stablecoins offer the user experience of cryptocurrencies like bitcoin or ether, without the volatility.

Circle manages the second most important stablecoin by market cap, albeit far from the leader, USDT (USD Tether). But Circle, just like Coinbase, and unlike USDT, is the kind of company that Wall Street is ready to welcome, with its clean reputation and compliance effort.

4. NFTs | Axie finds the winning formula

There are bulls, there are bears, and there are crabs. Some companies in the industry are thriving regardless of the current uncertain times for crypto. Gaming is hosting some projects that are moving “in mysterious ways.”

With the ink of the latest obituaries still drying ("NFT boom is over, for now” Quartz), some metrics from the NFT space are showing that the industry is in excellent shape. Open Sea, the leading NFT market, had its best month yet. Axie Infinity (a sort of crypto Pokemon, for the uninitiated) earned a record $12.2 million in revenue in June and a rise from 38.000 to 252.000 daily active users in two months.

The recent story of Axie is one of good market fit paired with a share of right decisions. Axie Infinity is a fun game with solid token logic that brings home the promise of play-to-earn philosophy: Axies are NFT creatures that users can breed and fight and get tokens in reward. It recently migrated its infrastructure to Ronin, a blockchain of their own, where they were able to avoid the high transaction fees of the Ethereum blockchain.

Axie is on its way to becoming the flagship or the industry of crypto-gaming. A combination of two worlds with outstanding potential.

5. Open Source | GETH

Hiring engineers is hard. There is a global shortage of tech talent. The problem Péter mentions is shared by many.

But Péter is an engineer in Ethereum, and he leads GETH (Go Ethereum), one of the three original implementations (along with C++ and Python) of the Ethereum protocol. Hiring engineers is hard. But when your software builds the foundations on which billion-dollar initiatives run, having problems hiring or retaining talent is plain weird.

Like the whole internet in general, crypto is maintained by anonymous heroes who work on open source projects that create building blocks for others to use. And they do so in an almost altruistic manner.

The silver lining is that the community, in general, knows this. Following Péter's tweets, projects like Uniswap or Year were quick to offer ways to contribute to the issue's solution.

6. Mining | Bitcoin's difficulty drop

The consequences of the miner's diaspora in China can be seen in the on-chain metrics of the protocol. At the beginning of July, Bitcoin network underwent the biggest difficulty drop ever (-28%).

What does "difficulty" mean in Bitcoin?

Mining is the process by which new blocks are added to the blockchain. Check out our last newsletter for an extended explanation.

It is the decentralized equivalent to your bank updating your balance if you make or receive a transaction. On a blockchain, all the possible transactions enter a queue called mempool, where they wait for miners to grab them, group them in bundles and propose them as candidates to become the next block in the chain. Every single miner and there are hundreds of thousands of them, proposes a new block to the community. The block that finally makes it into the blockchain is chosen by a process, the famous Proof of Work, where miners need to solve a mathematical puzzle. The difficulty of the mathematical puzzle gets adjusted constantly depending on the competition. More miners push the difficulty up to make the competition harder and fairer.

What we have recently seen is the technical manifestation of China's anti-mining policy. As Chinese miners sell their gear or hop on trucks to find a better place to work (Kazakhstan seems to be a favorite place to land), the Bitcoin network has adjusted to the decrease in activity.

If you have any questions or there is any topic you want us to address, write us at team@carbono.com, or reach out to @carbono_com@raulmarcosl or @mrubio on Twitter.

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