#31 Only web 3 real use cases can scare the bear
We had many top subjects to choose the main topic of the newsletter this week: SEC's rejection of Grayscale's spot bitcoin ETF and the situation miners are facing now were strong candidates.
Bear times are build times: we’ve quoted that mantra a few times already. But they’re also “contemplation times.” Many people have seen the red slopes of death in their portfolios and taken them as a sign to stop for a minute and think about the meaning of life.
The word on the street is that we won’t get another bull cycle fueled by speculation and FOMO. We’ve had our share of self-referential tokenomics, outright Ponzis, and failures that looked like frauds, and it’s time to put all our effort into more real-world value. In the words of Byron Gilliam (witty, sharp, insightful newsletooor from Blockworks), “work-to-earn is back in.”
So, what are the current and future real-world business cases for Web 3? Is there anything in crypto generating enough value to attract cash already, or are they all projects that create tokens to attract tokens that can be exchanged for other tokens until the pyramid topples?
Unsurprisingly, our take on this is that crypto/web 3 is already producing real use cases attracting capital and talent. And that the future use cases will likely dwarf crypto’s current contribution.
Some current use cases give us reasons to see the glass half full.
Money that a central government does not issue is a perfectly reasonable use case. Crypto is successful at being money. If you don't believe me, then I'm happy to sell you the laptop I'm writing this on for 1,000 ETH instead of 1,000 USD. - Where are all the crypto use cases? Evan Conrad
The definition of money applies to whatever entity has these three features: store of value, unit of account, and medium of exchange. There are many profound and very reasonable - philosophical objections to applying these terms to cryptocurrencies, but the truth is that, to some extent, all three are already happening in crypto. It might depend on the moment, it might depend on the token, it might depend on the specific use case, but Evan Conrad’s point remains.
Non-fungible tokens are already moving enough money to be considered a decent industry. Ask any startup entrepreneur how they feel about OpenSea’s numbers. Art, collectibles, and social media (for PFPs) provide fertile grounds for the ownership of digital goods. And creators are finding a new market to generate revenue. This is happening now. In the future, NFTs can potentially become the facilitator of private property in the celebrated coming of the metaverse. You might be starting to get a little fed up with the buzzword (we are), but it simply encapsulates the promise of a future that’s even more digital than the present. That´s a no-brainer. And if this more digital future needs unique, finite assets that are transferrable and interoperable, that’s what NFTs bring to the table.
NFTs can potentially become the facilitator of private property in the celebrated coming of the metaverse.
DeFi is finance reinvented and optimized. Remember that Uniswap made $1T worth of exchanges with a team of 50 people through a protocol that runs autonomously, without borders, and permissionlessly. DeFi has taken a massive blow in the recent bear market, with TVL falling from ~$240B to ~$70B in 2022. Money has left the building, but the structure is sound. DeFi is operating with reasonable normality despite the massacre. It speaks volumes about the antifragility of the technology, and history tells us that efficient technology prevails.
Web 3 building blocks
File storage and domain names are two very successful, although maybe niche, use cases of web 3. Filecoin or ARweave are bringing the crypto ethos of immutability and security to file storage (like when Hong Kong protesters uploaded the whole archive of the Apple Daily, a newspaper censored by the Chinese government, to Arweave). ENS is another excellent example of the simple and convenient use of crypto, with their service offering the purchase of readable versions of public addresses. Just like a DNS translates a readable URL like nytimes.com into an IP, you can perform wallet operations using easy-to-remember names with an ENS.
Other exploratory missions
There are quite a few exciting endeavors exploring other applications of crypto’s most relevant features. People worldwide are thinking about what the unique value of blockchain technology is helpful for, and the answers are very diverse. For example, carbon credit trading (Klima DAO) is applying crypto’s interoperability and borderless nature to trade with carbon credits; Helium network is using the network effects available through tokenomics to fight in the competitive market of device connectivity; cultural and media DAOs and companies are exploring the potential to fuel coordination through tokens -Coindesk’s DESK token is a web 3 equivalent of airline miles. And there’s a very relevant field of growth for personal data ownership in decentralized social media projects like Lens.
If you have some time to read and want to lift your spirits with the glass-half-full vision of the future of crypto, here are some recommended reads.
Evan Conrad’s take on crypto use cases
Blockworks’ Byron Gilliam with the Jerry Maguire reference: show me the USE CASES!
⬡ 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. What the future looks like for miners
It’s not a good time to be a miner in either major blockchains, Bitcoin or Ethereum.
Many of the world’s biggest Bitcoin miners are in distress. The depreciation of bitcoin and the decrease in on-chain activity have led to reduced fees and less valuable miner rewards. If you add to that a complicated credit situation, you get the roadmap for a sell-off event. Miners, traditionally considered the most faithful holders, because of their interest in a more valuable bitcoin, are being forced to sell their assets to face their obligations, although at a slow pace.
Private and publicly listed crypto miners owe up to $4 billion in debt used to finance the construction of gargantuan facilities across North America. Crypto Miners Face Margin Calls, Defaults as Debt Comes Due in Bear Market
In late 2021, during the happy days of Bitcoin’s all-time highs, mining companies borrowed money in the billions at high interest to invest in costly hardware. Today, they could be approaching the moment when they have to sell their mined bitcoin to pay for their bills in a move that would add selling pressure to the market.
Ethereum miners, on the other hand, are facing a similarly noteworthy, although more predictable, predicament. Ethereum is well on its way to transitioning from Proof of Work to Proof of Stake. New ether will be created and distributed according to financial incentives, not computing power; all the hardware purchased all these years needs to find a new job.
Some Ethereum miners are exploring the possibility of repurposing their infrastructure for other high-performance computing tasks, like cloud computing or A. Other options include turning into other PoW mining currencies, like Bitcoin or Ethereum Classic (not as profitable), searching for alternative web 3 applications for the hardware (such as blockchain storage), or just going on sale on eBay.
2. The SEC rejects Grayscale’s bitcoin spot ETF
The SEC had until July 6th to respond to Grayscale’s request to turn their Grayscale Bitcoin Trust (GBTC) into an Exchange Traded Fund (ETF) for bitcoin. The Commission had frequently shown their disapproval for a spot bitcoin ETF, so it must not have been too hard for them to produce a verdict earlier than expected.
The SEC rejected Grayscale’s application citing concerns about market manipulation. They’ve been saying that even after approving a futures-based ETF. Grayscale seemed to predict the outcome because they immediately sued the SEC for a different result in court.
Bitcoin spot ETF is an Exchange Traded Fund for bitcoin at retail price. That means someone puts bitcoin in a box and then creates shares for the box that investors can trade freely in exchange markets.
Grayscale’s GBTC in its current form could be defined with a similar metaphor. Still, there are very relevant differences: investors could deposit their assets in dollars or bitcoin and then obtain their GTB shares, which can then be traded on OTC desks. So far, the only difference with the “box” metaphor is the trading place. But in opposition to a spot ETF, Grayscale’s fund does not include redemption mechanisms: the assets investors deposit are locked inside Grayscale’s vault indefinitely. That was a-okay, and nobody cared for a long time, as long as GBTC shares were one of the only options for traditional investors to get exposure to bitcoin. For a while, they traded above the value of bitcoin spot price (Net Asset Value or NAV). But lately, GBTC shares are -30% of NAV. So investors have locked their assets and are left with cheap GBTC paper.
This spread is one of the reasons behind the crisis at Three Arrows Capital. The crypto hedge fund, likely headed towards liquidation, was at some point one of the most important holders of GBTC shares. A favorable decision from the SEC could have tossed them, and many other investors, a lifebuoy. Not today.
3. Solana Phone
Samsung and HTC are two of the most important smartphone brands making friendly moves toward crypto. Nevertheless, today we are reporting in the opposite direction: a crypto company going mobile.
Solana has announced the launch of an Android-based phone and a developer kit, the Solana Mobile Stack. The device, previously known as the Osom OV1, is built by Essential, a seasoned Android smartphone manufacturer. It will launch as Saga, and it will be accompanied by a development kit meant to break the barriers preventing crypto from going mobile at full speed.
It’s time for web3 devs to start building for mobile usage instead of around mobile usage. The blockers to achieving this goal are clear: The app store policies of Google and Apple haven’t evolved for web3. The custody solutions on phones haven’t materialized. The software and hardware haven’t been natively integrated. Solana Mobile Launches an Android Phone for Web3
There is an inspiring future in the improvement of crypto UX. Currently, using wallets, exchanges, and dApps, in general, is scary and inconvenient. The smartphone revolution shrunk the internet and made it portable and ubiquitous. The consequences for connectivity, social interaction, and commerce were magnificent. Now add crypto to the mix and imagine what might happen.
4. dYdX moves to Cosmos
dYdX, a perpetual futures decentralized exchange built on Ethereum and StarkWare technologies, has announced that it will move to Cosmos.
That was quite a mouthful, but the story of dYdX contains interesting lessons about the future of crypto, so let’s break it down and explain it for all audiences:
futures are a financial derivative product. They are contracts signed between two parties that contain the commitment for a future sale. Imagine I want to buy a pair of shoes for $100 but don’t want to pay now or receive the shoes until January 2023. I could sign a contract with the seller where all the conditions (price and delivery time) get settled. Futures are like that contract. Metaphorical pieces of paper that can be traded based on the predictions of the different parts (buyer or seller) that they might make a profit if the $100 price changes by the time the contract executes.
Perpetual futures are a crypto-native form of futures. The 24/7, automated nature of crypto can allow for futures not to have a fixed execution date and be constantly available for trade.
A decentralized exchange is a trading house built on top of a protocol. Investors interact with open software instead of with other people or organizations, which makes trading more efficient (24/7), cheap (lower fees because of disintermediation), and transparent (because of the transparency of blockchain and open source code)
dYdX was built on Ethereum and StarkWare. Ethereum is the second most popular blockchain after Bitcoin. Ethereum’s security is only matched by Bitcoin’s, but it has scalability issues (it cannot process high amounts of transactions). The solution for this is rollups: secondary blockchains, usually called Layer 2s, that perform operations and settle the results on the Ethereum blockchain. StarkWare is one of such L2s.
Cosmos is an alternative blockchain or Layer 1. dYdX has decided that the combination of Ethereum + StarkWare is not good enough for them in terms of scalability and decentralization.
Why does this very, very, very specific decision matter?
This anecdote tells two important stories about the future of crypto.
One is that dYdX is one of many projects choosing to double down on decentralization, probably as a defense mechanism against upcoming regulation. Legislators are making significant progress in the US and the EU, but truly decentralized protocols are generally beyond their scope.
Two, after the Terra blockchain collapse, many projects and developers were searching for a new home, and Cosmos seems to be one of their favorite alternatives. So we might see a thriving ecosystem of DeFi, NFT projects, or other Web 3 use cases blossoming there.
5. EU regulation takes two steps forward
EU legislation made significant progress last week. Two essential regulatory frameworks moved on to their next phase in just a few days. With them, crypto has dodged two great bullets according to their current formulation.
MiCA. The Markets in Crypto Assets is the broader, most comprehensive regulatory framework of the two. It was created and discussed by EU officials to provide multi-purpose umbrella legislation for crypto.
The text finally excluded one of the most controversial chapters of MiCA. At some point, it seemed like the EU was going to ban Proof of Work validated blockchains because of energy concerns, but that idea is off the table. There will, nevertheless, be some disclosure obligations regarding energy consumption imposed on crypto service providers. What remains are rules to control stablecoins, harmonize anti-money laundering (AML), and distribute competencies among supervisory agencies. NFTs, for the time being, stay outside of the scope. All the details are in this thread.
The other relevant legislation is the TFR, Transfer of Funds Regulation, which addresses AML more specifically. TFR imposes disclosure obligations on Crypto Asset Service, ensuring crypto-assets can be traced in the same way as traditional money transfers, “from the first euro sent.” This restrictive measure mostly leaves out every transaction involving unhosted wallets, which was one of crypto’s most important concerns. Every crypto transaction would have otherwise had to include a valid identification of your counterparty: every token swap, every loan, and every NFT sale, from every individual user would have included the obligation to obtain ID information and transmit it to the supervisor.
6. FTX saves BlockFi
Sam Bankman Fried is the hero crypto needs and deserves today. FTX has provided blood transfusions left and right ever since Celsius and Three Arrows capital opened deadly wounds on many crypto companies, including Genesis Global Trading, BlockFi Lending, and Voyager Digital. All victims of a chain reaction that is defining the present days of crypto:
Terra collapsed in the first weeks of May, during the confirmation days of the bear market.
Celsius and Three Arrows Capital (3AC) reportedly became insolvent because of their losses in Terra, margin calls on their loans, and low liquidity derived from poor choices (in Lido and Grayscale, respectively).
3AC creditors face enormous stress because of the default aggravated by further margin calls and drops in price.
Sam comes to save the day with loans to several victims of insolvency.
The latest headlines say that FTX increased its loan to BlockFi from $250M to $400M and included a purchase clause in the agreement that reads that FTX can acquire BlockFi at a price of up to $240M. Headlines also say there were conversations about Celsius, but the company’s balance sheet scared FTX away.
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