We need to talk about the umpteenth acronym shaking the foundations of crypto. Surprisingly enough, this time is not a token ticker or a new DAO: it’s the Securities Exchange Committee.

The last weeks have been frantic for the Commission. The SEC has taken its favorite approach of regulation by enforcement to a new level in a strategy reminiscent of Oprah.

In the last month, the SEC has:

taken down Kraken’s staking business
helped stop Paxos from issuing new BUSD (Binance’s stablecoin)
defined what they believe is a “qualified custodian” of crypto, virtually excluding exchanges from operating with registered investors
sued Do Kwon and Terraform Labs for unregistered securities offer.

We wrote a summary of the first three topics (the Do Kwon story broke later), illustrating how the SEC is taking on a newly aggressive stance against crypto, and how other actors are taking positions to present legal battle.

We’ve been through DeFi summer, NFT summer… Are we approaching the SEC summer?

This beginning of 2023 leaves us with overabundant and massive narratives to attend to. We’ve tried to write a quick reminder of where we stand in each of them in this issue:

The relationship between crypto and macro, in these times of monetary intervention
The scalability race, today featuring zk-rollups
The unexpected revolution in bitcoin created by Ordinals
The state of liquid staking as we approach Shanghai and how all eyes are on decentralization
The royalty wars between NFT marketplaces
And we’ll admit this is not a general crypto trend, but we’re excited about it: Variant Fund’s investment in Botto.

⬡ Six Angles

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

1. Macro | Bitcoin as a liquidity play

For years now, we’ve been trying to figure out how to frame bitcoin (and, more broadly, crypto) in the general landscape of global finance. Bitcoin has been defined at times as an alternative currency or banking system, as an inflation hedge, and as a risk investment similar to tech stocks. Noelle Acheson’s thesis on why bitcoin is the most sensitive liquidity play in the market would explain the current behavior of crypto prices, despite (or because of) the latest numbers in inflation and interest rates.

For BTC and other crypto assets, it’s not about rates – they don’t directly impact BTC, whereas the same cannot be said of other assets. With stocks, for example, rates impact earnings through operating and financing costs and current valuations through the discount factor applied to future cash flows. BTC has no operating or financing costs and no cash flows to discount. Rates only impact BTC in terms of liquidity withdrawal and release.

2. Scalability | Zero Knowledge heats up

Polygon has set March 27 as the launch date for their Ethereum scaling project, zkEVM: their EVM-compatible general-purpose zero knowledge rollup.

Matter Labs responded by opening up registrations for developers to deploy apps on their ZKSync rollup.

Zero-knowledge rollups are the great big hope for scalability and more. They are expected to increase throughput massively while at the same time maintaining privacy. ZK proof allows the software to verify that some information is accurate without revealing the information. Like proving someone is an adult without disclosing their age (I borrowed this explanation but can’t remember from where, excuse me for not attributing correctly). Imagine how much this means for blockchain systems, whose primary concerns are validation of operations and privacy. Zero knowledge promises a qualitative leap in both.

So far, we haven’t seen zero-knowledge solutions make a dent in Ethereum’s scalability. Try to find a zk rollup in DeFi Llama’s TVL per rollup chart.

Expectations are sky-high.

If you need an intro to Ethereum’s scalability solutions, here’s our paper from Aug 2022 about the L2 landscape. The different actors in the space have made significant progress since we published it, but the big picture remains the same.

3. Bitcoin | Ordinals gain momentum

The open debate about Ordinals keeps discussing whether NFTs on the bitcoin blockchain are the next best thing or noise intruding on the monetary purpose of bitcoin.

In the meantime, Ordinals ignore the discussion, continue gaining momentum and create the most exciting wave in bitcoin in ages.

Fees have skyrocketed (I wonder how many hardcore bitcoin maxis you can find among miners and if they disagree with a trend that has made them $170k in fees in one day), and new use cases are emerging, demanding the development of a whole ecosystem around them. The user experience around ordinals is still very bitcoinish, but we will probably soon see NFT fundamental tools deploying (marketplaces, wallets, galleries…).

4. Liquid Staking Derivatives | Decentralization matters

The LSD trend continues to evolve, these days determined by the SEC’s enforcement action over Kraken.

There’s a short list of elements involved in the evolution or success of a particular liquid staking derivative or liquid staking provider: there’s the APR race, the scope of integrations (where can a user re-invest their LSD to earn a yield on top of PoS rewards), and the design of the LSD per se (how the value is accrued and distributed). Today, the most critical debate is decentralization: we’ve seen what happened with Kraken, and Coinbase has declared that they’re gearing up for a legal battle. In the meantime, decentralized solutions such as Lido and RocketPool have become increasingly attractive, and the debate over who is genuinely decentralized is heating up.

5. NFTs | Royalty wars and the Blur token

NFT marketplace Blur launched its native token this week. Blur had recently been competing in volume against OpenSea thanks to its differential value proposition (increased speed, reduced costs, and better UX for pro traders) and mainly thanks to the promise of an airdrop.

The BLUR token is a classic utility token that allows holders to participate in protocol governance. The protocol airdropped it in a gamified fashion to traders, creators, and collectors with proven activity on the platform.

This is the last in a long list of contenders trying to question the hegemony of OpenSea, and it has sparked the latest marketplace battle. Like two boxers on a ring, Blur hit OpenSea with a direct request for creators to block OpenSea trades on their smart contracts to enforce royalties, to which OpenSea responded by dropping fees to 0% (”for a promotional period of time”) and implementing a 0.5% minimum creator earnings model.

6. Botto | Variant Fund invests in Botto

The Botto family recently welcomed a new member, with Variant Fund announcing their investment in the project. Forget about press releases, Medium posts, or Twitter threads: Variant has created an Oncyber Gallery to explain Botto and why they chose to join.

You should take a walk through the gallery and stop by the art and the explainers.

caleb shough.eth @calebshough

You have seen investment announcements before... But have you seen an investment announcement set in a digital art gallery (@oncyber) curated by a dad (me) and his 4-year-old? Check out Variant’s latest investment in @bottoproject .

oncyber.ioBotto AnnouncementImmerse yourself in shough’s Botto Announcement. Featuring NFTs from Cluttered Memories of Home, shough, last summer, Process of Creation.jpg and many more

Our warmest welcome to Caleb and the team.

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Carbono Insights

#51 The SEC summer