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in addition, episode 13 of galaxy brains is live and includes a conversation on the crypto markets with beimnet abebe from galaxy's principal trading team, as well as commentary about new crypto legislation introduced in the us senate with tyler williams from galaxy digital's legislative and regulatory affairs team. we also discuss defi treasury management during a bear market and the latest phishing attacks on bayc owners. be sure to catch the episode on apple, spotify, amazon, youtube, or wherever you get your pods.
plus in today's newsletter, we discuss the significance of paypal enabling crypto withdrawals and the outcomes of ethereum's merge activation on the ropsten testnet.
have a great weekend,
alex
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NEW REPORT: A Breakdown of Ethereum Supply |
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The distribution of supply on Ethereum has been a source of criticism and debate since the network's launch in 2015. This is primarily because over 60% of total ETH supply was issued through a premine ICO, as opposed to through the public process of proof-of-work (PoW) mining. Despite the controversies surrounding its initial distribution, however, over the last seven years, new coin issuances from PoW mining has succeeded in diluting ~68% of the premined supply, making Ethereum’s native token one of the most distributed and decentralized tokens next to Bitcoin in the entire crypto ecosystem.
At an issuance rate of 2 ETH/block, it is estimated to take 5 years to fully dilute the 72 million premine supply under a PoW consensus protocol. However, Ethereum will soon transition away from PoW to a proof-of-stake (PoS) model with the forthcoming Merge upgrade. Under PoS, the issuance of ETH is expected to decline. This reports dives into the breakdown of Ethereum supply distribution today and examines the trends impacting ETH distribution on the network under PoW vs. PoS.
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The total implied network value (market cap) of the digital assets market stands at $1.20tn, relatively unchanged from last week (when it stood at $1.21tn). Bitcoin’s network value is 4.63% of gold’s market cap. Over the last 7 days, BTC is down 0.26%. ETH is down 2.53%, ADA is up 5.78%, and XRP is up 0.72%. Bitcoin dominance is 46.83%, practically unchanged from last week. |
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Data current as of 9:27 AM ET on June 10, 2022. Prices and data via Messari.
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📃Introducing the Responsible Financial Innovation Act
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Bipartisan crypto legislation introduced in US Senate. Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act in the U.S. Senate on Tuesday, June 7. The bill proposes a comprehensive regulatory framework for digital assets like bitcoin and ether, as well as plenty on stablecoins.
The bill contains elements of the Token Taxonomy Act, seeking to clarify the regulatory status of various types of digital assets, including digital commodities, securities, and utility tokens. The bill draws heavily from the Digital Commodities Exchange Act by enshrining the CFTC (rather than the SEC) as the primary regulator for non-securities digital asset spot markets. On stablecoins, the bill proposes significant disclosure requirements on stablecoin collateral and suggests both prudential and supervisory oversight in a bank-like context, specifically allowing existing banks to issue stablecoins. The bill also ringfences SAB 121, the SEC staff accounting bulletin that guided exchanges and their accountants to consider custodied client funds as on-balance sheet (which resulted in the news stories about Coinbase users being unsecured creditors in the event of a bankruptcy), by specifying that users would have their assets returned to them directly in the event of a bankruptcy proceeding. The bill also bans the use of China’s ‘digital yuan’ CBDC, includes the Keep Your Coins Act from Rep. Warren Davidson (R- OH) (which specifically legalizes and protects self-custody), and includes a $200 de minimis capital gains tax exemption to support the use of digital assets for payments.
Note, we discuss the bill at length in this week’s edition of the Galaxy Brains podcast with Tyler Williams, Galaxy Digital’s head of public policy and legislative affairs.
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OUR TAKE: On balance, this is a great milestone for the cryptocurrency industry broadly. The bill is bi-partisan and many elements of it are bi-cameral, which signals an increasing and codifying level of support for digital assets in the U.S. Congress. The bill makes great progress on industry goals, especially on market structure issues, and the sheer size of the attempt at a comprehensive framework is truly impressive and deserves praise. It’s not all good, but it’s mostly good, and the effort itself is quite good.
This bill sets a strong marker for consensus building on this topic, and indeed moves the ball in the right direction on many issues. But there simply isn’t time in this Congress to get this done. There is a midterm election in November, a recess in August, and several must-pass items already on the agenda, including the National Defense Authorization Act (NDAA), government funding, and a potential reconciliation. That doesn’t include some topical issues that might see action, such as on guns or abortion. Given the sweeping nature of the Lummis/Gillibrand bill—touches all of crypto, affects banks and various regulators, impacts national competitiveness and security vis a vis China, etc—the bill will take an enormous amount of committee work and negotiation to move forward. And there just isn’t enough time this summer, let alone during the balance of the “legislative” calendar this year. So, this bill will be broken up, scrutinized, chopped and screwed (to reference my love of Houston rap music), etc. But if pieces of it survive whenever we do get comprehensive legislation, most likely those pieces will be good, and that’s very positive for the industry overall.
Lastly, it’s important to understand that this bill would “bring digital assets within the [U.S.] regulatory perimeter,” as the bill’s summary states. But there’s nothing that can be done by regulators or anyone else to stop Bitcoin the network, or most other decentralized networks. The bill, and most similarly thoughtful efforts at providing regulatory clarity, recognize this fact and thus seek instead to impact the users of these networks (whether retail or institutional) or regulate the on and off ramps to and from them. By creating rules for the exchange or issuance of assets, the U.S. would promote innovation in this space by allowing entrepreneurs and businesses the certainty of legality and oversight while simultaneously offering consumers protection through supervisory (and in some cases prudential) oversight regimes. -AT
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💰PayPal Enables Crypto Withdrawals
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PayPal enables transfers of crypto assets to/from external wallets and other PayPal accounts. PayPal added support for native transfer of crypto assets for its users, enabling them to send/receive crypto to/from an external wallet, exchange, or another PayPal user. PayPal noted that this was one of the most requested features by its users since rolling out the ability to buy/sell/hold select crypto assets (bitcoin, ethereum, litecoin, and bitcoin cash) on its platform in October 2020. PayPal is not charging any additional fees on top of any network charges for any external transfers to/from a non-PayPal address, and users will incur no fees for internal network transfers with another PayPal account. The feature is being rolled out to eligible US customers over the next few weeks.
The added functionality was announced the same day that the New York Department of Financial Services (NYDFS) had converted PayPal's conditional virtual currency license--or "BitLicense"--to a full BitLicense. PayPal was the first entity to receive a conditional BitLicense from the NYDFS when it started offering its users to buy/sell/hold crypto assets through its partnership with Paxos--the first DFS-regulated Trust company for digital assets since 2015.
On Thursday, the NYDFS also separately announced new guidance for issuance of stablecoins, calling for full backing and redeemability, segregated reserves consisting of select cash & cash equivalent assets, and monthly independent audits. This move was applauded by Paxos, which issues the stablecoins the Pax Dollar (USDP) and Binance USD (BUSD), and could potentially impact PayPal should it decide to issue its own stablecoin.
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OUR TAKE: PayPal delivers on a long-demanded feature, becoming one of the first fintechs after Block (Cash App) to enable native transfers to/from external addresses outside of its network. Users that bought crypto on non-crypto native fintech apps have typically been unable to make transfers to a self-custodied wallet. By aggregating users’ crypto assets in few enterprise-owned wallet addresses and managing their own internal ledgers for tracking user balances, these fintechs are able to save on expenses, and provide users with a better UX that shields them from potentially volatile and costly network fees. However, this has often limited users to just buy/sell/hold crypto assets and prevented them from using their crypto in DeFi or NFT applications.
The newly added capability could be detrimental to user deposits across PayPal accounts, though it may be partially offset by new inflows from external accounts that may be looking to aggregate their financial assets or to spend their crypto at 35m merchants using PayPal's Checkout with Crypto feature. PayPal and Venmo notably lack a self-custodied wallet product while its competitors Robinhood and Cash App have just launched or committed to launching their own products. The trend of users moving their crypto holdings off of exchanges and centralized platforms is likely to continue as users learn more about crypto and look to do more with it, especially if it's needed to access NFTs. In addition, the NYDFS appears to be taking a more active approach in regulating crypto entities, which could be a good sign for other crypto companies looking to operate in NY. The NYDFS has granted 22 BitLicenses - only 6 of which have been granted since 2021. -CY
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🐻Ethereum Testnet Ropsten Activates Merge Upgrade
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On Wednesday, one of the longest running testnets in Ethereum’s history known as Ropsten underwent the Merge upgrade and transitioned to a new proof-of-stake (PoS) consensus protocol. Ropsten is the first of three major proof-of-work (PoW) testnets that will be upgraded over the coming weeks as core developers rehearse the Merge upgrade for activation on mainnet Ethereum. The activation of the Merge on Ropsten was hailed as a “major success” by Ethereum Foundation developer Danny Ryan on Twitter and several other developers. That said, 14% of Ropsten Beacon Chain validators did experience downtime during the transition due to minor configuration issues and bugs. A full debrief on Wednesday’s Merge activation by developers will be shared during today’s All Core Developers meeting, which can be livestreamed here.
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OUR TAKE: The milestone that is the Ropsten Merge activation is one of several stepping stones that developers have crossed in their 7-year journey towards transitioning Ethereum away from PoW mining to PoS. This milestone is certainly not the last one that needs to be reached until users and other network stakeholders can be assured of an expected date for Merge activation. So far, developers have focused primarily on spinning up dedicated networks that are short-lived and permissioned to test Ethereum’s transition to PoS. Ropsten, which has been live since November 2016, is the first pre-existing and public Ethereum testnet to be upgraded for the Merge. There still remain two others, Goerli and Sepolia, that have yet to be upgraded before developers proceed with formally scheduling the Merge for mainnet activation.
The slow and steady pace of testing for the Merge upgrade is in large part due to the highly complex and risky nature of Ethereum’s transition from PoW and PoS. It has been described by core developers as the most “complicated” upgrade to release for Ethereum to date and as such, there remains a great deal of uncertainty from stakeholders around whether the upgrade will be activated as planned in August. Early fanfare on Twitter about Wednesday’s activation has also been somewhat premature. Further monitoring of Ropsten is still needed over the coming weeks to be doubly sure of the network’s stability and the impact of the upgrade on existing Ropsten users and decentralized applications (dapps). As developers inch forward towards a hopeful mainnet Merge activation, stakeholders remain at the edge of their seats without much assurance on when exactly this upgrade may happen on mainnet. -CK
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ApeCoin holders vote to stay within Ethereum ecosystem
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Osmosis chain halted for 2 days after liquidity pool exploit
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Account mismanagement by Wintermute leads to loss of 20m Optimism tokens
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Yuga Labs revokes code that would have granted ability to mint infinite Bored Ape NFTs
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Citadel and Virtu Financial to partner on building crypto trading ecosystem
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Solana Ventures establishes $100m fund for South Korean crypto projects
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Jay-Z & Jack Dorsey to launch Bitcoin Academy for Brooklyn public housing residents
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New York’s crypto regulator releases formal stablecoin guidance
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Co-founder of the Wyoming Blockchain Coalition Caitlin Long publishes an op-ed on activity around crypto regulation in Washington, DC.
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Access our research on the Bloomberg Terminal with ERH GXY <GO>
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A Breakdown of Ethereum Supply Distribution |
Christine Kim breaks down supply distribution on Ethereum today and examines the trends impacting ETH distribution on the network under PoW vs. PoS.
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NEW REPORT: Ready Layer One, Solana |
Sal Qadir evaluates Solana in-depth and uncovers how well-positioned it is to capture and retain market share in the Layer 1 blockchain landscape.
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Galaxy Digital Research Podcast |
In this week's episode, we discuss crypto markets with Beimnet Abebe, regulatory issues on the top of U.S. policy makers' minds with Tyler Williams, DeFi treasury management during a bear market with Christine Kim, and the latest phishing attacks on BAYC owners with Sal Qadir.
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The supply equality ratio (SER) is calculated by dividing the cumulative supply held in accounts (or address) with a balance of less than one ten millionth of total supply by the cumulative supply held by the top one percent of accounts by balance. Since May 2019, Ethereum’s SER has increased from 0.03 to 0.055, indicating increases in supply dispersion over that time. By comparison, Bitcoin’s SER, which has consistently ranked higher than Ethereum’s SER, has also grown from 0.075 to 0.088 over the same period. |
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Lido’s staked ETH (stETH) has been trading at a growing discount to ETH. This could be for a number of reasons including merge execution risk, validator slashing risk, and Lido-specific smart contract risks. In addition, there remains continued uncertainty around when exactly stETH will become redeemable for staked ETH given that withdrawals are not currently enabled on the Beacon Chain, nor will they be until at minimum 6 months after mainnet Merge activation. |
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Thanks for reading this week. Have a great weekend.
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Alex Thorn
Head of Firmwide Research, Galaxy Digital
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Legal Disclosure:
This document, and the information contained herein, has been provided to you by Galaxy Digital Holdings LP and its affiliates (“Galaxy Digital”) solely for informational purposes. This document may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Galaxy Digital. Neither the information, nor any opinion contained in this document, constitutes an offer to buy or sell, or a solicitation of an offer to buy or sell, any advisory services, securities, futures, options or other financial instruments or to participate in any advisory services or trading strategy. Nothing contained in this document constitutes investment, legal or tax advice. You should make your own investigations and evaluations of the information herein. Any decisions based on information contained in this document are the sole responsibility of the reader. Certain statements in this document reflect Galaxy Digital’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Galaxy Digital’s views on the current and future market for certain digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance may vary substantially from, and be less than, the estimates included herein. None of Galaxy Digital nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or any other information (whether communicated in written or oral form) transmitted or made available to you. Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of this information. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Galaxy Digital and, Galaxy Digital, does not assume responsibility for the accuracy of such information. Affiliates of Galaxy Digital may have owned or may own investments in some of the digital assets and protocols discussed in this document. Except where otherwise indicated, the information in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. The foregoing does not constitute a "research report" as defined by FINRA Rule 2241 or a "debt research report" as defined by FINRA Rule 2242 and was not prepared by Galaxy Digital Partners LLC. For all inquiries, please email contact@galaxydigital.io. ©Copyright Galaxy Digital Holdings LP 2022. All rights reserved.
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