DeFi Research News September 2022

In this edition of our monthly Research News Update, Here are the topics we discuss:

• The Macro Chaos
• Inflation is still here
• Regulations and Institutional Update
• Starbucks is using Polygon Network
• The ETHBTC ratio has rolled over 
• Bitcoin Hash Rate Hits New Highs

Macro View

The Macro CHAOS:

There has been a CHAOS  in the developed market currencies and sovereign bonds recently. To summarize the recent macro events:

• Japan performed their first currency intervention in over two decades to support the yen amid a backdrop of yield curve control
• British pound sterling had its biggest single-day move in history in response to a new fiscal budget announcement
• Bank of England resumed purchases of long-duration UK sovereign bonds despite 10% inflation because pension funds were getting margin called!! 
• Bond yields across the developed markets including the US had unusually volatile upside moves with constrained liquidity.
• Looking at the type of securities held by the UK, only about $15 billion is in hard cash and another $17 billion is in gold making a total of around $80 billion as of today. England GDP in 2021 was 3186 billion US dollars which makes the FX reserve at a ratio of 2.5%. At its peak of 93.034 Billion Dollars the FX reserve represented 93.034/2756.9 = 3.4%. This is important because it can be thought as a proxy of how much the Bank of England has in reserve to protect its economy from devaluing 

Energy Crisis

Meanwhile, much of Europe has an acute energy crisis due to Russia halting their gas flows, combined with domestic energy policies over the past several years that gave Russia a lot of leverage over them.

Recession Indicators are flashing

A big piece of market news recently is that FedEx (FDX) missed revenue and earnings expectations for the most recent quarter, and then pulled guidance for the whole fiscal year, citing bad global macro conditions. FedEx and other logistics companies are big tells about the state of the global economy. Overall, most indicators continue to suggest global economic weakness ahead, particularly in the United States and Europe.

Inflation is still here (we are not copy pasting from previous reports, it really continues to be a problem) 

Price inflation continues to be a problem as it came in above consensus expectations, even though it is down from the peak. In other words, it’s falling, but not nearly as fast as expected. The market was expecting 6.1% year-over-year core inflation, but got a 6.3% print instead. John Authors from Bloomberg pointed out that ‘services’ inflation has been substantial recently, although the energy prices have come down. 

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In other news, Iran is moving closer to joining the Shanghai Cooperation Organization, and Turkey stated their willingness to join as well. The organization is working towards doing more trade in non-USD terms. 

Regulations and Institutional Update

1. Nasdaq announced the launch of digital asset business segment primarily focused on crypto custody access to institutional clients.
2. Fidelity, Charles Schwab and Citadel are launching Bitcoin and Crypto exchange! 
3. Jack Dorsey’s TBD Teams Up With Circle to Take US Dollar Stablecoin Savings and Remittances Global. The partnership aims to improve people’s access to dollar-linked stablecoins in countries with rapidly devaluing currencies.
4. The $75B fund manager, WisdomTree, is set to launch a fund that fractionalizes its fund’s ownership using the Ethereum or Stellar blockchains. The asset manager looks to bring mainstream assets, such as US Treasury bonds, onto the blockchain. 
5. CFTC asserts jurisdiction over Ooki DAO in groundbreaking enforcement action, for failure to register as a futures commission merchant (FCM) and derivatives contract market (DCM) for activities that included offering leveraged and margined retail commodity transactions in digital assets. Apparently the DAO was required to comply with the same registration requirements that apply to highly regulated derivatives brokers and exchanges. 
6. U.S. lawmakers draft bill to allow bitcoin, crypto in 401(k) plans. The bill amends ERISA of 1974 to include digital assets under “covered investments,” thereby shielding investment managers from liability.
7. Swan Bitcoin, a financial services company, announced the acquisition of Specter Solutions. Specter’s software is ideal for multi-signature BTC custody, meaning setups where it requires multiple private keys (for eg. “4 of 6” or “6 of 8”) to move coins. They also launched Swan Advisor Services to help asset managers integrate BTC pie into client portfolios, in addition to the various reporting and rebalancing requirements involved. Some of Swan’s recent executive hires have come from Bridgewater, Goldman Sachs, and Salesforce. 

Other Noteworthy News/Events in September 

1. MicroStrategy Lightning Job Posting: MicroStrategy (MSTR), the software company holding 130,000 bitcoins, recently posted a job for a Lightning engineer on its website.

2. Starbucks is using Polygon Network to enable users to earn and buy digital collectible stamps and unlock new, coveted coffee experiences. link

On-Chain Metrics & Data

Ethereum Update

The ETHBTC ratio has rolled over as seen in the chart below:

This ratio sharply rolled over this summer during the broad crypto bear market, but then the Merge date was firmly announced for September, and that contributed to a renewed period of hype and upward movement in the ratio. With that pre-Merge rally over, the ETHBTC ratio might be ready to fall again. 

Currently the ratio is at 0.072. As long as it remains below the recent high of 0.085 it would continue to be bearish for ETHBTC. However, a breakout over that level would be an invalidation point in a charting sense.

Bitcoin Update

If we look at the chart of Bitcoin’s market price relative to its realized price (the aggregate on-chain cost basis for network participants) below, it is signaling a bottom, typically an accumulation zone. 

Coinchange doesn’t give financial advice nor trading strategies; but we do believe that dollar-cost averaging into a diversified portfolio is the best way to get exposure to crypto. 

Bitcoin Hash Rate Hits New Highs While Price Stays Flat. 

According to Cointelegraph, analysts say Bitcoin miners’ worst days are probably behind them, but the network's soaring hash rate and the uptick in difficulty are weighing on profit margins. The hash rate hitting a new all-time high means that profit margins will be further compressed and those that are unprofitable can continue to mine at a loss, assuming that BTC price will eventually go up, or they can go offline and wait until either the difficulty drops or energy costs improve.

A look at the top DeFi protocols based on the revenue generated

This month let's focus on how the fees being paid by users become protocol revenue that then can be used to incentivize adoption and innovation. 

The graphs below show cumulative protocol revenue over past 180days:

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In contrast we can see that over the past 90 days, LooksRare declined by 5 places onto number 6. This shows that LooksRare fees generation has slowed the past 3 months while other protocols have seen their revenue increase more rapidly (Synthetix). This is evidenced by a volume decrease of ~92% since May for LooksRare (as LooksRare revenue comes from NFT trading fee). On the other hand Synthetix jumped 5 places on this timeframe as trading volume has increased ~400% from May to today (Synthetix revenue comes from trading fees).

If you wonder where those Dapps revenue benefits the most, the answer depends on the revenue share model that each of them has in place. Dapps can distribute part or none of this revenue in an automatic manner to their stakeholders. OpenSea is an example of a platform that does not distribute protocol revenue to its token holders. On the other hand Pancakeswap, dYdX, Synthetix or LooksRare distribute it in various manner with the most common way being governance token staking reward. While those governance token could potentially fall under securities law, it is still a meaningfull way to understand the real economic driver of some DeFi applications. 

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