Ethereum Shapella Upgrade Goes Live, RWA Bridges the Gap Between Crypto & TradFi, and More.

This Week in Crypto

In a week marked by mixed news, the crypto market experienced relatively sideways movement, with a few notable exceptions. While inflation came in lower than anticipated, U.S. banks exceeded earnings expectations, leaving the Federal Reserve's response in their upcoming May meeting uncertain. Bitcoin remained relatively stable this week, while Ethereum surged nearly 10% following the successful Shapella upgrade. On the same news, Lido, a staking provider, witnessed an increase in TVL of more than 10%. Among the top performers were Solana, which saw a significant uptick with the announcement of their smartphone, SAGA, and Arbitrum in the scalability sector, boasting an impressive 30% growth.**

Figure 1: Weekly Price and TVL Performance of Major Crypto Categories*

Source: Coingecko, DeFi Llama. Close data as of Mar 20, 2023.*

Key takeaways:

• Two significant US house committee hearings that could affect DeFi, Stablecoins

• Ethereum Shapella upgrade is executed smoothly, Avalanche introduces subnets focused on financial-institutions   

• Real-world assets continues building bridges between DeFi & TradFi

• Reddit releases their third generation NFTs, Adidas reveals its dynamic NFT ecosystem

Spot and Derivatives Markets

Figure 2: Ethereum Futures Open Interest Source: Glassnode

Although Ethereum's price has trailed behind Bitcoin's impressive performance in recent weeks, a sudden surge in Ethereum Futures Open Interest suggests renewed enthusiasm and interest for the second-largest cryptocurrency. The successful Shappela upgrade has dispelled many uncertainties, fueling a resurgence of interest that has driven Ethereum's price to rally by over 10% week over week.

On-chain Indicators

Figure 3: Ethereum Deposits & Withdrawals

Source: Hildobby / Dune Analytics

Contrary to the speculation leading to the Shapella upgrade, which enabled withdrawals for the Ethereum network, users have been predominantly unstaking their rewards rather than their entire principal staked amount, as shown above. This echoes our belief that stakers are long-term believers of the Ethereum network, and as such, enabling withdrawals should merely be a non-event for them. To put it differently, users will be keen on withdrawing their rewards to unlock capital, but even so, they might re-stake it through the variety of liquid-staking protocols to use the idle capital across the DeFi ecosystem rather than removing themselves completely.

Macro and Regulations

Gary Gensler to testify at House Oversight hearing - SEC Chair Gary Gensler will be testifying at a House Financial Services Committee oversight hearing today. The SEC Chairman, in a prepared statement for the upcoming hearing, emphasized his view that most crypto tokens should be considered securities. He expressed concerns about crypto intermediaries' overlapping services, leading to conflicts of interest and risks for investors. Gensler also stressed that identifying as a DeFi platform does not exempt one from securities laws compliance. While hard to enforce, this would ultimately mean that DeFi platforms would fall under the purview of traditional exchanges. 

Stablecoins - On April 19 there will be another hearing titled “Understanding Stablecoins’ Role in Payments and the Need for Legislation”. The discussion will likely cover the 72-page draft bill, which aims to increase stablecoin oversight after TerraUSD's collapse last year and outlines requirements for stablecoin issuers, research on a digital dollar, and other regulations. The bill requires stablecoin providers to maintain one-to-one reserve backing and grants oversight of non-bank entities issuing stablecoins to the Federal Reserve's board of governors. Unauthorized issuance of stablecoins could result in a $1 million fine or up to five years in prison. In addition, it’s aiming to set standards for reporting and calling for a 2 year delay until the US treasury can complete its assessment.

MiCA - The EU's new crypto regulatory framework, MiCA, is set to be debated in the European Parliament today and tomorrow, with a final vote anticipated shortly after. MiCA is intended to close gaps in existing EU financial services legislation by establishing a harmonized set of rules for crypto-assets and covers various crypto sector aspects, including regulations for crypto asset issuers and crypto asset service providers (CASPs), such as exchanges, custody providers, investment advisors, and stablecoin issuers. The law is expected to come into force in July, with key provisions taking effect 12 to 18 months later. We, at 21Shares, believe MiCA will be a major step forward towards crypto regulations, which ultimately legitimizes the asset class and opens the door for more institutional adoption and innovation.

Crypto Infrastructure

Smart-contract platforms

The Shapella upgrade was executed successfully on April 12, enabling users to withdraw their staked ETH from the beacon chain contact after ~2.5 years and marking the complete transition to a proof-of-stake network. The major upgrade was a success for Ethereum, considering users' subsequent ability to exit their validator's position, withdraw their rewards, and even re-stake without any significant disturbances. Worth mentioning that Kraken is accountable for a significant portion (46.1%) of the 850K ETH waiting to be withdrawn, which shows the exchange's compliance with the SEC request to shut down its staking offering for US customers. The Ethereum core development team will now focus on improving scalability as part of its next major undertaking on the Ethereum roadmap, known as Proto dank-sharing (EIP 4844), making it cheaper to use L2 networks like Optimism and Arbitrum, and Polygon.

Figure 4: Ethereum Withdrawals Statistics Source: Tokenunlocks

Ava Labs has introduced Evergreen subnets, a new feature on the Avalanche network to accelerate its adoption by financial institutions. This tool enables the creation of permissioned networks that meet the specific requirements of institutions while still benefiting from the security of a public blockchain. Institutions can set up their private networks with their unique consensus mechanisms, validator sets, and customizable gas tokens while still being anchored to the broader Avalanche network for scalability, deeper liquidity, and interoperability on the back of the Avalanche Warm Messaging system. Wall Street firms like Wisdom Tree and Cumberland are already experimenting with the network to build out the "spruce" testnet for executing foreign exchange and interest rate swaps and planning test tokenized equity and credit issuance if preliminary tests yield positive results. The trend of subnet adoption is evident as Avalanche's active addresses hit a six-month high in April.

Figure 5: Avalanche Subnets Daily Active Addresses Source: Avalanche Subnet Explorer

The Solana Saga phone has finally arrived. The device runs on the Android operating system and has several Web 3 integrations that abstract the complexity of dealing with native-blockchain features. For instance, private keys are now stored internally in a secure hardware environment called the seed vault, linked to the device's biometric signatures. The vault's integration with the phone's Web 3 dedicated application store allows users to sign transactions like swapping tokens or minting NFTs using the device's fingerprint sensor. In addition, the phone's camera allows for innovative features such as converting pictures into NFTs instantaneously. Although there'll be some expected user experience glitches initially, the product is a constructive step in the right direction as it helps people forget about the complexities of the underlying blockchain technology and focus instead on its benefits.

Decentralized Finance

Figure 6: Top 10 DeFi Assets Weekly Performance Source: Coingecko

Real-World-Assets

Former Gemini officials unveiled OpenEden, an ETH-based smart-contract vault managed by a regulated entity in Singapore that enables exposure to US treasury bills. Users can deposit USDC on the platform in exchange for the tokenized certificate in the form of TBILL tokens that can be traded and transferred on the secondary market without having to pass through traditional intermediaries. In a similar vein, a hotel in Bali worth $10M will be tokenized on top of the Polygon Network. The initiative is a collaboration between Cofund, a leading marketplace for tokenized real estate, and a tokenization platform known as Tokenly, which will bring down the barrier of entry of investment for users by allowing anyone to participate with as little as $1K. Details about how the product will be structured are still unknown.

Ondo Finance, the company behind the OUSG token facilitating exposure to US treasury, announced OMMF; an ETH-based stablecoin that generates yield for its holders based on investments in low-risk money market funds backed by Blackrock and Pimco ETFs. OMMF will be exclusively available to qualified investors and can only be traded amongst KYC-approved and whitelisted token holders. Since many companies are now experimenting with tokenizing a wide range of assets, Citi professed in its report that it anticipates the tokenization markets to reach a $4T valuation by 2030, with private equities to be leading the way, which is slowly proving that tokenization might be the killer use case that accelerates the adoption of blockchain technology. The products are yet another testament to how blockchain-based tokenization is aiding in reducing costs, increasing efficiency, democratizing access to critical instruments of the traditional financial world, and offering heightened transparency into the underlying assets.

Ethereum ecosystem

The Uniswap community has voted to deploy the DEX on Polygon’s newest scalability solution, the zkEVM network. The new integration should help drive the growth of the TVL on Polygon, which has been lagging behind its counterpart zkSycn Era which has seen close to a 200% increase since its launch, although both went live roughly at the same time, as demonstrated below. Even though users have been moving funds to zkSync to speculate on receiving a future airdrop which has propelled the surge in user activity, Uniswap’s presence nevertheless attracts vast swaths of capital due to its capital efficiency and its battle-tested smart contracts.

Figure 7: zkSync Era Vs Polygon zkEVM AUM Growth Source: 21Shares on Dune

Comparatively, Uniswap outpaced Coinbase’s volume for the second month following the systemic banking crisis in Mid March, which took the Silicon Valley Bank, Signature, and Silvergate under. The divergence in volume can be explained by users’ fears around the US regulatory crackdown, combined with the impact of the banking crisis that might jeopardize the financial well-being of exchanges catering preliminary to US customers. Thus, users are favoring non-custodial solutions that help them retain ownership of their assets. Finally, Uniswap’s mobile wallet app went live on the Apple store. The application is now available for users to trade on the Ethereum, Polygon, Arbitrum, and Optimism networks globally. Uniswap’s mobile launch is crucial at a time when more than 80% of the social media usage is done on mobile devices, and especially as Metamask and other vital DeFi protocols are beginning to launch their mobile-centric applications.

NFTs and Metaverse

Figure 9: NFT activities on Ethereum Source: 21shares on Dune Analytics

Despite the subdued trading volume of NFTs, the ongoing commercial and institutional adoption involving major brands like Adidas, Nike, Mastercard, and others highlights the growing interest in utilizing Web3 capabilities to engage with users in innovative ways. In particular, Polygon, the Ethereum scaling solution, has emerged as a preferred partner for these commercial collaborations, offering a cost-effective approach to deploying and trading NFTs.

Reddit - introduced its third-generation (Gen 3) NFT collection, focusing on futuristic themes and expanding the number of participating artists and content. Initially launched in June 2022 on Ethereum's layer 2 network Polygon, the project was already able to attract more than 7.6 million holders, according to Dune data. Aiming to reach a broader audience, the Gen 3 collection increases its artistic base from 32 to 100 creators.

Adidas - In December 2021, Adidas launched its "Into The Metaverse" NFT collection, providing holders exclusive access to merchandise and virtual experiences throughout 2022. The first Web3 collaboration involved NFT influencer gmoney, PUNKS Comic, and Bored Ape Yacht Club, allowing NFT burning for a new ERC-1155 token and physical clothing. This week, Adidas teased its latest project, "ALTS by Adidas," the third phase of their Web3 roadmap on the rebranded platform. It's a loyalty program with a focus on identity, community, utility, and physical products, representing users' avatars or alter egos. Soon, Adidas NFT holders will discover their avatars, or ALTS, with one of eight rare traits tied to sports or lifestyle genres. Each trait offers unique utilities, such as exclusive access to physical and virtual products or event tickets, tailored to the holder's interests. ALTS integrates Adidas' sports and lifestyle brand into the digital realm, showcasing their pioneering approach to Web3 customer experiences.

Nike - Several months after introducing its .Swoosh Web3 community platform, footwear titan Nike is set to launch its inaugural NFT collection on the platform. Named Our Force 1 (OF1) and built on top of Polygon, the collection features virtual sneaker NFTs that pay homage to the legendary Nike Air Force 1, first released 41 years ago.

Mastercard - Mastercard announced at NFT.NYC that it is launching NFTs designed to support musicians leveraging Web 3. The Mastercard Music Pass NFT, which is free to mint and developed in partnership with Polygon, the Ethereum scaling solution, serves as a digital collectible granting artists access to the Mastercard Artist Accelerator Program.

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