Bitcoin

Originally announced at the Bitcoin 2021 conference in mid-June and days later made official, El Salvador officially became the first country to approve Bitcoin as legal tender. El Salvador’s president, Nayib Bukele, now a widely popular Bitcoin figure, submitted the proposal to the Legislative Assembly calling for the country to "regulate Bitcoin as unrestricted legal tender." El Salvador’s legislative body passed the law making both the US Dollar and Bitcoin recognized legal tender. Legislature members passed the bill with a supermajority vote, receiving 62 votes for the bill out of a possible 84.

This law now means Bitcoin can be used to pay taxes, businesses are obligated to accept Bitcoin for payment, and converting Bitcoin into other currencies will no longer be subject to capital gains tax. Additionally, the El Salvadoran government will be giving out $30 in Bitcoin to any of its adult citizens that download the Chivo e-wallet and go through KYC.

With El Salvador breaking the ice, fellow South American countries may soon follow suit. The next Bitcoin domino to fall could be the country of Panama. The congressman Gabriel Silva is hoping to have a similar Bitcoin legal tender bill in the Panamanian National Assembly “within a month.” Additionally, the national deputy of Paraguay, Carlitos Rejala, gave public statements urging his government to embrace Bitcoin in a manner similar to El Salvador.

Finally, while not recognizing Bitcoin as legal tender, QR Capital’s Bitcoin exchange-traded fund (ETF) started trading on the Brazil stock exchange in June under the ticker QBTC11. Brazil is one of only a few countries that has permitted a Bitcoin ETF. The product aims to give investors safe exposure to Bitcoin without the worries of private keys.

Despite the El Salvador surprise and plenty of other bullish news, the whole crypto market continues to trade ~50% down from its peak of $2.6T nearly 2 months ago. Bitcoin’s tumble has been triggered by multiple news events, including negative attention brought on by Elon Musk and Tesla, the ransomware attack , and two negative news items coming out of the Chinese market.

The People’s Bank of China (PBOC) reiterated its earlier commitment to restrict commercial banks from providing banking services to crypto businesses. While the law is not new, the strict enforcement is, especially concerning the OTC desks and crypto exchanges. The PBOC has taken swift action to curb what they deem excessive speculation, capital flight, and the financing of illicit activities.

Secondly, nearly all miners within Chinese borders have been ordered to shut down and/or move their operations outside of China. Even the province of Sichuan, known for being the hydroelectricity epicenter of China, was ordered to stop servicing 25+ mining farms. The Cambridge Centre for Alternative Finance has reported that Sichuan is the 2nd largest Bitcoin mining province in the country.

This exodus of miners from China is poised to birth new bitcoin mining hubs outside China, removing the long-lasting criticism that “China controls mining.” However, it will take months for the miners to relocate and successfully come back online. Until then, the Bitcoin hashrate will remain ~50-70% of what it once was. The network’s hash rate is down ~35% since May 14th and currently sits at around ~100 million terra hashes per second (TH/S), having been as high as ~180 million TH/S in mid-April.

Ethereum

A testnet for Ethereum’s forthcoming London upgrade, containing the highly-anticipated Ethereum Improvement Proposal (EIP) 1559, was deployed on June 24, 2021. Following the launch on the Ropsten Testnet, Ethereum’s Goerli, Rinkeby, and Kovan testnets will launch the London trial upgrade on their own test chains over the coming weeks. Following a launch on all the testnets, the Ethereum community and developers will agree upon a date for mainnet deployment with the consensus being in early August 2021. EIP-1559 will see transaction fees burned, which users can track at Watch the Burn.

Ethereum Second Layer Solutions

Layer 2 or second layer scaling is a general term for solutions that help with increasing the capabilities of the main chain by handling transactions off-chain (off Layer 1). The two primary improvements Layer 2 can provide are transaction speed and transaction throughput. On top of that, Layer 2 solutions can greatly reduce gas fees.

Polygon

Technically, Polygon is its own blockchain with its own token, MATIC, but was built to become Ethereum’s internet of blockchains. Polygon provides the architecture that enables developers to create custom, application-specific chains that leverage Ethereum’s security similar to the Cosmos hub-and-spoke model. It provides an interoperable layer that can bridge many different projects and scaling solutions, such as zk-rollups, optimistic-rollups, and sidechains.

Since Polygon is a separate chain, it must be secured by a separate proof-of-stake consensus mechanism where validators stake MATIC. However, the MATIC is staked in smart contracts on the Ethereum main chain. Polygon connects to Ethereum through a bridge with the use of a lock and mint mechanism. Users deposit funds into the bridge, which locks them in a smart contract on Ethereum and mints the equivalent amount on Polygon. To withdraw funds, you will have to go back through the bridge. The bridge and funds are secured by a 5/8 multi-sig scheme, making it incredibly more centralized than the Ethereum mainchain. Additionally, ~33% of staked MATIC is run by a node controlled by Binance. These centralization factors should be considered when weighing the cost of transacting on a Layer 2.

Despite potential centralization issues, Polygon has seen enormous growth in 2021, from ~$1B to $10B in total value locked on the chain. In fact, projects like Aave and SushiSwap now have more users on Polygon than on the Ethereum mainchain.

Rollups

Rollups improve scalability by combining or “rolling up” sidechain transactions into a single transaction, generating a cryptographic proof (called a SNARK),then submitting only the proof to the base layer. This removes the burden of data on Layer 1 while also allowing Layer 2 transaction data to be available on Layer 1 for validation. Moving transactions on a rollup Layer 2 solution guarantees that one could verify the integrity of the data if it’s actually present. Scalability is improved on the base layer due to the lack of reliance on Layer 1 storage.

Rollups offer similar capabilities as Plasma, but without suffering from the data availability problem. Rollups offer many-to-many transactions, smart-contract capabilities, and significantly reduced total Layer 1 block space requirements, all while extending Ethereum’s security assurance to Layer 2. Rollups are able to improve efficiency through a host of compression techniques that result in a 100x save in on-chain space.

eth roll up compression — A quick explaination for the parameters of a rollup compression. (Vitalik Buterin)

There are two types of rollups, Zk rollups and optimistic rollups:

Zk rollups are faster and more efficient than optimistic rollups, but they suffer from friction and compatibility issues when migrating smart contracts to Layer 2. Loopring, Deversifi, and zkSync are examples of projects utilizing Zk rollups.
Optimistic rollups run an EVM compatible Virtual Machine called Optimistic Virtual Machine (OVM), which removes the compatibility issues that exist in Zk rollups. This is extremely critical as composability is paramount in the Ethereum ecosystem, especially in DeFi. One project working on optimistic rollups is Optimism.

Rollups can 100x Ethereum’s scaling without ETH 2. With ETH 2 + Rollups, which may be years away, scaling should theoretically reach 25k-100k transactions per second (TPS). There is increasing competition among various flavors in the rollup space with the trend being towards EVM compatibility and catering towards various needs of dApps.

A general list of Ethereum Layer 2 scaling solution projects includes:

ZKSwap;
zkSync;
Hermez Network;
ImmutableX;
DeversiFi;
Arbitrum, which is live to developers;
Aztec, which is live on the mainnet with privacy smart contracts platform will be released later in 2021;
StarkWare, which was released in 2021 and followed by an AMM, Caspian, in June 2021; and
Optimism, which is set to launch at an as-of-yet unannounced date in 2021.

Binance

Britain’s Financial Conduct Authority has banned the exchange from undertaking any regulated activity in the country. Additionally, Binance must remove all advertising and financial promotions as well as make clear on its website and social media channels that it is no longer legally permitted to operate in the UK.

Binance is also being investigated by several agencies in the US. Binance is currently under investigation by the US Internal Revenue Service, as well as the Department of Justice for money laundering. Additionally, Binance is dealing with inquiries from the Commodity Futures Trading Commission (CFTC) over whether Binance allowed US residents to trade on its exchange. It is important to note that as of Q2 2021, "[t]he federal agencies haven’t accused Binance of wrongdoing." However, over the course of 2021, Binance hired a slew of high-profile individuals to join its regulatory advisory team, including former US senator Max Baucus as a regulatory advisor and two former members of the Financial Action Task Force (FAFT) to its advisory team.

Binance also faces legal troubles in Japan, where the government stated it offered crypto services without registration. In 2020, Binance faced regulatory pushback in Europe for providing stock token trading on its exchange.

Binance has moved headquarters from country to country to avoid regulation, most recently seeming to indicate there is not a headquarters after Malta denied Binance under its jurisdiction, the last known location of Binance’s headquarters. This represents a regulatory risk as businesses must fall under some jurisdiction. It is unprecedented for a legitimate business to not submit to some regulation scheme and it seems that now the walls may be slowly closing in on the world’s largest exchange.

Polkadot

Polkadot’s latest update introduces the necessary features to enable the release of parachains through slot auctions or crowdloans. These will first take place on Kusama, then on the Polkadot main chain once a new audit is completed. Kusama is Polkadot’s canary/test network, but with real money involved. Parachain slot auctions are a free-market way of selecting which other parachains will be added to the Kusama relay-chain and have their functionality become a part of the Kusama network. In just the first day on the Kusama blockchain, the auctions attracted over $140M of KSM, with Acala's Karura network responsible for almost $100M alone.

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