Bitcoin

It was a busy month for Bitcoin (BTC), both in price and underlying fundamental developments. This month’s Enthusiast starts off with a list of the most important Bitcoin-related news.

Hashrate Stabilization and Energy Usage Transparency

Bitcoin’s hashrate suffered a ~50% decline after China announced a crackdown on mining activities in Q2 2021. China’s sudden crackdown forced miners to shut down operations and move resources elsewhere. The worst appears to be over as the hashrate has started to rebound from a recent bottom over the last two weeks. Following roughly three months of uncertainty, this development might suggest that some miners have successfully relocated from China to a new country and restarted mining operations. It will take time to restore this hash power as the ASICs behind it are scrambling to find available hosting space outside of China and capacity is extremely limited.

Bitcoin hashrate july 2021 — Source: CoinMetrics

Based on a recent report from the Bitcoin Mining Council and past reports from the likes of Coin Shares and Cambridge Alternative Finance, Bitcoin mining is already “greener” than most industries and vastly more so than the U.S. electrical grid. This is contrary to the many hyperbolic headlines concerning Bitcoin’s energy usage and provides a new perspective on the mining industry. Take a look at the numbers from each report and ask yourself, “Why should Bitcoin mining, specifically, be condemned when so many other industries are less scrutinized?”

Estimated renewable penetration in Bitcoin mining:

2019 CoinShares research = 73%

2020 Cambridge Alt Finance research = 40%

Recent North American Mining Council report = 53%

US power grid = 19%, via @EPA

Lightning Growth

Bitcoin’s second layer is called the Lightning Network (LN) and enables users to open multi-signature payment channels with others in the network in which they can send fractions of bitcoins back and forth without paying on-chain transaction fees each time. If at any point one party would like to exit the channel or settle their transactions, they can close the channel and settle back on the base layer. This means users can fit many transactions into one fee-driven large settlement. Importantly, an individual doesn't need to have a channel open with the exact person with whom they're trying to transact. They only need to have a path between nodes that eventually links to that person, which becomes easier as the network grows. Since the start of 2021, the number of LN nodes has increased from 12,000 to 20,000+, while channels increased to over 62,000.

Until recently,the LN only saw modest growth. The LN began 2021 with ~1,000 BTC of capacity and has since increased to 2,000 BTC in merely seven months. LN Strike, a private company built on the LN, began working intimately with the country of El Salvador earlier this year as El Salvador prepared to make BTC legal tender.

BTC lightning channels july 2021 — Source: txstats.info

New Last-Minute Regulation Coming?

U.S. Congress has put forth a bipartisan infrastructure bill that includes a last-minute crypto addition. The new crypto language aims to raise ~$30B from crypto taxes, specifically targeting more strenuous reporting requirements on various intermediaries such as exchanges, wallet providers, liquidity providers, and possibly even decentralized exchanges. The controversy in the bill surrounds the language, specifically the definition of “broker.” In the bill, a broker is “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This definition remains quite broad and leaves too much room for (potentially) cumbersome regulation.

In the U.S., brokers are required to give Form 1099s to their users for them to file to the IRS as well. By this new language, miners, liquidity providers, and certain DeFi users would be forced to collect customer data with their counterparty, which is oftentimes impossible.

Nine-Day Rally in Price Action, Bitcoin Remains Bound Between $30k - $42k

The crypto market soared by ~30% this month after sharp declines in May and June. Bitcoin briefly surged past the $40k mark for the first time in 6 weeks on the back of an Amazon rumor (later denied) and short squeeze. Despite the sharp boost upwards, BTC traders are left wondering if this is the start of a new up-trend or relief rally that ultimately leads lower. $30k and $42k remain the price levels to watch.

Ethereum

It was also a busy month for Ethereum (ETH). Ethereum turned six years old on July 30 and has its biggest upgrade in years (EIP-1559) set to roll out this week as part of the London hard fork. Below is a list of the most important Ethereum news.

London Upgrade

The London hard fork went live this week! The most anticipated upgrade in the hard fork is a change to Ethereum’s gas fee structure known as EIP-1559. The goal of implementing EIP-1559 is to eliminate the wild volatility and imprecise bidding associated with the current gas fee market, making fees smoother and more predictable for Ethereum users. It is, at its heart, a UX improvement, but also has financial implications for the chain at large. It is important to acknowledge that EIP-1559 does not directly lower gas fees, although it could help in certain edge cases. To learn more about EIP-1559 and Ethereum’s tokenomics, check out the Ethereum CORE report.

Eth2

Nearly 6,500,000 ETH has been staked into the Eth2 Beacon Contract, equating to nearly $17 billion in USD. There are now over 200,000 validators supporting Eth2 with 99.6% successful validator/network participation. If the London hard fork is successful, all eyes will be on Q1 2022 when “The Merge” is proposed to be completed. “The Merge” is the next hard fork, when the Ethereum Proof of Work (PoW) chain will be “merged” into Eth2, eliminating PoW and miners from the network.

Eth2 validators Aug 2021 — Source: Beaconch.ain

Steady Adoption Metrics

~25% of all ETH is locked up in smart contracts, a ~50% increase from January 2021. 6.4 million ETH is staked on the Beacon chain while ~9.8 million ETH is being put to work in DeFi applications. Coupled with the increase of ETH in smart contracts is the decrease in ETH held on centralized exchanges (chart below). This suggests that an increasing number of Ethereum users are finding use cases for their ETH outside of holding it on an exchange and/or trading.

ETH in smart contracts July 2021 — Source: Glassnode

Another, albeit imperfect, measuring stick for blockchain adoption is the number of transactions. The proliferation of use cases on Ethereum (gaming, NFTs, DeFi, DAOs, and so on) has led to a consistent increase in ETH transactions since the beginning of 2020, increasing 120% over that time. Conversely, on-chain transactions for Bitcoin have decreased by 20% since January 2020. This suggests a greater and increasing amount of utility being generated by Ethereum.

ETH vs BTC daily transactions — Source: IntotheBlock

An even better metric for determining the health and adoption of a blockchain remains the amount of fees it generates. Bitcoin and Ethereum have limited block space, therefore, fees are more representative of the demand to interact with the chain. In this case, Ethereum has recently surpassed Bitcoin and held above it throughout most of 2021.

ETH vs BTC daily fees — Source: IntotheBlock

NFTs and Gaming

After a springtime lull, NFTs are again dominating the crypto headlines in July while gaming dApps, specifically Axie Infinity, have exploded. Stoner Cats, promoted by actors Mila Kunis and Ashton Kutcher, sold an animated cat series in the form of NFTs which clogged the Ethereum main chain as users poured in bids in hopes of purchasing one. The popularity of the NFT sale caused gas fees to surge, created long wait times for transactions and led to the failures of millions of dollars worth of transactions because the right gas limit was not set when attempting to mint the NFTs (EIP-1559 helps with this!).

Art Blocks, computer-generated “scribble-like” NFTs, gained significant traction as well, doubling the amount of holders since May. The takeaway is that NFTs are having another moment in the sun and their applicability is rapidly expanding. The explosion of the sector in general is bullish for crypto, Ethereum, and, specifically, NFT marketplaces like OpenSea, which is quickly becoming one of Ethereum’s biggest dApps.

OpenSea volume July 2021 — Source: Delphi Digital

CryptoPunks were already a known NFT project prior to July but things turned a new corner when Gary Vee purchased a knitted-cap ape cryptopunk for 1,600 ETH ($3.7M) last week. Later that same day, another anonymous user purchased a different Crypto Punk for 2,250 ETH ($5.5M). These two high-profile purchases set off a buying frenzy and was enough to send nearly every Crypto Punk metric to an all-time high.

NFT ETH cryptopunks sales july 2021 — Source: Dune Analytics

However, Axie Infinity and the AXS token have stolen the show for the month of July. Axie Infinity is a play-to-earn role playing game on Ethereum with its own AXS token. AXS greatly outperformed the broader crypto market, even creating momentum for other tokens in the same category.

NFT sales july 2021 — Source: Delphi Digital

UNI

Uniswap Labs delisted several synthetic tokens from its app interface, stating they are no longer available “because they are unable to allow trading for legal reasons.” This serves as a reminder that even though the Uniswap protocol and smart contracts are totally decentralized and immutable, the user-facing frontends are not. This means that websites used to access the protocol can be changed or censored.

BNB

Binance is not enjoying the summer as legal issues have begun to mount over the last two months. Kicking off Binance’s legal woes was the regulatory pushback in Europe that the exchange saw for providing stock token trading on its exchange. Additionally, in June 2021, the UK's lead financial regulator announced that Binance's UK division is not permitted to conduct operations related to regulated financial activities in the country. This order followed a similar one from Japan stating that Binance isn't registered to do business in the country. Binance's regulatory troubles again intensified in late July 2021 when Malaysia's Securities Commission ordered the company to cease operations in the country. Binance also recently reduced the amount of non-KYC’d Bitcoin withdrawals from the site from 2 BTC down to 0.06 BTC, as well as removed any leverage over 5x. These are seemingly in response to the regulatory pressure as of late.

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