Headlines

Genesis, Gemini reach $100M agreement over Earn program
SEC sues crypto exchange Gemini and crypto lender Genesis for selling unregistered securities
Nexo's Bulgaria office raided by police
Avalanche scores partnership with Amazon (AWS) to scale blockchain adoption
EU's final vote on MiCA regulation postponed until April 2023
Disgraced 3AC founders Zhu and Davies attempt toraise $25 million for new crypto exchange
Avraham Eisenberg, Mango exploiter, is charged with fraud by the CFTC
New DeFi dApp, Ondo, looks to tokenize US Treasury Bonds
Leading MEV development firm, Flashbots, looks to raise $50M at $1B valuation
FTX-linked Alameda Research sues Voyager Digital for over $445M
BTC payments company, Strike, launches remittances to Philippines
DeFi project 1inch Network will launch their own hardware wallet
~200 Congressmen took direct contributions from FTX and now FTX is attempting to claw it back
Coinbase reaches $100mm settlement with NYDFS for AML/KYC violations, stock up ~100% in January
Alex Mashinsky of Nexo sued by NY AG for making false statement to investors
Grayscale’s appeal of SEC’s Bitcoin ETF set for March 7th
Binance admits stablecoin pegged-BUSD was once under-collateralized by $1B, claims it’s now fixed
USDC announces Cross-Chain Transfer Protocol, allowing for frictionless bridging between blockchains with native USDC on each chain

Macro

As expected, the FOMC carried out a 25 basis point increase to the Fed Funds rate in February, the smallest increase in nearly a year (March 2022).

The FOMC no longer views public health or the Ukraine conflict as significant drivers of inflation but did make every effort to caution the American public that the fight against inflation is by no means over. Chair Powell expressed concern about the persistent core service inflation, excluding housing and a competitive job market.

The latest US employment report showed a significant increase in nonfarm payrolls, with 500,000+ jobs added in one month. This far surpasses analysts' predictions of a rise of ~187,000. The US unemployment rate has dropped to a historic low of 3.4%, the lowest number since May 1969!

The report suggests that the US economy is not facing a recession, and consumers still have spending power. However, good news can sometimes be bad news in the macro world. The positive job indicators give the Federal Reserve more room to continue with rate hikes to control inflation.

Despite some disinflation in certain areas, Powell emphasized the cyclical nature of commodity-driven inflation and the Fed's commitment to preventing entrenched consumer inflation expectations through this hiking cycle.

Despite his efforts, Powell’s speech was largely interpreted by the market as dovish and as a sign to continue their risk-taking behavior. Tech stocks like Facebook and Coinbase have jumped 20%+ in just a few days, while the crypto market is up, including enormous “pumps” in projects like Aptos and Canto. Even the Bank of England (BOE) and European Central Bank (ECB) hinted at their plans to pause as central banks approach the end of the rate hike cycle. Despite the momentary good times, there are still plenty of reasons to be cautious as an investor. Reviewing our last macro article that looks into 2023 provides more insights.

Bitcoin

January saw a significant boost in the value of bitcoin, with a ~35% increase in its price. This marks the third-highest growth in cryptocurrency during the month of January in its 14-year history. The rally was driven by a number of favorable macroeconomic factors (discussed above), as well as a reduction in the impact of negative events that impacted the crypto market in the final quarter of the previous year.

BTC Jan 2023 performance — Source: Arcane

Ordinals

NFTs are marketed as "digital assets" that are provably unique because they are tied to a hash on a blockchain. They are often linked to digital files such as art, movies, or music as a way to prove ownership or membership in a group. They became popular in 2017 with the rise of crypto kitties, but the NFT market has since lost over 96% of its trading volume and the speculation around it has declined.

In the past, NFTs have been a part of the bitcoin ecosystem but never took hold due to the lack of interest among bitcoin holders (Rare Pepes, anyone?). Projects like Colored Coins and Mastercoin, which aimed to add additional data to the bitcoin blockchain, faded away as the blockchain became congested and uneconomical to post information that provided no value.

However, this all changed in January with the release of a new project, Ordinals. Thanks to the most recent Bitcoin soft fork, Taproot, Ordinals figured out a way to transfer individual satoshis onto the Bitcoin network and create NFTs. Ordinals are a numbering scheme for satoshis that allows tracking and transferring individual sats. The Ordinals protocol allows users to connect satoshis to a digital file and broadcast it to the bitcoin blockchain, enabling the permanent storage of text, images, or HTML on-chain. This is in contrast to NFTs on smart contract blockchains, which store references to files hosted elsewhere and can become compromised if the file storage service is deleted or goes down.

The Ordinals protocol enables users to inscribe assets into individual satoshis, a process called inscription. When the larger, bloated transaction with the inscribed file is broadcast to the network, it competes with other transactions in the mempool to be added to a new block. If block space is limited and competition is high, miners must make a decision about which transactions to add to the block.

The Bitcoin blockchain has seen a growing number of inscriptions being added in a permissionless manner, including JPEG images, NFTs from other blockchains, and even a video game file. The biggest surprise was the mining of a 3.96 MB block by Luxor mining pool that contained an Ordinal inscription #652, a JPEG image of a wizard.

bitcoin ordinal wizard — The infamous NFT that created the biggest Bitcoin block ever.

The proportion of block space used by Ordinal inscriptions is growing daily and has caused concern among Bitcoin maximalists and proponents of small blocks. Bitcoin advocate Jimmy Song has claimed that the Luxor mining pool will be punished by the market and suggested smaller blocks may be necessary. However, this view is criticized by Bitcoin developer Luke Dashjr who views Ordinal inscriptions as similar to attacking Bitcoin.

Ethereum

The first major upgrade of the Ethereum network since the Merge is scheduled for March and is referred to as Shanghai and Copella. There are two upgrades necessary because one is done at the Execution Layer on Ethereum and one at the Consensus Layer. Read more about Ethereum’s design here. Despite this technicality, most simply refer to the uprades as a singular event, most often calling it the Shanghai upgrade. This upgrade includes the highly anticipated EIP-4895, which will enable users to withdraw their staked ETH. The Zhejiang public testnet went live on Feb 1, 15:00 UTC. Users will be able to practice the withdrawal process once the Shanghai and Capella testnets, which handle the consensus layer for withdrawals, are launched at epoch 1350, six days after the Zhejiang launch. After Zhejiang, another open testnet will be run and, assuming there are no issues, a date for the actual upgrade could be set by the end of February.

The upcoming hard fork will enable the 16 million+ currently staked ETH to be unstaked. However, it is not anticipated that all or even a significant percentage of that number will be unstaked for many reasons. For starters, ~30% of all staked ETH is already in the form of Liquid Staked Derivatives using services like Lido and RocketPool. This means that ~30% is already liquid and able to be sold/traded. Additionally, ~50% of all currently staked ETH was staked at a price higher than today (~$1600). This means stakers are “underwater” and probably not looking to sell at a loss. Finally, the unstaking and withdrawal process is throttled, meaning not everyone can immediately unstake and sell their ETH at the same time. This will smooth out the selling over weeks, not days. You can learn more about that process in our latest article about LSDs here.

Governance Drama

The Uniswap community has proposed a community vote to deploy the V3 protocol on the Binance Chain (BNB) before the business license expires on April 1, 2023. Once the license expires, any competitor or other projects will be able to "copy and pasta" Uniswap’s code to launch their own competing version. It is, therefore, in Uniswap's best interest to go ahead and launch their version to try and capture some of that market before others do.

However, a16z, a crypto-focused VC fund with large stakes in both Uniswap and LayerZero, has decided to vote against the proposal because the Uniswap community did not decide to use LayerZero (one of a16z's investments) as its official bridge over to the BNB chain. a16z used its entire 15 million UNI holdings to block the proposal. This move by a16z shows the lack of decentralization at the governance level and the fragility of on-chain voting systems. A16z has 41.5 million UNI tokens through multiple wallets and the vote is expected to last until February 10th. Currently, 77% of the community supports deploying on BNB via the wormhole integration. However, with only 3.95% of the total eligible UNI delegated so far, the outcome of the voting process remains uncertain.

Crypto Alpha and Education

DeFiLlama does much more than just publish analytics dashboards, as the platform’s builders have also released a variety of tools aimed at making the lives of DeFi users easier. Some of these resources include:

LlamaNodes — a source of public and premium web3 RPCs
Directory — a database for going directly to DeFi websites to avoid Google scam results
Token Liquidity — a search tool for quickly finding the most liquid trading avenues for token pairs on the most popular DeFi chains

MetaMask

MetaMask is a cryptocurrency wallet that supports the Ethereum blockchain, Layer 2 networks, and standalone EVM-compatible blockchains. It is a non-custodial solution that enables users to interact with decentralized applications and manage their crypto assets. Developed by Consensys, it is widely supported by the Ethereum developer community and has gained significant popularity, with over 30 million monthly active users as of Q1 2023.

One of the key advantages of MetaMask is its flexibility in supporting EVM blockchains. In recent years, there has been a proliferation of EVM-compatible blockchains, each offering improved efficiency and cost-effectiveness over the original Ethereum blockchain. MetaMask's technology allows for easy integration of these new networks, enabling users to switch between them and access decentralized applications on any network. This is particularly useful for investors who are always looking to explore new projects and ecosystems.

Another advantage of MetaMask is its ease of access and user-friendly interface. The wallet is available for all smart devices, and the interface is designed for basic transactions, making it accessible for even casual investors with minimal knowledge of the technology. Additionally, MetaMask can be used in conjunction with hardware wallets such as Trezor and Ledger, providing users with the option to store their crypto assets in a more secure manner for long-term holding.

One of their popular offerings is the MetaMask swaps, which was processing $3B-$5B of volume per month at its peak and generating close to $0.5B in revenue since its launch in late 2020. MetaMask charges a 0.875% swap fee on top of the 1-30bps DEX fees the user is already paying, which is considered a rather high fee by some.

MetaMask's second app was the bridge product which supports 4 EVM L1s and has three levels of fee extraction taking place. However, the bridge volume saw a drop of ~80% due to market conditions and EVM rollups gaining share from the L1s. MetaMask recently launched liquid staking in-app, which allows users to stake their ETH for an LSD without going to the protocol and reduces the attack surface.

MetaMask's latest development is their product "Snaps," which is still in its pre-release phase. Snaps allow external developers to build apps on top of MetaMask's functionality, similar to the App Store or Microsoft's Windows. Snaps are JavaScript files that can be installed by users to increase the functionality of MetaMask. Some potential snaps already being showcased include StarkNet for contract accounts on L2, Web3Auth to turn MetaMask into an MPC wallet, ZK-Nullifier to create pseudonymous apps, smart accounts to access smart contract wallets directly from MetaMask, and more. Snaps is an exciting development from the MetaMask team as it allows them to scale their wallet and increase its functionality in a way that is not possible with a closed development loop.

However, MetaMask also has certain limitations that make it less suitable for certain investors. One limitation is its maximalism towards the Ethereum blockchain and EVM blockchains, which means it only supports these types of crypto assets and doesn't have plans to support other blockchain networks. This can be inconvenient for investors who hold assets across multiple chains and are looking for a single wallet solution. Additionally, the process of manually adding custom blockchains can be time-consuming and less convenient for some investors.

In summary, MetaMask is a popular and versatile cryptocurrency wallet that supports EVM blockchains and enables easy access to decentralized applications. Its flexibility and user-friendly interface make it accessible for a wide range of investors. However, its maximalism towards the Ethereum blockchain and the process of manually adding custom blockchains can be limiting factors for some investors.

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