Top Stories of the Week - 3/1
This week in the newsletter, we write about the wild week in the Bitcoin market, Uniswap Foundation’s proposal to activate the “fee switch,” and Robinhood integrating with Arbitrum, an Ethereum L2.
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Bitcoin Now 10% From ATHs
On Wednesday, February 28, Bitcoin touched $64k for the first time since November 15, 2021. Bitcoin is now 10% away from its all-time high. During Bitcoin's explosive price action this week, spot BTC ETFs took in a whopping net $1.77bn from February 26 to February 28 with Blackrock's BTC ETF ($IBIT) seeing $1.24bn in net inflows during this time. February 28 now marks the largest day for net BTC ETF inflows with Blackrock and Fidelity alone taking in $857.3m, representing 96% of total BTC ETF flows that day. Despite constituting only 0.2% of BlackRock's ETF lineup, $IBIT has contributed to an astounding 42% of Blackrock’s ETF net flows this year, while $FBTC, comprising 2% of Fidelity's ETF lineup, contributed 64% of Fidelity’s net ETF flows.
OUR TAKE:
BTC approaching all-time highs is the culmination of increasing confidence in the asset among U.S based investors, RIA platforms and institutions. This week, we saw Michael Saylor purchase another 3k BTC for $155.4m, Reddit potentially adding more BTC to their balance sheet, and Fidelity Canada recommending a 1-3% allocation to BTC. With BTC up 20% in the past seven days and BTC ETF net inflows reaching new highs, there is plenty of reason to believe that the Bitcoin ETF story is just getting started. As we wrote in our October 2023 report “Sizing the Market for the Bitcoin ETF,” the primary net new accessible market for these vehicles are wealth managers and financial advisors, who have not had a real way to allocate client capital to Bitcoin exposure. Galaxy's head of Research, Alex Thorn, noted that while we are periodically seeing headlines of RIAs adding support for the ETFs, $40tn in Assets Under Management (AUM) at banks and broker/dealers remains untapped, awaiting activation. As a result, we could see continued interest from RIA platforms to offer the spot BTC ETFs to their clients over the next 3-18 months.
The increased access to the spot BTC ETFs for wealth managers and financial advisors in the U.S will inevitably contribute to the acceleration of net inflows. This week, Wells Fargo and BOA's Merrill Lynch announced that they will begin offering the spot BTC ETF to clients on their brokerage platforms on an unsolicited basis, and Morgan Stanley noted that they are considering adding the ETFs to their brokerage platform. As Bitcoin is 51 days away from its fourth halving, the increased net inflows for spot BTC ETFs will continue to push the spread between BTC's daily issuance and BTC purchased through the ETFs. The spot BTC ETFs are currently extracting 10x-11x the amount of newly-produced BTC from the market than BTC issued daily from the block reward, which is around 900 BTC. If the current BTC ETF inflows hold or even increase over the next 51 days, the Bitcoin ETFs will be taking +20x more BTC off the market than the daily issuance.
As Bitcoin surges towards all-time highs ahead of the halving, there's a heated debate over whether we're nearing the cycle's top; however, a significant paradigm shift has occurred since the last cycle in November 2021 with the introduction of spot Bitcoin ETFs. Bitcoin has reemerged at the forefront of macro investors' discussions, now mentioned in the same breath as gold and treasuries as a pivotal macro hedge asset. The advent of the Bitcoin ETFs in the United States represents a monumental shift poised to disrupt conventional notions about Bitcoin price cycles, the evaluation of holder behavior, and the dynamics of intra-crypto rotations. - Gabe Parker
Robinhood <> Arbitrum
Robinhood to collaborate with Arbitrum to advance DeFi accessibility. On Thursday at ETHDenver, Robinhood and Arbitrum announced they will collaborate to empower new users to facilitate onboarding of new users to web3. Robinhood is integrating Arbitrum's L2 technology / ecosystem to power low-fee in-app swaps for Robinhood Wallet users.
"Accessing and transacting on L2s has historically been difficult to non-crypto natives, but Robinhood Wallet now helps strip away the complexities to help onboard those new to web3,” said Johann Kerbrat, GM of Robinhood Crypto. AJ Warner, Chief Strategy Officer at Offchain Labs (the core development team behind Arbitrum) added, “As DeFi continues to lead on Arbitrum, we’ll now see one of the most recognizable trading platforms bring low-cost in-app swaps to a wide audience of traders. This collaboration pushes web3 democratization forward and is poised to empower users to further explore the potential of web3 in finance.”
The price of ARB jumped as much as 7% to $2.10 immediately following the news.
OUR TAKE:
Robinhood's latest expansion into crypto is a meaningful development for the industry as it eases the onboarding of a large population of users on-chain. With 11m monthly actives (per 4Q23 reported financials), Robinhood is one of the most popular brokerages, especially for younger demographics. The trading app’s rise in popularity was largely due to its mobile-first, easy-to-use, affordable (i.e., commission-free trading) approach to simplifying finance for users. Now Robinhood will look to extend those same principles to simplify the user journey to move on-chain to access to DeFi, NFT, social/gaming or other activities through Robinhood Wallet.
While Robinhood Wallet currently offers support for multiple crypto networks aside from Arbitrum (including Ethereum, Bitcoin, Polygon, Optimism & Base), this new partnership with Arbitrum establishes the L2 network as Robinhood’s preferred network for its Wallet users, serving as a testament to Arbitrum's tech stack and usability (which should further improve once EIP-4844 lowers transaction fees by ~10x from current levels). It’s a strong match between the fintech brokerage and leading rollup by user activity as Robinhood's 'degen-heavy' user base will likely find it relatively easier to participate in Arbitrum’s leading DeFi ecosystem and appreciate the values of DeFi. - Charles Yu
Uniswap Fee Switch Reignites Debate
On February 23, a new governance proposal was submitted by Erin Koen, the Governance Lead at Uniswap Foundation, to implement the Uniswap fee switch. The fee switch generally refers to a process whereby Uniswap governance enables distribution of protocol fees to UNI token holders. Today, only liquidity providers into Uniswap’s decentralized exchange asset pools earn a percentage of transaction fees. Fee switch proposals have been submitted multiple times in the past. Prior proposals failed to pass for several reasons, primarily due to concerns over regulatory and tax complications.
The proposal requests permission to update the ownership of a Uniswap smart contract, V3FactoryOwner.sol, to enable for the programmatic and permissionless collection of protocol fees from Uniswap liquidity pools. Users stake their UNI and then delegate it to active governance participants, earning a percentage of protocol fees. Pools accrue fees up to a set level, determined by governance, at which point a fee distribution mechanism can be triggered. To trigger the distribution a user must also deposit the total amount of fees they intend to claim. The accrued fees are then directly released to the depositor, with the depositor rewards then distributed to UNI stakers over a set period.
Despite being one of the largest and best established DeFi applications, Uniswap has one of the simplest governance processes (For a full overview of Unsiwap Governance please refer to our report Governance in DeFi). This was done purposefully to limit politics from interfering with the protocol’s core operations. As a result, in the lead-up to the announcement the Uniswap Foundation rolled out several new initiatives aimed at fostering a more organic and engaged governance body.
The proposal is currently being debated on the Uniswap governance forum. It will go to an initial Snapshot vote on March 1. If approved by a majority, the proposal then moves to an official onchain vote on March 7 that programmatically upgrades the Uniswap protocol if approved. If that vote passes, further proposals would then need to pass governance to actually implement the fees. This proposal simply introduces the functionality to do that without enabling it.
OUR TAKE:
Approving the Uniswap fee switch would be one of the most important governance decisions in DeFi’s short history. For Uniswap, approval transforms the way in which the protocol’s incentives are distributed and will have serious implications for Maker’s continued growth and sustainability. For the rest of DeFi, approval would signal a significant shift by one of the largest and most influential applications in the DeFi space, opening the door for others to experiment as well (already other large DeFi applications such as Frax have indicated they will also consider fee switches).
One of the biggest critics of the proposal are liquidity providers (LPs), who could see a percentage of their fees diverted to stakers. This could disincentivize liquidity provision, damaging one of Uniswap’s largest moats – its liquidity. Others have highlighted regulatory concerns and flaws in governance incentivization. Governance continues to be an Achilles heel for crypto, and especially DeFi. Less than 10% of circulating UNI has been used to vote on recent proposals and the top 10 Uniswap delegates by voting power having not voted on the last 10 proposals.
Despite these issues, the proposal has a higher chance of passing compared to prior ones simply because it is being advanced by the Uniswap Foundation, which continues to play a significant role in guiding the protocol’s growth and governance. It seems highly unlikely they would put forth a proposal they do not feel has a high probability of succeeding, especially given the challenges faced in getting prior proposals approved. - Lucas Tcheyan
Charts of the Week
February 2024 notched the biggest monthly candle in bitcoin’s history. Opening February at $42,950, BTC closed the month at $61,296 adding $18,706. It has been 29 months since BTC posted a monthly candle of this size in October 2021, the month before it made the current all-time high around $69,000.
Other News
Marathon Digital unveils two Bitcoin sidechains as part of Anduro network
Gemini to pay $37 million fine, return over $1 billion to Earn customers in settlement with NY regulator
MicroStrategy's bitcoin portfolio reaches $12.24 billion in value as bitcoin breaks past $60,000
VanEck launches NFT platform, set to offer split ownership of token-backed watches and wine
Blockchain-based social graph Lens Protocol enters ‘permissionless' phase
Arweave releases testnet for ‘absurdly scalable’ compute layer designed for social media, AI
Yuga Labs protects NFT royalties ahead of Magic Eden's Ethereum marketplace launch
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