Top Stories of the Week - 5/10

This week in the newsletter, we write about crypto policy entering the presidential race, the Friend.tech token airdrop, and a new EIP for Improving Wallet UX.

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Crypto Policy Enters the Presidential Race

Former President Donald Trump said Wednesday “If you’re in favor of crypto, you better vote Trump” at a Mar-a-Lago event. Speaking before supporters at an event related to his NFT collection, Trump mocked President Biden, saying “If you asked Biden… ‘sir, are you for or against that,’ he’d say ‘get me off the stage…’ he has no idea. But, look, Gensler is very much against it. The Democrats are very much against it. And I say this: a lot of people are very much for it, a lot of people in this group. And I’m fine with it. I want to make sure it’s good and solid and everything else, but I’m good with it.” Messari founder and CEO Ryan Selkis also addressed the room, voicing support for Trump’s crypto stance and saying “it’s about time that we bring and prioritize American tech jobs and American jobs in general and make sure that we invest in technology that will extend the dominance of the dollar.”

The same day, the U.S. House passed a resolution of disapproval that would overturn the Security & Exchange Commission’s Staff Accounting Bulletin 121 (SAB 121). The resolution was sponsored by Rep. Mike Flood (R-NE) and Rep. Wiley Nickel (D-NC) and passed the house 228-182, with 21 Democrats joining all Republicans to vote in favor. In a statement, Nickel said “Gary Gensler and the SEC deliberately sidestepped the customary regulatory process, amounting to an obvious overreach of the agency’s authority” and argued that SAB 121 “prevents well-regulated banks from safeguarding digital assets, making the industry less safe for consumers.” This was the U.S. House floor vote on a standalone crypto-related bill in history, and Sen. Lummis (R-WY) is sponsoring the effort in the Senate. Lummis said “we cannot allow the administration to regulate tools for financial freedom out of existence.” Importantly, because the effort is a resolution of disapproval (which is a “privileged resolution” and not a normal bill), the Senate needs only a simple majority to approve the measure and send it to President Biden’s desk.

Also Wednesday, the White House released a statement saying that “if the President were presented with [the bill], he would veto it,” and argued that SAB 121 “was issued in response to demonstrated technological, legal, and regulatory risks that have caused substantial losses to consumers.” The White House also argued that overturning SAB 121 “could also inappropriately constrain the SEC’s ability to ensure appropriate guardrails and address future issues related to crypto-assets including financial stability.”

The SEC issued SAB 121 in March 2022. The bulletin “expresses the views of the [SEC’s] staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for platform users.” The guidance specifically suggests that publicly traded companies should account for custodied client/user assets on their own balance sheets, a departure from longstanding custody norms, in which custodied assets legally belong to their end-client owners and thus are protected in the case that the custodian goes into bankruptcy. Because many banks – which themselves are custodians – are public companies, and because of separate bank capital requirements that require matching balance-sheet assets with cash, the rule effectively makes it impossible for banks to custody cryptoassets. For that reason, the biggest bank lobby has also opposed SAB 121 and supported Congressional efforts to overturn it.

Lastly, also on Wednesday, the Blockchain Association and Digital Currency Group released a survey of likely presidential voters in swing states (Arizona, Michigan, Montana, Nevada, Ohio, and Pennsylvania) that showed 1 in 5 registered voters in battleground states “consider cryptocurrency a major issue in the 2024 election.” The study found that the “vast majority of voters overall and Crypto-Positive voters plan to vote in the 2024 election (90%+) and are closely split in party lean,” suggesting that crypto is a bipartisan issue. 26% of respondents said they currently or have previously owned crypto, and of those, 47% reported profiting while 32% reported losing money.

OUR TAKE:

The juxtaposition of the White House threatening a veto on SAB 121 and former President Donald Trump (and frontrunner for the 2024 Republican Nomination) saying pro-crypto voters should “vote Trump” was striking. Tight Senate races in Montana and Ohio, particularly, could turn on the crypto vote, and Trump’s team is now directly leaning into an issue that could determine outcomes in tight races, while the White House is taking a tough stance on a rather fringe issue.

Indeed, the White House’s argument that overturning SAB 121 could lead to “financial instability” and that it was instituted because of “risks that have caused substantial losses to consumers” is backwards and nonsensical. If American custody banks (think State Street, BNY Mellon, JP Morgan, etc.), among the most regulated institutions in the world, were able to custody digital assets, consumers could store their crypto in much more highly regulated entities than they can today. And because SAB 121 requires that these companies carry assets on their balance sheets, removing their bankruptcy remoteness, consumer assets would be decidedly less safe if their custodian faces financial hardship. Coinbase was forced to acknowledge this reality shortly after SAB 121 was issued in 2022. The statement of administration policy seems more like a defense of the current SEC’s posture on crypto broadly than a reasoned argument about the effects of letting banks custody cryptoassets. It’s worth noting that these types of statements of administration policy are typically steered by the National Economic Council, and one of its deputy directors (Jon Donenberg) was previously chief of staff to Sen. Elizabeth Warren (D-MA), longtime cryptocurrency antagonist (and Donenberg replaced another deputy director Bharat Ramamurti, who left the NEC in September 2023 and was previously a senior counsel for banking and economic policy for Warren until 2019, and also was economic policy director for Warren’s failed 2020 presidential bid).

Not only is SAB 121 bad policy that contributes to the centralization the cryptoasset custody market and prevents the world’s oldest and most storied custodians from participating, it was also issued without any rulemaking process. The SEC has argued that Staff Accounting Bulletins are “non-binding guidance,” but both Congress and the Government Accountability Office (GAO) have said that the bulletin amounts to a rule. If public accounting firms are told by the SEC that public companies should account for something a certain way, the companies do it. And regulatory rulemaking needs to conform to certain processes under the Administrative Procedures Act (APA), such as giving time for public comment periods and publishing in the Federal Register, none of which happened here. Because of the tie-in with bank capital requirements, it also represents a pretty notable expansion of SEC’s regulatory power over banks, an encroachment on the regulatory authority of banking regulators. With 21 Democrats joining House Republicans to rebuke the SEC on this, it’s clear that consternation over the SEC’s leadership and stance on crypto is not a partisan issue. -Alex Thorn

Friend.tech Airdrop Attempts to Win Back Users

Friend.tech, the first Social-Fi DeSoc app released in August 2023, airdropped their native token ($FRIEND) to users on May 3, 2024. Social-Fi DeSoc apps promote a user experience that often involves the purchasing of assets that give access to gated content. On Friend.tech, users purchase keys from other users and use the key to access an issuer's private chatroom. To read more about DeSoc apps, check out ourGalaxy Research report covering the DeSoc ecosystem.

Friend.tech airdropped 88m $FRIEND tokens to 278.4k users with an average of 292 tokens per user. The top 20 airdrop recipients received 8% of the entire airdropped token supply. A total of 81.3m tokens, representing 92.4% of the airdropped supply, has so far been claimed by users.

The $FRIEND token airdrop coincided with Friend.tech's V2 launch, introducing a new feature called "Clubs." These Clubs function as community spaces collectively owned and managed by multiple key holders. Acquiring keys for Clubs involves purchasing them in $FRIEND tokens, accompanied by a 1.5% purchasing fee. Of this fee, 0.5% is allocated to the Club President, 0.5% benefits users exchanging for Club keys, and the remaining 0.5% is directed to liquidity providers on Friend.tech's DEX. To ensure that Club keys do not have a high price causing a barrier to entry, the bonding price curve for Club keys is flatter than regular Friend.tech keys, incentivizing Club communities to accumulate mass amounts of users.

OUR TAKE:

The Friend.tech airdrop underscores the importance of timing for token airdrops. During its peak, Friend.tech attracted over 830k unique active users within three months of its launch. However, the lack of clarity surrounding the $FRIEND airdrop in November 2023 led to a significant number of users abandoning the application. Subsequently, from November 2023 to May 3, 2024, Friend.tech experienced a notable decline in the rate of new user sign-ups, adding only 66k users over seven months.

The subtle uptick in Friend.tech's daily user transactions following the airdrop highlights a key finding that delayed airdrops fail to address user retention challenges. On the day of the $FRIEND airdrop, Friend.tech recorded 82k daily transactions. Despite reaching its highest daily transaction count YTD on May 3, 2024, this figure still represents a 77% decrease from Friend.tech's peak daily transaction volume observed on September 13, 2023.

Friend.tech's airdrop also shed light on the dangers of rewarding power users who solely engage in airdrop farming. Following the airdrop, the third-largest recipient of $FRIEND tokens swiftly offloaded over 500,000 tokens onto the open market. This action influenced other token holders to follow suit, selling off their airdrop shares to secure profits. Consequently, the thin liquidity on decentralized exchange (DEX) trading pairs for $FRIEND led to a sharp 52% drop in the token price on the day of the airdrop. The rapid decline in $FRIEND's value was further exacerbated by technical bugs that prevented some users from claiming their airdrop. While post-airdrop token sell-offs are not uncommon, this scenario discourages core users from retaining their airdrop allocations. Nonetheless, Friend.tech exists at the intersection between blockchains and social media, and is one of the more interesting projects to launch in the last year. Social media is one of the most centralized and controversial consumer technology segments, and if Friend.tech, or another player like Farcaster or Nostr can upend the Web2 social media giants, it will represent a coup for decentralization. - Gabe Parker

Vitalik Proposes New EIP for Improving Wallet UX

On Tuesday, May 7, co-founder of Ethereum Vitalik Buterin presented Ethereum Improvement Proposal (EIP) 7702, set EOA account code for one transaction. As the EIP’s title suggests, the proposal is aimed at expanding the functionality of EOAs, externally owned accounts, which are the type of accounts on Ethereum that are controlled by users rather than smart contract code. For years, protocol developers have wanted to make EOAs more flexible to use by supporting native account abstraction (AA), meaning programmable EOAs or smart contract wallets. Practically speaking, there are two features that Ethereum EOAs do not easily support. First is transaction batching or authorizing multiple transactions through one signature. Second is transaction sponsorship or allowing another Ethereum account to pay for the gas fees necessary to send a transaction from an EOA. EIP 7702 supports both functionalities through the introduction of a new transaction type.

EIP 7702 was presented by Buterin as an alternative to EIP 3074 on an Ethereum developer breakout meeting dedicated to discussing the future roadmap for AA. Before this meeting, protocol developers had agreed to include EIP 3074, which also supports transaction batching and sponsorship, in the forthcoming Ethereum upgrade, Pectra. However, on All Core Developers Execution (ACDE) call #186, wallet developers speaking on behalf of the broader AA developer community raised concerns about the security of user accounts under EIP 3074. The AA breakout meeting on May 7 was scheduled so that all Ethereum stakeholders, not only protocol developers, could come to consensus about EIP 3074 and the roadmap for enabling full native AA on Ethereum.

Based on the discussion from the breakout meeting, there is positive sentiment among all stakeholder groups for replacing EIP 3074 with Buterin’s proposal, EIP 7702. However, there are details about EIP 7702 that Buterin and other AA-focused developers are presently trying to work out. EIP 7702 currently does not specify a way to revoke authorizations granted by an EOA through the new transaction type. Further, there are concerns about the cost effectiveness of these transaction types for EOAs and questions about how to model the EIP’s pricing. Thus, in the latest All Core Developers call held on May 9, Ethereum protocol developers agreed to continue moving forward with EIP 3074 in Pectra specifications until EIP 7702 is fully fleshed out and make a decision in the coming weeks about which of these two EIPs to ultimately include in the upgrade.

For more information about account abstraction, read this Galaxy Research report.

OUR TAKE:

The debate about the inclusion of EIP 3074 in Pectra is a healthy sign affirming that decentralized governance on Ethereum works and decentralized governance does not always need to result in a permanent chain split. First, decentralized governance on Ethereum works. Consider that the primary participants of All Core Developers (ACD) calls are Ethereum protocol developers and on these ACD calls, this amorphous group decides on what code changes to push on Ethereum, when, and how. Other types of Ethereum stakeholders are not usually present on ACD calls as working on the protocol of Ethereum is not everyone’s specialty, full-time job, or interest. However, when and if any of these stakeholders are negatively impacted by a decision made on an ACD call, they are able to join the call, express their sentiments, and press to change governance decisions.

This is what is happening with EIP 3074. Protocol developers decided to include it in Pectra on ACDE #185. Wallet developers showed up to the next meeting, ACDE #186, and disagreed. So, all developers agreed to speak further on the matter on a separate call to figure out a path forward for EIP 3074. And it appears with Buterin's proposal, EIP 7702, may be the path forward for enabling more flexible EOAs on Ethereum in the short-term that all parties can agree on.

Of course, not all disagreements on ACD calls can be solved with a new EIP. Some disagreements are strongly held by participants on the call enough that they are willing to fork the Ethereum codebase, or in the case of the DAO hard fork simply reject an upgrade, and create a permanent chain split. This occurred during the Ethereum Merge upgrade and will likely occur again as Ethereum protocol developers pursue still more ambitious and controversial code changes in the future. But, as illustrated so far by how the discussion on EIP 3074 is evolving, decentralized governance does not always need to result in a chain split. It can result in constructive dialogue between different stakeholder groups in an open-source project that ultimately results in a new path forward with higher consensus among participants than before. This is the ideal outcome that will always remain a possibility on Ethereum so long as the Ethereum governance process, its forum (ACD calls), and its primary participants (Ethereum protocol developers), remain open for anyone to engage with. - Christine Kim

Charts of the Week

Bitcoin’s hash rate, using the 14-day moving average, has come down 4.1% since the halving on April 19, 2024. The decline in hash rate coincides with a 54.6% reduction in hash price, which serves as an indicator of the approximate revenue miners earn per unit of hash power they have online. As of May 9, 2024 miners are earning ~$0.0471 per terahash of power they hold. This is pushing against all-time lows.

The largest negative difficulty adjustment since December 2022 took place on May 9, 2024 at -5.63%. This adjustment, along with future declines in difficulty, will reduce the stress on miner profitability and allow hash to stabilize. While it is still early, the next difficulty adjustment is set to take place on May 23, 2024 with a change of -0.3%.

The decline in hash power and miner revenue post-halving is typical, and is something the Galaxy Research desk noted in Watch This Space in January of this year.

Other News

• Over 20% of voters in swing states consider crypto a key issue in US elections

• Bitcoin mining difficulty drops 6% in largest fall since bear market lows

• Optimism’s Superchain now supports Layer 3 chains via OP Stack

• Donald Trump says he'll accept crypto for campaign donations

• Robinhood posts Q1 earnings beat, sees 224% increase in crypto trading volume

• Fantasy.top and pump.fun break into top ten crypto protocols by fees generated

• South Korea’s winning party moves toward bitcoin ETF promise