Weekly Top Stories - 8/9
In the newsletter, we write about the market shock earlier this week, Ethena’s expansion to Solana, and the launch of hotly anticipated Bitcoin app Fedi.
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Macro Headwinds Create Weakness in Markets
Global risk assets repriced lower Monday following an unexpectedly hawkish rate hike from the Japanese central bank last week that heavily impacted the dollar-yen carry trade. Equities, FX, and crypto all repriced lower Monday morning, with the S&P 500 down almost 9% Monday from its all-time high on July 16. Last week, Bitcoin dropped 23% to $49k and Ether dropped 33% to $2300, each the lowest levels since February. Both assets have since recovered modestly, with Ether up 14% and Bitcoin up 19% from its weekly bottom. The recent market downturn can be attributed to a confluence of macro-economic factors, including weakening U.S. data and global monetary policy shifts, as well as crypto-specific issues such as significant ETH sales from Jump Crypto ($470m) and various token distributions.
Bitcoin ETF flows have been net negative this week while Ethereum ETF flows have been more positive generally speaking, with Grayscale ETHE outflows declining steadily since launch. Flows for the Ethereum ETFs have been net-positive on the week for the first time.
Other onchain movements that shook the market last week include the U.S. government moving $2bn of Bitcoin seized from the Silk Road to two new addresses on July 29, just a few days after Trump announced he would create a “national Bitcoin stockpile.” It’s uncertain whether these coins were moved to facilitate their liquidation or if the U.S. Marshalls were simply moving into Coinbase Custody, which they recently onboarded as a custody and trading vendor. Additionally, the Chinese government also appeared to be consolidating about $450m of ETH seized from the 2019 ponzi-scheme PlusToken.
OUR TAKE:
Bitcoin's recent 26% drop from its all-time high, while significant, is not unprecedented in the context of broader bullish market cycles. In 2017, Bitcoin experienced six separate occasions where it dropped 25% or more as it ran to new highs. While it's important to note that market cycles aren't perfectly congruent – as evidenced by the distinctly different patterns seen in 2021-2022 – these substantial drawdowns can be part of Bitcoin's typical volatility during bullish periods.
Looking ahead to the rest of the year, three main catalysts are on the radar for Bitcoin. First, the distribution of $12 billion in cash to FTX creditors could potentially inject new capital into the crypto market, although the extent of this impact may be limited by the fact that a large portion of the distribution will go to funds who bought claims from individual creditors. Second, the U.S. presidential election looms large, with Trump's crypto-friendly stance potentially boosting Bitcoin if his odds improve. If Democrats remain hostile and Harris’ odds improve, that could present a headwind. Interestingly, if Democrats soften their position on crypto, the correlation between Trump victory odds and BTCUSD could break down. Finally, the Federal Reserve's September rate decision remains crucial, though its impact may be muted if it aligns with the current consensus expectation of a rate cut. Given these factors, Bitcoin is expected to see mostly rangebound price action in the near to medium term. The primary downside risks include further macro landscape deterioration or government-held crypto movements, while potential upsides stem from the FTX distributions, an improving political climate, and an easing rates environment. - Alex Thorn, Gabe Parker
Ethena’s USDe Faces First Stress Test
Ethena expands USDe to Solana, plans to onboard SOL as a backing asset. On August 7, Ethana Labs deployed its delta-neutral stablecoin USDe on Solana, its second ecosystem after first launching on Ethereum in February 2023. The integration with Solana was facilitated by interoperability protocol LayerZero. Ethena's Solana integration will also come with an incentivized 'Sats Campaign' that rewards participants with points that will be exchangeable for ENA tokens. USDe is already available on Solana DeFi apps including Kamino Finance and Drift, and will soon become available on restaking protocol Jito.
As background, USDe is a 'synthetic dollar' that is collateralized with crypto assets (e.g., ETH, ETH LSTs, BTC, USDT) and corresponding equal-in-size short futures positions. This delta-hedged mechanism helps to maintain USDe's peg stability as changes in ETH spot price and mints/redeems are offset by changes in the size of short perpetual positions. This design generates yield from both staked ETH and the funding & basis spread from futures positions - currently, staking USDe as sUSDe offers an APY of 3.8%. USDe has a market cap of $3.1bn, ranking as the fourth largest stablecoin behind USDT, USDC and DAI.
According to the announcement post on X, Ethena Labs also expects SOL to be onboarded as a backing asset for USDe, subject to governance (vote expected next week). Adding SOL as a collateral asset 'opens up an extra $2-3bn of open interest across major exchanges', with the Ethena team adding that SOL funding rates have outpaced both BTC and ETH funding rates so far YTD. According to Solscan, the USDe supply on Solana is 4.2m held across 120 unique addresses.
OUR TAKE:
Since launching under a year ago as an ETH-focused project, Ethena is quickly transforming into a more generalized delta-neutral operation as it now looks to add SOL to USDe's backing after it had added BTC in April. Adding BTC (now 46% of USDe's total collateralization) has improved the scalability of USDe as the open interest levels are 2.5x larger for BTC than ETH, and SOL would be the next logical asset for Ethena to integrate due to trader interest (SOL is ranked #3 in aggregate OI levels behind BTC and ETH).
Adding other types of collateral assets outside of just ETH also improves the risk profile of USDe, which just survived its first meaningful stress test at the beginning of this week after ETH funding rates flipped negative for the first time this year (funding rates for BTC and SOL mostly remained positive). Still, Ethena was able to successfully process $112m in USDe redemptions while maintaining the stablecoin's peg as positive funding income from BTC and yield from ETH LSTs was able to offset the losses to the protocol from ETH's negative funding. Ethena's alternative design for its stablecoin is still relatively novel and not fully battle-tested, but these periods of market turmoil can help prove the resilience of the protocol. In addition, with greater expectations for rate cuts later this year, USDe's reliance on crypto-native collateral could provide an advantage over traditional stablecoins that are primarily backed by US Treasuries (e.g., USDT and USDC).
As for Solana, its DeFi ecosystem gets a large boost from Ethena's expansion (thanks to LayerZero's omnichain fungible token (OFT) standard). DeFi users have already been rewarded with large incentives for using PayPal's PYUSD stablecoin after its launch on Solana on May 29 - the 17% APY offered on PYUSD deposits on Kamino helped to quickly grow the supply of PYUSD on Solana to nearly $320m over just a few months, nearly overtaking its supply on Ethereum. Separately, USDC supply on Solana also expanded by ~$430m since the start of July to total nearly $2.6bn. USDe's expansion should further add to the stablecoin momentum on Solana, which has seen DEX volumes surpass that of Ethereum for the entire month of July. That said, the aggregate stablecoin market cap on Ethereum is still more than 20x greater than that on Solana ($79.5bn vs. $3.7bn), suggesting that at least on this metric, Solana still has to make plenty more progress before catching up to Ethereum and its bourgeoning L2 ecosystem. - Charles Yu
eCash Making a Comeback for Bitcoin Payments
Much anticipated Bitcoin app Fedi launched on Wednesday. The app offers an accessible way to store and spend bitcoin securely and is primarily aimed at empowering underserved populations. The highly anticipated app leverages a novel technical architecture developed by the Fedimint protocol, introducing a community-driven approach to bitcoin custody and payments. Notably, Fedimint raised at least $23m from venture capitalists to date, making it one of the more prominent Bitcoin startups.
Fedi utilizes a federation model where a select group of entities control user assets through a multi-signature wallet, eliminating a single point of failure. Unlike other federation models, Fedi distinguishes itself by allowing users to choose the federation that custodies their bitcoin, or create their own. To enhance traditional custodial solutions, the project implements Chaumian eCash, a privacy-centric digital currency concept invented in 1982 by cryptographer David Chaum. This innovative approach represents dollarized claims on the community's bitcoin reserves, enabling confidential transactions between community members while safeguarding individual balances. Within the Fedi app, users transact with eCash, which function as IOUs backed by the sender's Bitcoin reserves on the platform. This innovation streamlines the user experience by abstracting the complexities associated with sending small Bitcoin transactions denominated in dollars. Additionally, the Fedi app serves as an application layer for web developers; it now incorporates encrypted private messaging, and it’s possible other networking and social features will be added in the future.
OUR TAKE:
Bitcoin payments is an extremely competitive sector that has been dominated by the Lightning Network since 2018. While the Lightning Network has struggled with technological complexities, Lightning is the premier Bitcoin payment layer. Despite Lightning's dominance in Bitcoin payments, though, an emerging second generation of Bitcoin Layer 2s suggests that Lightning's supremacy in bitcoin payments is not immutable.
Although the Bitcoin payments sector will become even more competitive when these Bitcoin L2s gradually go live, Fedi is positioned to stand out as a private payment and custody solution. Although Fedi is not a self-custody platform, its focus on catering to non-crypto native users will help the app onboard a new cohort of Bitcoin users. More importantly, Fedi takes a different approach by marketing their product in underbanked regions of the world, addressing a critical market need. - Gabe Parker
Charts of the Week
This week’s market turbulence, from August 2 to August 7, saw more than $650m of USDT, USDC, and DAI borrows on Ethereum Mainnet across Aave v2/ v3 and Compound v2/ v3 get erased. The drop, which represents a 17% decline in open borrows of these stablecoins, took utilization (Amount Borrowed / Amount Supplied) to a year-to-date low of 75.9%. The decline in utilization is due to a sharper fall off in the amount of these stablecoins borrowed than that in the amount supplied. Over the same period, $409m worth of these stablecoins were withdrawn from the earlier mentioned applications, representing a 9% decline.
New lows in utilization have brought on new lows in the cost to borrow these stablecoins, as there is a direct relationship between utilization and cost to borrow. DAI and USDC both set new low borrow APRs using their 30-day moving averages at 4.27% and 4.98% respectively. USDT’s borrow APR is still ~80 basis points higher than its year-to-date low of 8.3% from early February.
Other News
Franklin Templeton's on-chain money market fund launches on Arbitrum
Kamala Harris ties with Trump at 49% election odds on Polymarket
Ripple fined $125 million, court denies full SEC demand
Dormant wallets linked to PlusToken scam move large amounts of ether
Bitcoin miner Core Scientific to deliver additional 112 megawatts to CoreWeave
Ronin bridge pauses amid $11.8 million outflow to MEV bot white hats
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