Weekly Top Stories - 7/26
This week in the newsletter, we write about the first week of Ethereum ETF market activity, synthetic dollar issuer Ethena opening up to RWAs, and Solana’s Jito Foundation unveiling a restaking solution.
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Ethereum ETFs Kick Off “Big Week”
Spot ether ETFs debut in US markets. On Tuesday, Ethereum ETFs debuted with $1.1bn in trading volumes on Day 1, resulting in $107m of net inflows which includes $484m of outflows from Grayscale's ETHE Trust. Bloomberg ETF analyst Eric Balchunas reported the Ethereum ETFs ranked the highest in Day 1 volumes among all ETF launches over the past 12 months (excluding Bitcoin ETFs), led by Blackrock's ETHA and Fidelity's FETH funds. “[I]f we compare it to a standard ETF launch, it was a smashing success,” Bloomberg Intelligence ETF analyst James Seyffart told The Block. “The problem is we are comparing it to the biggest ETF launch of all time in the Bitcoin ETFs."
Compared to the launch day, Day 2 was a bit more underwhelming – trading volume was slightly down ($937m) while aggregate flows netted out to $133m of outflows, led by $327m in outflows from Grayscale's ETHE Trust. ETH's price fell to $3150 late Wednesday, down 10% from $3500 on Tuesday morning.
Day 3 saw trading volumes of $848m, declining modestly from the prior day. ETHE outflows increased slightly from the prior day to $346m, while aggregate net flows for the ETFs were negative for the second consecutive day at $152m. Sentiment continued to weigh on ETH price throughout Thursday, trading as low as $3100 in the afternoon before recovering back above $3200 after market close.
OUR TAKE:
Despite the less-than-ideal price action for ETH, the initial trading days of the ETFs should be considered largely successful, all else considered. Even in the midst of the summer slowdown, the Ethereum ETFs saw 23% of the trading volumes that Bitcoin ETFs saw on their first day of trading in January when trading activity is seasonally more active. Trading volumes had not materially slowed in the subsequent trading days since launching, contrary to the drop off that many had expected would occur after the initial hyped-up launch day.
Relative to volumes, however, net flows into the Ethereum ETFs were a bit disappointing as the pace of outflows from Grayscale's ETHE Trust over the first few days has been much faster than anticipated. The Trust saw outflows of $1.16bn over the first three trading days, leading to a 12.6% drop in AUM and a 9.1% decline in the ETH held. For reference, the outflows from ETHE in dollar terms were essentially identical to the of outflows from GBTC over the first three trading days ($1.17bn), though this only amounted to 4.3% of BTC held in the Trust. On a relative unit basis, outflows from ETHE are outpacing that of GBTC by over 2x so far through the first three days of trading. ETH price was already facing headwinds from slowing macro indicators, tech underperformance (equities had their worst day in 18 months) and Gox distributions to Kraken and Bitstamp, so the reporting of the net outflows after market close only added to the negative sentiment.
ETH price is following a similar downward trajectory as BTC in the first days since ETFs were launched – BTC traded down for the first two weeks before logging a gain of 90% by the second month after launch. GBTC also saw outflows for 78 straight trading days before its first net inflow in May. For ETHE, if this pace of outflows is maintained, the Trust would only have 8 more days of runway left before the remaining balance of ETH is depleted, suggesting the Grayscale trust will have less of a drag on flows going forward. So if it's any consolation to those feeling disappointed in ETF performance so far, remember that "Rome wasn't built in a day" and that success of these ETFs should be measured in months/years, not days. - Charles Yu
Synthetic Dollar Issuer Ethena Opens Up to RWA Strategy
Synthetic dollar issuer Ethena intends to lean on yield-generating opportunities and real-world assets (RWAs) in place of the unproductive backing of its synthetic dollar, USDe, and in its Reserve Fund. On July 16, 2024 the protocol published a proposal in its governance forum, which included an application for parties to present allocation strategies for ~$235 million worth of USDT currently serving as USDe collateral and $45.4 million worth of Reserve Funds. As of July 25, 2024 the protocol’s Reserve Fund mostly consists of $18.4 million of USDT, $15.5 million of yield-bearing stablecoin sDAI, and $11.4 million of USDe/USDT Uniswap liquidity provider (LP) positions.
Notably, BlackRock by way of Securitize, pitched a $34 million allocation to its U.S. Treasury fund, Buidl; and Steakhouse Financial pitched a lending vault on Morpho Blue, a lending protocol on Ethereum. BlackRock’s Buidl allocation expects to capture the U.S. overnight repo rate, which is around 5.3%, through U.S. Treasuries, notes, and other obligations that mature in three months or less. The expected APY of the strategy is around 4.88% net of management fees. Steakhouse Financial’s strategy targets a wider APY range of 0.91% to 31.19% plus a $MORPHO token allocation. The on-chain nature of Steakhouse’s strategy, which includes lending USDC and USDT to overcollateralized borrowers, means the expected APY can be more volatile but creates the opportunity to capture yields that exceed what is possible off chain.
OUR TAKE:
Replacing the USDT portion of USDe collateral (currently around 9%) with RWAs is the more significant component of Ethena’s proposal. The USDT collateral is paired with spot ETH/ ETH liquid staking tokens (LSTs) and BTC with corresponding short perpetual swaps (perps) today. This allows the protocol to capture the perps funding rate and distribute it to users who stake their USDe for sUSDe as yield. Funding rates reached as high as 70% on ETH and 20% on BTC since the protocol onboarded each using market-wide, open interest-weighted annualized rates. As of July 24, 2024 they sit at 10.3% and 9.8% respectively.
The strategy of using yield generating off-chain assets as collateral for on-chain dollar-reflective assets is not novel. It is also leveraged by Frax Finance and early mover, MakerDAO. MakerDAO enacted an RWA strategy in June 2023 that has led to its DAI stablecoin being 42.5% collateralized by off chain assets, like U.S. Treasuries and private credit, today. These assets have given MakerDAO an economically efficient outlet to issue DAI, while benefiting from their yield generating nature, scale, and assurances (e.g. Treasuries being backed by “the full faith and credit of the United States”). They also serve as a supplement to the on-chain portion of DAI’s collateral mix, dampening the volatility and cyclicality of the yield and value of the stablecoin’s collateral broadly. Ethena introducing RWAs to USDe’s collateral mix can bring similar benefits to the synthetic dollar. More on this idea and other considerations of RWAs’ place in DeFi products can be found in this Galaxy Research report.
The benefits of supplementing on-chain collateral with RWAs don’t come without risk, however, especially in the context of Ethena’s principled approach to unrestricted USDe redemptions and replacement of USDT collateral. Allocating the stablecoin portion of their portfolio into RWAs and money market funds reduces their liquid collateral and introduces interest rate risk, opening the protocol up to asset-liability mismatch if too many users simultaneously redeem their USDe. While the USDT share of USDe collateral is relatively small and interest rate cuts are more likely than hikes in the near term, the risk of the synthetic dollar being undercollateralized in some scenarios is worth noting nonetheless. - Zack Pokorny
Jito Foundation Unveils ‘One-Stop Solution’ For Restaking on Solana
On Thursday, July 25, the Jito Foundation open-sourced code for Solana applications and services to easily integrate activities like staking, restaking, and liquid restaking into their operations. Jito Foundation is the entity behind the Jito Network, a liquid staking service built on Solana that distributes maximal extractable value (MEV) to its liquid staking token holders. The organization was created to oversee the release and distribution of the Jito Network’s governance token, JTO, which was launched last December. Jito Labs is the development team behind the Jito Network and other MEV products on Solana.
Jito Restaking is a new module released by the Jito Foundation. It contains two components: the Vault Program and the Restaking Program. As stated in a blog post, these codebases offer a “one-stop solution for launching and managing staking, restaking, and [liquid restaking] products on Solana, streamlining the development process for projects.” The code for Jito Restaking is undergoing formal verification and audits. The Jito Foundation is looking for partners to test out the module and participate in the creation of the “Jito Restaking Network,” presumably the ecosystem of actively validated services (AVS’), node operators, and liquid restaking token providers that the Foundation hopes to kick start through the adoption of its Vault and Restaking Programs.
Aside from Jito Restaking, the Jito Foundation maintains multiple open-source modules on GitHub including Jito Solana, a Solana validator client that is designed to earn additional rewards from MEV, and Jito Relayer, a transaction processing unit for Solana validators.
OUR TAKE:
Jito is not the only player in the Solana ecosystem building restaking services. Cambrian, Solayer, and Picasso are some of the other projects looking to repurpose Solana’s economic security, or pool of staked assets, to secure alternative protocols. In the case of both Jito Restaking and Picasso, the solutions are generalized and designed to enable the restaking of any type of asset, not strictly staked SOL and liquid staked SOL tokens. This differs from how the leading restaking solution, EigenLayer, on Ethereum is designed to only accept collateral in the form of staked ETH and tokenized representations of staked ETH. Though there are general restaking solutions also being built on Ethereum, they are in an even more nascent and experimental phase of development than EigenLayer, which has yet to enable core functionalities, like the very activity of restaking to earn additional staking yields. Solana’s restaking ecosystem on is in a similarly early stage and only just beginning to take shape.
However, unlike on Ethereum, where modularity is embraced and restaking is viewed as a key technology to facilitate layered scaling solutions, the restaking ecosystem on Solana does not benefit from the same narrative as of yet. There is not a plethora of new Layer-2 protocols and supporting middleware on Solana like there is on Ethereum. Therefore, it will be important to see what types of applications and services partner with Jito to build out the Jito Restaking Network and if the generalizability of Jito Restaking or others like it can one day support restaked security from Solana to apps and services built on other blockchains. It will also be important to assess the risks of restaking solutions being built across nearly all major blockchain ecosystems, Ethereum, Solana, and Cosmos, as the economic value tied to these solutions grows. For more information on the risks of restaking, read this Galaxy Research report. - Christine Kim
Charts of the Week
The daily median transaction fee on Ethereum mainnet is back below $1 per transaction after reaching $1.94 on July 13, 2024. As of July 24, 2024 the daily median transaction fee on Ethereum was $0.87. This is a relatively rare phenomenon on Ethereum with the daily median transaction fee being less than $1 only 17.55% of the time since the Merge on September 15, 2022.
Declining gas prices, which dictate the cost to transact on Ethereum, is making it cheaper to use the network. As of July 24, 2024 the daily average gas price was 6.97 Gwei. Average daily gas prices on the network have only been cheaper on 20 other days since the Merge (only 2.95% of the time).
Gas prices also influence the amount of ETH that is burned on a daily basis, and, in turn, the inflation rate of ETH. Gas prices and ETH inflation have an inverse relationship. As gas prices rise so does the network’s base fee (the portion of fees that get burned), which leads to higher amounts of ETH getting burned and lower rates of inflation. The annualized net supply inflation of ETH stands at 0.6% using the 30-day moving average as of July 24, 2024. This is the highest it has been since October 2022, just a month after the Merge.
Other News
Jersey City’s (New Jersey) Pension Fund Will Invest in Bitcoin ETFs
Poly Market Hits New All-Time High in July Trading Volumes
Monad-based On-Chain Orderbook Exchange Kuru Raises $2 Million in Seed Funding
MARA Purchases $100 Million Worth of Bitcoin, Holdings Surpass 20,000 BTC
Aave Proposal Considers Activating Fee Switch and Buying Back Tokens From Open Market
Coinbase’s CBPL Fined $4.5 Million by UK Regulator For Lapses in Onboarding Controls
Morpheus, Decentralized AI Project From Lumerin Goes Live on Arbitrum Test Network
Bitcoin Startup Alby Unveils ‘One Click’ Lightning App Store With New ‘Hub’ Service
Peter Thiel’s Founders Fund Leads $11 Million Round For Pudgy Penguins’ Parent as it Builds New Layer 2 Blockchain
On-Chain Platform on Base Now Lets U.S. Politicians Receive Crypto Donations
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