November 26, 2021
This Week
El Salvador plans to build a "Bitcoin City" funded by issuing a $1bn "Bitcoin Bond;" Square releases white paper describing a new decentralized exchange framework for digital assets; and Zcash plans to move from Proof-of-Work to Proof-of-Stake.
Market Update
The total implied network value (market cap) of the digital assets market stands at $2.43tn, down 2% from last week (when it stood at $2.48tn). Bitcoin’s network value is 8.65% of gold’s market cap. Over the last 7 days, BTC is up 7.6%, ETH is down 8.1%, and ADA, SOL, XRP, DOT, and many other altcoins are down double digits. Bitcoin dominance is 42%.
Data current as of 8 AM ET on November 25, 2021. Prices and Data via Messari.
All markets broke down overnight with fear spreading through media and markets. Top of mind was a new Covid variant identified in South Africa, B.1.1.529 (pending a Greek letter name from the WHO), which appears to have many mutations that could make it both more transmissible and more resistant to vaccines. The news broke worldwide yesterday evening Eastern Time, and by the late evening most online news outlets were running it as a top story. CNBC was broadcasting live from South Africa at 4am EST. 

Stock futures took a hit, with DJIA down 2.11%, S&P 500 down 1.6%, Nasdaq 100 down 1%, and the Russell 2000 down 3.5% at the time of writing. Bonds and gold traded higher. A risk off attitude gripped markets. 

BTC and ETH started to slide heading into, and through, expiry, but the Europeans woke up and hit the bid, accelerating the move, with each off 7% and 10%, respectively. It seemed the street was short upside in BTC and ETH heading into expiry. The market gapped lower as ~$350m in liquidations went through in short order, sending BTC ~3% and ETH ~5% lower at the Euro open. 

In total, crypto markets have seen more than $750m in futures liquidations over the lats 24h, with more than $665m occurring over the last 12 hours. Short-dated BTC vol exploded higher, hitting 80% vs 77 with 1m unchanged at 82. ETH 1wk vol is at 94 and 1m at 99. BTC 1wk 25d skew is at 14% vs 9 pre move and 1m 8 vs 6. Funding has been flat to negative across the perps and basis dropped sharply with price. 

via Matt Newton (Galaxy Digital Trading) and Alex Thorn (Galaxy Digital Research)
Three Big Stories
🌋 Bitcoin Bonds to Build a Bitcoin City
The Government of El Salvador is funding the construction of a new city entirely through bitcoin bonds. President Nayib Bukele announced on Monday that construction for an oceanside “Bitcoin City” would begin in 2022 near the Conchagua volcano located in southeastern El Salvador. In partnership with blockchain services company Blockstream, El Salvador is planning to raise $1 billion for its Bitcoin City by issuing tokenized 10-year bonds to investors that pay 6.5% initially. Half of the money raised will go towards building the sprawling metropolis of residential areas, malls, restaurant, ports, restaurants, and more. The other $500 million will be reinvested back into bitcoin. Bukele noted that the city and the bitcoin mining operations in its vicinity would be powered through geothermal energy from the volcano. Earlier this year, El Salvador became the first country in the world to formally adopt bitcoin as legal tender, meaning that all businesses in the country are now obligated to accept bitcoin as payment alongside the U.S. dollar. 
OUR TAKE: Despite heavy-handed warnings from the International Monetary Fund (IMF) calling on El Salvador to halt their plans for integrating bitcoin into the country’s economy, President Nayib Bukele is forging ahead unabated. Since the adoption of bitcoin as legal tender within the country in early September, the government of El Salvador has rolled out a cryptocurrency wallet called Chivo that Bukele reports is being actively used by 2.1 million Salvadorans. The next step in Bukele’s ambitious plans around bitcoin to “make El Salvador the financial center of the world” is the issuance of tokenized bonds on Blockstream’s Liquid Network, a bitcoin sidechain, for the creation of a Bitcoin city. (Read our report on Layer 2 networks to understand how sidechains work:

As explained by Blockstream’s chief strategy officer Samson Mow, the bonds will carry a coupon of 6.5% initially. However, after a five-year lock up period, the government of El Salvador will start selling some of the bitcoin used to fund the bond to give investors additional dividends. “If bitcoin at the five-year mark reached $1 million, which I think it will, [El Salvador] will sell bitcoin in two quarters and recoup that $500 million,” said Mow. Like other cryptocurrencies, El Salvador’s bitcoin bonds can be traded 24/7 and transferred trustlessly through the Liquid sidechain. The government is also planning on passing new laws to facilitate the listing of these bonds on a regulated El Salvadorian securities exchange.

While several financial products can and are being built on top of Bitcoin, the one announced by Bukele on Monday is perhaps one of the most ambitious and high-profile to be pursued by a state leader. It is likely to be the subject of intense scrutiny by other governments and international organizations for its disruptive potential on capital markets. However, if pulled off successfully in 2022, the same formula for issuance of bitcoin bonds may be replicated by other nation states who, like El Salvador, are looking for foreign investment independent of existing global lenders like the IMF to fund domestic infrastructure projects. For now, the idea alone highlights the increasing potential of cryptocurrencies to transform the flow of investment capital, not just for individual and businesses but governments as well. 
💱Square Builds a DEX
U.S. payments giant Square recently released a report outlining the details for its highly-anticipated decentralized exchange (DEX), dubbed tbDEX. TbDEX is aimed at offering users an easy way to convert their fiat currencies into bitcoin and other real-world goods. “It is still prohibitively difficult for the average person, starting with traditional fiat-based payment instruments, to directly access on-ramps and off-ramps into and out of the decentralized finance system… The tbDEX protocol is directed at this problem,” notes the white paper. Square’s payments application, Cash App, has allowed users to buy and sell bitcoin across all 50 U.S. states since August 2018. However, plans for the tbDEX would offer users a more direct way to convert their fiat by circumventing centralized entities and using decentralized technologies instead such as zero-knowledge proofs to transact with other users. 
OUR TAKE: Designs for Square’s tbDEX puts trust between users on a spectrum. For users desiring maximum anonymity, the fees and costs associated with their transactions will be higher than for others who undergo Know-Your Customer screenings on the exchange. In addition, the txDEX protocol itself will not execute fiat or cryptocurrency transactions but rather rely on Participating Financial Institutions (PFIs) to offer liquidity services to the network. Any PFI can connect to the DEX without third-party approval and have full control over which asks to offer bids for. In this way, the tbDEX appears to act as a springboard for users to access curated networks of liquidity and transaction counterparties.

Some of the considerations not addressed in the white paper include how chargebacks and frauds will be processed, as well as how settlement defaults and the non-delivery of funds will be handled on the exchange. Square has published the white paper for tbDEX on Github in hopes of garnering feedback from the wider cryptocurrency community. It is likely that designs for the DEX will undergo further revisions and edits in the following months. Similar to the regulatory backlash Facebook received shortly after the release of their white paper for the creation of a new stablecoin in June 2019, Square’s tbDEX whitepaper may also spark opposition from regulators. However, the idea for tbDEX openly released by Square this week suggests the San-Francisco based tech giant is serious about bridging the gap between fiat and bitcoin. 
🔄 Zcash Will Move to PoS
Privacy network Zcash (ZEC), an ancient chain by crypto standards, will transition to a Proof of Stake consensus algorithm and will in all likelihood become fully interoperable with the Cosmos ecosystem in the next three years. After over a year of rumors swirling in the crypto space, the Zcash Foundation, the nonprofit behind the privacy coin ZEC, has announced that the network will not only transition away from Proof of Work consensus but will in all likelihood join the Cosmos ecosystem. Tendermint, which is a PoS algorithm utilized by popular Cosmos-based networks like Terra and Secret, in conjunction with InterBlockchain Communication (IBC) and Cosmos SDK, has allowed the aggregate Cosmos ecosystem to dwarf every other one except for the oldest and most valuable smart contract network, Ethereum.

The move, which will lessen the carbon footprint of the network, will create an amalgamation of talent by mixing proven Cosmos devs that have been behind some of crypto’s most innovative and popular app chains and the Zcash dev community, which has helped pioneer zero-knowledge cryptography, a nascent technology that renders anonymity on networks like Zcash and increases scalability on smart contract platforms like Ethereum. In addition to the transaction to PoS, another of Zcash’s key players, the Electric Coin Company, announced it will release an official and open source ZEC wallet sometime in 2022.
OUR TAKE: Created in 2013 (two years before Ethereum’s mainnet went live), the Zcash chain is one of crypto’s oldest networks, and therefore arguably one of its most established. But that doesn’t mean the project is a success. In fact, Zcash, from both price and adoption perspectives, has been lackluster to say the least. This failure likely rests on the projects past development issues, ZEC miners propensity to quickly liquidate newly mined coins, and, perhaps most importantly, most people’s indifferent attitude to privacy.

So, it’s important to note that while the transition to PoS and integration with the $172bn Cosmos ecosystem should be a major catalyst for temporary growth, the moves may just be an attempt to put the currency back in the limelight by dropping energy intensive PoW mining in favor of the more in vogue and environmentally conscious PoS validation process. But the addition, should it occur, should not be wholly considered a public relations stunt.

For the Cosmos ecosystem, this shift has the potential to bring a major privacy improvement to the so-called “internet of blockchains,” whilst also adding zero-knowledge expertise to the ecosystem. This talent will not only help with the security and anonymity of the ecosystem, but also help with scaling, as ZK technology is widely regarded as one of the better ways to scale blockchain networks.

To date, Ethereum, due to both its history and its incredibly high fees, has been the community most focused on scaling. Cosmos, as an increasingly important competitor to ETH, should benefit from the years of knowledge amassed by the Zcash Foundation and the other entities that built ZEC. While the chain’s main components, like the Hub and Osmosis, are not focusing on vertical scaling per se and are scaling horizontally via app chain integration, devs within the Cosmos ecosystem are already researching dedicated Layer 2 app chains that will likely utilize ZK tech. The addition of the dev talent from Zcash into Cosmos, should it come to fruition, will undoubtedly enhance these efforts, bolstering Cosmos further into the stratosphere. 
Other News
  • Inflation is hitting everyone, everywhere, as retailer Dollar Tree pumps prices to $1.25 for the first time ever
  • Cosmos Hub’s Vega upgrade is slated to wrap up in mid-December
  • Coinbase has picked up BRD, a crypto wallet firm, for an undisclosed sum
  • A bug let a user acquire roughly $1.5mn from DeFi reserve currency protocol OlympusDAO instead of $50k
  • ConstitutionDAO is giving back donors all $48mn (minus gas fees) following the failed attempt to purchase a copy of the US Constitution
  • Cardano, a smart contract platform still underdevelopment, saw its native ADA token sink to a 3-month low after news brook that eToro would halt trading of it on its site
  • Avalanche is following in Ethereum’s footsteps, as a surge in demand for EVM block space has boosted fees, pricing out users
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
Galaxy Digital Research printer go brrrrrrr. We've been very busy the last few weeks. If you haven't had the chance to check out all our recent reports, here are the last 2 weeks of reports from Galaxy Digital Research. Read up over the holiday weekend!
Decentralized Autonomous Organizations
Sal gives a great overview of DAOs: what they are, how they work, which ones are big, and what the future holds

How Much Does it Cost to Mine a Bitcoin?
Karim and Brandon explain how bitcoin mining operations should account for their expenses. We also provide a calculator spreadsheet so anyone can properly calculate the costs!

Crypto VC for Q3 2021
Alex gives an overview of venture capital activity in the crypto ecosystem last quarter, the which featured the largest VC deployment in history!

Reconstructing the ATOM: What's Next for the Cosmos Hub
Walt digs into forthcoming upgrades for the Cosmos Hub and explores what it means for ATOM going forward.

EIP-1559 Upgrade: 100 Days Later
Christine breaks down the short-term impacts of Ethereum's fee market upgrade, EIP-1559, on major network stakeholders including users, miners, and investors.

Bitcoin Activates Taproot
Alex explains the implications of Bitcoin's first major upgrade in over four years. Colloquially known as Taproot, the upgrade brings privacy and security enhancements to the world's most valuable blockchain.

Ready Layer One
In this comprehensive report, the team gives an overview of Ethereum & 10 of its smart contract platform challengers.

US Govt's Report on Stablecoins
Alex and Chuck break down the recent stablecoin report from the Presidential Working Group on Financial Markets and explain how its recommendations could signal the future of a "digital dollar."

Charts of the Week
The combined market capitalization of major DAO governance tokens exceeds $35bn today.
Since activation on August 5, 2021, Ethereum’s fee market upgrade, EIP 1559, has saved users a total of $844 million in transaction fees through base fee refunds.
In Q3, the median valuation of a crypto VC deal exceeded the median valuation of all VC deals by 72%.
Thank you!
Thanks for reading this week. Have a great weekend!

Please feel free to contact us at [email protected] with any questions or comments.
Alex Thorn
Head of Firmwide Research
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