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The total implied network value (market cap) of the digital assets market stands at $1.96tn, up 9.5% from last week (when it stood at $1.79tn). Bitcoin’s network value is 6.47% of gold’s market cap. Over the last 7 days, BTC and ETH are both up 5%. All major coins are in the green WoW. ADA is up 30% and SOL is up 12%. Bitcoin dominance is 42.6%, practically unchanged from last week. |
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Data current as of 8:59 PM ET on March 24, 2022. Prices and Data via Messari.
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💪 Terra Fortifies Stablecoin Reserves With BTC
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Luna Foundation Guard commits to purchasing $10 Billion worth of $BTC for TerraUSD reserves. TerraUSD (UST) has seen exponential growth in the past six months, rising from a market cap of $2.88 bn in Nov 2021 to over $15 bn today. For users to mint $1 of UST, they must burn $1 of Luna and vice versa if one wants to redeem their UST. LUNA, the native terra network coin, is used to maintain the stable value of UST. If UST deviates from its $1 peg, users are incentivized with $LUNA rewards to arbitrage the spread and increase or decrease UST supply.
Despite this novel balancing system, a growing constituent of the Luna community is concerned about the possibility of what is called a “death spiral” due to the market volatility of the $LUNA token. As was observed with the $TITAN coin, this self-reinforcing loop can quickly get ugly. Unlike centralized stablecoins, UST is not backed by dollars but instead by LUNA reserves and the user-driven arbitrage system. Either due to broader bear market selling or UST supply contraction, the catalyst for a death spiral is the rapid decline in the market price of $LUNA. This rapid decline leads to a bank run on UST; more $LUNA is then minted, leading to a further drop in the price of $LUNA.
To squelch concern and fortify the UST peg, the Luna Foundation Guard (LFG) raised $1 bn through the sale of $LUNA with a commitment to allocate funds to a decentralized reserve, Bitcoin. A week later, Do Kwon, co-founder of Terra, tweeted, “The Terra Protocol will be one of the largest holders of $BTC (Michael Saylor) beware.” Thereafter, on March 14th, Kwon unveiled a plan to accumulate more than $10 bn in BTC reserves. On March 21st, LFG made its first purchase of $BTC worth $125 million. During periods of rapid supply contraction, $UST can be redeemed for $BTC rather than $LUNA, thus reducing the risk of expedient supply expansion of $LUNA. In addition, a smart contract will be built on Terra to allow users to conduct direct $UST-$BTC swaps. In this swap mechanism, $1 UST can be minted by depositing $1 worth of $BTC, and vice versa when burning $1 of UST. It is important to note that the size of the BTC reserve will have an inverse correlation to the burn rate of $LUNA.
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OUR TAKE: The crypto community has become accustomed to two main types of decentralized stablecoins: algorithmic stablecoins and debt-based stablecoins. The latter is perceived as more stable due to an over-collateralization requirement. Perceived stability, supported by capital intensive minting, comes with constraints on the speed at which the market cap of a debt-based stablecoin can grow. $DAI, one of the first debt-based stable coins to be created on Ethereum, has exhibited this phenomenon of mitigated growth over time. Despite their many failures, algorithmic stablecoins offer the flipside, rapid scaling abilities by only requiring 1:1 collateral requirement. However, this at par collateral requirement creates the risk of a death spiral scenario. Several algorithmic stablecoins have fallen victim to this. Last year, the Iron Finance protocol plummeted from a $2bn valuation to near zero after being caught in a death spiral.
TerraUSD (UST) has distinctly set itself apart from competing algorithmic stablecoins, like Iron Finance’s $TITAN stablecoin, because it exists within an ecosystem that facilitates its utility. Nobody had a reason to hold $TITAN. $LUNA, on the other hand, is the native Terra protocol token. To interact with the protocol’s 90 projects, users must hold and transact with the token. Mirror, a popular synthetics protocol on Terra, requires UST to trade, borrow, and farm. Increased utility within the Terra ecosystem can maintain supply stability for $LUNA and $UST, thus alleviating death spiral concerns. Moreover, the allocation of $BTC to reserves adds to the resilience of $UST.
Decentralized stablecoins require decentralized reserves, or else they run the risk of contagion via censorable centralized collateral. $DAI has become increasingly vulnerable, with over 50% of existing collateral in the form of USDC. With a finite supply, Bitcoin is the most resilient decentralized reserve asset. Do Kwon cites one key additional reason why LFG selected bitcoin; it possesses the most “calcified and hardcoded base” when compared to other digital assets. In other words, it is least susceptible to developer-led protocol changes. LFG is substantiating the idea that BTC creates decentralized stability, a bitcoin standard upon which a digital ecosystem can be built. Bitcoin is correctly considered “pristine collateral,” and so might be the perfect unit upon which to build a collateralized stablecoin. -LM
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💰 Yearn.Finance Launches a New Vault Enabling Users to Earn Interest on Staked ETH Derivatives
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Users of the yield aggregator Yearn.Finance on Ethereum can now deposit any major ERC-20 token and start earning staking rewards. The vault launched by Yearn on Tuesday will automatically convert deposited tokens into ETH staking derivatives, rETH or wstETH. These staking derivatives are then re-deposited into the decentralized stablecoin exchange known as Curve, where deposits of rETH or wstETH earn users staking rewards, Curve pool emissions, and trading fees. Staking rewards on rETH and wstETH range from 4% up to 6.36% annual percentage return (APR), while the yield from deposits into Curve’s rETH-wstETH pool offer users an additional 2% to 5% APR.
rETH and wstETH are the two most popular liquid staking tokens on Ethereum. The former is issued by decentralized staking protocol Rocketpool. Rocketpool currently manages roughly 156,000 ETH staked, which represent 5% of the total liquid staking market share. 88% of market share is dominated by Lido. Lido issues the wstETH token, which is a version of their stETH token that is easily compatible with decentralized finance (DeFi) protocols like Curve and Yearn. Without wrapping the stETH token, users who deposit ETH into Lido can still earn APR on daily staking rewards but they cannot re-deposit stETH directly to earn additional yields in the DeFi ecosystem.
Lido manages by far the largest pool of stake on Ethereum, surpassing even centralized exchanges such as Kraken and Binance. The total amount of ETH locked in Lido smart contracts soared last week following the launch of Ethereum’s Merge testnet Kiln. (Read our previous newsletter to learn more about the Kiln testnet.) Over the past 2 weeks, deposits into Ethereum’s staking contract in general has seen an uptick, rising 3.7%. At over 10 million ETH staked across all staking platforms and individual users, about 9.1% of ETH’s total supply is being used for earning rewards on Ethereum’s proof-of-stake (PoS) network, the Beacon Chain.
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OUR TAKE: The launch of Yearn’s new vault targeting yields from ETH staking derivatives highlights the expanding role of staked ETH tokens such as rETH and wstETH in Ethereum’s DeFi ecosystem. Unlike ETH and other ERC-20 tokens, both rETH and wstETH are designed to capture the returns from staking on the Beacon Chain without its holders having to give up the liquidity of their ETH holdings or run their own validator software. By locking ETH into Rocketpool or Lido, users receive in return a derivative token that can be wrapped or used directly to trade on DeFi platforms. On DeFi platforms such as Curve or Yearn, users can earn additional yield on their staked ETH. As such, holding derivative tokens like rETH and wstETH is a superior strategy for earning interest on ETH than simply holding ETH. As user confidence in the Beacon Chain’s PoS protocol increases the closer Ethereum developers become to activating the Merge on mainnet, ETH staking derivatives in DeFi are likely to proliferate and become a popular base currency for trades.
As attractive as the yield from holding and trading ETH staking derivatives are, they do present users with a high degree of technical risk. Last year, it was revealed that the smart contracts supporting Lido and Rocketpool contained a critical vulnerability that if exploited would have allowed validator node operators to steal user deposits. Luckily, the vulnerability was disclosed by a whitehat, a hacker that uses their skills to help projects fix their bugs instead of taking advantage of them. When it comes to fully decentralized protocols such as Rocketpool, the risks of funds being lost falls mostly on the users interacting directly with smart contract code and tokens, as opposed to a company. Lido is curiously a liquid staking protocol that retains some levels of centralization, especially when it comes to vetting validator node operators on their platform.
When it comes to centralized staking providers, the technical risks falling on users are certainly mitigated but at the expense of network decentralization and security. The centralization of stake to a single entity such as exchange or staking as a service provider is a common concern and critique of PoS blockchains. As such, there are important tradeoffs between using Rocketpool versus Lido as a liquid staking service provider. Lido is by far the more trusted and used protocol for liquid staking on Ethereum. This highlights the preferences of users in choosing a more centralized protocol over a decentralized one at present. That said, Lido developers are working towards upgrading the platform over time and turning it into a fully decentralized protocol, which is hopeful news for the future of Ethereum as it draws closer to transitioning into a PoS blockchain. -CK
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🛢️ Russian Lawmaker Suggests BTC as an Acceptable Form of Payment for Natural Resources
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Pavel Zavalny, head of the Russian State Duma Committee on Energy, said on Thursday bitcoin could be considered an acceptable form of payment for the country’s oil and gas resources. The remarks were shared as an afterthought during a news conference where Zavalny explained purchases of Russian commodities by the country’s allies need not be hampered by a lack of access to the U.S. dollar. “As for friendly countries, China or Turkey, which are not involved in the sanctions pressure. We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan. With Turkey, it will be lira and rubles. The set of currencies can be different and this is normal practice,” said Zavalny, adding thereafter, “You can also trade bitcoins.”
Earlier this week, European gas prices soared after Russian President Vladimir Putin said the country would seek payment for its gas exports from “unfriendly” countries in rubles, as opposed to euros or dollars. German Chancellor Olaf Scholz later dismissed these demands at a press conference following a summit of G7 countries on Thursday. The central bank of Russia reportedly has one week to come up with a concrete solution on how to move existing operations into rubles and carry out all necessary changes to existing gas contracts. According to Russian gas giant Gazprom, 58% of sales of natural gas to Europe and other countries has been settled as of January this year in euros, and 39% of sales in U.S. dollars.
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OUR TAKE: Ongoing sanctions against Russia for its invasion of Ukraine is further expediting trends of dedollarization within the country. Since 2014, following its annexation of Crimea, Russia has made several key moves to reduce its reliance on the dollar by increasing its foreign currency reserves and gold reserves. As of 2020, only 22% of Russian exports are settled in dollars compared to 96% in 2013. However, the latest news from Russian President Vladimir Putin and Chairman of the State Duma Committee on Energy Pavel Zavalny suggest Russia is now preparing to move one step further by also radically reducing its reliance on any foreign currency that is controlled by a state that has unfriendly relations with the country.
In Zavalny’s translated comments, it is clear that he has favorable views towards gold or bitcoin—as payments alternatives, in addition to foreign currencies issued by countries that are on good geopolitical terms with the country. However, in addition to the dollar, it would seem even Russia’s reliance on the euro will see a significant drawback in forthcoming months as a result of ever worsening relations between the country and the rest of Europe. Due to the restrictive measures and sanctions placed on Russia by the European Union following the invasion of Ukraine, the country is rapidly barreling towards shuttering itself from any currency system that it deems in Putin’s words “unfriendly.”
An additional angle that is driving the rejection of western currencies is a Russian ploy to fight the rapid devaluation of the Ruble. First Russia demanded payment in only Rubles, then compromised to accept gold and potentially BTC as well. In each instance, buyers must sell a substantial amount of Euros or USD to purchase Gold or Rubles to then buy Russian resources. This exchange devalues Euro and USD and appreciates the Rubles and gold that Russia has amassed in reserves.
In a world where the prominence of the dollar and other fiat-backed currencies are seen as politically biased and rejected by states like Russia, bitcoin may provide a guidepost to what a credibly neutral monetary system should look like. Already, bitcoin has played a major and unprecedented role in financing Ukraine’s defense against Russia. The possibility for Russia, acting on the other side of the conflict, to also benefit from the Bitcoin network’s permissionless and censorship-resistant nature by settling payments through BTC speaks volumes to the revolutionary nature of Bitcoin’s technology. As a global monetary system that is not beholden to the competitions and machination of the world’s superpowers, the Bitcoin network offers the potential for a future where the world ceases to oscillate from one superpower-controlled reserve currency to another, but instead settles on one, credibly neutral and secure platform.
Read more about dedollarization and the future of money in light of the Russia-Ukraine conflict in our previous newsletter where we debuted the section, Letter from the Editor. -CK, LM
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Gamestop NFT marketplace launches atop an Ethereum Layer-2 protocol called Loopring.
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A deputy minister in Malaysia urges the country to adopt bitcoin as legal tender.
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Stablecoin Cashio on Solana is exploited for $50 mn in a fake account exploit.
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Decentralized lending protocol Compound discloses details surrounding a critical vulnerability previously patched by developers.
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A16z proposes new economic model for MakerDAO’s governance token, MKR.
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Aave and Balancer communities weigh the potential for a strategic partnership through the acquisition of 300,000 BAL.
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Access our research on the Bloomberg Terminal with ERH GXY <GO>
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An Introduction to On-Chain Fundamental Analysis |
In this major report, GDR's Christine Kim offers a comprehensive and generalized overview of how to use on-chain data for the fundamental analysis of cryptoassets.
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Galaxy Digital Research Podcast |
In the second episode of our weekly podcast series, newly named Galaxy Brains, we discuss the fortification of Terra stablecoin reserves with BTC, the proliferation of ETH staking derivatives in the decentralized finance ecosystem, and Avalanche's forthcoming browser wallet.
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The market capitalization of the algorithmic stablecoin UST has soared in comparison to its longer-running counterpart DAI. Year-to-date, UST market capitalization has increased 55%, while DAI’s has risen 5.7%. |
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Daily deposits into liquid staking protocol Lido broke record highs as a result of the launch of Ethereum’s Merge testnet, Kiln. Since the launch last Tuesday, over 470,000 ETH, worth approximately $1.4 bn, has been deposited into Lido. |
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Thanks for reading this week. Have a great weekend.
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Alex Thorn
Head of Firmwide Research
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