July 29, 2022
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this week, we have a new writeup written by christine kim summarizing the ethereum core developers' call which happened yesterday on july 28. also in today's newsletter, we discuss antpool's investment of $10mn to the ethereum classic ecosystem, the unveiling of a new p2p video messaging app by tether and bitfinex, and a governance proposal on uniswap to introduce protocol fees.

on our galaxy brains podcast, we discuss a number of topics including the Fed's decision to raise interest rates by 75 basis points, Coinbase's new marketing strategy, the launch of the Central African Republic's Sango Coin, and much more. listen to our conversation on apple, spotify, amazon, or youtube.

that’s all for now – wishing you the best for the weekend.

– alex
Market Update
The total implied network value (market cap) of the digital assets market stands at $1.07tn, unchanged from last week (when it stood at $1.07tn). Bitcoin’s network value is 3.88% of gold’s market cap. Over the last 7 days, BTC is up 4.50%, ETH is up 9.62%, and BNB is up 8.47%. Bitcoin dominance is 41.87%, down slightly from last week.
Data current as of 8:50 AM ET on July 29, 2022. Prices and data via Messari.
Three Big Stories
🐜 Antpool Invests $10mn to Support Ethereum Classic 
Antpool, the third largest BTC mining pool and the 13th largest ETH mining pool by hashrate, announced this week an investment of $10mn to support the Ethereum Classic ecosystem. Ethereum Classic is a forked version of the Ethereum blockchain that was created in 2016 in the aftermath of the DAO hack. Core developers decided at the time to issue a hard fork that would restore user funds stolen from a decentralized application known as “The DAO.” However, there was a portion of network stakeholders that strongly believed the canonical history of the blockchain should remain unchanged. This group of developers, users, and miners launched their own version of Ethereum that continues to live on today as Ethereum Classic (ETC).

Over the past six years, Ethereum Classic has evolved in similar ways to Ethereum. In January 2022, ETC developers activated the Mystique hard fork which contained similar upgrades to the ones included in Ethereum's last major hard fork known as London. To read more about the Ethereum London hard fork, click here. Though Ethereum Classic maintains a high level of interoperability with Ethereum, it is not expected to execute the Merge upgrade, which is Ethereum’s upcoming transition to a proof-of-stake consensus protocol. To read more about the Ethereum Merge upgrade, click here. Instead, Ethereum Classic developers intend to keep maintaining the network as a version of Ethereum that relies exclusively on proof-of-work (PoW) mining for security and blockchain consensus. 
OUR TAKE: Antpool’s investment in the Ethereum Classic ecosystem suggests vested interest from stakeholders in the Ethereum mining industry to continue operations post-Merge by redirecting hashpower to a version of Ethereum that relies on PoW consensus. However, because ETH commands a significantly higher market value than ETC, it is not financially feasible for all mining operations on Ethereum to move to Ethereum Classic. As of July 28, 2022, the average daily hashrate directed at Ethereum is 38x times larger than the hashrate directed at Ethereum Classic.

Ultimately, Antpool’s investment of $10mn is meant to help boost the profitability of mining on Ethereum Classic such that more hashrate from existing mining operations on Ethereum can be redirected to Ethereum Classic and remain cost-effective. Already, this strategy by Antpool appears to be working. In the 48 hours following Antpool’s announcement on July 26, ETC price has soared over 50% and is currently trending above $40. It remains to be seen whether other Ethereum mining pools will follow suit and invest in the Ethereum Classic ecosystem in preparation for the Merge upgrade.

Ethermine, Ethereum’s largest mining pool by hashrate, has publicly announced their intentions to convert into a staking pool post-Merge, which suggests that miners who were directing their hashrate to Ethermine will have to redirect to another pool such as Antpool or simply sell their mining machines post-Merge. It’s worth noting that Antpool is a mining pool affiliated with crypto hardware manufacturer Bitmain. Earlier this month, Bitmain released a new specialized mining device for Ethereum miners, which further explains why Antpool may have vested interests in helping boost the profitability of mining on Ethereum Classic.
Aside from mining on other PoW blockchains and selling off mining machines, Ethereum miners also have the potential to continue mining the current version of Ethereum post-Merge. This would create a forked version of the Ethereum blockchain like how Ethereum Classic was created in 2016. However, the likelihood of a long-lived fork of Ethereum post-Merge is slim due to the high degree of social coordination this strategy requires. For the mining activity on the alternative Ethereum PoW-chain to be of economic value, miners would need to lobby and convince exchanges of this alternative chain’s relevance. In doing so, exchanges would then issue a ticker symbol for representing the alternative ETH, such as ETHCASH or some other variation.
Ticker symbols are unique identifiers that are assigned to financial assets to easily differentiate the trading of one financial asset from another. However, in the crypto markets, there is no standardized way for determining which ticker symbol should be assigned to which crypto asset. It is up to the discretion of exchanges, which don’t always align with each other. At times, the same ticker symbol has been shared by two different cryptoassets. In addition, during the split between Bitcoin Cash and Bitcoin SV, there was fierce debate over which version of the Bitcoin Cash blockchain should retain the BCH ticker symbol. As such, for miners to be financially incentivized to progress an alternative Ethereum PoW chain, social coordination and lobbying for recognition of a new ticker symbol to contest ETH and trade on exchanges is an important first step.

With the Merge tentatively expected to activate in late September or early October, there remains a possibility that the Ethereum mining community could band together to begin such lobbying efforts. Alternatively, it is possible that more mining entities invest in the Ethereum Classic ecosystem in the hopes that mining on Ethereum Classic becomes more profitable over time, especially if the Merge does not activate smoothly and negatively impacts the user experience on Ethereum. (For more information about the execution risks associated with the Merge, click here.) For both cases, it will be important to watch for how much hash rate continues to mine on Ethereum and by how much the existing hash rate on Ethereum Classic increases immediately following the Merge transition. -CK
🕳️ Tether Fires Back at Critics and Unveils New P2P Application
Tether regains peg and launches Holepunch. Since depegging in the wake of Terra’s collapse in mid-May, Tether—crypto’s largest stablecoin—recovered back to $1 this past week. Tether has deviated from peg on multiple occasions since launching in 2014 as it faced a long history of criticisms and scrutiny into its reserve practices. Price deviations from its peg have become less severe and less frequent over time as Tether made meaningful improvements to its reserve composition and disclosures; though concerns over its backing resurfaced after UST failed, leading USDT to trade as low as $0.95 on May 12. The price quickly recovered by the next day to ~$0.999 – a small discount that had persisted for over two months.

Following the recovery of the peg, Tether published two articles on its official blog: (i) denouncing “the spread of false information,” and (ii) criticizing hedge funds for unsuccessfully attempting to short Tether in recent months. Tether also disclosed that an audit is finally coming from one of the “Big 12” accounting firms. The second post, entitled “Why Hedge Funds are Losing Money Shorting USDT,” also refuted claims that Tether has significant exposure to Chinese debt and laid out a timeline for winding down its remaining $3.7 billion in commercial paper exposure by November 2022.

Tether’s re-peg also coincides with its launch of Holepunch, an encrypted peer-to-peer communication platform backed by Bitfinex (which shares the same parent company as Tether) and Hypercore—a cryptographic peer-to-peer distributed systems developer. In the announcement post, Holepunch’s Chief Strategy Officer Paolo Ardoino (also Tether’s CTO) cited concerns over user’s control of data in existing communication applications as a driving reason for Keet, Holepunch’s first application which provides peer-to-peer audio/video calls, texting, and file sharing: “[Tether] believes that freedom of choice, communication and finances are the lifeblood of the future, and anything that will enhance those freedoms is worth amplifying.”

Separately, reports emerged last week that a new bipartisan stablecoin bill from the House Financial Services Committee was close to completion. However, pushback from the Treasury Department and other congress members over the draft language related to reserve and custody practices have delayed the bill’s release, now expected in September.
OUR TAKE: Tether has endured a long history of criticism. Most recently, shorting USDT had become a popular trade among hedge funds. Throughout the negative sentiment, Tether has processed over $10bn in redemptions over just 10 days – an impressive feat that no other stablecoin has ever experienced. Despite meeting all redemption requests and addressing false theories against it, Tether has continued to lose market share to perceived to be safer stablecoin competitors – namely USDC. The USDT/USDC ratio now stands at ~1.2, the lowest in the history of the two stablecoins. While Tether as an off-shore issuer may not be directly covered in the upcoming release of the House Stablecoin Bill, it could still be impacted depending on the bill’s text around reserve and custody requirements for its on-shore counterparts.
The launch of Holepunch highlights Ardoino’s ambitions to be more than the largest stablecoin issuer and build out a suite of applications that incorporate USDT. Holepunch establishes Tether tokens as the default payment method for any applications building on top of it using Holepunch’s SDK. Its payment API will run on top of Bitcoin’s Lightning Network but the rest of Holepunch is not necessarily reliant on any blockchain. If successful, Holepunch could help accelerate adoption of decentralized peer-to-peer future of work technologies, challenging centralized offerings like Zoom while also enabling new opportunities through micropayments. This expands USDT use cases and could help slow or even reverse Tether’s declining market share. LT
🗳️ UNI Holders Discuss Implementation of Protocol Fees
Uniswap governance has drawn a lot of attention over the last week as discussion heated up around the introduction of protocol fees for several pools. The proposal, originally posted to the Uniswap governance forum by Leighton Cusack, co-founder of PoolTogether, on July 18th, suggests the implementation of a 1/10 protocol fee on the USDC / ETH @ 0.05% pool and the USDC / UDST @ 0.01% pool. These specific pools were chosen to experiment with how liquidity providers (LPs) react to the fees in both a stable / volatile asset pool and a stable / stable asset pool, where fees are critical to offset impermanent loss.

Uniswap is a decentralized exchange on Ethereum which uses an Automated Market Maker (AMM) algorithm instead of an order book to process exchanges of tokens between users. Its latest implementation, Uniswap V3, utilizes concentrated liquidity around specific price ranges to improve capital efficiency and trade execution prices for users. Uniswap V3 also introduced fee tiers, which break token pairs into pools with different fee levels, such as 0.01%, 0.05%, 0.3%, and 1%, that accrue to LPs. Fee tiers give LPs the flexibility to explore the tradeoffs between volatility, volume, and impermanent loss in their desired trading pairs. While the tiered fee system complicates the underlying mechanics of Uniswap, its user-facing routing algorithm obfuscates the complexity and always uses the most optimal swapping route through the variety of pools.

Every week, Uniswap processes an average of $8 billion in trading volume, generating roughly $9.5 million in LP fees. If the lowest possible protocol fee setting, 1/10, was implemented across all pools, Uniswap would accrue $950k per week to the protocol treasury. The current proposal, however, doesn’t implement protocol fees across all pools at once. To avoid making drastic decisions that could impact the long-term future of the protocol, Leighton Cusack proposed only implementing protocol fees for two specific pairs, which he estimated would accrue $20-40k per day to the treasury. So far, the proposal has attracted a lot of discussion on the forum and has passed the temperature check.
OUR TAKE: The discussion around protocol fees on Uniswap spans several years, ever since the possibility to capture revenue was introduced with V2 in May 2020. The main argument against has always been that the protocol should prioritize rapid growth and control of market share. Every prior proposal to turn fees on has failed, including a proposal to merely research the possibility earlier this year. Every proposal leading up to the current one has been marginally less drastic and more experimental, culminating in this one, which only affects two pools and is open to a discussion.

It is, however, too early to be overly optimistic. Because the passing of the temperature check for the current proposal was decided by a single vote by monetsupply.eth, it’s possible that this early success isn’t representative of what will follow during the consensus check vote to proceed or in the on-chain vote, especially considering the risk-averse initial reaction from the community. The on-chain vote will likely be the biggest challenge in the process, as it requires a minimum of 40 million UNI to vote in favor, currently equal to $381 million. Despite that, on July 28, as more attention was drawn to the proposal and the discussion around it, the UNI token significantly outperformed the market, rising in price by 37% in 24 hours.

The passing of this proposal will only be the first step towards utilizing Uniswap cash flows towards the development of the protocol. Before these funds can be used, they will need to be converted from native tokens of each trading pair into a token like ETH or USDC. This infrastructure may take months to build out, so we are still far away from seeing these funds be deployed. Until that happens, however, Uniswap will be accruing a variety of tokens for which protocol fees have been implemented. Arguably, that could benefit its sustainability in the long run, considering that its treasury is currently fully composed of UNI tokens. -KN
Other News
  • House Financial Services Committee delays stablecoin bill until after August.
  • Crypto exchange, FTX.US, launches stock trading platform to users in the US.
  • Coinbase hit with SEC investigation over trading unregistered securities.
  • Senators push for bill to make crypto transactions under $50 tax-free.
  • Meta sued by US antitrust watchdog for monopolizing the metaverse after the acquisition of a VR fitness app.
  • Solana opens inaugural in-person store in New York City.
  • Variant raises $450 million for two new venture funds.
  • Ethereum developers announce date for activation of the Merge upgrade on Goerli testnet.
From the Desk
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or visit www.gdr.report
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Galaxy Digital Research Podcast
Listen to our podcast on Apple, Spotify, Amazon, or wherever you listen to podcasts.

In this week's episode, we discuss a number of topics including the Fed's decision to raise interest rates by 75 basis points, Coinbase's new marketing strategy, and the launch of the Central African Republic's Sango Coin.
Charts of the Week
Tether (USDT) regained its dollar peg for the first time in over two months last Tuesday, July 19, and has since remained steady trending at or above $1 valuation. Back in May, USDT tanked after there was a panic sale of dollar-pegged cryptocurrencies in the aftermath of the Terra/Luna collapse. To read more about the collapse of Terra’s algorithmic stablecoin Luna, read this Galaxy Digital research report.
The number of Ethereum daily active addresses peaked at 1,093,870 this Tuesday on July 26. It was the first time Ethereum addresses have broken past 1 million since the network was under a denial-of-service attack back in 2016. CoinMetrics attributed the recent spike in addresses to the activities of an Ethereum wallet controlled by cryptocurrency exchange Binance which appeared to be consolidating several addresses into one.
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research, Galaxy Digital
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