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U.S. President Joe Biden signed a long awaited Executive Order directing federal agencies to pursue a wide range of initiatives aimed towards regulating the crypto industry in a coordinated fashion; Andre Cronje and Anton Nell, two industry figureheads in the decentralized finance space, has shut the door on further involvement in the space; A team of Stanford researchers unveiled plans to launch a new high-throughput, EVM-compatible blockchain based on zero-knowledge proof technology called Espresso. |
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The total implied network value (market cap) of the digital assets market stands at $1.68tn, down 6.7% from last week (when it stood at $1.80tn). Bitcoin’s network value is 5.82% of gold’s market cap. Over the last 7 days, BTC is up 1.8%, ETH is up 1.05%, and LUNA is up 18.64%. Bitcoin dominance is 45%, up to 2 percentage points from last week. |
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Data current as of 7:56 AM ET on March 11, 2022. Prices and Data via Messari.
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✒️ Biden's Executive Order Recognizes Crypto’s Importance and Promise
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President Biden signs long awaited Executive Order on Digital Assets. On Wednesday morning, President Biden signed an Executive Order ("EO") on digital assets that directs U.S. federal government agencies to pursue a wide range of initiatives in a coordinated "whole-of-government" approach towards regulating the crypto industry. The White House’s Fact Sheet accompanying the EO highlights the explosive growth of digital assets, referencing surveys that suggest 40m Americans (16% of adult Americans) have invested/traded/used digital assets, notes the 100+ countries that are exploring or piloting CBDCs, and recognizes the importance of digital assets for American competitiveness and as a tool for international engagement. The EO details 6 focal areas: (i) consumer and investor protection, (ii) financial stability and mitigation of systemic risk, (iii) illicit finance and usage, (iv) the leadership and global competitiveness of the US in technology and in the global financial system, (v) financial inclusion, and (vi) responsible innovation.
With these key considerations in mind, the EO orders multiple federal agencies to research the global impact of crypto and report on the risks/benefits of different crypto assets and offer suggestions for new rules or legislative changes, which are due in the next 90-360 days. Specifically, key deliverables mandated under the plan include:
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The reports mandated by the EO will go through an inter-agency process that is coordinated by the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP). The EO does not impose any new regulations and does not present any specific positions that the Biden administration intends to take. Instead, these directives to study digital assets in depth are meant to inform thoughtful policies and result in a unified regulatory framework, something the industry has notably lacked.
Crypto markets rallied on the release of the EO as it came in more supportive than expected. Many had feared that the EO, the existence of which was first reported several months ago, would put outsized emphasis on the risks of crypto and fail to recognize its benefits and wide adoption, or that the administration would rush to impose new rules or restrictions in light of the Ukraine-Russia conflict.
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OUR TAKE: The long awaited EO represents a pivotal moment for the crypto industry. The existing regulatory framework has been fragmented and disorganized, with states, the CFTC, SEC, IRS, and US Treasury Department each implementing different and sometimes contradictory approaches. As a result, both market participants and policymakers have been calling on the government to provide more regulatory clarity with agency responsibilities better defined In light of the lack of clarity in current laws, the SEC and DOJ, for example, have been approaching regulation through enforcement actions and fines. FinCEN considers cryptocurrencies to be money considering and thus subject to money transmission rules under the Bank Secrecy Act; IRS considers it to be property subject to capital gains taxes. The CFTC says Bitcoin and Ether are commodities, but the SEC chairman believes that many cryptocurrencies are securities. While all these issues surely will not be sorted by this process, Wednesday's EO nonetheless marks an important step towards a more cohesive, coordinated approach for government policy on the growing cryptocurrency industry.
Most importantly, the framing of the EO struck a surprisingly balanced tone that acknowledged the wide adoption and the potential benefits of digital assets. It suggested for the first time that the Administration was accepting of the technology, recognizing its importance in our economy as a new asset class and its potential to improve on the global positioning of the US. The EO calls to examine the differences between different crypto assets which is meaningful because not all crypto assets should be regulated the same way. With acceptance coming top-down from the Administration and bottom up with growing adoption among Americans, policymakers can then direct their attention to more productive and conducive discussions on how to best harness the technology and unlock its potential for the best interests of the nation and its constituents.
Despite the positive reception, there is now a lot of work to be done. Industry advocates will engage with policymakers to educate them on the myriad complexities of this growing industry. We believe that the crypto story is positive for financial inclusion, transparency, access, and fairness, and we are hopeful that this process will bring both clarifying and positive government policy to the asset class.
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🚪 DeFi Founders Andre Cronje and Anton Nell Officially Resign From All Projects
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Former Fantom Foundation senior solutions architect Anton Nell posted a letter of resignation on Twitter, leading to numerous tokens plunging in market value. Fantom is a new but popular alternative layer 1 blockchain platform that has seen significant growth over the last couple quarters. In the post on March 6th, Nell stated that he and smart contract developer Andre Cronje were “closing the chapter of contributing to the defi/crypto space.” Nell later shared that it was not a “knee jerk” reaction, but one they both had both been battling for some time. Andre Cronje, a trailblazing smart contract developer, is responsible for building the first yield vault project: Yearn.Finance (YFI). After teaming up with the Fantom developers, Cronje contributed to the notoriety and growth of the Fantom Blockchain. Both Cronje and Nell collaboratively and independently built +20 crypto projects, most recently Solidly and Keep3r, respectively. Cronje spawned the slogan “building in #Defi sucks,” sharing his frustrations in blog posts dating back to Feb 2020. The week prior to March 6th, Cronje finalized his time with Fantom Foundation via an update on LinkedIn, closing a three-year and 8-month tenure.
In the last seven days, Fantom token (FTM) has been down by more than -25%, with other Fantom ecosystem tokens such as Multichain (MULTI) and Chainlist (CLIST) dropping -35%. Solidly (SOLID), Cronje’s most recent development on the Fantom mainnet, was just recently deployed on January 23, 2022. Cronje’s cult-like following drew considerable hype and traffic to the Fantom network in anticipation of project deployment. The SOLID token is now -87% from its all-time high on Feb 26, 2022. In comparison, Yearn Finance (YFI) has remained resilient, fighting back from a seven-day -20% low. YFI has operated independently of Cronje for over a year; the project has been supported and maintained by more than 40 devoted developers. In addition to the quality of his development work, Cronje became well known for launching Yearn with a fair launch, meaning there was no pre-mine or tokens allocated to himself or a protocol foundation or developer team.
Following the Twitter post by Nell, numerous fantom community members and leaders rushed to clarify the implications and finer details within the ordeal. Michael Kong, CEO/CIO of Fantom Foundation, wrote, “they are ‘terminating’ their involvement, and handing over anything they run to the existing teams.” Solidex announced they are taking over the Solidly UI, effective April 3rd. This rhetoric provided menial reassurance to Fantom network participants—total value locked (TVL) in Fantom-based DeFi apps is down 26% since Nell’s post on March 6th.
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OUR TAKE: The fallout from Nell and Cronje’s exit has shined a light on the allure and personality of core developers driving token value. Developers who drive the creation and deployment of a project are human, possessing opinions, ambitions, and skills, which in change can be analyzed, forecasted, and speculated upon. When developers remain completely anonymous, users and investors are less able to rely upon their contributions to drive value, let alone weigh the anonymous developers’ involvement fully into their investment theses This has never been true Andre Cronje, who as a public developer of groundbreaking projects had amassed many followers and critics who followed his every move. Millions of dollars flow into his “Test in Prod” projects with the hope of asset appreciation, even before users or investors know what those projects are. In the month leading up to the Solidly Jan 23rd snapshot, Fantom TVL more than doubled, and block size reached a year high. This rapid rise and subsequent fall in on-chain traffic calls into question the belief in, and value, of Fantom without Andre Cronje contributing to it.
Almost two years since Defi Summer, the sector may have found itself at a new crossroads. Under the weight of the current macro conditions, market participants are contentious and hungry for alpha. Rightfully, developers are growing exhausted from the expectations of the ever-growing crypto community. Although Nell and Cronje’s exit was blunt, it is a testament to the value of protocols that lack multisigs or admin keys. Truly decentralized projects must thrive beyond the contributions of their founding developers.
Fantom and its underlying projects are decentralized technologies, not endowed to one individual or entity. It is not a question of if a founding developer should depart from a project, but more how and when. Projects with strong communities and passionate developers will thrive far beyond an individual’s life. Yearn Finance is a prominent example; since Cronje’s exit, the project has sustained in the top 10 ETH Defi projects by TVL. On the other hand, projects like Solidly have not been given time to grow and begin their community adoption phase. This stark difference is visible in the market reaction in both YFI and SOLID tokens. The sustained bid in YFI tokens is a testament to users’ belief in the core technology and design, with or without Cronje’s involvement. As a new project, Solidly is unproven as an automated market maker (AMM); its value has been largely reliant upon the history of the human capital Andre Cronje brought to the table. To exit stage left less than 45 days after project deployment raises questions about the project’s long-term prospects.
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☕ Espresso Systems is Coming for Ethereum’s Crown
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Espresso is the name of a new, high-throughput, EVM-compatible blockchain that a team of Stanford researchers and developers are currently building. The project, along with the company leading Espresso’s development, Espresso Systems, were both unveiled on Monday. The core team of Espresso Systems includes Ben Fisch and Charles Lu, two PhD students at Stanford in Computer Science, as well as Jill Gunter, Venture Partner at Slow Ventures and long-time cryptocurrency analyst. The company also announced Monday it had raised $32m in seed funding from Greylock Partners and Electric Capital, as well as other notable backers including Polychain Capital, Alameda Research, and Coinbase Ventures.
The Espresso network is designed to be a proof-of-stake (PoS) blockchain that relies on zero-knowledge proof (ZKP) to achieve both transaction scalability and privacy. “The fully transparent nature of most blockchain systems leaves their applications unsuitable for any users that harbor sensitivities around their data,” writes the company in a blog post. “We are building the scaling and privacy solutions that will unlock new possibilities for Web3 applications.” Already, Espresso Systems has open-sourced two code repositories on GitHub that can be used by Ethereum Web3 developers today. (To learn about what Web3 means in the context of crypto, read one of our past newsletter issues here.)
The first repository, called “Jellyfish,” is a toolkit of cryptographic primitives such as hash functions, ZK setups, transaction signature schemes, and more, all written in Rust that can be used by anyone to build ZK proof systems like Espresso. CEO of Espresso Systems Ben Fisch said the bridging function from Espresso to Ethereum would also rely heavily on the features of the Jellyfish repository. Second, Espresso Systems has released the specifications for a smart contract application on Ethereum to newly create or wrap existing tokens with easily modifiable privacy properties. Though called the Configurable Asset Privacy for Ethereum (CAPE), the code can be implemented on any EVM-compatible blockchain including Avalanche, Fantom, Polygon, and of course Espresso when it launches.
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OUR TAKE: Espresso Systems is not the only company looking to build privacy-centered and scalable general purpose blockchains through ZK tech. This past week it was reported that Starkware, an Israeli-based blockchain infrastructure firm, is raising funds at a $6bn valuation for its Layer-2 ZK network built atop Ethereum. The founder of Ethereum, Vitalik Buterin, himself has written extensively about the ways Ethereum as a base protocol can leverage ZK tech to resolve its own scalability challenges, though the roadmap to realizing the full benefits of the technology he caveats will likely take years of refinement. Even Bitcoin developers have been turning their attention as of late to the scalability and privacy benefits of ZK proofs. Alex Gladstein, Chief Strategy Office of the Human Rights Foundation and well-known Bitcoin advocate, tweeted on Wednesday that his Foundation, in partnership with Starkware, would be funding a research fellow with 1 BTC, worth roughly $40,000, to product an industry paper on the potential uses for ZK systems built on Bitcoin.
All this development, news, and activity being generated around ZK proofs and their application on various blockchains illustrates the mounting importance of this tech to the crypto industry. First conceived in 1985, well before bitcoin and crypto assets ever existed, ZK technology enables its users to quickly generate a succinct proof that an arbitrary computation has a particular output without having to disclose information about what the original computation was. This is of great relevance to blockchains for the ways in which it could lift transaction capacity restraints by introducing a significantly more efficient process for verifying on-chain data. In addition, it also has the potential to improve the privacy features of blockchains by removing the need for on-chain data to be publicly revealed before it can be trustlessly verified.
There have been several implementations of ZK-proofs for blockchains, beginning with ZK-SNARKs back in 2016 for the Zcash blockchain. Other notable implementations include Arbitrum, Optimism, Zksync, StarkNet, and PLONK. We wrote extensively about Layer 2 rollup networks that implement zero-knowledge proofs in our report, In Search of Scaling: A Guide to Layer 2. Though the revolutionary potential of ZK tech has never been a secret, its relevance to the industry is attracting more attention and investment now than ever before. In part, this is because of the growing narrative around crypto’s use case as dissident tech as result of the geopolitical tensions between Russia and Ukraine. Beyond that, though, privacy on the blockchain is continuing to become more relevant because of the myriad use cases for Web3 applications that seek to return self-sovereignty and privacy to users while improving the scalability of public blockchains. The popularity of decentralized finance (DeFi) applications and non-fungible tokens (NFTs) causing fees to sky rocket on Ethereum in 2020 and 2021 has motivated development in ZK tech as a potential long-term solution for blockchain scalability. Though fees on Ethereum are currently trending in 2022 at 7-month lows, the development of Espresso and other projects related to ZK tech illustrates the confidence that other narratives - be it gaming, music, or more generally, the metaverse - will inevitably take off again and push existing blockchain infrastructure to its limits.
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Cryptocurrency exchange Okcoin in partnership with the Stacks Accelerator and Stacks Foundation pledges to deploy $165 mn into products that accelerate bitcoin adoption over a year.
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Limewire, a former peer-to-peer file sharing service, pivots to becoming a Web3 NFT marketplace.
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Pro-crypto, conservative candidate Yoon Suk-Yeol wins South Korea’s Presidential elections.
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Deposits into Ethereum's proof-of-stake network, the Beacon Chain, reach a new milestone of 10mn ETH.
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Ethereum layer-2 network Polygon suffers from a multi-hour outage caused by a node failure.
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Avalanche Foundation unveils $290 mn incentive program to spur growth of subnets.
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Chainalysis makes new crypto sanctions monitoring tools free for public use.
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Fees on Ethereum have reached 7-month lows due to declined user trading activity on DeFi applications and NFT marketplaces. |
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Close to 2 million ETH, worth over $5bn by current estimates, has been burned since the activation of Ethereum’s fee market upgrade, EIP-1559. This has caused Ethereum’s annualized inflation rate to dip lower than Bitcoin’s for most of the past 7 months, strengthening the store of value narrative around the network’s native crypto asset, ether. |
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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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