Weekly Crypto Digest: When Regulatory Actions Shake Markets 2023.06.05–2023.06.11
Dear Reader,
Welcome to the June issue of Gryphsis Academy’s weekly Crypto Digest. We bring you pivotal market trends, insights into emerging protocols, and fresh industry updates, all designed to enhance your crypto and Web3 expertise.
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Market and Sector Snapshot
Layer 2 Overview:
LSD Overview:
AI Sector Overview:
Main Topics
Macro Overview:
- US Stock V.S. Crypto
Big Story:
- SEC sues Binance and Coinbase
- June 9 Market Crash
Protocol Spotlight:
- Frax Finance
Narrative Pick(Trading Tool):
- Unibot, the Telegram Uniswap Sniper Bot
VC Funding Highlight:
- Meanwhile ($19M)
- Lens Protocol ($15M)
Alpha Threads:
- @Chadcaff’s analysis of $GMD
- @defi_mochi’s tutorial on whale hunting
- @Louround’s research on Spin
- @Rekwang’s insights on Radiant
- @VitalikButerin’s take on Ethereum’s technical transitions
Upcoming Events:
- Crypto
- Macro
Macro Overview
This week in the macroeconomic world saw some significant events. Notably, ISM Non-Manufacturing indices revealed a slight expansion in the service sector (PMI at 50.3), albeit decelerating from last month’s 51.9. The Employment Index fell to 49.2, hinting at contraction in the labor market and possibly foreboding a service sector slowdown, potentially impacting equity markets. Despite these indicators, the equity market hasn’t shown direct negative effects. The S&P 500 maintained an upward trajectory despite reaching and retracting from previous highs. NASDAQ outperformed, already surpassing its August 2022 high with considerable momentum, potentially propelled by the recent surge led by NVDA.
While the stock market shows resilience, the crypto market continues to tread a sideways to downward trajectory, diverging from its past correlation with the equities. This week’s weaker crypto performance can be attributed mainly to the SEC lawsuits, stalling the nascent recovery and potentially stifling the growth initiated in early 2023.
Story of the Week
Binance and Coinbase Under Siege: Dissecting the Recent SEC Lawsuits
In a high-stakes shakeup this week, the SEC has launched sweeping lawsuits against two of the world’s leading crypto exchanges, Binance and Coinbase. The legal battles have sent ripples through the crypto Twitter space, stoking fear, uncertainty, and doubt among investors.
On June 5, the SEC has charged Binance, its U.S. affiliate BAM Trading Services, and founder Changpeng Zhao, with multiple securities law violations. The allegations include covertly permitting high-value U.S. traders to use Binance.com, misleading investors about Binance.US’s independence, and manipulating customer assets, including transfers to Zhao-owned Sigma Chain.
Additionally, Binance and BAM are accused of operating unregistered securities exchanges and offering Binance’s own crypto assets, like BNB and BUSD, without proper registration. The SEC’s complaint claims that since 2017, Binance has raked in over $11.6 billion from U.S. transaction fees. The charges underscore the SEC’s concern about deceptive practices and legal evasion by Binance, endangering customers and investors.
Binance’s Response:
Subsequently, the SEC then accused Coinbase of operating its trading platform as an unregistered securities exchange, broker, and clearing agency. Furthermore, Coinbase faces charges for not registering its crypto asset staking-as-a-service program. The complaint claims that since 2019, Coinbase has unlawfully facilitated billions in crypto asset securities transactions. The lack of registration, according to the SEC, deprives investors of key protections, including safeguards against conflicts of interest.
The SEC also charges Coinbase’s holding company, Coinbase Global Inc., as a controlling entity and, therefore, liable for some violations. The complaint suggests that Coinbase’s staking program, which pools customers’ stakeable assets to validate blockchain transactions, is an unregistered securities offering. The SEC seeks relief, penalties, and other equitable relief for Coinbase’s alleged violations.
Coinbase’s Response:
While both Binance and Coinbase face SEC lawsuits, the charges significantly vary. The SEC accuses Coinbase primarily of operating as an unregistered exchange and dealing with unregistered securities. Binance, on the other hand, faces accusations of fraud and market manipulation in addition to registration violations. Binance’s CEO, Changpeng “CZ” Zhao, is specifically named as a defendant, emphasizing the internal nature of the allegations. Despite the serious allegations, both Binance and Coinbase have vehemently denied the SEC’s claims.
Our Take
The SEC’s recent lawsuits against crypto giants Binance and Coinbase signal a rigorous assertion of control over the industry, which may impact its growth within the U.S. The crypto-friendly policies of countries like Singapore, Hong Kong, and Dubai might attract the talent and innovation pushed away by the SEC’s aggressive stance. Also, the looming uncertainty around these lawsuits could stall the recovering crypto market. Those worried about the ripple effects may want to explore hedging strategies to mitigate risk.
Moreover, diving deeper into the exchanges’ inflow/outflow dynamics, we find that most of the outflows from Binance were directed towards OKX, according to data from DeFiLlama. This is not surprising given OKX’s long-standing reputation as a top 10 exchange for spot trading and a top 5 exchange for derivatives. The exchange has recently launched its Web3 wallet feature, which has gained considerable traction.
Exchanges Inflows/Outflows:
Both Binance and OKX have their native tokens, namely BNB and OKB, and their YTD performance reflects a positive alignment with the exchange’s operations. As OKX is set to launch the feature of an AA wallet soon, coupled with its comprehensive product line, investors interested in platform tokens should keep a close eye on OKB.
Drawing from past events, stablecoins such as USDT and USDC could be the next potential targets. A practical hedge against the depegging risk could be through Y2K Finance, a structured product protocol designed to facilitate hedging or speculating on depeg events.
Their flagship product, Earthquake, allows users who have deposited ETH to place wagers against each other. By depositing ETH into the Hedge/Risk vaults, users can buy or sell insurance on the pegged assets. At the end of each epoch, if there has been no depegging, depositors in the Hedge vault transfer their paid premiums to the Risk vault depositors. However, if depegging occurs, while the Hedge vault depositors still transfer their paid premiums to the Risk vault depositors, they also receive a proportionate share of the deposits in the Risk vault.
Vaults Mechanism:
June 9 Market Crash: Unveiling the Potential Market Maker Sell-Off
The crypto market experienced a harsh sell-off on June 9, with several altcoins, primarily those listed as securities by the SEC, witnessing a steep 10%-30% decline. Interestingly, BTC and ETH seemed relatively unaffected, recording a mere 4% drop for BTC. This disproportionate impact has led to speculation about whether this sell-off was triggered by the capitulation of market makers, especially given the recent SEC lawsuits primarily targeting altcoins.
Additionally, Robinhood’s recent decision to delist certain tokens ($ADA, $MATIC, and $SOL) deemed securities by the SEC, adds another layer of complexity. This move could contribute to market makers’ bleak outlook on altcoins, given the potential for further delisting in the future.
Tokens Listed as Securities:
Our Take
The drastic scale of this sell-off points towards market makers being the likely culprits, given their ability to significantly sway the market. We’ve already seen the recent news of Jane Street and Jump Trading retreating from U.S. crypto trading due to heightened regulatory scrutiny aligns with this theory, and this week’s SEC lawsuit could be the final straw driving others to retreat. Yet, attributing the cause to specific entities remains speculative. The sell-off, however, definitely underscores that some major players have a bleak outlook on the current market, offloading substantial volumes even during the weekend’s typically lower liquidity — signaling their firm intent to exit.
Jane Street and Jump Trading News:
For retail investors, observing market movement rather than making reckless entries is recommended in such scenarios. While prices might rebound slightly post a major drop, the risk of further losses persists. Those looking for buying opportunities should ideally wait for prices to find solid support, offering a safer entry point.
Weekly Protocol Pick
Welcome to our “Weekly Protocol Pick” — where we spotlight a protocol that’s making waves in the crypto space. This week, we’ve picked Frax Finance, an algo-stablecoin and LSD protocol.
Since launching its LSD tokens, frxETH and sfrxETH, Fran Finance has rapidly gained momentum within this competitive sector, claiming a market share of 2.34%. The protocol’s swift growth can be attributed to its higher yields. By cleverly leveraging its governance power, Frax has ingeniously created two income streams to cater to users with varying needs.
However, one persistent complaint from users regarding the V1 frxETH has been the centralization of the mechanism, in which the protocol relies on its in-house validators. In response, the frxETH V2 is soon to be launched, aiming to decentralize the mechanism while offering the same or even higher yield for users.
At its core, frxETH V2 incorporates two innovations: a utilization-based interest rate and a decentralized lending market. Frax regards the LSD market as a lending (stakers) and borrowing (validators) market, prompting these modifications.
The V2 version adopts a peer-to-pool model for LSD, enabling anyone to provide collateral and borrow ETH from stakers in order to become a validator. The interest rate is determined based on utilization dynamics. For instance, if there are a lot of lenders, the borrowing rate would be lower, leading to higher earnings for validators, and vice versa. veFXS holders will also decide the type of collateral and the loan term. Ultimately, there will be a marketplace for LSD lenders and borrowers.
frxETH V2 Overview:
Our Insights
We anticipate that the introduction of frxETH V2 will boost the utilization of Frax’s LSD, increasing its market share within the sector. Rocket Pool, Frax’s closest competitor, currently holds a 7% market share. Rocket’s primary appeal lies in its decentralized validator onboarding mechanism. With the advent of V2, Frax will address this issue while simultaneously offering higher yields than Rocket. It’s not unreasonable to expect the gap between the two protocols to narrow.
Moreover, in light of the recent SEC charges, Coinbase is under immense pressure. This could potentially lead risk-averse investors to hold other kinds of LSDs, thus creating an even more favorable situation for Frax.
Coinbase Past Week ETH Flows:
Another thing to note is that decentralization is becoming a trend for LSD protcols. Not only Frax, Lido’s V2 and Rocket’s Atlas upgrade are all designed to foster a more decentrlized ETH staking process. Within this trend, an interesting LSDFi protocol to look at is unshETH.
unshETH aspires to be a liquidity hub for LSD by adopting a diverse basket of LSDs for shared liquidity. To minimize the impact of any single asset depegging, the protocol caps the weight of assets in the pool via governance. The protocol’s diversified approach to LSDs leads not only to better risk-adjusted yields but also holds the potential to enhance the overall decentralization of validators and provide liquidity access to smaller-cap tokens. Despite a recent exploit, it’s still worth keeping an eye on this protocol as it demonstrates strong potential.
Trending Narrative: Trading Tool
This week, we have observed an emerging narrative, “Trading Tool”, has been gradually trending in the crypto twitter. Uniswap V2 may be daunting for newcomers to the DeFi space. The necessity to interact with smart contracts using Ethereum wallets, such as Metamask, adds complexity. Furthermore, Uniswap’s automated market maker model can lead to price slippage, especially for large orders or less liquid tokens. Not to mention the potential MEV exploit users might face.
Unibot, an innovative trading tool accessible via Telegram, is designed to enhance Uniswap user experiences. It offers a variety of trading functionalities. The Multi-Wallet Swap allows for simultaneous trades across numerous wallets. Private Transactions function provides protection against front-running and sandwich attacks. The Token Sniping feature offers users the opportunity to instantly purchase tokens at launch, ideal for capitalizing on initial offerings or market swings. Sniper Mirroring allows users to emulate seasoned traders, perfect for newcomers or those seeking strategy diversification. Additionally, Unibot supports advanced orders like limit orders, significantly elevating the trading experience.
Unibot’s UI:
Our Insights
Although the Trading Tool narrative has only recently begun to gain momentum in the DeFi space, we anticipate this burgeoning sector will garner significant interest over the next 6–12 months. Since its launch in May, $UNIBOT has showcased an impressive performance given the current market state, achieving an extraordinary 31676% gain, which is partly why this protocol has caught our attention.
Moreover, data from Nansen suggests $UNIBOT has seen the largest influx of smart money post the potential market maker sell-off on June 9th. With Unibot’s V2 set to roll out in mid-June, this presents a compelling reason to closely monitor this token’s trajectory.
As this narrative begins to gain traction, we expect to see the emergence of more trading tools like this, capitalizing on various DEXs and trading instruments. When evaluating such protocols, it’s crucial to focus on the level of innovation they offer and the security they ensure. These two factors are pivotal for sustainable growth, enabling trading tools to distinguish themselves in a rapidly evolving sector.
Stay tuned as we continue to monitor and provide updates on this emerging sector for you.
VC Highlights: Top Funded Crypto Protocols This Week
Welcome to our weekly Investment Spotlight, where we shine a light on the most significant venture capital moves in the crypto space. Each week, we’ll focus on protocols that have attracted the most funding.
Meanwhile
Meanwhile is a Bitcoin life insurance company that has recently gained significant attention in the financial sector. The company is backed by notable figures and entities such as Sam Altman and Google’s VC fund, Gradient Ventures. On June 6, Meanwhile raised $19 million in funding, making it the protocol that raised the most this week. The raised fund will be used to earmark on helping deceased Bitcoin holders pay out their surviving loved ones in cryptocurrency. This funding round has brought the company’s valuation to $100 million.
Meanwhile’s CEO Zachary Townsend:
Lens Protocol
Lens, a decentralized social media platform ensuring user data ownership, secured $15 million on June 8 in a funding round participated by over 30 high-profile VCs, angel investors, and DAOs, including Blockchain Capital and Delphi Digital. With its user-centric model, Lens aims to disrupt traditional social platforms by allowing users to switch networks without losing their content or followers. Despite being in closed beta, Lens’s budding ecosystem has positioned it as a SocialFi protocol to keep an eye on.
Lens Protocol Seed Round Investors:
Protocol News
Camelot flagged potential issues of their V3 AMM.
Fantom released 2023 roadmap.
DeFiLlama added cliff unlock to their dashboard.
Syncswap launches Move bridge.
Kyber Network launched KyberAI.
OKX wallets will support AA wallet soon.
Aave launched GHO governance proposal.
Level Finance partnered with Trader Joe.
Synthetix V3 spot market is live.
Curve Finance adds stETH market for crvUSD.
Kraken launched NFT market place.
Industry Updates
JP Morgan uses blockchain for 24/7 dollar transfers with Indian Bank.
Arca cut off 30% of employee.
Robinhood may delists the tokens listed as securities.
Australian bank limits payments to crypto exchanges in light of scams.
Coinbase CEO states that they are not shutting down staking service.
Gary Gansler lays out path for crypto compliance.
VCs sues Curve’s founder.
Crypto.com suspends US institutional exchange service.
Alpha Threads
Alpha is abundant on Crypto Twitter, but navigating thousands of threads in Twitter can be hard. Each week, we spend serveral hours researching, handpick threads packed with insights, and curate a list of weekly selection for you. Let’s dive in!
Originally a pseudo GLP vault protocol, GMD has recently seen its token price and TVL skyrocket. You might be wondering how a vault protocol can achieve such a growth, especially under current market conditions. The secret lies in its launchpad product. For a deeper understanding, check out @Chadcaff’s thread.
Mastering whale hunting is pivotal when navigating the tumultuous seas of the crypto world. This skill can shield you from potential scams and guide you towards tokens with the potential for a 10–100x return. @defi_mochi’s thread offers valuable technique into using a Dune dashboard to locate the whales for any altcoin.
Unearthing early gems in the initial stages can lead to substantial profits. With the buzz around Arbitrum, ZK L2s are now in the market spotlight. As one of the prime contenders in ZK L2, Polygon zkEVM offers plenty of opportunities. @Louround’s thread shares insightful research on an orderbook-based DEX demonstrating huge potential.
Since launching on Arbitrum, Radiant Capital has made a significant splash as the first omnichain DEX in the DeFi space, poised to tackle the issue of liquidity fragmentation. The protocol is primed for even more growth with its promising V2 tokenomics. For a deeper analysis and insights, don’t miss @Rewkang’s illuminating Twitter thread!
Lastly, make sure to check out Vitalik’s latest article exploring the three key technical transitions that Ethereum must undertake as it evolves. These shifts are not only vital, but they also pose challenges due to the immense coordination necessary for their successful implementation. They are set to fundamentally alter our interaction with Ethereum.
Upcoming Events
News Sources:
https://blockworks.co/news/us-states-are-going-after-coinbase-following-sec-lawsuit-heres-how
https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges
https://blockworks.co/news/coinbase-binance-suits-different
https://www.investopedia.com/robinhood-to-delist-cardano-polygon-and-solana-7510331
This newsletter is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. The past performance of any asset is not indicative of future results.
