Carbono Insights #55 | We didn’t start the fire
After the collapse of three crypto-friendly banks and the subsequent version of an on-chain bank run, everything looked bleak with the depeg of USDC. Crypto seemed badly wounded again. But apparently, it wasn’t crypto that went wrong. As we will see later, the Fed giveth, the Fed taketh away (or rather the other way round): the Fed’s increasing rates brought the banks down, and it was only when the Fed promised to pump as much money as necessary to save deposits that the markets cooled off.
Crypto was singled out as the problem; now, people are discussing a widespread banking crisis.
We’re left with a surprisingly positive week for bitcoin, whose narrative as a hedge against the whims of traditional finance has earned a new “I told you” moment.
While we wait for macro to stabilize, here are some of the things happening in crypto:
- Some people on Twitter claim that there’s a stealth financial crisis coming.
- As the dust settles, USDT emerges as a winner.
- Arbitrum launched one of the most anticipated tokens in crypto.
- Meta said, “maybe later” to NFTs.
- Gensler insists that Proof of Stake tokens are securities (while a judge complains about Gensler).
- As the Shapella approaches, we zoom back into liquid staking on Ethereum. This time with a white paper by your truly, Carbono.
Some readers might be too young to remember the reference from the Billy Joel song. A rapid fire of names and events that had left a mark in the century reminded us that things got to where they were because the past determines history. Seemed apropos. In the official video that aired on MTV, Billy Joel stood in front of a fire singing the chorus: “we didn’t start the fire, it was always burning since the world’s been turning.” Some readers might be too young to remember MTV.
⬡ Six Angles
We select six topics to illustrate the different angles from which we can approach crypto. We could choose dozens, but six is the atomic number of carbon… and otherwise, we’d be writing for ages.
1. Macro | “The Fed caused the banking crisis.”
As time goes by, it seems apparent that it was not crypto that killed Silicon Valley Bank, and probably not Signature. Rising rates are hurting bank balance sheets all across the world. It was not crypto that made banks trip, it was the Fed.
Probably aware of the situation, the Fed stepped up and guaranteed deposits beyond the FDIC’s $250k insured limit. Markets sighed in relief. But then they thought, how is this not a new stimulus package?
Balaji is one of crypto’s main thinkers and the strongest speaker for the “stealth financial crisis” thesis. One that points out that US authorities are about to print $2T to rescue institutions (right when we “celebrate” the third anniversary of the covid-19 lockdowns, which triggered the last massive stimulus package).
For the sake of debate, here’s the counterargument: Crypto Twitter Thinks the Fed’s $297B Balance Sheet Expansion Is ‘QE’, But It’s Not
2. Stablecoins | And the winner is…
The triple bank crash of last week had the counterintuitive consequence of being a golden week for many DeFi protocols. The offline bank run was met with a spike in DeFi activity, with protocols like Uniswap or 1INCH increasing their trading volume massively. But this was just the effect of investors fleeing USDC and related tokens like DAI.
If there’s a winner in crypto, that is USDT. This time, the opacity around their reserves played in their favor. Tether’s stablecoin today doubles USDC’s market cap.
3. L2 | Wen Arbirtrum token? Now
One of the most anticipated airdrops in crypto is finally happening. Arbitrum, one of the two leading contenders, has announced the launch of their token ARB. The L2 race has been an interesting one to watch lately. Arbitrum had the lead in the most relevant metrics, such as TVL, active addresses, or daily transactions (recently, Arbitrum surpassed Ethereum in this metric). Optimism was putting up a fight thanks, especially to recent announcements (like their partnership with Coinbase or the launch of Bedrock, their most outstanding code upgrade), and the momentum of their native token, OP, that is used in Optimism’s groundbreaking governance model, and as a reward mechanism for ecosystem development.
Now Arbitrum has a token too.
Simultaneously to the token announcement, Arbitrum launched Orbit, a developer toolkit meant to give L2 devs superpowers like Bedrock.
The total supply of ARB will be 10B (12,6% will be airdropped on March 23rd), and the token is presented as a governance token. ARB is the key to the project’s decentralization, one of the most important pending subjects of L2s. In Vitalik’s words, L2s have been running on “training wheels”: decentralizing governance is a necessary improvement to guarantee the healthy development of the whole Ethereum ecosystem.
For a few weeks, though, everything we’ll be hearing about will be token price action, bag dumping, etc. The airdrop effect.
4. NFTs | Meta ditches NFTs
Mark Zuckerberg’s Meta is delaying their NFT integration efforts indefinitely. The company explained they want to focus on other priorities now and that NFTs are still immature.
In the meantime, gaming giant Epic announced they have nearly 20 crypto games in the pipeline. These games are developed by third parties and include crypto-native features. People at Epic are distancing themselves from any responsibility regarding transactions, customer support, or refunds, although they claim they will monitor security issues closely.
5. Regulation | Gensler insists that PoS coins are securities
Who needs proper guidance and frameworks when you have casual remarks?
SEC chairman Gary Gensler spoke to reporters last week and gave his opinion about Proof of Stake tokens.
“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries,” Gensler said.
These remarks followed strong criticism of the SEC from the Voyager bankruptcy case judge, who complained about the lack of support for the Commission’s arguments against Binance.
6. Ethereum | Liquid Staking Tokens Primer
After successive successful dress rehearsals, we have a date for Ethereum’s Shapella upgrade: the fork that will close the circle of ETH withdrawals from the Proof of Stake mechanism.
We recently released a paper explaining the process of staking and unstaking, offering a 101 to any investors interested in understanding the main components of liquid staking.
The combined fork of Shanghai and Capella will unlock the full potential of liquid staking on Ethereum. Liquid Staking Tokens, tokens that guarantee the claim over staked assets, will allow investors to trade their LSTs across DeFi protocols without giving up on the rewards of the Proof of Stake protocol. A groundbreaking development in Ethereum will probably be one of the leading trends in 2023. As the LST competition heats up, the following paper aims to explain the main elements to consider when diving into this opportunity.
You can read the content or download the PDF version here.
