Carbono Insights #61 | Another bank bites the dust
Another bank bites the dust. Crypto prices took a hit last week when they were rescued again by a failing bank. First Republic Bank announced $100B losses in deposits and kicked off another uncertain, slow collapse process where regulators and other banks are trying to find the best way to deal with the remains (finally, it was JPMorgan who scooped up First Republic). After falling from the $30k mark to the $27k low, bitcoin regained strength at $29k.
These are not the only bad news that is good news for crypto. Macro data still need to dance in tune: inflation and employment rates were supposed to lower due to increasing interest rates, but they refuse to comply. In the meantime, growth in the US is lower than expected, bringing up fears of stagflation (negative growth while inflation and unemployment rise). This week we will probably see another 25bps rise in interest rates, but what’s remarkable about this one is that it might be the last for a long time. This seems as far as the Fed is willing to turn the screw. Crypto shines in times of crisis, and the possibility of relief in liquidity might help further.
Hopefully, the industry will put it to better use than memecoins. But, as you can see below, we remain in this strange territory where crypto is fighting regulatory battles and gaining a reputation in the macro scenario. Yet, at the same time, things behind the curtains revolve around stuff like memecoins.
To illustrate this week’s regulatory battle, a basketball 1 on 1 between a startup and an executive. Collect this INTERPOLATION of Carbono Insights on OpenSea, or share this newsletter on Twitter (tagging @carbono_com) and get one sent to your wallet
This week in Carbono Insights
- MEV bots were the most profitable vertical in crypto
- Coinbase fights the SEC back
- Circle launches a USDC multichain transfer solution
- Some whales are on the move, and they are unpredictable
- NFT sales are decreasing, and OpenSea is struggling
- And, of course, $PEPE
1. MEV | MEV is the real MVP
Maximal Extractable Value (MEV) has been around for long enough, but it’s never been as hot as lately. Let’s bring up a quick explainer fSo, for those coming late to the party.
MEV happens mostly around decentralized exchanges, where traders place orders to make token swaps, and protocols process those orders on the blockchain.
In a world as volatile as crypto, it’s very common that the price of an asset when you place your order is different from the one you’ll end up paying once the order is processed. The difference is called slippage. Dexes allow users to fine-tune the slippage they’re willing to accept.
Imagine buying crypto shoes and telling the shop assistant that you want to buy a pair for $100, but you’ll be ok if the price moves between $98 and $102.
Blockchain transactions must go through a process before being validated and set in stone. Before entering the blockchain, transactions wait for approval in a waiting room called the mempool, which is publicly visible to everyone.
Imagine your offer (” I’ll buy these shoes for any price between $98 and $100”) is publicly displayed to the rest of the shop buyers.
MEV bots are software programs that scan mempools for opportunities to game the system and extract some profit. One of the most common MEV operations is sandwich attacks. Sandwich attacks happen when an MEV bot front runs your operation, buys an asset faster than you for a price lower than your higher range, and sells it back to you for profit.
Imagine Bob is constantly looking at the screens where all offers are displayed. Bob sees your request and decides to take a profit from it. Bob talks to the shop clerk and tells them that they want to buy the same shoes for $98, and he gives the shop clerk $3 in bribes to sell them to him first. As soon as he gets the shoes, he turns around to you and sells you the shoes for $102. Bob has paid $101 and obtained $102.
Now imagine Bob was a bot who could do this a thousand times daily.
Memecoin season has been very fertile for MEV bots. Most memecoins are not trustworthy enough to trade on centralized exchanges, so trades happen on Dexes vulnerable to MEV. And with a record-breaking number of trades on Ethereum, MEV operators have made great money.
2. Regulation | Coinbase fights back
Coinbase has sent the ball back into the SEC’s court. The centralized exchange issued a counter-lawsuit to force the Commission to avoid enforcement actions and provide clarity. Coinbase has requested a US Court to compel the SEC to respond to a rulemaking petition submitted last year that the SEC ignored. Instead, the Commission chose to take Coinbase to court.
This way, Coinbase translates into legal action what the company has been saying since they received a Wells Notice from the SEC: that the Commission has actively avoided providing legal transparency.
3 Stablecoins | Circle launches USDC bridging solution
USDC issuer conglomerate Circle recently announced the launch of the Cross-Chain Transfer Protocol (CCTP), a protocol allowing developers to implement seamless transfers of USDC across chains. CCTP will initially be available only on Ethereum and Avalanche, but plans are to expand to other ecosystems. As Circle claims on its website:
Because CCTP can route USDC across chains behind the scenes, users never need to switch wallets or even think about which chain they’re holding USDC on.
Not needing to switch wallets or to know what chain you’re on. That is THE dream in crypto.
3. Wallets | Unpredictable whales
The US Government might have been behind the price slump that preceded the rise after First Republic went belly up. And the reason is different from what you would expect: no regulatory red alert, enforcement action, or lawsuit of a significant exchange. Instead, it was the fear of the government selling massive bags of BTC.
Over the years, the US government has slowly amassed a whale-sized bag of bitcoin in subsequent criminal case seizures, namely Silk Road (2020), Bitfinex(2022), and James Zhong’s (2022). As a result, the US Government holds an estimated 205.5k BTC or 1.06% of the total circulating supply. This gives enormous power over bitcoin price to an actor who, in theory, has no financial expectations deposited on their holdings and, therefore, will not necessarily behave according to common-sense market rules. Dune Dashboard, here.
Something similar goes for the Mt.Gox creditors. The victims of the 2014 exchange crash are expected to receive their repayments this year. According to 21 Shares, “the Mt. Gox trustee’s balance sheet contains 141,686 BTC, 142,846 BCH, and 69.7 billion JPY (~$510 million).” That’s 0.71% of bitcoin’s circulating supply. Check the Dune Dashboard.
MtGox creditors are probably a bit more predictable than the government. Their motivations are more straightforward and less politically or legally driven. But we will only find out whether they hold or dump their assets if it happens. Or when it happens.
5. NFTs | OpenSea, cooling down
Tiger Global invested $300M in OpenSea in early January 2022. OpenSea was the solitary leader among NTF marketplaces, BTC stood at $47k, down from the highs of November 2021 ($64k) but still far from the lows of November 2022 ($16k), and the Series C round Tiger entered valued the startup in $13B.
Things have changed a lot now. Blur emerged as a fierce competitor, riding the wave of a perfectly designed token launch and airdrop, and NFT sales started cooling down.
Last week, Tiger Global marked down its investment in OpenSea, from $126.8 million to $30.2 million. So things could be better for OpenSea.
But it looks the same for the rest of the competitors. Sales are low all across the board, even for token-fueled Blur. An interesting phenomenon, considering crypto is going through relatively bright times.
https://dune.com/sealaunch/NFT
6. Memecoins | There’s something about Pepe
We can’t NOT write about $PEPE these days, but we honestly don’t know what to say about it. $PEPE is the latest memecoin sensation. In just a few weeks, it has reached the top 100 coins by market cap, after surpassing the $500M mark, and is now on the memecoin podium alongside Doge and Shiba Inu. But there’s no product or service, no fundamentals, just the expectation of making money from whoever comes behind you.
But if you need one more reason to mistrust $PEPE, know that 83% of holders are in profit, meaning they would make money if they sold.
