Carbono Insights #64 | Crypto is in self-referential mode

This chart illustrates the evolution of the stablecoin market cap in 2023 and speaks about the broader implications of cryptocurrencies. We will delve into the details later, but it highlights the decline of Binance’s BUSD due to regulation, while USDC struggles to recover despite its unwavering compliance efforts. Tether, benefiting from its opacity, capitalizes on the opportunities left by others. However, it appears to be a zero-sum game where winners gain at the expense of losers without expanding the overall market.

While the rest of the world awaits more favorable conditions, the crypto industry continues to introspect. This self-reflection sometimes leads to toxic dynamics, such as the cannibalistic war of memecoins, but it can also foster constructive growth, as crypto activists emphasize transparency, privacy, and decentralization.

This newsletter will cover these topics from various angles:

• First, we provide a quick overview of the significant stablecoins’ current situation.
• We address macro uncertainties, focusing on the US debt ceiling.
• We examine Bitcoin’s accelerated growth as an ecosystem driven by enthusiasts.
• We explain Ledger’s public image issues.
• We introduce Maker’s plan to enhance its efficiency as a DAO.
• We explore Tether’s efforts to shift the tide and generate profits for the crypto sector within traditional finance (TradFi).

1. Stablecoins | A snapshot

Stablecoins are often regarded as a measure of crypto adoption since they resemble a fiat on-ramp within the digital realm. They represent digitized dollars circulating within the system.

Let’s briefly recap the latest news and events concerning the leading stablecoins, organized by market cap:

• USDT is thriving. Recently, they released a partially, as always, attestation report revealing $1.4 billion in profit.
• USDC, America’s trusted stablecoin, faces challenges due to uncertain regulatory conditions, as its market cap has not recovered from SVB’s failure.
• BUSD is declining since US regulators compelled Paxos to cease its issuance.
• DAI’s Rune Christensen’s Endgame has ambitious plans to rebrand and switch to a soft peg to ensure genuine decentralization. Meanwhile, MakerDAO explores broader use cases for DAI.
• FRAX’s USD-pegged stablecoin has not been in the news lately, but its parent protocol, Frax, remains a consistent innovator in the stablecoin space. Their recent focus has been on Ethereum-pegged stablecoins: frxETH and sfrxETH.

Honorable mentions to two emerging stablecoins:

• crvUSD: Curve’s newly launched USD-pegged stablecoin, which unveiled its first frontend a week ago.
• GHO: A highly anticipated Aave stablecoin that will introduce additional features to the leading lending protocol.

2. Macro | US Debt Ceiling

In a nutshell, the US government lacks sufficient funds to support its operations, leading to the need for borrowing. However, there is a limit to the amount the government can borrow, known as the debt ceiling. The US is on the verge of reaching this limit and exhausting its Extraordinary Measures. This is the essence of the debt ceiling story.

Unless the major political parties reach an agreement, the US Treasury cannot fund government operations. The potential consequences are severe, including debt default, unemployment, and stock market crashes. Therefore, it is highly likely that an agreement to raise the debt ceiling will be reached due to the dire implications of inaction.

Opinions on this topic vary. Some consider it one of the riskiest threats to the global economy, while others find it unfathomable that politicians would fail to agree on a debt ceiling raise. Some believe that crypto will thrive in an over-politicized financial world order. In contrast, others argue that the mere possibility of default will lead to risk-averse behaviors and crypto market declines. Stay tuned for data-driven conclusions as June approaches.

3. Bitcoin | Eppur si muove

Recent developments in the Bitcoin ecosystem have finally answered a long-standing chicken-and-egg question: which comes first, the application or the infrastructure?

This question frequently arises in crypto, with people debating the significance of scalability improvements while the adoption of crypto is still lagging.

In Bitcoin’s case, the emergence of Ordinals has unleashed a wave of new use cases for Bitcoin blockspace. First, we witnessed the rise of Ordinals (Bitcoin’s equivalent of NFTs), followed by BRC-20s, ORC-20s, and now SRC-20s (equivalent, to some extent, to Ethereum’s ERC-20s), which allow for creating numerous memecoins.

To experience an ecosystem without robust infrastructure, try purchasing an SRC-20 token. You will lack indexes, explorers, marketplaces, and wallets supporting these new innovations.

Yet, progress persists.

4. Security | Ledger’s back door

Wallets serve as interfaces for interacting with blockchains. They store users’ private keys, which are required to sign transaction messages. Private keys are long alphanumeric codes, so wallets generate seed phrases as a recovery mechanism.

Recently, Ledger, a cold wallet manufacturer, launched Recovery, a new service that enables users to split their seed phrases and send them to trusted third parties for safer recovery. However, this controversial move has eroded user trust and become a public relations nightmare for the company. If Ledger can break down and share seed phrases, it implies that they have access to them. And that’s no good.

While Ledger is likely trustworthy, the essence of crypto lies in being fully trustless. The objective is to eliminate the need for trust, as captured by one of crypto’s unofficial mottos: “Can’t be evil,” a play on Google’s “Don’t be evil.” It’s not that people mistrust Ledger; they probably trust the company. However, trust should be unnecessary. If Ledger has no access to seed phrases, there is zero possibility of intentional or unintentional wrongdoing.

Although a completely trustless environment is an impossible dream, striving for it enhances security.

5. Governance | MakerDAO’s plan

In October last year, MakerDAO approved “The Endgame,” a plan to further decentralize the protocol and enhance its governance structure. Rune Christensen, the founder of MakerDAO, proposed this plan after the Tornado Cash crisis highlighted the risks of relying too heavily on centralized assets like USDC. The Endgame comprises three core elements: reducing reliance on centralized assets, creating a freely floating DAI, and decentralizing governance through specialized SubDAOs.

Recently, Rune proposed a five-phase roadmap for implementing the Endgame. These phases aim to establish DAI as one of the most widely used stablecoins within the next three years while maintaining a balanced governance structure.

The first phase of The Endgame involves rebranding and revitalizing MakerDAO, including launching two new tokens to replace MKR and DAI. The second phase focuses on establishing six specialized SubDAOs to enhance governance. The third phase proposes the development of open-source AI governance tools, while the fourth phase aims to incentivize participation in governance. Finally, in the fifth phase, MakerDAO will launch a separate blockchain to implement new governance mechanisms.

MakerDAO consistently leads the way in DeFi innovation, particularly in stablecoins and governance.

6. Tether | 15% Bitcoin buyback

Just days after releasing an assurance report on its reserves, which included the disclosure of $1.4B in net profit, Tether demonstrated its commitment to Bitcoin by announcing a pledge to allocate 15% of its net realized operating profits toward BTC purchases.

“Tether will regularly allocate up to 15% of its net realized operating profits towards purchasing Bitcoin.” (source)

It’s fascinating to think that the profits generated by Tether’s collateral through traditional finance products can contribute to buying pressure for BTC.