Carbono Insights #68 | Macro Waves, Crypto Currents

Currently, macro factors play a crucial role in shaping the crypto landscape. Ever since the SEC targeted major players and created regulatory uncertainty, investors who are unsure about the future of Web 3.0 have either permanently left or are observing from the sidelines.

Previously, news regarding technical advancements would have sparked excitement and enthusiasm, and mobilized liquidity. However, nowadays, they generate more of a nerdy interest without much impact on prices.

On the other hand, when the Fed announced a temporary halt in rate hikes (meaning they will likely raise them one or two more times before the year ends), people reacted by selling, resulting in a decline in crypto prices. And when Blackrock announced the submission of a bitcoin spot ETF, many investors returned, leading to a subsequent price increase.

The current bear market has two main aspects: the macro context and regulatory uncertainty. Crypto possesses the necessary tools to withstand both challenges. It offers a window of opportunity for traditional finance, which will flourish once conditions improve. Regulatory clarity, one of those essential conditions, is only a matter of time. Maybe regulation in the US will not be favorable in the end. But we simply need them to be clear. Crypto will pave its own path.

Meanwhile, for all you enthusiasts still paying attention, here is an update on how the industry is progressing.

• Uniswap Labs unveils the protocol’s V4, featuring an intriguing foundational approach.
• USDT experiences a temporary depegging, triggering a wave of transparency from Tether.
• Polygon announces V2 with a new philosophy.
• Blackrock aims to succeed where Grayscale failed: introducing a spot Bitcoin ETF.
• We thoroughly enjoyed an article from Andreessen Horowitz about decentralization and why we’re still here.
• We provide some quick tips on how to safely engage with a protocol.

1. Dexes | Uniswap Announces V4

Uniswap Labs has revealed its vision for the fourth iteration of its decentralized exchange. Uniswap’s AMM (Automated Market Maker) has become the leading decentralized exchange in the crypto space, resembling basic infrastructure at this point.

Designing a decentralized exchange involves hundreds of decisions and subsequent trade-offs. Every different swap protocol uses these design decisions in their marketing pitches: more liquidity, less slippage, and multichain support. For V4, Uniswap has decided to compete with all of them.

The most crucial design decision in V4 is the introduction of hooks. Uniswap has simplified the design of its smart contract, such that every new pool, instead of having its own contract, will be deployed within an omnibus singleton smart contract. This contract will consist of only the most essential functionalities, while hooks will serve as extensions that developers can include to customize pool features. Think of dynamic fees or the introduction of new order types. If you’re familiar with add-ons or plugins in other software products, you’ll grasp the concept of hooks.

This way, Uniswap outsources innovation, enabling pool creators to think of ways to enhance the service they receive through Uniswap.

2. Stablecoins | USDT Depegging Incident

On Thursday, USDT, the leading stablecoin in the crypto market, experienced a temporary depegging from the dollar due to a surge in operations by whale investors. At a certain point, the Curve pool, which typically holds a relatively balanced proportion of USDC, USDT, and DAI, found itself holding around 75% USDT. Within a few hours, hundreds of millions of dollars were dumped, leading to market fear.

Further on-chain analysis revealed that the depegging had no real cause other than speculation. It was likely driven by the fear induced by sudden price movements. After all, Binance is currently paying the price for its shady past, and it wouldn’t surprise anyone if an organization like the SEC targeted Tether in the future.

Following the panic, Tether decided to demonstrate transparency by releasing information that had been disclosed to the New York Attorney General. Tether had been resisting a request to disclose these documents publicly but eventually ceased its opposition, probably with the intention of stopping the panic.

By sharing this documentation, Tether indirectly confirmed some of the rumors surrounding their activities, particularly regarding their excessive holdings of Chinese Papers (short-term loans to Chinese companies) and their underwhelming banking counterparties.

A weird move. While trying to show transparency, Tether confirmed some of the worst fears from the past. The only mitigating factor is that the documents were old (from 2021), and things have probably changed a lot since. In any case, Tether was able to honor withdrawals, which is the soundest sign of solvency.

3. Scalability | Polygon V2

Polygon, one of the longest-standing and most vibrant Ethereum scalability solutions, has recently unveiled its future vision. Polygon will now focus on creating the value layer for crypto on top of a network of zero-knowledge Layer 2s that process and secure blockchain activity on the Ethereum blockchain.

Polygon is not the first to envision an interoperable multichain future. This vision is deeply embedded in Cosmos’ DNA and is a significant component of Optimism’s roadmap. Furthermore, Polygon is currently facing significant headwinds after its native token, MATIC, was mentioned as a security in the SEC’s lawsuits. Nevertheless, Polygon has a proven track record of relentless building and development, and we wish them the best.

4. Bitcoin | Blackrock’s Spot Bitcoin ETF

Blackrock is attempting to succeed where Grayscale failed. The world’s largest asset management firm, with close to $1 trillion in assets under management, has filed a registration statement with the SEC to request permission to launch a spot Bitcoin ETF. Grayscale’s ETF was, for a time, a driving force in the crypto market, allowing traditional investors to gain exposure to BTC without the complexities of decentralization (like wallets or custody).

However, Grayscale’s ETF had several flaws, including the inability to withdraw deposited BTC. Reportedly, Blackrock is addressing these critical design flaws from its predecessor, and it has partnered with Coinbase for operational support. Nevertheless, they now face the same challenge: the SEC has repeatedly denied permission to launch a spot Bitcoin ETF, citing concerns about market manipulation in the crypto space.

Blackrock, however, is known for not shying away from challenging battles.

There are two opposing interpretations of Blackrock’s move: some say that this is an unexpected breath of fresh air for crypto in times of turmoil that ridiculizes the SEC; others see it as a collaboration between the SEC and one of the biggest actors in TradFi to own the space.

5. Decentralization | Andreessen Horowitz’s reminder

In our latest newsletter issue, we reported on how Andreessen Horowitz expresses their commitment to crypto with actions after opening an office in the UK to help them navigate the regulatory complexities in the US. But a16z is excellent at defending crypto with words, as demonstrated in their recent article on decentralization.

In “Factors of Decentralization of Web3 Protocols: Tools for Planning Greater Decentralization,” three a16z partners outline the recipe for decentralization (technical, economic, and legal). However, before delving into the details, they remind us all why we’re in this for the long run. It’s a must-read.

Decentralization is the critical feature of Web3 protocols that enables this paradigm shift. Decentralization will drive the creation of a democratized internet and enable three important shifts: promoting competition, safeguarding freedoms, and rewarding stakeholders.

6. Security | How to know a protocol has been properly audited

If crypto is the Wild West, code auditors are the lonely sheriffs trying to bring justice to every corner. We still hear about hacks and exploits daily, so until we can safely roam these lands, make sure to look for the golden stars that indicate a safe place. Today, with the help of Audita, we’ll give a few tips on how to find these golden stars.

The advice is simple: interact only with audited protocols. Code audits involve independent developers actively searching for vulnerabilities that hackers could exploit. Protocols rely on audits (the more, the better) to ensure that all necessary precautions have been taken. So when you consider investing in a token or interacting with a platform, look for proof that their code has been audited. Where can you find this information?

• Check the product documentation, particularly the sections related to the protocol’s smart contracts or under Audits/Security.
• Some websites have a dedicated section for audits. You might even be able to download the PDFs.
• Look into the protocol’s GitHub account.
• If the protocol is featured in analytics platforms like DefiLlama, they will probably show info about the audit situation.
• If the auditing firm is disclosed, visit their website for more information.
• You can also perform a quick check by searching for “audit” on the project’s Twitter account. All projects want to make known that their code is sage.

If you want to go the extra mile in your DYOR efforts, make sure to understand the differences between auditing efforts. Not all audits are created equal, as some protocols may deceive about their efforts or conduct low-cost, superficial code checks and present them as proper audits.