Carbono Insights #88 | Love is in the Air

As winter blankets the world in a serene hush, the crypto space is experiencing a springtime of warmth and growth. The sun of innovation is shining bright, and the air is filled with the sweet perfume of collaboration between traditional finance (tradfi) and decentralized finance (defi). It’s a season of harmony where green leaves of progress sprout, and the vibrant flowers of new possibilities bloom.

The financial world is abuzz with excitement as JPMorgan, a heavyweight in TradFi, embraces the purebred crypto protocols of Avalanche, Axelar, and Layer Zero. In this edition, we witness the imminent union of the Exchange Traded Fund (ETF) with the crypto market, a marriage that seems just a couple of months away. The love affair continues with Solana’s unrelenting shine, PayPal’s love letter to crypto, the cross-pollination of crypto and TradFi through the tokenization of offchain assets, and the nascent Avalanche spring.

1. TradFi x DeFi | Project Guardian

Project Guardian is a collection of pilots exploring asset tokenization for financial institutions led by the Monetary Authority of Singapore. It has hosted several exciting test runs that have attracted a stellar cast of TradFi names and, in its latest episode, some relevant DeFi actors as well.

Last week, JPMorgan’s ONYX division (the team in charge of the homonymous permissioned blockchain) and Apollo launched Crescendo, a proof of concept in improving discretionary portfolio management. This project involved many actors, including on-chain Tier 1 projects such as Avalanche (L1 blockchain), Axelar (bridge), and Layer Zero (interoperability protocol).

Discretionary portfolio management has many pain points that tokenization addresses (see below👇). Project Guardian still follows a heavily permissioned approach to blockchain tech, but high degrees of decentralization should not be expected in institutional pilots.

Institutional engagement with crypto is becoming increasingly sophisticated over time. Even amidst regulatory uncertainty, we observe major players in the finance sector making well-informed decisions on how to construct a robust infrastructure.

2. ETF | Expectations are high

The ETF journey unfolds as anticipated. Contrary to the most optimistic views, the SEC did not approve any ETFs in these initial windows but, as expected, deferred the verdict. Presently, we witness a surge in insightful speculation regarding the potential impact of an approval.

Coinshares has presented a broad-strokes estimation of the price impact a spot Bitcoin ETF could exert on the asset, based on the projected inflow of funds into the crypto space.

However, there are contrarian opinions circulating, asserting that ETF approval changes nothing substantially in what crypto has to offer the world (I, myself, summarized this perspective in a lengthy tweet).

On the flip side, asset manager Pantera Capital holds the opposing view. Unlike the previous two catalysts preceding bull runs (Coinbase’s IPO and the approval of Bitcoin futures ETFs), Pantera Capital believes that the launch of spot BTC ETFs this time will indeed alter the way the world engages with crypto.

3. Solana | A Sun that doesn’t set

The Sun continues to shine brightly on Solana as its winning streak approaches the two-month mark. Initially, this success could be attributed to notable partnerships (VISA and Shopify), followed by the momentary excitement of their annual convention, and now, the announcement of robust technical improvements such as the launch of the node client software, Firedancer. Whatever the reason behind it, Solana’s momentum remains strong.

Previous reservations that warranted caution before declaring a victory for the L1 are now diminishing in importance or losing influence. FTX’s liquidation of tokens proceeds without harming the ecosystem, and the once-famous outages that tarnished Solana’s reputation have been consigned to the past. Their value proposition and technical reliability have even earned them substantial endorsements, such as Cathy Wood’s. She drew an analogy between what Ethereum was to Bitcoin (a quantitative leap in performance) and what Solana is now to Ethereum.

4. PayPal | Love letter to crypto

Speaking of endorsements, last week, PayPal published an article praising crypto with the enthusiasm of a teenager in love. In their post, they reiterate their commitment to a simple vision — facilitating innovation in payments — and highlight how crypto serves as the means to achieve it.

While the digital payment landscape has strived to offer global, instantaneous, and seamless transactions, the reality often falls short.(…) Crypto gets us closer to what people desire: fast, cheap, global payments. And, as we’ve said before — we are in the payments business. Pay how You Want

This love letter coincides with the launch of PYUSD, PayPal’s stablecoin issued by Paxos, demonstrating their commitment to walking the talk.

5. Tokenization | The two-way bridge

Tokenization dominates the headlines this week, with significant developments reflecting the translation of off-chain assets into on-chain versions. Tokenization company Fnality closed a $95M funding round led by Goldman Sachs and BNP Paribas, while the Philippines plans to sell tokenized treasury bonds to broaden the reach of the asset. Standard Chartered announced an initiative to tokenize the Singapore dollar government bond fund for accredited investors. And remember Project Guardian with JP Morgan. Tokenization is in the air.

Tokenization bridges traditional finance (TradFi) and decentralized finance (DeFi), transforming tangible off-chain assets into their digital on-chain counterparts. Despite appearing divergent from crypto’s original vision, this shift is crucial for its evolution and broader adoption. While some may view it as a departure from the core principles of early crypto settlers, it’s a necessary step for the industry to gain mainstream recognition and engage the next billion users. The path forward promises excitement as we navigate the challenges of merging two financial paradigms.

6. Avalanche | L1 spring

Is this the rebirth of the L1 narrative? We’ve been immersed for months in an exciting race between Layer 2s, the chains that manage operations but rely on Ethereum for final transaction settlement. However, recent weeks have seen a resurgence of interest in Layer 1s. Solana was discussed earlier, and now it’s Avalanche’s turn.

Avalanche is another approach to the design of an L1. Avalanche tries to offer maximum speed, security, and decentralization through a unique approach: this Layer 1 comprises three blockchains where the tasks are distributed.

Kraken explains them like this:

• The Exchange Chain (X-Chain) is the default blockchain on which assets are created and exchanged. This includes Avalanche’s native token, AVAX.
• The Contract Chain (C-Chain) allows for the creation and execution of smart contracts. Because it is based on the Ethereum Virtual Machine, Avalanche’s smart contracts can take advantage of cross-chain interoperability.
• The Platform Chain (P-Chain) coordinates validators and enables the creation and management of subnets.

This division allows for a customization of the design that makes Avalanche an ideal ecosystem for the development of solutions for traditional finance.

Some months ago, they launched a grants program to increase the presence of RWA in their ecosystem, and last week, as we saw above, they announced a very positive partnership with traditional institutions through Project Guardian. Also, Startup fintech Republic Crypto shared its plans to launch a revenue-sharing tokenized security on the Avalanche blockchain.

If you believe the future of DeFi involves a closer relationship with TradFi, it looks like Avalanche is your play.