FIVE MINUTE FINANCE: TORNADO SANCTION, CPI BREAKDOWN, ETH OUTPERFORMS BTC X3
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Implications: US Treasury Sanctions Tornado Cash
- Has Inflation Peaked? July YoY CPI 8.5%, Market Reaction
- ETH is Outperforming BTC x3: What’s Next
- BlackRock to Launch Spot-traded BTC Trust (Already)
- Is Web3 Really Web3?
Tornado Cash Sanctioned, Financial Privacy in Peril
- Tornado Cash’s USDC Frozen as Stablecoin Censorship Fears Grow (link)
- Tornado Cash Sanctioned by the US: Would Prohibition Work on DeFi? (link)
Open-Source Code Sanctioned by US Treasury
Tornado Cash (TC) is a cryptocurrency mixer on the Ethereum blockchain. It allows users to remain anonymous on-chain, by making transactions untraceable.
This past week, the US Treasury decided it doesn’t like that.
By sanctioning Tornado Cash, the Treasury’s OFAC office placed all addresses dealing with Tornado Cash on a Specially Designated Nationals And Blocked Persons List (SDN). Once on this list, there are monetary fines and prison sentences of up to 30 years hanging over anyone dealing with Tornado Cash.
Because of this severe threat, contributors to TC’s open-source code have been kicked off GitHub, the Microsoft-owned code repository. Moreover, Circle blacklisted USDC stablecoin addresses connected to TC’s smart contract, freezing about 75k USDC. Decentralized exchange dYdX was also spooked and issued its own blacklisting.
Tornado Cash smart contracts hold substantial funds from which people deposit and withdraw anonymized transfers. Image credit: Dune Analytics (@poma)
Given the avalanche of blacklisting that ensued, does that mean Tornado Cash is only used by criminals to launder money? Due to the inherent transparency of the blockchain, there are a number of other, less “illicit” use cases that Tornado Cash offers, which are otherwise widely available when using traditional fiat.
Maybe you’d like to:
- Prevent your employer from tracking your crypto financial transactions.
- Donate to polarizing causes without anyone knowing, to protect either the sender or the recipient, or both (Vitalik Buterin, who was born in Russia, admitted to using Tornado Cash to donate to Ukranian defensive efforts — this very reason).
- Donate anonymous gifts.
- Prevent governments or other institutions from tracking certain financial transfers in the event that laws are modified, similar to the overturn of Roe vs. Wade.
- Prevent stalkers, neighbours, colleagues (or that friend you lost a bet to) from discovering your crypto-related details on a public blockchain.
In short, Tornado Cash anonymizes crypto transfers, so it can of course be used for money laundering as well. And the Treasury saw this money laundering potential as a sufficient reason to ban the open-source code altogether.
On its face, many believe attacking financial privacy trounces established legal precedents. For instance, Bernstein vs. DOJ established that code is speech, while Citizens United vs. FEC established that using money is essentially a form of speech. In the US, freedom of speech is protected by the First Amendment.
The Treasury seems to count on years of litigation needed to sort it out. In the meantime, the crypto sector — which is full of privacy and decentralization enthusiasts — reacted predictably:
Soon after USDC blacklisted TC addresses, decentralized governance tokens jumped by +40%. Image credit: Tokenist
While Tornado Cash cannot be shut down (in practice) unless Ethereum itself shuts down, its front-end interface can. By cutting off domain and RPC nodes (already blocked by Infura and Alchemy), users now have a more difficult time accessing Tornado Cash as a dApp, which is essentially a web interface to a smart contract.
In the grander scheme of things, it is estimated that up to $2 trillion in fiat money is laundered annually. The Treasury claims that up to $7 billion has been laundered via Tornado Cash in the last three years, which places the alleged money laundering impact at 0.1%.
July CPI at 8.5%, Down from June’s 9.1%: Inflation Tamed?
- Bitcoin Gains on Optimistic CPI Print, But Will a Rally Follow? (link)
- US Inflation Eases with July CPI at 8.5% (link)
Investors across the board were anxiously awaiting this week’s inflation report. If it had gotten over the estimated 8.7%, or even higher than June’s 9.1%, it could’ve put the Fed into interest rate hiking overdrive. This would’ve increased capital costs further, fuelled fear, and triggered market selloffs.
For on-risk assets such as digital assets, this would’ve been devastating, with new bottoms. Crypto’s total market cap was $2.18 trillion in January, but 48% of that has already been melted away. Thankfully, inflation-related tension has eased, as July’s CPI report delivered an 8.5% inflation rate.
US inflation rate is still dangerously high, but the momentum seems to have fizzled out in July. Image credit: TradingEconomics
In the aftermath of the good CPI news, both crypto and equity markets gained some ground. However, while Ethereum got up by +12% and Bitcoin by +4%, equity market gains were neutralized by poor performance of the health care and consumer sector.
Despite higher prices in Consumer Staples sector (clothing, food, daily products), it still underperformed. Real estate also underperformed due to 22-year low demand in mortgages. Image credit: Liz Sonders
This brings us back to full circle. Let’s not forget what the word “rate” means — continued momentum. The inflation rate may have peaked, but it’s still at a 40-year high level. Meaning, even if there are 0% monthly changes until the end of 2022, the CPI would still be at an annualized 6.3%, 3x over the Fed’s stated target of 2%.
Although gasoline prices has been dropping for nearly two months, they’re still up 44% from last year, while electricity is up by +15.2% and food at home by +13%. Of particular importance is shelter cost because it makes up 32.77% of CPI’s weight, and it’s still up by 5.72%, the highest percentage increase since 1991.
Unlike during the Great Recession, shelter costs skyrocketed this year. Image credit: MacroMicro
In short, for there to be a continued downward momentum, prices of core services (goods besides food and energy) will also have to go down. In the end, it bears keeping in mind the big picture from the past. During the early 2000s tech bubble, it was common to see big market rallies, but they ended up with new lows — lower highs.
With that said, the Biden admin could be correct in labeling this a technical recession, i.e. soft landing. After all, it was correct in painting June’s inflation rate as lagging, which turned out true because crude oil price slowly returned to pre-Ukraine conflict levels. Either case, all will be revealed in Q3’s GDP, which the Atlanta Fed’s latest forecast puts at positive +2.5%, an uptick from the previously reported +1.4%.
Ethereum Flippenning Coming?
- ETH Gas Fees Plummet as Merge Test Run Completed (link)
- Does Ethereum Face a PoW Fork in the Road Before its Merge? (link)
Ethereum Hype Not Waning
After multi-year delays, Ethereum’s proof-of-stake (PoS) woes are (almost) no more.
After successfully completing the last testrun dubbed Prater/Goerli, the Merge date is set — from September 15th to 16th. Ethereum becoming PoS will not result in lower gas fees or greater scalability. That is for the Surge late next year.
But, it is super important nonetheless. By ditching miners, Ethereum is estimated to lower its energy footprint by ~99.95%. Let us not forget that Ethereum dominates the dApp ecosystem, despite losing 33% of its TVL from last year. Additionally, all major alternative PoS networks have bridges to Ethereum, acting as rivers into the largest smart contract lake.
Most importantly, Ethereum’s tokenomics will drastically shift. As the Fed showed us in the last two years, when it pumped the economy with $5 trillion stimulus, money gets devalued from overflowing circulating supply. Unlike alternative networks such as Avalanche or Cardano, there is no ETH maximum cap.
This means that Ethereum’s market cap is equal to its fully diluted market cap. Ethereum’s circulating supply is presently at 13,500 new ETH. In other words, Ethereum’s inflation rate is about +4.3%, which is not good. After September’s Merge, this goes down all the way to 0.4%, earning it the moniker “triple-halving” as a reference to Bitcoin’s own inflation control.
All blockchains manage their circulating supply to mitigate demand. PoS networks rely on validators to issue new assets as rewards, the rate of which can usually be voted on. Image credit: EtherScan.io
Why? Because Ethereum’s greatly improved energy efficiency means that validators need fewer ETH rewards for validating transactions. On top of this, EIP-1559 continues to burn ETH base gas fees, having already sent 2.58 million ETH ($4.8 billion) to an unretrievable wallet.
Altogether, when one combines Ethereum’s increasing utility, lowered inflation and burning mechanic, it means that ETH demand should outpace its supply.
And whenever that happens, the asset could see a significant increase in value. At least, that is what some are counting on. For the time being, ETH is outperforming Bitcoin 3x.
BlackRock Launches Spot-traded BTC Trust, but it’s Private
- BlackRock Offers Institutions Direct Exposure to Spot BTC (link)
From “Index of Money Laundering” to “Oldest, Largest Crypto”
Ethereum is not the digital asset on the block with good news. Last week, we covered a crucial crypto milestone when BlackRock, manager of $9.4 trillion in assets and often called “the world’s largest shadow bank”, selected Coinbase as a facilitator of its plan to introduce Bitcoin to hundreds of investment funds.
This week, Bitcoin’s layer-2 Lightning Network (equivalent to Polygon for Ethereum) marked four times the payment traffic it had last year, to a new high capacity of $107.8 million.
What does the full picture look like?
Lowered BTC price didn’t lower the overall LN traffic. Image credit: Bitcoin Visuals
It seems that the Bitcoin prophecy is coming true — it’s making progress as a payments network, and investor activity continues to suggest its progressing as a reserve store of value, possibly a global reserve currency native to the internet. At least, that’s how big institutional investors are seeing it, as BlackRock admits “substantial interest from some institutional clients”.
“Bitcoin is the oldest, largest, and most liquid cryptoasset, and is currently the primary subject of interest from our clients within the cryptoasset space”
To meet their demand, BlackRock launched a spot-traded BTC fund. This way, institutional investors get direct access to Bitcoin. For years, such an ETF was coveted among all Bitcoin maxis. Instead, the SEC only approved derivative BTC ETFs.
While this is a major bullish signal, it is also bittersweet. BlackRock’s spot-traded fund is private, so retail still has to wait for the merciful SEC. Nonetheless, it appears that environmental concerns surrounding Bitcoin mining are seeing less and less reference.
Previously, this was a common critique.
If you recall, it was Elon Musk who played a big part in triggering the Bitcoin crash in May 2021 when he decided that Bitcoin was not eco-friendly enough for Tesla payments. Well, it was BlackRock itself that has largely pushed ESG into the investing space. And now, we see Musk calling out much of ESG as a scam.
How the tides turn when the prospect for gains does the talking.
Web3: Virtual Human Industry
- FTX Partners with Reddit to Put Community Points on Mainnet (link)
- Beijing Plans for a $7.5B Virtual Humans Industry Using Web3 By 2025 (link)
Is Web3 Really Web3?
When a term is overused, it often becomes diffused from its original meaning.
This could be happening to Web3. Does it matter if it’s centralized or decentralized? Reddit for example is a highly centralized platform, yet it’s the latest to take a further step into Web3 waters.
Reddit (the world’s largest online forum aggregator) entered the blockchain game with its introduction of Community Points in 2020, stored as tokens on Ethereum. Reddit users can earn them by posting quality content and comments, growing their reputational status. In turn, this makes it more likely their own content receives public traction, if it avoids being deleted by moderators.
However, Community Points have no monetary value, which should not be confused with valueless. After all, having your content potentially exposed to millions is a pretty big deal, as any marketer can tell you. This explains why paying gas fees for a technically valueless token makes sense.
Now that Redditors can use FTX Pay to conveniently cover those gas fees, there will be even more demand for ETH cryptocurrency.
“FTX Pay’s payment and exchange infrastructure integrates with Reddit Community Points, making the customer experience a more seamless process,”
-FTX CEO Sam Bankman-Fried
In other Web3 news, Beijing, the capital of China, plans to add $7.5 billion in the next three years for its take on the Web3 ecosystem. By the looks of it, it will be a highly centralized one. Beijing will pick a couple of key companies, their own Facebooks, to spearhead digital assets, NFTs, and governance.
However, this form of Web3 funding is not that different from the West’s, dominated by VC firms. This year’s first half saw a new funding record at $30.3 billion, putting to shame the entire 2021, which was largely in the bull market.
Drastically reduced crypto market cap failed to tame VC interest during 2022. Image credit: Messari
While all of this is great to arrive at the projected $1.5 trillion Web3 market size by 2029, not everyone in the crypto space is on board with the current shape of Web3. Last year, Jack Dorsey, the former Twitter CEO, warned:
“You don’t own ‘web3’.
The VCs and their LPs do. It will never escape their incentives. It’s ultimately a centralized entity with a different label.”
Dorsey clearly sees little change between existing Web2 platforms and the current prospects for ‘Web3’.
Tweets of the Week
Peak #inflation narrative gets another favorable number: US July PPI YoY drops to 9.8% vs 10.4% expected & lowest since the 8.9% seen in Oct 2021. The Core PPI YoY at 5.8%, lowest since June 2021, which was 5.6%. PPI is the 2nd better-than-expected inflation report this week.
MakerDAO founder: “I think we should seriously consider preparing to depeg from USD”
Interest for the #EthereumMerge is EXPLODING! 🚀
Price to Earnings Ratios…
S&P 500: 21x
Price to Sales Ratios…
S&P 500: 2.5x
Short thread about the risk of having Dai backed by USDC.
1/ After Cirle froze USDC belonging to Tornado cash many lost faith in the famous stable coin. What to do? Maybe using a decentralised alternative like Dai?
No so fast, unfortunately roughly 50% of Dai are backed by USDC