Apr 1, 2022

13 min read

March Overview

Your Monthly Brief into the World of Digital Assets

Article by Sixte C. Edited by Lesia M.

Market Overview

Open Interest

Regulators

Biden issues an Executive Order focused on cryptocurrencies
European Union voted for a new regulatory framework on cryptocurrencies
Swiss city, Lugano, will accept BTC, UST and LVGA as ‘de facto’ legal tender

Financial institutions, DeFi, GameFi

Why LUNA’s price rose 133% in two months and why is Terra buying Bitcoin?
DeFi pioneer, Andre Cronje, quitting the DeFi space led dozens of tokens to crash
Axie Infinity’s Ronin sidechain lost $625 million on a private key exploit.

Market Overview

Open Interest

In our market overviews, we pay particular attention to the build-up of Open Interest on perpetual futures, looking closely at BTC as a gauge for the overall crypto sector.

Open Interest increases when new futures contracts are created and decreases when these positions are either closed or liquidated. Growing OI indicates new capital flowing into the market, which is most likely to support the ongoing trend (either bullish or bearish). Declining OI signals market participants closing their existing positions (or being force liquidated), mostly in an anticipation of a trend reversal.

After a prolonged period of decreasing OI and leverage positions being net-net closed (10 Jan — 2 Mar), Open Interest finally started to build up in March, hinting at a potential reversal of the price trend. Since the beginning of March, we have witnessed a net-net accumulation of BTC leverage.

However, as much as OI is an important indicator for market sentiment, it would be false to rely on it alone. In fact, it is only when all three align that we can conclude the beginning of a healthy bull market:

BTC bullish price reversal
Opening OI positions
Funding rate confident in the positive territory.

At the moment, leverage traders do not have a consensus as to the direction of future price movement. Funding rate has been flat in March, in the -0.043% / +0.036% range (8h funding rate on FTX).

*Source: JKL Capital Research | app.intotheblock.com*

There are a few bullish events coming up in the space — including the Bitcoin 2022 Miami conference and, of course, Ethereum’s PoS launch in a few months. If the funding rate picks up to reflect the ongoing buzz in the market, we might see another ATH behind the corner.

Regulators

Biden issues an Executive Order focused on cryptocurrencies

Biden has signed a long-awaited executive order (E.O) on digital assets. It is important to note that no direct action will immediately stem from this executive order. The E.O is more about laying the ground as to how the cryptocurrencies will be regulated. It sets out 7 different objectives:

Protect consumers, investors, and businesses

Privacy is a priority

2. Ensure global financial stability

Recognition that the digital assets might require tailored legislation

3. Address illicit finance through U.S government agencies cooperation

It covers sanctions, money laundering, terrorism, and cybercrime

4. Reinforce U.S financial leadership

Showing awareness of the potential of cryptocurrencies for financial inclusions and as a payment system

5. Enable access to safe and affordable financial services

Recognition that it can address the needs of Americans marginalized from the traditional banking system

6. Support technical advances

Reduce its impact on the environment while ensuring privacy and security

7. Foster the creation of a US CBDC consistent with the “U.S. priorities and democratic values”

The E.O requires actions, meeting expectations, to be taken within 180 days. Possibly due to the war in Ukraine and fear of sanctions easing through crypto, the report suggests that illicit finance issues should be addressed in the next 3 months.

The E.O shows awareness of what is at stake regulating digital assets while understanding how the nation could benefit from them. Nevertheless, as it encourages research on CBDCs, it is missing out on two of cryptocurrencies’ main features: decentralization and scarcity.

The O.E also manifests the government’s conviction to apply blockchain technology to many fields beyond digital currencies. However, illicit use of cryptocurrencies remains executive board’s main focus, and might overshadow the beneficial use of cryptocurrencies by leading to hostile rulemaking. We therefore expect high correlation between US regulatory moves and the crypto markets at least until US mid-term election of November 2022.

The European Union voted for a new regulatory framework on cryptocurrencies

Just like in Russia and India last month, on the 15th of March the EU parliament’s Economic and Monetary Affairs Committee decided to regulate crypto assets instead of fully banning them as it was planned in the first instance. In fact, the Markets in Crypto Assets (MiCA) framework previously included a provision that would have eventually led to a ban of PoW cryptocurrencies such as Bitcoin. However, following strong negative reaction from the industry, the draft was modified to offer a more moderate paper that would enjoin the European commission to place crypto mining firms under the EU taxonomy. It is a classification system aiming to concentrate money towards climate friendly projects.

Overall, the rules laid by MiCA cover mostly trading and issuance of crypto assets. Its main component would be the “passportable” license that once granted would allow a firm to expand its activity to all 27 European Union states without the need for local licenses. This feature will certainly facilitate growth of crypto companies within Europe. However, the cost for a token issuer will range from $4,500 to $87,000 per white paper depending on its complexity and legal consulting needed. Added to the average cost of $4,500 to ink a white paper, the overall cost might push back entrepreneurs outside of Europe. Finally, MiCA is also highly restrictive to stablecoin issuers, particularly to the biggest players such as Tether. Latter needs to keep capital funds (excess of assets over liabilities) at 3% of total reserve assets.

To conclude, despite lifting ban fears, MiCA outcome is mitigated and it might explain why the market has reacted positively after rectifying to previous levels around $38,700. Around mid-March, trading flat was already an outperformance for the crypto market, while the Hang Heng Index for example decreased by 33% between the 1st and 14th of March.

Swiss city, Lugano, will accept BTC, UST and LVGA as ‘de facto’ legal tender

During the very turbulent month of March, one news remained broadly unnoticed yet highly noteworthy. The Swiss city of Lugano, in addition to creating its own token LVGA, partnered with Tether to accept BTC, UST and LVGA crypto payment to pay taxes, parking tickets, public services and tuition fees. In future, Lugano’s administration is aiming to enable crypto payments for all goods and services within the city. What’s more, Tether is planning to implement a multi-million fund in Laguna to foster blockchain-based ventures. Tether collaboration is also meant to help the city overcome scalability issues by using the lighting network.

The city of Lugano might seem small (only 64,000 inhabitants), however, its experiment will offer consistent use cases for cryptocurrencies to test their efficiency on a small scale. Lugano’s strategic move is a bet on cryptocurrencies’ future success to be ahead of traditional tech centers in the event of blockchain mass adoption. Overall, Switzerland seems bullish on blockchain-based currencies, with both cantons of Zug and Zermatt accepting crypto for tax payments.

Financial Institutions, DeFi, GameFi

Why LUNA’s price rose 133% in two months and why is Terra buying Bitcoin?

Luna reached new ATHs at the end of the month. Its marketcap rose 138-fold since the start of 2021. More than 100 projects are currently building in Terra’s ecosystem and Terra’s DAO announced a 5-year partnership with the Washington Nationals baseball team.

But the real reason its token LUNA is hitting new highs is that Terra’s wallet now represents the third largest Bitcoin treasury behind Micro Strategy and Tesla. According to its CEO, Do Kwon, Terra is aiming to become the largest BTC holder by purchasing a total of US $10 billion worth of coins.

Terra is accumulating such a big amount of BTC to strengthen the peg of its stablecoin UST. Terra network has two native tokens, LUNA and UST. UST is an algorithmic stablecoin and LUNA is a token helping it maintaining its peg. UST maintains its peg to the US dollar thanks to arbitrage incentives and protocol mechanisms. Any market participants can mint 1$ worth of LUNA and burn 1 UST (case n°1) or mint 1 UST and burn $1 worth of LUNA (case n°2).

Case n°1: When UST is under the peg (for example $0.98) a user can swap 1 UST for $1 worth of Luna (arbitrage opportunity = $1 worth of LUNA — 1 UST worth $0.98 = 2 cents). He will then proceed to cash in this arbitrage move by selling $1 worth of LUNA. In the process, the user will earn 2 cents per UST swapped and the protocol will burn 1 UST and mint $1 worth of LUNA. The supply of UST will decrease so its price will increase back to $1.
Case n°2: When UST is over the peg (for example $1.02) a user can swap $1 worth of LUNA for 1 UST (arbitrage opportunity = 1 UST worth $1.02 — $1 worth of LUNA = 2 cents). He will then proceed to cash in this arbitrage move by selling 1 UST. In the process, the user will earn 2 cents per $1 worth of LUNA swapped and the protocol will burn $1 worth of LUNA and mint 1 UST. The supply of UST will increase so its price will decrease back to $1.

In bear market conditions, LUNA’s price is likely to lose value. If LUNA is used to keep UST peg, users can naturally speculate the peg may fail so they sell their UST. If UST supply is not satisfied by sufficient demand, UST will go under the peg. The protocol will then proceed to mint more LUNA to keep peg. LUNA will lose more of its value and a “death spiral” is born.

The death spiral is the reason why Terra is increasing its BTC reserve. Instead of interacting with the protocol that mints new LUNA to keep the peg, users will interact with the BTC reserve. BTC reserve will give out $0.98 worth of BTC to any users that provides 1 UST. So, if UST is trading under $0.98, market participants will be incentivized to buy BTC at a discount using UST. The increase in UST demand will recover its price to peg. Therefore, BTC is not used to mint or burn UST but only to recover its peg to $1.

In addition, to increase BTC demand and drive its price up, Terra created a new use case for BTC in the algorithmic stablecoin ecosystem. Terra’s initiative strengthened users’ trust in its stablecoin. The more people use UST, the more LUNA tokens need to be burnt, applying upward pressure on its price. On the flip side, part of the BTC purchase is funded by an OTC sale of LUNA with a vesting schedule of 4 years. No information has been given on the price of LUNA tokens sold but they surely have been issued at a discount. Thus, it might add supply pressure and decrease price performance over the long term.

DeFi pioneer, Andre Cronje, quitting the DeFi space led dozens of tokens to crash

On March 6th, Andre Cronje’s exit of the DeFi/crypto space was made public by his collaborator Anton Nell on twitter. Andre Cronje, considered as DeFi “Godfather”, was an early blockchain-based financial developer that made his way to the top by contributing to around 25 Dapps in the Fantom ecosystem. He continually expressed his disarray concerning the space by emphasizing the sad truth about crypto projects: “Good marketing is more powerful than a good product.” His latest project, Solidly, was a failure after a marketing flop caused by its marketing manager’s (Dani Sesta) exit due to a crisis on an annex project. This event might have been the final straw that pushed Andre Cronje away from the space for good.

Projects highly reliant on Cronje took the greatest hit, including Solidly, whose TVL dropped by 68% after the Anton Nell’s tweet. In the end, all 25 Dapps tokens directly or indirectly linked to him lost value. Most notable ones being Yearn finance (YFI) loosing 10% and Fantom token FTM dropping down 20%.

This event brings to light the core value of distributed ledge technologies: decentralization. In a way, projects greatly associated with one central party show a lack of reputational decentralization. Imagine if Buterin at Ethereum, Zhao at Binance, Hoskinson at Cardano, Yakovenko at Solana, Sirer at Avalanche or Gavin Wood at Polkadot were to leave the space. Their projects would immediately lose credibility and see their value shredded apart (at least short-term following the announcement). We can clearly see a pattern here — most of the top 20 cryptocurrencies have one point of failure: their founder. Technically, the safety of these projects is not endangered, but their functionality and adoption inherently depend on the users’ faith in the system.

Axie Infinity’s Ronin sidechain lost $625 million on a private key exploit

The Ronin Network, built to support Axie infinity game, has been hacked. The amount stolen of $625 million in ETH and USDC is one of the biggest in crypto history. The hack occurred 6 days before being noticed by a user trying to bridge ETH from Ronin. The hack might be accountable for the lack of decentralization on the proof of authority Ronin sidechain. Ronin only consist of nine validator nodes, of which four are controlled by Ronin’s developer Sky Mavis. The hacker managed to get access to all Sky Mavis’ private keys as well as Axie DAO’s. To obtain the latter, the hacker successfully accessed the Sky Mavis’ system that was whitelisted since November to sign transactions on Axie DAO’s behalf because of the spike in new users. Since only five nodes are necessary to withdrawal funds, the hacker was able to take advantage of Ronin’s high level of centralization.

Like in the past DeFi hacks, all eyes are now on the hacker to see if he will be able to launder such a ridiculous amount of money. In an interview to CoinDesk, Tom Robinson, the co-founder of Elliptic, a blockchain analytics firm, explained that it is simply impossible or might take years. Since the hacker initially funded the wallet he used for the attack with centralized exchanges which require KYC, his days might be numbered.

In the 24 hours following the public release of the hack, Axie infinity governance token, AXS, lost 11.5% of its value and the token used to reward players, SLP, decreased by 12.7%. The biggest loser is the governance token of the Ronin sidechain, RON, which tumbled from $2.3 to $1.7, only to recover to $1.83 as of today.