Weekly Industry Report 【May 14,2022】
This week, we focus on the following events: 1) OpenSea is implementing changes to its account verification and NFT ‘Copymint’ detection systems; 2) Web3 development platform Moralis completes US$40 million Series A financing; 3) Germany’s Federal Ministry of Finance publishes first nationwide cryptocurrency tax guide;
Project Analysis: Terra, which provides protocol for algorithmic stablecoins, lost the stability of the price of TerraUSD or UST and LUNA. The following report will analyze the mechanism behind the Terra protocol and details of this event.
1. Industry overview
I. Overall market trend
At the opening of the U.S. stock market on Wednesday, 11 May 2022, Bitcoin fell below the US$30,000 mark once, hitting its lowest point since December 2020. Earlier data showed that the year-on-year growth rate of U.S. CPI inflation remained close to a 40-year high. Bitcoin prices then rebounded, recovering most of the CPI’s losses since the announcement. In the previous week, Bitcoin hit a recent high of US$40,000 but quickly reversed the next day and has been steadily declining ever since. This is the second time this week that Bitcoin has fallen into the US$29,000 range, having halved 50% since its November 2020 high.
At the same time, other cryptocurrencies are also falling, with Ethereum briefly falling below US$2,200 per ETH on Wednesday. The algorithmic stablecoin TerraUSD continued its downward spiral, falling as low as 30 US cents intraday on Wednesday. As the native PoS token of the Terra chain, LUNA coin fell below US$1, with a drop of more than 97% in the day, and its market value has shrunk significantly. According to CoinMarketCap data, the current total market value of the cryptocurrency market is US$1.26 trillion, with a 24-hour decline of 12.04%.
Most altcoins are in the red at this time. It’s a major blow in the crypto space and people are trying to analyze their positions. Avalanche has plummeted 34% to under US$32 and even crashed below US$28 which is far worse than its slump in August 2021. More so, Solana is now down by 52% which has further dropped to around US$44 as of this writing. LUNA is the cryptocurrency of Terra. Following the collapse of USDT or the dollar stablecoin, LUNA also suffered a massive 99% slump and is now below $1. ADA of Cardano has also slid by 29% or $0.44 displaying tremendous dips comparable to what transpired in February 2021. Additionally, Polkadot (DOT) has also crashed to around 27.52% over the past 24 hours, to about US$8. Other tokens and meme coins are also extra volatile and dipping like Dogecoin which is down 30.98% or $0.075 and Shiba Inu, which has lost over 35.37% in the past 24 hours. Meanwhile, ApeCoin is also falling rapidly and has scraped 36.72% off its market value over the past day with the current prevailing price at US$5.68. The price has now plunged to 85% compared to its highs at US$39.40 following its launch in March of this year.
The NFT market has generally remained relatively stable last week, with a total market capitalization of US$10.594 billion and a total sales volume of US$389.47 million. As the founder of Azuki fell into a trust crisis, Azuki fell to second place this week, replaced by Otherdeed for Otherside, whose seven-day trading volume reached 39,184.66 ETH. In addition, BAYC and MAYC are still hot and have been in the TOP10 for several consecutive weeks.
2. Market news
I. Industry news
OpenSea is Implementing Changes to Its Account Verification and NFT ‘Copymint’ Detection Systems
OpenSea announced today that it is rolling out new features to improve its user account verification process and detect counterfeit NFTs. These new features are intended to reduce instances of imitation and plagiarism in order to “improve authenticity” on the marketplace.
In two blog posts published today, OpenSea highlighted the changes that cover two areas: an updated account verification and collection badging system that also increases the number of creators eligible for verification; and an automated system to identify, remove, and prevent instances of “copymints” (copies of authentic NFT content).
Brazilian Digital Bank Nubank Launches Bitcoin and Ethereum Trading
Brazil’s largest digital bank by market capitalization, Nubank, announced Wednesday that it will add options for customers to buy and sell Bitcoin and Ethereum on its platform. Crypto trading and custodian services will be provided by Paxos’ blockchain infrastructure. Paxos said the product will gradually open to Nubank users in Brazil on Thursday and will be open to all customers by the end of July. According to Paxos, users will be able to buy and sell cryptocurrencies in Brazilian Reals, but will initially not be able to withdraw or deposit cryptocurrencies. According to Nubank’s website, the company has thus far only allowed users to invest in cryptocurrencies through exchange-traded funds offered by its investment arm NuInvest.
Meta is partnering with Polygon to enter Web3
Ryan Wyatt, CEO of Polygon Studios, recently posted on social media: “We are delighted to share that Meta is working with Polygon to enter Web3. Meta (formerly Facebook) chose Polygon for three main reasons: 1. Polygon has a good carbon neutral footprint. 2. Polygon provides scalability. 3. Polygon has a better developer environment, and the developer ecosystem chooses to build on Polygon.
II. Investment and Financing
MARA completes US$23 million in financing, with participation from Coinbase and Alameda
MARA, a cryptocurrency trading platform focused on the pan-African market, announced the completion of a US$23 million financing transaction, with participation from Coinbase Ventures, Alameda Research, Distributed Global, Day One Ventures, TQ Ventures, and more. Thanks to this latest financing, MARA plans to invest in a range of products targeting Africa’s two largest countries, Nigeria and Kenya, before expanding into East Africa and other French-speaking African markets.
Web3 development platform Moralis completes US$40 million Series A financing
Moralis, a Web3 development platform, announced the completion of a US$40 million Series A financing, with participation from EQT Ventures, Fabric Ventures, Coinbase Ventures, and Dispersion Capital. Moralis provides the infrastructure for developers to build and publish cross-chain applications, games and NFTs. This round of financing will be used for product development, improving user experience and scaling to increase its customer capacity and support larger customers.
Cross-chain DEX project Chainflip Labs raises US$10 million, with Pantera Capital and others participating
Berlin-based cryptocurrency startup Chainflip Labs has announced a US$10 million funding round with participation from Framework Ventures, Blockchain Capital and Pantera Capital in exchange for equity in the company. The valuation of the financing was not disclosed. It is reported that Chainflip Labs is building a cross-chain decentralized cryptocurrency exchange. Simon Harman, founder and CEO of Chainflip, said the startup is trying to “take capital efficiency to the limit” with a simple interface and user experience, eliminating the need for encapsulated tokens or small wallets. Additionally, Chainflip is planning an IDO for its native token, FLIP, later this year.
US Accounting Standards Board plans to review digital assets on balance sheet
The U.S. Financial Accounting Standards Board (FASB) on Wednesday unanimously approved the launch of a project to review the accounting of exchange-traded digital assets and commodities. The news was tweeted by Michael Saylor, CEO of MicroStrategy, which holds more than 129,000 Bitcoin (BTC) on its balance sheet. The U.S. Financial Accounting Standards Board (FASB) website showed “Accounting for Exchange Traded Digital Assets and Commodities” on the day’s board agenda, but has yet to update any vote results. As Thaler previously pointed out, current rules could prevent businesses from holding Bitcoin on their balance sheets, as accounting departments charge fees when Bitcoin prices fall, but do not allow any funds to be recovered when Bitcoin prices rise.
European Commission considers limiting stablecoin offerings
According to a document, the European Commission is considering strict limits on the ability of stablecoins to replace fiat currencies for widespread use. EU finance ministers have proposed tough measures aimed at preventing stablecoins from replacing the Euro, and have called for a halt to issuance if a single day’s volume exceeds 1 million or the transaction value exceeds 200 million euros. The document is marked “off-paper”, meaning it does not reflect the official position of the Committee. European Union lawmakers and the government are trying to finalize a landmark cryptocurrency law known as Market Regulation in Crypto Assets (MiCA), with the committee to hold closed-door negotiations at a later stage.
Germany’s Federal Ministry of Finance publishes first nationwide cryptocurrency tax guide
According to documents released by the German Federal Ministry of Finance, the ministry has published the first nationwide cryptocurrency tax guidelines covering mining, staking, lending and airdrops, as well as tax scenarios for BTC and ETH transactions. But individual sales of BTC and ETH remain tax-free for a year, according to German parliamentary state secretary Katja Hessel in a statement.
3. Trending project analysis — TerraUSD and LUNA
This week’s trending theme has been about Terra. According to the data, as of May 13, LUNA has collapsed to nearly US$0, and TerraUSD or UST, which is supposed to be pegged one-to-one with the U.S. dollar, fell sharply below the US$1 mark. Having once relied on algorithmic stablecoins to dominate the market, now Terra’s unlimited and positive prospects have disappeared. The dramatically decline of its cryptocurrency LUNA and stablecoin UST attracted much attention and incited panic in the crypto community, with Bitcoin plunging to a 2022 low.
1) Terra’s Ecosystem
Terra protocol creates stablecoins Terra to consistently track the price of any fiat currency and LUNA to provides users staking rewards and governance power. To guarantee a stable demand for Terra and to appreciate LUNA’s value, Terra builds an entire ecosystem around its stablecoin. Currently, the ecosystem consists of a payment app (Chai), a savings protocol (Anchor), and a synthetic stock market (Mirror) and more.
How does the Terra protocol work?
Terra issues stablecoins that track prices of any fiat currency. Users mint new Terra by burning LUNA, and these stablecoins are named based on their fiat counterparts. For example, the Terra stablecoin that tracks the price of U.S. dollar would be called TerraUSD or UST. On the other hand, LUNA is the native token that absorbs the volatility of Terra. The more Terra is used, the more LUNA is worth.
Stablecoins are only valuable to users if their price is pegged one-to-one to their fiat currencies. The Terra protocol utilizes the basic principle behind the supply and demand to maintain the price.
If Terra’s price is relatively higher than its peg: supply is small, and demand is high. The protocol encourages users to burn LUNA and mint Terra until Terra goes back to its target price. The LUNA pool then becomes smaller, which increases the volatility of LUNA. Upward price pressure will be more prominent with higher volatility.
If Terra’s price is relatively lower than its peg: supply is large, and demand is small. In this situation, the protocol incentives users to burn Terra and mint LUNA. The LUNA pool gets larger, the sell-side pressure will be very large and would likely cause a price decrease of LUNA.
Since Terra prices are intended to be pegged to fiat currencies, such as 1 USD worth of LUNA for 1 UST, If 1 UST is trading at 1.01 USD, users can use the Terra Station’s market swap to trade 1 USD of LUNA for 1 UST. The swap burns 1 USD of LUNA and mints 1 UST. Users can then sell their 1 UST for 1.01 USD, profiting 0.01 USD through arbitrage. This arbitrage continues until UST price falls back to match the price of USD, maintaining Terra’s peg. Conversely, if 1 UST is trading at .99 USD, users can buy 1 UST for 0.99 USD. Users then utilize Terra Station’s market swap function to trade 1 UST for 1 USD of LUNA. The swap burns 1 UST and mints 1 USD of LUNA and users profit .01 UST from the swap. This arbitrage continues, and UST is burned to mint LUNA until the price of UST rises back to 1 USD. This protocol helps to stabilize the price of Terra.
2) Terra’s event
Since the Federal Reserve announced a 50BP rate hike, the Nasdaq fell sharply, and Bitcoin hit its biggest drop in nearly a month. The market’s reaction to the macro situation has been extremely pessimistic, and panic has been spreading rapidly throughout the crypto market. On May 8, Terra’s LUNA Foundation Guard (LGF) announced that it would lend US$1.5 billion in Bitcoin (BTC) and terraUSD (UST) to defend the peg of its algorithmic stablecoin to the U.S. dollar and prepare for a new pool of four stablecoins that would unseat the 3pool fund. However, at that time, a huge sale of TerraUSD or UST in a single trade of US$84 million influenced the balance of supply and demand in Terra’s pool.
Following, LFG removed US$100 million of UST liquidity from Curve. However, as many whale accounts started dumping UST, with each transaction amounting to millions of dollars, Terra began to lose its peg. In addition, a large number of UST locked in Anchor flowed into the market, further causing selling pressure on UST. Since May 8, the price of UST has been lower than the US$1 mark, and the market balancing mechanism of “burning UST to mint LUNA” continuously operated for the past few days, which can be reflected in the circulating supply of LUNA changes. However, under extreme panic, the mechanism has been slow to achieve its ideal effect. The meltdown in UST, one of the world’s largest stablecoins brought shockwaves to the crypto market. Tether, which is the largest stablecoin, also fell below its US$1 peg.
4. Calendar of future popular asset events
I. NTF mint Calendar
II. Token Airdrops
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