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Huobi Research

Weekly Industry Report 【May 23,2022】

Authored by Eno Zhang, Fubing Yang, Researchers at Huobi Research Institute

Abstract

This week, we focus on the following events: 1) Optimism launches Optimism Ecological Foundation; 2) Crypto startup KaJ Labs closes $400 million seed round, led by GEM Digital; 3) U.S. Department of Commerce to publish 17 encryption questions for comment to help develop encryption framework;

Project Analysis: Lido is Etherum liquid staking, allowing users to stake ETH and getting stETH tokens in return. stETH token can be held, sold, or applied in any DeFi applications. However, effects of the Luna bloodbath reverberated through the crypto market, and stETH became unpegged to ETH. The following report will analyze the mechanism behind the Lido system and details of this event.

1. Industry overview

I. Overall market trend

Bitcoin and other cryptocurrencies have tumbled this month, in part due to investor concerns about persistently high inflation and the collapse of the TerraUSD stablecoin. Bitcoin’s price has fallen 32% over the past year to US$29,128.50 as of Wednesday, while shares of MicroStrategy have fallen 56.6% to US$197.44 over the same period.

However, the recent volatility could lead to new regulation of the cryptocurrency market, which MicroStrategy supports. Biden signed an executive order reviewing digital currencies in March. In addition, the SEC said this month that it would add 20 investigators and litigators to a division investigating cryptocurrency fraud. SEC Chairman Gary Gensler said Wednesday that he is concerned that more crypto investors will be hurt after the TerraUSD crash.

At the same time, in a letter to investors, MicroStrategy CEO Michael Saylor stated that the Bitcoin strategy will be actively pursued in the future. It may bring about a recovery in Bitcoin and the entire digital currency market.

USDT, the world’s largest stablecoin issued by Tether, briefly decoupled from the U.S. dollar last Thursday after the algorithmic stablecoin UST and its sister token Luna both plummeted. The unit price of USDT once fell to 94.55 cents, a new low since December 2020.

The stability of USDT has been widely questioned as investors have withdrawn more than US$7 billion from Tether since USDT briefly detached from its peg to the U.S. dollar.

On Tuesday, CNBC found from data provided by CoinGecko that Tether’s circulating supply had slipped to less than US$76 billion on Tuesday, from about US$83 billion a week earlier.

II.NFT

Most of the blue-chip NFTs remained in the top 10 in total sales this week, although some floor prices fell by nearly 25% over the past seven days.

Notably, Otherdeed for Otherside, Bored Ape Yacht Club (BAYC), and Mutant Ape Yacht Club (MAYC) all saw a drop in floor prices. After the launch of Otherdeed, BAYC has recovered from the decline in floor prices, with BAYC’s lowest decline of 3% in the past seven days. Floor prices in MAYC have fallen nearly 13% over the past seven days.

MAYC has been on a tailwind, falling sharply from a peak of 41.2 ETH to $120,386. Currently, MAYC is valued at 19.6 ETH, which is about a 53% discount, as MAYC’s ability to skyrocket in price is largely due to their eligibility to apply for Otherdeed for Otherside.

Despite the controversy surrounding Otherdeed’s declining NFT sales, the project has remained at the top of the list despite a 75% drop in sales over the past seven days.

III.DeFi

IV.Layer 2

2. Market news

I. Industry news

Optimism launches Optimism Ecological Foundation

On May 18, Optimism, the second-layer expansion network of Ethereum, announced its latest progress in decentralized governance, and released the Optimism Collective Governance Operation Manual v0.1, authorizing Token House to perform upgrades and fund pool allocations. Additionally, a new independent entity, the Optimism Ecological Foundation, was launched to enable a durable governance system. Its primary responsibilities include: tracing public product funding and identity-based NFT experiments, maintaining the Playbook, and executing governance-oriented on-chain actions, the foundation is led by Optimism’s two founders, Jing and Ben. Optimism said the focus will shift to Citizens’ House, an identity-based NFT governance layer, which is managed by citizen NFT holders and whose primary responsibility will be to fund those public goods that have the most positive impact on Optimism and the Ethereum ecosystem. The first Citizens’ House experiment and its corresponding Citizenship NFT series will be the Collective’s next major milestone.

S&P Global Ratings Forms DeFi Panel to Build Crypto Framework

S&P Global Ratings has created a DeFi strategy group to help build the firm’s decentralized marketplace framework for investors. According to Monday’s announcement, Chuck Mounts will lead the group as chief DeFi officer and will work with the newly appointed head of DeFi transformation, Charles Jansen. The team seeks to build on S&P’s analytical and risk assessment capabilities for traditional finance and DeFi clients.

AAVE is internally testing the use of NFTs as collateral

Stani Kulechov, founder and CEO of DeFi protocol Aave, revealed at the Permissionless Summit that AAVE is internally testing the use of NFTs as collateral. Kulechov added that he was shocked by the speed at which the industry was developing, as locking up billions of dollars of value in smart contracts is not an easy task; yet, this has happened within only a few yea

II. Investment and Financing

Crypto startup KaJ Labs closes US$400 million seed round, led by GEM Digital

On May 18, crypto startup KaJ Labs raised US$400 million through the sale of LITHO Token, setting the world’s second-largest seed round in 2022 so far. Investors in the financing transaction include Global Emerging Markets (GEM) Digital, Four Digital, and a group of individual investors, including GEM Digital, a $5 billion alternative investment group headquartered in the Bahamas. Lithosphere, a blockchain platform owned by KaJ Labs, is the first blockchain that uses embedded deep neural networks to make smart contracts smart, and supports cross-chain network operations. This interoperability enables multiple ways of transferring value under a single governance structure, eliminating many of the problems inherent in existing blockchain networks.

Web3 accelerator Seed Club closes US$15 million financing

It was reported on May 18 that the Web3 accelerator Seed Club will complete a US$15 million financing at a valuation of $150 million. USV, MulticoinCapital, and Placeholder will participate in the investment. The financing will be used for ecological development. SeedClub passed a vote on new strategic contributors with a 99.99% approval rate on May 16, and the vote includes allocating 1 million CLUBTokens (10% of the total) to new strategic partners, who will provide 15 million USDC. The CLUB allocation will be locked for one year and then unlocked in three years.

Metatheory closes US$24 million financing, led by a16z

Web3 interactive media company Metatheory has completed a US$24 million Series A financing, led by a16z, with participation from Pantera Capital, FTX Ventures, Breyer Capital, Merit Circle, Recharge Theme Ventures, Dragonfly Capital Partners, Daedalus, Sfermion, and Global Coin Research. According to reports, Metatheory was founded by Twitch co-founder Kevin Lin to build Web3 games and virtual worlds, with a focus on building franchises with strong IPs that go beyond the games in themselves.

III. Supervision

U.S. Department of Commerce to publish 17 encryption questions for comment to help develop encryption framework

On May 19, the U.S. Department of Commerce called for submissions on how to create a framework to enhance the U.S.’s economic competitiveness in digital assets such as cryptocurrencies and stablecoins. The U.S. Department of Commerce (DoC) intends to issue a series of 17 questions for comment through the International Trade Administration. The request will be published in the Federal Register on May 19. These issues relate to the Department of Defense’s efforts to develop a framework under President Joe Biden’s executive order to address the challenges facing the economic growth of digital assets in the United States. The questions will cover a range of topics relevant to U.S. crypto businesses, such as perceptions of how regulations can improve competitiveness and the obstacles business owners currently face. It will also cover digital asset mining, possibly related to Bitcoin and Ethereum.

SEC Chairman: Many Cryptocurrency Exchanges Are Trading Securities, Not Commodities

On May 19, SEC Chairman Gensler told the House Appropriations Financial Services Subcommittee on Wednesday that according to the SEC’s definition, many cryptocurrency exchanges are trading securities, not commodities, and should therefore be registered with the agency. Unlike traditional commodities, cryptocurrencies such as Bitcoin come from one major issuer, he said. “None of the commodities (corn, wheat, gold, or oil, etc.) have a (specific) issuer. There is no particular party behind a commodity, and the public doesn’t make expectations based on that party.” It was previously reported that the SEC needs more staff to supervise the crypto industry and that crypto exchanges should register with the SEC.

Biden Administration Wants Crypto Exchanges to Build Funds Firewall

On May 19, according to people familiar with the matter, the Biden administration is pushing for legislation to isolate customer funds from funds in cryptocurrency exchanges to ensure that these funds can be safe in the event of problems with the exchange. This could limit how the industry operates. This type of custody rule is standard for financial institutions such as futures firms, but cryptocurrency exchanges often mix their funds with assets held by customers, and the government wants legislation to end that. It has been revealed that federal officials will push the rule into any related encryption bills considered by Congress in the coming weeks. This builds on an argument in last year’s Financial Markets Working Group report on stablecoins that companies hosting cryptocurrency wallets need close federal oversight.

3. Trending project analysis — Lido and stETH

This week, we are focusing on the project called Lido. Influenced by the Luna Bloodbath and UST’s collapse, the crypto market is still in turbulence, and the swap rate between ETH and stETH — a tokenized version of staked ETH — has been deviated from the assumption that it is supposed to be pegged one-to-one. Since May 7, the stETH price to ETH dropped below 1, and the all-time low has reached 0.95. As of May 20, the price hasn’t returned to 1. Futhermore, Lido Finance was ranked second place by the TVL inDeFi once, and has now fallen to fourth place. Why has stETH become uncontrolled? And, why is Lido so strongly affected?We will further review the mechanism behind Lido and analyze these two questions.

1) Lido Mechanism

How does users start to use Lido?

Lido is managed by Lido DAO and DAO members are responsible for Lido’s stabilization and ensure its efficiency. Its mandate is to promote Lido, as well as recruiting new users, node operators, and validators with educational content, promotional campaigns, and affiliate marketing. When a user choose to stake ETH with Lido, he or she will send ETH to the smart contract and get stETH tokens in return. stETH tokens represent a tokenized staking deposite, while stETH can be held, sold, traded, or used in any DeFi applications. The balance of stETH is based on the total amount of
staked ETH plus total staking rewards and minus slashing penalites applied on validators.

How does Lido profit?

Lido profits by the beacon chain which is a separate network. Initially, since Lido smart contracts cannot access their data, the beacon network is performed by the Lido DAO appointed oracles to get corresponding data. On every update submitted by an oracle, the system recalculates the stETH token ratio. If the overall staking rewards are greater than the slashing penalties, the system registers a profit, and the stETH token balances will increase. Therefore, Lido would apply a 10% fee which is applied by minting stETH tokens. Part of the fee from Node operators is distributed proportionally to the corresponding active validation keys on the beacon chain.

2) Lido Tokenomics

stETH token

As previously stated, stETH token is a liquid alternative for the staked ETH. When a user sends ETH into the Lido liquid staking smart contract, the user receives the corresponding amount of stETH tokens. Furthermore, it is also supposed to be pegged one-to-one to ETH. To get their ETH back, the Lido DAO will upgrade Lido to allow the users to burn stETH tokens in exchange for ETH. Although the main driver of the stETH/ETH exchange rate should be 1:1, other factors are also affecting the market prices.

LDO Token

Lido is managed by Lido DAO, and Lido DAO governs a set of liquid staking protocols with Lido on Ethereum among them. Lido’s key parameters, like fees, as well as Lido upgrades are controlled by Lido DAO. To order to ensure the efficiency of the governance, Lido introduces a new token, LDO. LDO voting weight is proportional to the amount of LDO a voter stakes in the voting contract. The more LDO locked in a user’s voting contract, the more voting weights the voter gets.

3) The Departure from ETH-stETH Parity

The LUNA tragedy continues to reverberate around crypto markets. On May 13, Lido’s official account sent a warning on Twitter.

The warning stated that stETH was trading at a discount of 4.2% to ETH on the main Curve pool, and the discount went up to as hig as 5% before falling again. People who previously staked stETH in the Anchor lending protocol, which ran on the Terra blockchain, urgently needed to retrive stETH in time. The price of stETH surged. Although Lido eventually provided some solutions around how to get stETH off the Terra blockchain, the problem had already existed.

When people realized that stETH has a higher value than ETH, they could redeem their stETH for more ETH than which they initially deposited. This would trigger the shortage of ETH in the pool, because people appeared to burn their stETH for ETH. Accoding to the basic idea of supply and demand, less supply and more demand of stETH led to the increase of price. Therefore, if the discount continued to grow, users could encounter risk of liquidation on leveraged stETH. For example, the AAVE protocol allows users to borrow ETH or other tokens, equal to 73% of their stETH collateral. If a user deposit 1 ETH, the user can borrow 0.73 ETH. But if the value of a loan exceeds 75% the value of their deposit, becoming undercollateralized, it’s in danger of being liquidated. The fact that stETH has become unpegged from ETH will result in liquidations, and traders have to pay penalties and gas fees. Lido Finance also advised people who leveraged stETH to minimize risk by adding extra collateral.

The Terra meltdown has reverberated across the whole crypto market. Despite Lido’s warning and offers of advice, the addition Curve pool which Lido revealed on May 12 seemed insufficient to maintain parity between ETH and stETH. Lido stated that it was offering 1 million LDO tokens as incentives for users to provide liquidity to the new pool. However, the price of stETH still has not returned to 1 ETH, at time of writing.

4. Calendar of future popular asset events

I. NTF mint Calendar

II. Token Airdrops

About Huobi Research Institute

Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. Since March 2018, it has been committed to comprehensively expanding the research and exploration of various fields of blockchain. As the research object, the research goal is to accelerate the research and development of blockchain technology, promote the application of blockchain industry, and promote the ecological optimization of the blockchain industry. The main research content includes industry trends, technology paths, application innovations in the blockchain field, Model exploration, etc. Based on the principles of public welfare, rigor and innovation, Huobi Research Institute will carry out extensive and in-depth cooperation with governments, enterprises, universities and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain. Industry professionals provide a solid theoretical basis and trend judgments to promote the healthy and sustainable development of the entire blockchain industry.

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Disclaimer

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4. The information, opinions and inferences contained in this report only reflect the judgments of the researchers on the date of finalizing this report. In the future, based on industry changes and data and information updates, there is the possibility of updates of opinions and judgments.

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