DeFi Research News February 2023
To help you stay up-to-date about crypto and DeFi events in February, we have collected some of the hottest topics here.
- DeFi TVL Updates
- Macro View
- Global, regulations and institutional update
Other Noteworthy News/Events in February, Bitcoin Miners Update and On-Chain Metrics & Data we discussed in our blog.
Tap the link and to read the full version, which includes information about Galois Capital closed down due to $40M loss to FTX bankruptcy, One of Bitcoin’s most prolific contributors steps down, Bitcoin Difficulty Regression Model, Ethereum and Bitcoin updates, and many others.
DeFi TVL Updates
Key DeFi Stats for February:
February was a month of stagnation and suspense for DeFi Total Value Locked (TVL). The TVL started the month at ~$48B and remained unchanged for the entire month. Ethereum chain held its dominance over the market with ~59% of the total TVL whereas runner-ups Tron and Binance chain held ~10% each. Despite the stagnant TVL, the activity in the DeFi ecosystem witnessed a surge, causing DEX volume to increase to ~$54B over the past 30 days, an 11% increase since January. Lido Finance continued its reign as the #1 spot in TVL after snatching it from the long-term king of TVL, MakerDAO, which had held the top spot since June 2022, with an impressive ~$9B TVL. MakerDAO was relegated to the #2 spot for a second consecutive month with ~$7B TVL, followed by AAVE and Curve for a tie at the 3rd place with ~$4.8B TVL and finally Convex Finance held its #5 spot after pushing Uniswap down with ~$4.2B in TVL.
Macro View
The State Of Inflation
The financial markets are like a seesaw right now, with improving liquidity on one end and a crummy economic cycle on the other. Better liquidity means more money sloshing around, which has caused a bit of an uptick in inflation. Recent reports show that inflation is still trending downward compared to last year, but it’s higher than expected. It’s like trying to keep a volleyball underwater — the moment you let go, it bounces back up. Looks like the markets have been loosening their grip on the volleyball a bit in the past few months, huh?
Global Update
Looks like China’s playing a game of “now you see me, now you don’t” with COVID-19! Their rapid reopening has resulted in a surge of infections, catching a population that’s been cooped up with less herd immunity off guard. As a result, some countries have slapped travel restrictions specifically on Chinese travelers. But fear not, we expect these restrictions to loosen up in the coming months and for Chinese outbound tourism to gradually bounce back.
Meanwhile, Europe’s economy has been weaker than an overcooked spaghetti noodle, but it seems to be hitting rock bottom now. The energy crisis has simmered down for the time being, giving Europe all of the warmer months of 2023 to prep for the next winter. Hey, maybe they could try their hand at expanding their LNG import infrastructure, coal, and other energy sources. It’s all about finding those silver linings, folks!
Regulations Update
Get ready to put on your reading glasses, folks, because the regulatory section is gonna be a doozy! With all the recent regulatory actions hitting the crypto industry like a ton of bricks, it’s like trying to keep up with the Kardashians — you never know what’s coming next! But hey, at least we can all agree that this is one soap opera that no crypto person wants to miss, right? Here’s the TL;DR of recent regulatory actions summarized by Sam Andrew in his recent must-read article on regulatory crackdown:
Banking restrictions for crypto companies
It seems like US crypto companies are the black sheep of the financial sector. The collaborative policy specifies that state banks must refrain from engaging in any activities that are prohibited for national banks. This is to prevent state banks from participating in risky crypto ventures that could pose a threat to the stability of the US banking industry. Violation of federal laws by state banks engaged in crypto-related transactions could lead to the termination of their FDIC insurance and/or Federal Reserve access, which would be a major issue for these banks. As a result, crypto businesses are being increasingly excluded from the US banking system, and relationships between the two are deteriorating.
Stablecoins being deemed securities
Asset-backed stablecoins, as a category, are not subject to the same argument put forth by the SEC regarding UST being a security. On February 16, 2023, the SEC charged Terraform Labs and its founder Do Kwon with “orchestrating a multi-billion dollar crypto asset securities fraud.”
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However, it seems Paxos has landed itself in hot water, with news breaking that they received a Wells notice on February 3, 2023, alleging that BUSD is a security and should have been registered under federal securities laws. While the SEC is considering action, Paxos appears to be at odds with the claims. As if that wasn’t enough, the New York Department of Financial Services delivered another blow to Paxos on February 13, 2023, ordering them to halt BUSD issuance — talk about a bad day at the office!
Proposed custody rules that cut off institutions from crypto
On February 15, 2023, the SEC announced a proposal to amend existing rules for Registered Investment Advisors. Registered Investment Advisors are required to have custody of the “securities and funds” they manage on behalf of their clients with “Qualified Custodians.” Qualified Custodians are vetted entities that hold client “securities and funds” in segregated accounts among other things. The proposed rule change would expand “securities and funds” to “any client assets of which an adviser has custody.” including crypto. SEC Chairman Gensler said:
“the current business model in crypto exchanges does not meet the qualified custodial standard.”
So if RIAs can’t interact with centralized exchanges, they can’t trade crypto, which means they won’t offer it to their clients. From SEC’s viewpoint, they might be thinking about this from TradFi’s perspective. The regulation of custody and trade execution functions in US equity markets is divided between separate entities that are subject to regulatory oversight. Conversely, in the crypto space, centralized exchanges typically handle both custody and trade execution services. The SEC’s proposal seeks to address concerns related to customer fund manipulation and bankruptcy claims, which is certainly a welcome move. But one can’t help but wonder — will this new approach prove to be the solution the crypto industry needs, or will it create new challenges to navigate?
Staking services considered securities offerings
The SEC charged Kraken on February 9, 2023, with “unlawful offer and sale of securities” in violation of the Securities Act of 1933. Kraken’s staking-as-a-service product constituted the sale of unregistered securities. Kraken agreed to immediately terminate its US staking business and settled the charges by paying a $30 million fine. Here’s why Kraken’s service falls under securities law: Kraken advertised a program where people could invest their money and get back returns of “up to 21%.” Kraken was in charge of the program and kept clients’ money safe. They combined everyone’s money together in a pool. Even though the rewards could change, Kraken paid a set amount. They also paid interest at a certain time, even if they didn’t receive rewards yet. Lastly, Kraken made sure there was a pool of tokens that could be used to take money out of the program whenever anyone wanted. Remember “invests money in a common enterprise and reasonably expects profits or returns derived from the entrepreneurial or managerial efforts of others,” the offering constitutes a securities contract. Kraken is the common enterprise. Clients expected a return from Kraken’s efforts. So let’s take a deep breath because it turns out that the panic over the SEC cracking down on staking was as overblown. That’s right, staking is still alive and kicking, whether you prefer to stake your crypto with the centralized bigwigs at Coinbase or roll with the decentralized protocols like Lido and Rocket Pool.
Charlie Munger Wants To Ban Cryptocurrency
Charlie Munger, one of the smartest investment polymaths in modern history, is back at it again with his opinions on bitcoin and cryptocurrency. He’s advocating for an outright ban on crypto in the United States and even giving props to the Communist Party of China for their own ban. But, let’s be real here, has he done the required able to discuss the implications of bitcoin’s utility? Has he heard of Segwit and Taproot soft-fork updates to Bitcoin, or is he too busy hoarding his bags of cash? Does he have an opinion on appropriate block size and the associated discussions around decentralization, or whether the base layer should be Turing-complete? Can he articulate key technical differences between BTC, ETH, SOL, and AVAX? Is he familiar with the usage of bitcoin, stablecoins, and related assets by people in war-torn, authoritarian, and/or persistently inflationary developing countries to preserve and/or move some of their purchasing power? Probably not, eh?
Institutional Update
Coinbase launches an Ethereum Layer-2 blockchain
Did you hear the news? Coinbase just announced that they’re launching their own blockchain! According to their blog, Base is a secure, low-cost, developer-friendly Ethereum L2 built to bring the next billion users to web3. Base will serve as both a home for Coinbase’s on-chain products and an open ecosystem where anyone can build. They are collaborating with Optimism team to use their tech stack to build this rollup. Talk about the world’s first public company to launch its own permissionless decentralized blockchain. They’re not just launching a blockchain, they’re launching a token too! Just kidding, they explicitly said they’re not doing that, but of course, crypto markets never let facts get in the way of a good pump. So a completely unrelated token called BASE token shot up like a rocket from under a dollar to over $7!
So how else will Coinbase make money from this? Jesse Pollack, Senior Director of Engineering at Coinbase recently joined the Bankless podcast to explain this. You can watch it at this time stamp to skip to the answer. Long story short, Coinbase will offer easy to use and trustworthy User Interface for the DApps built on Base.
Noteworthy VC money Raised
- Galaxy Digital closes $44 million acquisition of self-custody platform GK8
- Abu Dhabi starts $2 billion initiative to back Web3 startups
- Bitcoin mining consulting firm Sabre56 raises $35 million to build 150MW of hosting sites
- DeFi yield startup Affine Protocol raises $5.1 million in a seed round
- Multichain wallet Blocto closes a Series A funding round at a valuation of $80 million
- Chaos Labs raises $20 million in a seed round led by Galaxy Digital and PayPal
- User privacy Web3 dapp ecosystem Beldex raises $25 million
- Indian Web3 gaming studio Kratos raises $20 million seed round at a $150 million valuation
- NFT trading platform Blur set to raise at a billion dollar valuation
- NFT animation shop Superplastic raises $20 million from Amazon, Google, Animoca Brands and others
- White label blockchain node staking-as-a-service firm BlockJoy raises $12 million
- Solana-based crypto payments platform TipLink raises $6 million in seed funding
- Kaito AI raises $5.3 million to build ChatGPT-powered search engine for crypto
- Digital asset firm Taurus raises $65 million in a Series B round led by Credit Suisse
- Digital assets protection firm Coincover raises $30 million
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