Nethermind's Crypto Chronicle March 2023

Key Takeaways

• The Layer 2 narrative is gaining traction, with Layer 2 transactions now exceeding Layer 1s. Coinbase's recent launch of Base is an open, permissionless, high-performing Layer 2 solution built on the Optimism (OP) stack and compatible with the EVM ecosystem.
• The SEC has increased its regulatory oversight, resulting in the planned end of the US Kraken staking scheme and the BUSD stablecoin. Dapper Labs, the developer of NBA Top Shot, is also facing a lawsuit for selling unregistered securities .
• As the Shapella Upgrade approaches, liquid staking continues to outperform. Despite many projects attempting to capitalize on this trend, Lido's market share remains unchallenged.
• The concept of algorithmic stablecoin appears to be close to its end, as Frax has recently switched to 100% collateralization. USDT continues to gain market share, currently representing 52.7% of the total stablecoin TVL.
• Blur has surpassed OpenSea as the primary NFT marketplace after its airdrop . This spurred a war between the two exchanges, with OpenSea slashing its fees to 0 and enforcing royalties on all collections to 0.5%. In retaliation, Blur requested their artists to block their collections on OpenSea and announced a second airdrop.
• While fundraising levels are still below those before the FTX collapse, venture capitalists continue to invest in projects related to scaling, zero-knowledge proofs, and digital identity.

The Liquid Staking Rush

The upcoming Shapella upgrade, anticipated to launch in early spring, will allow validators to safely exit and increase the number of ETH validators. This has sparked a new discussion surrounding liquid staking, with growth in the sector and opportunities for new competitors to Lido and CEXes. Coins associated with liquid staking have had a strong year-to-date performance, and we examine the protocols that are gaining market share. We also take a look at how Lido and Rocket Pool are preparing for the post-Shapella era.

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Stablecoin Regulation: How the SEC's Crackdown Affects the Market

Stablecoins are one of the most successful applications of cryptocurrencies, playing a significant role in the current blockchain ecosystem. However, their rapid growth in the past couple of years, along with some recent high-profile failures, such as Luna’s now defunct UST stablecoin, have brought regulatory scrutiny upon them. The latest stablecoin to fall under this scrutiny is Binance’s BUSD. In this article, we will go over the regulatory issues currently surrounding BUSD and also analyze its implications for the broader stablecoin market to understand how the market can adapt and determine whether excessive regulatory actions could hinder the growth of stablecoins.

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Market Commentary

Macro

• Bitcoin surged to a multi-month high in early February, nearly reaching the $24,250 level, while Ethereum crossed the $1,700 mark. This move occurred simultaneously with the increase in stock prices and bond yields, driven by optimism in the US Federal Reserve's disinflationary process. However, prices later came under pressure after US CPI data showed that inflation remained relatively high despite a downward trend. With improved employment, the Fed could have more leeway to prolong rate hikes to combat high inflation, which will continue to exert pressure on prices.
• Later in February, the market experienced a correction as a result of the Securities and Exchange Commission (SEC) charging two Kraken subsidiaries, Payward Ventures Inc and Payward Trading Ltd, with the failure to register their staking-as-a-service program correctly.
• Following the correction, the market surged almost to an eight-month high after Hong Kong announced its potential plans to open its doors to digital assets and investors, with Bitcoin coming close to the $25,250 level. Additionally, the Chinese central bank infused a massive $73 billion into its banking system via reverse repurchase contracts to support economic recovery.
• Overall, the market failed to achieve a meaningful breakout, leaving the early-year rally at some risk of a price correction in the month ahead.

Crypto Indices

• Ethereum has outperformed Bitcoin in the last month, with Ethereum demonstrating a price uptick of 2.7%, while Bitcoin experienced a relatively lower appreciation of 1.4%.
• The Arbitrum and Optimism ecosystems, which account for 84% of the market share under layer-2 solutions, have demonstrated strong returns. For the first time, the number of daily transactions on Arbitrum has surpassed that of Ethereum, providing further support for the L2 narrative.
• The Liquid Staking sector has been bolstered by both the SEC investigation of Kraken's staking business and the forthcoming Shapella upgrade. Centralized exchanges (CEXs) represent 28.2% of the total staking market, and regulatory oversight is expected to result in a substantial market share increase for them. Additionally, the number of staked ETH has accelerated (+10% since the end of 2022) in the first two months, with liquid staking grabbing the lion’s share.
• Bridges are benefiting from the growing use of L2s, resulting in more cross-chain operations. However, the gaming/NFT tokens, which topped the leaderboard in January, experienced the most significant declines in February.

DEX Volumes Across All Chains

• The activity of Decentralized Exchanges (DEX) has seen a significant surge, with a monthly volume increase of 37.7%. Among the DEX platforms, Uniswap has further strengthened its dominance, now accounting for the majority (51.8%) of cryptocurrency volumes.
• Meanwhile, Sushiswap, Canto Dex, and DODO have seen an increase in their market share. It is worth noting that Canto Dex, which was launched in Q3 2022, now accounts for 2.22% of total trading volumes.
• Some DEX platforms have experienced a decline in their market share. Curve, PancakeSwap, and Balancer were the main losers in this regard.

Active Addresses

• In February 2023, the overall number of daily active addresses on the primary blockchains has remained relatively stable. Arbitrum continues to surpass Optimism since its initial overtake in mid-January 2023.
• The number of active addresses on the Solana network has returned to around the same level as at the beginning of the year. However, this is still approximately 75% lower than the network's peak in late May 2022. The Solana network went offline twice in a week due to technical issues, explaining the dip in the Solana chart below.
• A 30-day moving chart from 2022 indicates a consistent upward trend for Arbitrum and a downward trend for Solana. In contrast, Ethereum and Polygon have exhibited a relatively more stable trend over the past year.

Transaction Count

• The overall daily transaction count across major blockchains remained stable in February 2023, with the exception of Arbitrum, which continues to show an upward trend from the previous month.
• Optimism has maintained an average of approximately 200,000 transactions per day, since losing ground to its closest competitor, Arbitrum, in mid-January 2023.
• Despite being down from its peak of around 60 million transactions per day at the beginning of 2022, Solana still outperforms all other blockchains in the charts, with a daily transaction count ranging between 30-40 million.

Stablecoins

• USDT has maintained its claim as the dominant player in the stablecoin market, with a market share of over 50%. This can be attributed to various factors, including the SEC's increased scrutiny of stablecoins.
• For instance, the BUSD stablecoin has been programmed to unwind, and there are rumors that the SEC is planning enforcement action on USDC. All of this has benefited USDT, especially on the Tron chain, where USDT has a 95% market share.

Notable Projects and Themes

Source: DefiLlama

Scaling the blockchain & roll-ups

Caldera | Raise: $9,000,000 | Funding type: UNKOWN

Caldera specializes in creating customized layer-two blockchains for specific applications. These blockchains, called Caldera Chains, are designed to provide high performance, low latency, and customizable features to enhance decentralized application performance. They can process hundreds of transactions per second and confirm them within sub-second times.

Monad | Raise: $19,000,000 | Funding type: SEED

Monad is developing a Layer 1 blockchain that is compatible with Ethereum's virtual machine (EVM), with the aim of improving the overall Ethereum ecosystem. Monad enables parallel execution for EVM transactions that do not have common dependencies, allowing it to process transactions more efficiently without disrupting app developers. Transactions and blocks are still linearly ordered, but Monad identifies transactions within a linear ordering that can be executed in parallel without affecting the outcome. This allows existing Ethereum apps deployed on Monad to function the same way.

Zero Knowledge and privacy projects

Polybase | Raise: $2,000,000 |?Funding type: PRE-SEED

Polybase is a decentralized database that prioritizes user privacy, utilizing zk-STARK technology. It employs a zk-rollup technique, along with native indexing, to enable fast and scalable decentralized database rules and queries. One unique feature of Polybase is the ability to encrypt data using wallets for self-sovereign data and verifiable queries. This sets it apart from traditional databases such as Postgres or Supabase.

Polyhedra | Raise: $10,000,000 |?Funding type: STRATEGIC

Polyhedra provides various infrastructure solutions using zero-knowledge (ZK) proof technology. These include zkBridge, a zero-knowledge bridge solution that facilitates asset transfer between web2 and web3 systems, and zkDID, a decentralized identity solution that uses ZK proof technology. Additionally, Polyhedra offers a scalability solution called ParaPlonk, which utilizes a large-scale distributed proof generation network to accelerate ZK rollups.

Renegade | Raise: $3,400,000 |?Funding type: SEED

Renegade is a decentralized exchange that prioritizes trade privacy, providing pre-trade and post-trade anonymity. This ensures that trade activity remains hidden from third parties, eliminating counterparty risk present in centralized exchanges and OTC desks, resulting in better pricing and optimal execution. The platform addresses DeFi spot market issues, such as minimal MEV and validators only seeing zero-knowledge proofs of valid trades. As a result, block producers cannot front-run, back-run, or sandwich trades.

Cysic | Raise: $6,000,000 | Funding type: SEED

Cysic is a developer of a hardware system designed to provide hardware acceleration systems for ZK-proof protocols.?

Reputation and Fraud monitoring

Elementus | Raise: $10,000,000 |?Funding type: EXTENDED SERIES A

Elementus provides an analytics platform that utilizes the transparency of blockchain to generate actionable insights. The platform identifies security vulnerabilities, exposes bad actors, and provides market intelligence for digital asset investments. By bringing transparency to the blockchain ecosystem, Elementus aims to build trust and accountability across the crypto markets for its clients.

Port3 Network | Raise: $3,000,000 |?Funding type: SEED

Port3 is a data aggregation and standardization platform that creates a Social Data Layer for Web3 use cases by consolidating both off-chain and on-chain data. The company's product, SoQuest, serves as a task and minting platform, covering 9 L1s and most EVMs. SoQuest aims to provide universal accessibility and power to the Web3 community through its Social Data Layer.

Kaito | Raise: $5,300,000 |?Funding type: UNKNOWN

Kaito is an AI startup that addresses the issue of information fragmentation in the crypto industry. The company aggregates data from various sources, including Discord, Medium, Mirror, podcast transcripts, news, and research platforms, through an AI-powered search engine. Kaito utilizes AI for not only aggregating information but also for ranking, recommendations, and topic mining to provide a comprehensive solution for the crypto community.

Making DeFi more efficient

Mangrove | Raise: $7,400,000 |?Funding type: SERIES A

Mangrove is a decentralized exchange (DEX) that operates on an order book system, offering liquidity providers the ability to post arbitrary smart contracts as offers. This allows for increased flexibility in posting offers that are not fully provisioned. The order book on Mangrove lists promises instead of locked commitments, making liquidity shareable, borrowable, lendable, and available for sourcing only when an offer is hit.

Huma Finance | Raise: $8,300,000 |?Funding type: SEED

Huma Finance is a decentralized finance (DeFi) lending protocol that operates on an income-backed model. Its primary focus is on developing the necessary infrastructure for income-backed decentralized financial services. The platform's initial offering is an online factoring marketplace that allows individuals and businesses to obtain loans based on their projected earnings instead of their current token assets.

Chaos Labs | Raise: $20,000,000 |?Funding type: SEED

Chaos Labs has developed a risk suite designed to safeguard DeFi protocols against malicious attacks and economic instability. The suite consists of customized simulation models that enhance risk and capital efficiency, along with a cutting-edge scenario simulation engine capable of recreating specific attack strategies and proposing risk mitigation strategies. Additionally, the suite provides streamlined risk assessments and spend optimization services to assist DEXs in expanding liquidity and maximizing ROI.

User Friendly and Efficient Wallets

Sumi Network | Raise: $3,000,000 |?Funding type: SEED

Sumi is a Polkadot blockchain project that facilitates direct communication between wallets. It includes several anti-spam filtering methods, such as restricting message access to wallets via NFTs or tokens. Sumi offers full support for Ethereum, Bitcoin, and Substrate-based wallet addresses upon launch. The project has developed its own storage layer that leverages peer-to-peer technology and is compatible with Amazon S3.

Webacy | Raise: $4,000,000 |?Funding type: SEED

Webacy is a technology layer that offers security features to mitigate the risk of asset loss or theft, a common concern in the crypto world. The platform provides users with access to their self-custodial wallets without the need for keys, seed phrases, or passwords. Additionally, the company offers a safety product suite that includes a wallet watcher for real-time monitoring, a backup system in the event of lost keys or seed phrases, a "panic button" for bulk-transferring assets to a safe wallet in the event of an exploit or hack, and a crypto will to ensure assets are transferred to a designated individual upon the owner's passing.

Sending Labs | Raise: $12,500,000 |?Funding type: SEED

SendingMe is a Web3 native community chat application that provides decentralization, privacy, and security. It enables users to engage, transact, and reward their community in a single platform while maintaining complete control over their interactions. With SendingMe, community members can manage digital assets and communicate with ease, all within a secure and private environment.

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