Blockchain Confidential: 19 November 2021

Taproot launches, DeFi continues to grow, and our regulator radar flashes red

The Week

The week started with a smooth rollout of Bitcoin’s Taproot upgrade; Bitcoin Magazine has a technical explainer and a shorter summary on this most significant upgrade since SegWit four years ago. As an old-school Wall Street IT developer, I appreciate there’s nothing better than a high-stakes upgrade that’s a non-event.

The battle between DeFi and CeFi in the digital asset market continues to run hot, with decentralized exchange (DEX) volumes up 550% in 2021. With all the liquidity fragmentation, DEX aggregators are becoming a big business, and ParaSwap airdropped 150 millions hybrid governance/utility tokens to reward early adopters. Cypher raised funds to launch a traditional-style futures market on DeFi, while the Injective DeFi derivatives protocol launched its mainnet with $120M in incentives. And based on all this excitement, Coinbase now wants to get in on the action.

In the Layer 2 world, Polygon announced a zero knowledge-proof based rollup mechanism, Miden; ZK rollups are expensive gas-wise, but the consensus is that once this problem is solved, zkRollups are likely to be an essential part of scaling up Ethereum. On the Layer 1 side, Solana’s Anatoly Yakovenko talked about their approach to scalability in an interview this week. This debate is definitely not settled.

Finally, a former colleague likes to obsess about the implications of quantum computing for blockchains — none of which use quantum-resistant ciphers and digital signatures — so this exploration of the implications is for you, Max.

The Essay

This week’s essay looks at three different ways of thinking about the value of NFT’s. Read Taking NFT’s Seriously Not Literally.

The Geek Out

For the Geek Out we dive into blockchain analytics and play with Moonstream, an open source blockchain analysis platform. Read Riding Moonstreams.

From the Research Desk

This week our Head of Research Ilya Kulyatin reviews a paper from Gudgeon et al. on how a DeFi meltdown might play out. Read Decentralized Financial Crisis.

Regulator Radar

In the ETF space, VanEck had a hit and a miss, with the SEC rejecting their spot Bitcoin ETF proposal, while their Bitcoin futures-based product launched on CBOE.

On the enforcements side, the SEC asked a court to enforce a subpoena against Terraform Labs, the company behind the Terra blockchain and the Mirror synthetic protocol. They also have their eyes on BlockFi’s high-yield DeFi accounts. Everyone in DeFi says they want clarity, but few seem to be listening to Gensler’s clear statements about most tokens being securities. This is likely the leading edge.

In the U.S., President Biden signed the infrastructure bill into law, including its controversial crypto broker tax reporting provisions, but Republican legislators are already agitating to strip them out. The OCC’s acting chief Michael Hsu telegraphed that there is more crypto regulation coming for banks as well, and it’s likely to discourage them from engaging in the digital asset markets. Finally, the U.S. Congress started their “demystifying crypto” hearings. Expect at least one legislator to compare the blockchain to a series of tubes, folks.

Around the world this week the tone from regulators was broadly negative. India plans to ban crypto as payments but regulate them as assets. Both the BoE and the ECB expressed concerns about digital asset market impact on financial stability, and top law firms in the U.K. are recommending that firms from the famous fintech cluster move offshore. China made explicit they don’t want SOE’s involved in Bitcoin mining. It makes you wonder who did not get the memo in September. Fidelity got cleared to be Canada’s first qualified digital asset custodian. Finally, Ukraine is making a play to be a crypto-friendly jurisdiction.

On the CBDC & stablecoin front, in contrast to the vocal concerns about the broader market, the Indian central Bank may pilot a CBDC in 2022 and a top ECB official said a digital euro could become legal tender, though also said such an outcome should not be taken for granted. Fed Governor Chris Waller weighed in on the debate about whether only chartered banks could issue stablecoins — expressing concerns about limiting competition by limiting it to banks.

At the Office

This week we started wrapping up U.S. incorporation and kicked off the process of Singapore incorporation. We continued working on a mock-up of our flagship risk & analytics product, and also started building the earliest stages of our data pipelines to acquire the tons of data we will require daily to make it a reality. The team continues to operate fully-remote across the U.S. and Asia, and we are talking to a wide range of potential clients & partners in both regions.