Blockwall - April 2024 - What happened in Web3?

Dear Founders, Investors, and Friends,

The past month was marked by increased volatility.

After seven consecutive months of price appreciation, Bitcoin has seen - for the first time since September 2023 - a monthly price decline, leading to a substantial but overall healthy correction in the entire crypto market. This is why crypto's total market capitalization fell by almost $440 billion over the course of April. Besides geopolitical tensions, a rather pessimistic macroeconomic outlook - especially the U.S.’s fear of stagflation - have contributed to this month's sentiment shift. Whereas six rate cuts starting in May were anticipated by market participants at the beginning of the year, now the general expectation has been reduced to only 1.5 cuts starting in November.

Those factors directly seemed to translate into the recent ETF flows.

ETF Update

The amount of inflows as well as the volumes of the Bitcoin ETFs sank significantly, marking the first month with net outflows since launch.

Furthermore, BlackRock’s streak of 71 consecutive days of positive inflows came to an end, indicating that the momentum has stalled a little bit at the ETF front.

Outside the U.S., other jurisdictions made some more positive ETF-related headlines.

On the 30th of April, both Bitcoin and Ether spot ETFs debuted on the Hong Kong Stock Exchange (HKEX), registering over $290 million in inflows. However, the majority of those flows came from the seed capital that the three issuers were able to raise from investors in advance of the launch. It is expected that daily flows will be significantly lower in the future.

Bitcoin Halving: Recap and Impact

For the fourth time in the network’s history, Bitcoin successfully went through its halving.

First, we saw a significant spike in miner revenue - reaching $107 million at halving day - primarily fueled by the launch of the Runes protocol, a new technological standard that allows the creation of fungible tokens on the Bitcoin network.

Shortly after launch, activity cooled off, revenues decreased, and ultimately reached a level not seen since October 2023 ($29 million). As with every halving, this drop in revenues especially challenges miners with old mining hardware and / or weak balance sheets - potentially filtering out inefficient operators.

Zooming out, the effect of the halving diminished over time, with this halving’s impact already being somewhat negligible. Future halvings will rather serve as periodic reminders that the Bitcoin network eventually needs to find ways to compensate miners for the diminishing block subsidies to maintain the network’s security.

The most obvious solution to Bitcoins dwindling “security budget” is to generate significantly more revenue from transaction fees, e.g. through increased economic activity on the network. In the future, a layer 2 ecosystem on Bitcoin could enable exactly that.

Regulatory Update

Meanwhile, not a single month goes by without a new legal dispute igniting between the SEC and a crypto company. Last month, Uniswap Labs, the developing company behind crypto’s biggest decentralized exchange, found itself in the sights of the U.S. federal agency. On April 10th, the SEC served Uniswap Labs with a Well Notice - signaling an intent to sue the company in the near future. According to Uniswap, the notice - specifically through the Uniswap Wallet and the DEX - allegedly qualifies as an unregistered securities broker and exchange. Whether Uniswap’s native token was additionally classified as a potential security remains unclear.

Consensys vs. SEC

Almost two weeks later, Consensys, the company behind the crypto wallet MetaMask, filed a lawsuit against the SEC. In its statement, the company accuses the federal agency of acting unlawfully and posting a threat to blockchain innovation by attempting to extend its jurisdiction to Ethereum. The indictment also disclosed that the SEC had already served a Wells Notice to Consensys a few weeks earlier. In the agency’s view, MetaMask would represent an unregistered broker because the wallet offers its users to stake ETH on their behalf. Consensys is now seeking a court declaration through its lawsuit that a) ETH does not constitute a security and b) MetaMask does not fall under the category of a broker.

We at Blockwall strongly believe the ongoing litigations are pivotal matters for crypto and web3, especially as it revolves around the preservation of self-custody - a fundamental pillar of crypto. Without it, crypto merely replicates existing systems. That’s why this topic warrants close observation.

EigenLayer’s Mainnet Launch and Token Announcement

Earlier last month, the restaking protocol EigenLayer launched its “Stage 2” Mainnet on the Ethereum network.

In "Stage 1," users were limited to depositing ETH or Liquid Staking Tokens into the protocol. The recent upgrade further introduced Operators and Actively Validated Services (AVS), so that the staked assets - and therefore Ethereum’s economic security - can now be leveraged to secure other networks or protocols. Moreover, the team introduced the $EIGEN token, which is based on an innovative token design and also can be used to secure other protocols leveraging Ethereum’s security, without overloading the network with additional complexity. EigenLayer stands out as one of the most innovative protocols in recent times, as it offers developers unprecedented access to Ethereum’s staked capital and decentralized validator set, unlocking a multitude of new use cases down the road. This is why EigenLayer - this year alone - managed to attract over $15 billion in TVL, making it the second largest protocol in all of DeFi as well as the most anticipated launches of this year.

Our Take On Overall Crypto Sentiment

Throughout April, our team attended a few crypto conferences - namely the Paris Blockchain Week, Digital Asset Summit in London and the Crypto Asset Conference in Frankfurt. Visiting events like these oftentimes provide valuable insights into the broader crypto sentiment. Compared to last year, these events were way busier, with people from the traditional finance world - also from the biggest financial institutions - making up a large part of the crowd.

From our discussions, it’s clear that tokenization and blockchain’s potential to reduce costs and time across a wide array of processes inside traditional finance are among the most captivating topics for those institutions.

Analogous to the introduction of the Bitcoin spot ETFs, that have sparked the curiosity of the “traditional finance” world towards crypto as a new asset class, we believe that the launch of BlackRock’s BUIDL have reinforced the interest of the same institutions in the practical application of blockchains for their businesses.

Private Market Commentary

Global fundraising in April totaled around $935 million - out of which 35% were raised by two alternative layer 1 networks: Monad ($225 million) and Berachain ($100 million). This is once again a clear signal towards the perceived value and popularity of infrastructure projects inside the crypto industry - something our internal data further reaffirms.

Out of the 143 deals we saw in April, 23% were infrastructure projects, with “finance” being the only vertical that had a bigger share with 35%.

Startups inside other verticals currently attract large amounts of capital as well - especially when it comes to Crypto and AI.

Despite relatively low traction, the valuations of those companies are constantly trending upwards.

Why is that?

Well, compared to other sectors, where established players already dominate their respective markets, Crypto and AI still have to find their category leaders. The sole chance to get a piece of the next Uniswap (at the intersection of crypto and AI) is what leads investors to increasingly write bigger cheques. The sole chance to get a piece of the market leader in such a promising vertical is what leads investors to increasingly write bigger cheques.

Nevertheless, we are still operating in reasonable trajectories when it comes to the valuation of individual rounds.

Outlook

Drawing from the data of recent months, our private market outlook for the upcoming months remains optimistic. Especially because the amount, and most importantly the quality, of projects we see on our desks is constantly trending upwards. Yet, in the public markets, we see ongoing uncertainty in the near future.

Blockwall Portfolio Update

While we haven’t announced any new closings in April, other noteworthy developments occurred within several of our portfolio companies.

First, community engagement platform Zealy announced their “Zealy Creators Program”, where creators get the chance to gain free access to Zealy forever, get visibility on the company’s homepage reaching millions worldwide, and close exclusive brand deals. Here you can find out more.

Staex, a company building out infrastructure for the Internet of Things (IoT), announced their partnership with Germandrones GmbH, a leading developer of unmanned aerial systems (UAS). Together, both companies want to showcase the seamless integration of drone operations and online machine-to-machine payments. You can find the whole announcement here.

Besides that, Validation Cloud, a leading web3 infrastructure provider, introduced a new feature on their staking platform, that allows its customers to stake their assets across multiple networks like EigenLayer, dYdX and Aptos.

Last but not least, identity management platform Spherity’s Battery Passport Management Solution is now officially certified by Catena-X, making them the first certified provider in the data ecosystem of the European automotive industry.

Key events of the last few weeks

1/ Circle integrates BlackRock’s BUIDL token. Using a new smart contract functionality, BUIDL token holders are now able to seamlessly exchange their tokens for the U.S. stablecoin USDC. (Source: Business Wire)

2/ Stripe announces stablecoin payments. After a 6-year hiatus, the payment company will integrate stablecoin payments via USDC on the Ethereum, Solana, and Polygon network. The new feature will be rolled out in the coming months. (Source: TechCrunch)

3/ U.S. Senate introduces new stablecoin bill. According to the proposal, U.S. Senators Cynthia Lummis and Kirsten Gillibrand want to ban the issuance of algorithmic stablecoins and require issuers to fully back their tokens with cash or cash equivalent reserves. (Source: Forbes)

4/ Worldcoin announces World Chain. According to the announcement, the upcoming Ethereum layer 2 is aimed primarily at verified Worldcoin users, who should not only benefit from cheaper transaction fees, but also from shorter transaction processing times - at the expense of non-verified users and bots. (Source: Worldcoin)

5/ Telegram integrates free USDT payments. Telegram users can now send the U.S. stablecoin USDT to their contacts via the messaging service's wallet. The transfer is completely free and is processed via the TON network, a Telegram-focused layer 1 blockchain. (Source: CNBC)

What we’ve been reading

1. Chris Dixon: How bad policy favors memes over matter
   In his newest piece, Chris Dixon elaborates on how the current state of crypto regulation in the US hinders the creation of productive blockchain assets - promoting the creation of memecoins instead.

2. a16z crypto: Token Launch Playbook
   In four extensive blog posts, the team from a16z crypto provides web3 companies with a precise framework on how to launch a token. Feel free to have a look on Dominic’s LinkedIn post regarding his favorite pieces of advice.

3. Coinbase & Glassnode: Guide to Crypto Markets Q2 2024
   Together with the data analysis platform Glassnode, Coinbase provides comprehensive insights on the most important key figures and trends for institutional investors.

4. Placeholder: Onchain Finance Is Thriving - What’s next?
   In this blog post Mario Laul from venture capital firm Placeholder provides some insights into the current state of onchain finance and shares his thoughts about what kind of other crypto applications could see significant traction in the future.

PS: We have an exciting internship opportunity available at Blockwall, as we’re currently searching for a Visiting Investment Analyst. See here for a detailed overview of the position. If you have any candidate you would like to recommend, please send an email directly to jobs@blockwall.capital