Dear Founders, Investors, and Friends,
We believe it's fair to say that we are currently navigating the so-called 'summer lull', a period known for its subdued market activity.
Nevertheless, many significant technical as well as regulatory developments took place throughout last month - the most important of which we want to discuss with you in detail.
Bitcoin Under Pressure
In June, Bitcoin (BTC) fell from around $71,000 to almost $58,000. This was primarily due to increased selling pressure from various market participants.
The German Government began liquidating a portion of its Bitcoin holdings, worth around $3 billion, which the state's federal criminal police office seized from the operators of the piracy website Movie2k. To date, nearly $170 million of these assets have been transferred to crypto exchanges.
In addition to that, Bitcoin wallets from the U.S. government also started to make some moves and sent around $252 million to exchanges.
Furthermore, Bitcoin miners sold more than $200 million worth of their BTC reserves: On the one hand, to cover their operating expenses, as the miner's revenues decreased sharply following the Bitcoin halving, and on the other hand, to establish new sources of revenue in the area of artificial intelligence.
Instead of mitigating the selling pressure, Bitcoin ETFs contributed to it with outflows totaling approximately $1 billion over the month.
In July, the market is still afraid of a major sell-off, as re-payments to the Mt. Gox creditors are scheduled to begin this month, bringing BTC worth around $9 billion onto the market. But according to Alex Thorn, the Head of Research at Galaxy, the worries are unfounded. He argues that those who intended to sell their claims before the actual payout have likely already done so, while the remaining holders are long-term investors who are unlikely to immediately offload all their holdings. Consequently, the pressure on BTC is expected to be lower than anticipated.
While Bitcoin had a difficult month, Ethereum, on the other hand, showed some relative strength.
Ethereum ETF Update
On the one hand, it could be because the SEC has stopped its investigation into ‘Ethereum 2.0’ and thus indirectly, once again, confirmed ETH's status as a commodity. Second, the markets likely are pricing in the Ether ETF launch, which, according to the Bloomberg ETF expert Eric Balchunas, will probably start trading between the middle and end of July.
To date, only two issuers have officially announced the fees for their ETFs. First, Franklin Templeton set its fee at 0.19%. Subsequently, VanEck announced that their ETF will not incur any fees until 2025 or until the fund reaches $1.5 billion in assets under management.
Meanwhile, some experts reason about the actual inflows we could witness following the launch of these products.
Matt Hougan, CIO of Bitwise, for example, expects that the ETFs will attract $15 billion in net flows in their first 18 months on the market. Interestingly, this estimate would correspond to the net flows of the Bitcoin ETFs in the last six months.
In order to help those figures to materialize, the company published a brilliant ad campaign that showcases Ethereum’s value proposition in contrast to ‘Big Finance’.
Solana Ecosystem Update
In the last week of June, all eyes were on Solana.
ZK Compression
(“ZK stands for zero-knowledge. Zero-knowledge proofs. With a zero-knowledge proof I can prove to you that I have certain data without revealing the data itself.”)
First, two infrastructure providers from the ecosystem presented ZK Compression, a new technology that is intended to make the Solana network even more scalable.
While the computing costs (the costs of executing transactions) on Solana are relatively low and get continually reduced through regular upgrades, data storage costs are comparatively high.
Unlike Ethereum, where developers only need to pay a one-time gas fee to deploy their smart contracts and users pay for all subsequent interactions, Solana operates on a rent system. Here, app developers must regularly pay fees (rent) for the storage space (state) their applications use, with the cost increasing based on the amount of space occupied.
By leveraging Zero-Knowledge cryptography, developers utilizing ZK Compression will no longer need to keep all relevant application data onchain - without impacting the network's performance or security.
The result? Drastically lowered storage costs.
As per the announcement, using ZK Compression reduces the cost of an airdrop to 1 million users to just $50, instead of $260,000.
A massive unlock for all Solana developers.
Still, some criticize the technology as it introduces dependencies on external infrastructure-providers, who are responsible for storing data offchain. Time will tell if and how this might impact the appeal of building on top of ZK Compression. Currently, the upgrade is only live on the testnet, while the timeline for a mainnet rollout remains unclear.
Solana Blinks
This announcement has taken the entire crypto industry by storm.
A new suite of developer tools, namely Solana Actions and Blockchain Links (Blinks), allow Solana applications to be embedded on practically every website by simply sharing a link.
This, for example, enables users to trade tokens, stake SOL, or mint NFTs through their social feed on X without having to leave the platform, bringing Solana apps to where the consumers are.
In the coming weeks, platforms like Reddit and Discord will also be supported, effectively turning them into interfaces and distribution channels for Solana applications. However, it should be mentioned that users must have a Solana wallet installed in order to interact with Blinks. Nevertheless, it's great to see that the concept behind 'Frames' (introduced by the Ethereum-based social media protocol Farcaster at the beginning of the year) got adopted and advanced by another ecosystem.
This kind of innovation is crucial to onboard more people into web3.
Solana Spot ETF
Out of the blue, VanEck filed a Solana ETF application with the SEC, becoming the first U.S. asset manager to do so.
Although many observers currently give the application little chance of approval, VanEck’s Head of Research Matthew Sigel confirmed that the application is primarily a bet on Donald Trump's possible election win.
If all the necessary forms are filed timely, the deadline for a final decision would expire in March 2025. By then, Trump, if elected, will be in office, increasing the odds for an approval.
Until now, 21shares is the only issuer who followed VanEck’s call.
We are really looking forward to seeing how this strategy will play out in the coming months.
Regulatory Update
Just before the end of the month, significant rulings were issued in U.S. courts that could have significant long-term implications for the country's crypto regulation.
SEC sues Consensys
The SEC has officially charged Consensys, the developer behind the popular MetaMask wallet, with violations of securities laws.
According to the SEC, Consensys acted as an unregistered broker through its MetaMask Swaps feature, enabling users to trade tokens directly within the wallet via decentralized exchanges. This feature allegedly facilitated the trading of thousands of securities and generated over $250 million in fees. Furthermore, the SEC's charges extend to Consensys' involvement with Liquid Staking protocols like Lido and RocketPool. The SEC views these protocols as issuers of securities in the form of Liquid Staking Tokens. Since MetaMask provides users access to these services, Consensys is also accused of acting as an unregistered broker via its staking product.
Some experts find it puzzling that the SEC is targeting MetaMask's Swaps feature, especially given that a similar charge was recently dismissed in the SEC's legal dispute with Coinbase.
Binance vs. SEC
In the ongoing legal battle between Binance and the SEC, U.S. District Judge Jackson dismissed several charges, including the SEC's claim that secondary sales of Binance’s BNB token should automatically be classified as securities.
Judge Jackson referenced Judge Torres’ ruling from the Ripple case, stating that the economic reality of each transaction determines whether it constitutes an investment contract and if the underlying token is a security.
The ruling was well-received by legal experts in the crypto industry, as it challenges the SEC's broad approach to classifying cryptocurrencies as securities. This decision is particularly significant for companies like Coinbase, Robinhood, and Uniswap, which are also facing legal battles with the SEC.
SCOTUS overturns ‘Chevron Doctrine’
The U.S. Supreme Court voted 6-3 to overturn the 40-year-old Chevron Doctrine. In essence, this doctrine required courts to defer to administrative agencies' interpretations of ambiguous laws if deemed reasonable. The ruling has broad cross-industry effects and was also welcomed in the crypto industry, where the SEC has been criticized for exploiting the lack of clear regulatory guidelines.
However, the doctrine’s overturn seems not to affect the classification of tokens as securities, which is determined by the judicially established Howey Test, not the agency’s interpretation.
But whether with or without Chevron - there is no way around a clear regulatory framework for the growth of the crypto industry.
The upcoming months and years will reveal whether MiCA, partially implemented on June 30th, will therefore enhance Europe's appeal as a hub for crypto companies and maybe even attract some U.S. companies to relocate.
VC Market and Portfolio Update
Per Galaxy Digital’s Q2 Crypto VC report, deal count decreased slightly from 603 in Q1 to 577 in Q2, while capital deployed increased from $2.5bn to $3.2bn.
The increase in capital deployed with a lower deal count is caused mainly by an increase in valuation. Galaxy reported a valuation median of $37m compared to $19m in the previous quarter. We believe this to be driven by many founders adding tokens to their businesses, in order to capitalize on the strong investor demand for token deals since January, even though in our opinion it does not always make sense from a long term business perspective.
Valuations for token rounds are higher compared to equity rounds due to 1) historic returns of token deals like Ethereum, Solana, Uniswap, etc leading to investors being willing to pay higher prices and 2) due to a smaller number of follow-on rounds and early liquidity events. For equity and token deals however, competition at the early stages has increased. In addition, Web3 has a general premium compared to traditional SaaS businesses. Investors are generally more willing to accept a higher valuation (at lower traction), as category leaders have not yet been formed in many market segments.
We continue to focus on identifying and supporting fundamentally strong equity business models with our fund 2 (in comparison to our fund 1 which was token only). We have actively screened 427 new deals in Q2. In terms of new investments, we closed one deal, have 2 deals in closing, and have committed to another deal where we are currently finalizing the details. With several deals additionally under diligence, we expect to close further investments in Q3.
Key events of the last few weeks
1/ Tether announces gold-backed stablecoin. aUSDT is over-collateralized by Tether’s tokenized gold token (XAUt), which is supported by real physical gold stored in Switzerland. According to the announcement, aUSDT is the first of many 'tethered assets' to be created on Tether's soon-to-launch tokenization platform. (Source: Tether)
2/ Fox Corporation launches its own Layer-2 network. Through 'Verify,' media companies can register their content and grant usage rights, while consumers can authenticate the origin of this content. TIME Magazine is among the first to adopt this platform. (Source: The Block)
3/ Coinbase and Stripe announce partnership. Users will soon be able to purchase USDC on the Base Layer-2 network via Stripe's onramp. In return, the onramp will be integrated into the Coinbase Wallet. (Source: Coinbase)
4/ Circle receives EMI license from French authorities. This makes Circle the first global stablecoin issuer authorized to issue its USD and EUR stablecoins under EU’s new MiCA regulation. (Source: Circle)
5/ Paradigm introduces a new Ethereum execution client. By using Rust as the underlying programming language, 'Reth' is said to be the most performance-efficient client to date. With the new software, the research and investment company primarily wants to significantly increase the transaction throughput on Ethereum's layer 2 networks. (Source: Paradigm)
What we’ve been reading
In its latest report, Coinbase uses 10 charts to spotlight notable developments in the crypto industry over the past six months. Highlights include the growth of Total Value Locked (TVL) across various blockchain networks, the economics of Ethereum layer-2 solutions post-Dencun upgrade, and an analysis of capital flows into Bitcoin ETFs. Feel free to take a look at Dominic’s ‘summary’ for the most important figures.
Together, Coinbase and The Block examine the increasing adoption and the optimistic outlook of important decision makers towards blockchain technology among Fortune 500 companies. See Dominic’s LinkedIn post for a brief overview.
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