Dear Founders, Investors, and Friends,
Let’s have a look at what happened in the past month.
Besides the fact that BTC broke it's All-Time High before the Halving - for the first time in the asset’s history - the past few weeks have been dominated by technological as well as regulatory developments in the industry.
Let’s unpack them.
Ethereum: A true roller coaster ride
March was an exceptionally complicated month for Ethereum.
After the record-breaking performance of the Bitcoin ETFs, investors were optimistic about the approval of the Ether ETF in late May - so that, in the first days of March, Bloomberg analysts assigned a probability of around 70% of it going through.
In the course of the last weeks, this probability shrank to approximately 25%.
There are several reasons for this.
Besides a lack of communication between the applicants and the SEC, the latter seems to actively plan to classify ETH as a security, according to reports made by Fortune.
The plan stands in opposition to the view of other organizations like the CFTC, which is known to classify ETH as a commodity.
Nevertheless, that hasn’t stopped asset managers like Fidelity from updating their application to include ETH staking, or Bitwise to submit an application including a very detailed correlation analysis between ETH spot and futures prices at the NYSE - thereby supporting the case for an approval. Back in January, the same analysis was a key argument used by the SEC for the approval of the Bitcoin ETFs.
While ETH’s performance obviously suffered from the negative sentiment around the ETFs, further reinforced by a multi-year low compared to BTC, the Ethereum tech stack saw major improvements as well as continued adoption.
BlackRock BUIDL - A New Era for Asset Tokenization?
Together with the tokenization platform Securitize, the world's largest asset manager launched the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) - its first ever tokenized money market fund.
The fund is backed by a mix of cash reserves, US treasuries and overnight repos.
Whitelisted investors, who right now primarily consist of already ‘crypto-native’ players like onchain funds or DAO treasuries, initially need to contribute at least $5 million to invest, with plans to lower the minimum investment to $100,000 over time.
In exchange, they receive BUIDL tokens. The value of these tokens aims to be pegged to the US dollar, with BUIDL holders earning interest from the fund through monthly token distributions.
Interestingly, the blockchain of choice wasn't some private or high-throughput network but the Ethereum Mainnet itself - something that surely can be attributed to the network's liquidity and security.
Over the course of three weeks, the fund attracted around $280 million in assets, positioning it as the second largest offering in its category, just behind the product from Franklin Templeton.
The signals sent out by the launch of BUIDL are twofold.
First, the success of this initiative will likely drive other asset managers to develop their own tokenization strategies over time.
Additionally, the decision to launch the fund on Ethereum could initiate an interesting trend reversal. Whereas the bulk of previous tokenization initiatives was conducted on private blockchains, BlackRocks advance could encourage them to carry out their future tokenization initiatives on open and permissionless infrastructure.
Dencun Upgrade & New Rollup Economics
But besides that, the most important development for Ethereum was the successful implementation of the long-awaited Dencun Upgrade.
The upgrade saw the implementation of EIP-4844, which introduced 'Blobs' as a new data type. 'Blobs' permits Layer-2s to efficiently post their transaction data to Ethereum, avoiding the competition for blockspace with applications on the Layer-1, and thereby reducing the associated costs by an order of magnitude.
This drastically enhances the user experience on Ethereum's Layer-2s, demonstrates the network's potential for sufficient scaling, and also opens the door to new applications and business models within its ecosystem.
At first, gas fees on Ethereum Rollups declined significantly.
This, in turn, led to an increase in overall onchain activity on Ethereum Layer-2s.
A perfect illustration of the ‘Rebound effect’, where the increase in efficiency with which a resource is used, in this case blockspace, tends to increase the overall consumption of that resource - thus partly canceling out the original savings.
Although transaction fees have risen ever since, users still enjoy sub-10-cent fees across major Ethereum Layer-2s.
Now, the fact that Rollups need to pay less to Ethereum, combined with higher network activity and therefore increased overall revenues, leads to higher profitability for the Layer-2s.
As one can see, the greatest beneficiary of those dynamics is Coinbase’s Layer-2 Base.
Ever since the upgrade, the network experienced extraordinary growth in user activity, which can be attributed to the exchange’s more than 100 million users and their stated goal to bring more of them onchain. Based on transaction fees collected, Coinbase was able to generate as much as $10 million in profit in a single week.
It’s difficult to say whether Wall Street analysts are aware of Coinbase's earning potential.
What can be said, however, is that other companies and institutions featuring a similar distribution could also consider setting up their own rollups given these numbers.
Coinbase continues legal battle with SEC
Apart from the good news, the exchange also made rather negative headlines on the regulatory front, as a New York court ruled against Coinbase’s “Motion to Dismiss” in their ongoing lawsuit with the SEC.
But what seems to be a loss on the surface, actually wasn’t that big of a setback. First of all, most of those motions are getting rejected. Second, the ruling concluded that the offering of the Coinbase Wallet wasn’t enough to classify the exchange as an unregistered broker, which signifies a huge win for self-custodial crypto wallet providers.
Ultimately, the ruling means that we will see a potentially year-long litigation process between Coinbase and the SEC - and probably one of the more important ones for the digital assets industry.
Private Markets Update
As we anticipated in our last letter, the private markets picked up steam in March.
The amount raised in recent weeks more than doubled compared to the approximate $480 million in February, reaching $1 billion.
When taking a look at the entire first quarter, a total of $2.5 billion was raised in funding rounds, according to PitchBook data. This represents a 25% increase over the $2 billion recorded in the fourth quarter of 2023.
“Crypto x AI” and privacy enhancing technologies, like Zero-Knowledge- or FHE-based protocols, seem to be the hottest verticals right now - although some of the valuations we are seeing there, especially at the intersection of Blockchain and AI, can be considered a bit “over-optimistic”, given how early we are in the cycle.
Outlook
Over the upcoming weeks, Bitcoin once again will capture everyone's attention.
The upcoming halving, which will take place around April 20th, will not only be followed by active market participants, but will also attract the attention of the general public, reinforced by extensive coverage in mainstream media.
Continued inflows into BTC through the ETFs, combined with the reduced issuance might indeed result in a supply shock for Bitcoin, leading to a "a rising tide lifts all boats" kind of situation for the broader crypto markets. Because of that, crypto venture will surely continue to heat up - additionally bolstered by the projected rate cuts in the U.S. ahead of the upcoming presidential election.
Blockwall Portfolio Update
Regarding our own portfolio, we are thrilled to announce that we have taken the lead in the €2.5 million funding round of Spherity.
The company is a leading enterprise solutions provider in the decentralized digital identity domain, offering secure, blockchain-agnostic identity services for businesses, particularly within regulated industries.
In a dedicated blog post our investment manager Syed Armani dove deeper into the “Why” behind our investment in Spherity.
If you’re eager to find out more about the “Why” behind our investment in Spherity, we really recommend the dedicated blog post by our investment manager Syed Armani.
Key events of the last few weeks
- Sam Bankman-Fried is sentenced to 25 years in prison.
The sentence is well below the 40 to 50 years that the US Federal Prosecutor's Office demanded for the FTX founder. Back in November the jurors found him guilty on seven counts of fraud and conspiracy. (Source: CNN) - Fetch.ai, Ocean Protocol and SingularityNET join forces to form the Superintelligence Alliance.
Together, the three projects (two of which, Fetch.ai and Ocean Protocol, are part of Blockwall’s portfolio) want to advance the decentralization of AI. As part of the partnership, the protocols' native tokens will be merged into a new $ASI token. (Source: Fetch.ai) - Nick Van Eck launches own Stablecoin
Nick Van Eck, the son of investment manager Jan Van Eck, is set to introduce Agora, a new stablecoin backed by cash, US Treasury bills, and overnight repos, with VanEck overseeing the management of Agora’s reserve fund. (Source: Bloomberg) - SWIFT publishes results of its CBDC experiments.
With its technology, the international banking network was able to successfully process CBDC transactions between 38 leading financial institutions across various payment networks. (Source: Source: SWIFT) - Ripple announces its own Stablecoin.
The company aims to launch its own US Stablecoin by year's end, which should be deployed on both Ripple and Ethereum. According to the announcement, Ripple's introduction of a Stablecoin primarily seeks to kick-start its nascent DeFi ecosystem, which is intended to eventually open up to institutions. (Source: Source: Financial Times)
What we’ve been reading
Travis Kling, CIO of Ikigai Asset Management, explains the idea behind the concept of 'Financial Nihilism', why particularly young people are taking increasingly greater risks while investing, and how this dynamic affects the crypto markets as well as his investment thesis for the upcoming bull run.
Shayon Sengupta, Investment Partner at Multicoin Capital, discusses how the internet-native, seamless exchange of value across blockchain networks can advance the financialization of attention and thus lead to the emergence of entirely new internet platforms - the so-called 'Publisher-Exchanges'.
In the first part on the 'State of Wallets,' Coinbase Ventures highlights the latest technological developments of Web3 wallets, how the trend is moving from traditional self-custodial wallets to embedded wallets, and why wallets could lead to crypto's 'iPhone moment' over the coming years.
In their very first annual crypto compensation report Dragonfly Capital took a look at their own portfolio companies and showed how compensation approaches differ across geographies, verticals and company sizes. See Dominic’s LinkedIn post for the most important insights.
In this blog post, Rex Woodbury from the venture capital firm Daybreak explains what structural transformation the venture capital industry has undergone during the COVID era and how he envisions this trend to reverse in the near future - thereby returning to the initial principles of venture capital.
Disclaimer
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