A monthly review of what's happening in the crypto markets enriched with institutional research on the most important topics in the industry in cooperation with the Swiss digital asset specialist, 21Shares AG.
March was a month packed with macro headwinds. The systemic contagion risk in the banking sector, instigated by the collapse of the 16th largest lender in the US, sent the crypto market cap in the opposite direction touching $1.2T in market value. Even with the regulatory crackdown on Coinbase and Binance in the US, the total crypto market cap increased by 10.83%. As shown in Figure 1, Bitcoin was the outlier this month, increasing by 20.66%, while Ethereum increased by 9.62%. Metis and Maker suffered the most from last month’s rally, decreasing by 23.15% and 25.76%, respectively.
Macro and regulations
Systemic risk spread worldwide, emphasizing the message the crypto industry has been carrying since 2009, inspired by the Great Financial Crisis. For the first time since 2020, the central banks of the US, Canada, England, Japan, Europe, and Switzerland announced that they would enable USD swap lines from once a week to daily, from March 20 to at least through the end of April. The move was nothing other than a tactic to contain the contagion that spread quickly to Credit Suisse after Silvergate, Silicon Valley, and Signature banks fell under the control of the US government, which added $300B to its balance sheet to make all depositors of the financial crisis whole. The Swiss National Bank brokered a deal between Credit Suisse and UBS, but investors are still worried as selling pressures intensified on Deutsche Bank, the largest bank in Europe’s largest economy.
The price performance between Bitcoin and the stocks of the banks in question shows the distinction between the confidence in the banking system as opposed to Bitcoin. We are still seeing crypto adoption from icons of traditional finance like Nasdaq, which is eyeing crypto custody and aims to launch by the end of Q2. In its earnings report, Microstrategy disclosed that it had paid off its $205M loan to Silvergate and bought 6,455 BTC over the past month. This ties in with our thesis that Bitcoin could act as a hedge against monetary debacles in the long run, thanks to its scarce and decentralized nature.
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In light of the ongoing crackdown on unregistered securities, Coinbase published a petition for rulemaking that argues that core staking services are software services, not investment contracts. The Securities and Exchange Commission (SEC) issued a Wells Notice to Coinbase. The SEC isn’t interested in the technicalities. In its view, staking and all cryptoassets, excluding Bitcoin, fulfill the four prongs of the 77-year-old Howey Test:
- The investment of money
- In a common enterprise
- With the reasonable expectation of profits
- Derived from the managerial efforts of others.
On the other hand, the Commodity Futures Trading Commission (CFTC), filed a lawsuit against Binance and its CEO, Changpeng Zhao (CZ), for routinely violating several provisions of the Commodity Exchange Act. According to the complaint, Binance isn’t registered "with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets." The CFTC joined the SEC, Department of Justice, and IRS, in their long standing investigations into Binance.
This recent regulatory overreach brings the US a few steps back as countries like the UAE and Switzerland leap toward crypto adoption. There is so much more that we can look forward to next month, as the European Parliament is set for the final say on Europe’s renowned legislation Markets in Crypto Assets (MiCA) on April 18. MiCA is widely celebrated by both the crypto industry and regulators for its power to protect investors from meltdowns like FTX back in November.
Layer 2 solutions are booming
Polygon and Eclipse collaborated to release a scalability solution focused on the Solana network. Known as Sealevel Virtual Machine (SVM), the solution will come as an optimistic-rollup on top of Polygon allowing developers to leverage Solana's high transaction throughput environment. Further, Polygon’s zkEVM mainnet beta went live on the 27th, while zkSync Era opened to the general public after being restricted to developers only over the past month. Consensys also launched its zkEVM public testnet called Linea.
Arbitrum launched its governance token, ARB, on March 23rd, which will be utilized for steering the development of the Arbitrum One and Nova networks. Like Optimism, gas fees for settling transactions on the mainnet layer will continue to be paid in ETH. The upgrade also introduced Orbit, a platform enabling developers to build Arbitrum-based rollups on top of the network. This move resembles Optimism’s vision of becoming a super chain via their decision to launch OpStack, the platform on which Coinbase recently publicized it’ll build its upcoming ETH scalability solution called Base. That said, Arbitrum leads the scalability race, possessing over 50% of the L2 market share, owing to the fact that it had developed its fraud-proof system at a time when its biggest competitor is still lagging behind.
Ethereum, after running multiple dress rehearsals over the last several months to replicate the processing of withdrawals on ETH testnets, users will finally be able to withdraw their locked assets from the beacon chain on April 12. The ETH core development team has confirmed that the Shapella upgrade will materialize on epoch 194,048, introducing changes to the execution (Shanghai) and consensus layer (Capella).
Decentralized Finance
Three out of the six banks holding USDC reserves collapsed during the second week of March. These included a voluntary wind down from Silvergate, and a takeover of Signature bank and Silicon Valley Bank (SVB) from US financial regulators amid insolvency fears. As Circle disclosed that SVB holds 8% of USDC cash reserves, the USDC stablecoin depegged over the following weekend, reaching an all-time low of 87 cents. US regulators stepped in to protect all depositors of SVB and Signature Bank, and other potentially-affected banks.
Uniswap expanded its operations to two additional smart-contract networks. Uniswap v3 went live on BNB, making use of the wormhole bridge solution during mid-March which was timely since Pancake swap V3 is expected to be deployed live on BNB during the first week of April. The absence of Uniswap would have left a gap for Pancake Swap to continue dominating the alternative L1, which has a current monopoly of 48% . With this expansion, Uniswap will capture a more significant market share and generate more revenue for the blue-chip protocol. At the same time, its capital efficiency can significantly improve liquidity conditions across the network. Uniswap is now also deployed on Avalanche using the LayerZero cross-chain messaging protocol.
Aave held a governance discussion to determine the validity of deploying on Polygon’s upcoming zkEVM network. Although the protocol has been live on Polygon zkEVM testnet since mid-2022, Aave hopes to launch an MVP as soon as Polygon’s mainnet goes live to have a strategic first-mover advantage while offering a limited implementation of the protocol. To that end, Aave’s revenue has been steadily increasing over the past five months, so it is reassuring that the protocol continues to expand to more chains to amplify its presence across the smart-contract ecosystem and cultivate profits.
In addition, the contagion events of the last weeks have prompted users to embrace the on-chain protocols over CEXs, as seen by the surge in fees and protocol earnings shown below. That said, it’s encouraging to see DeFi blue-chip protocols racing to expand to Polygon as the network will rely on critical service providers to power up its financial industry.
Metaverse and NFTs
March hasn’t been great for the metaverse industry, especially in Disney, shutting down its metaverse division and laying off 50 employees as part of staff cuts that promise to reduce headcount by around 7,000 across the company over the next two months. Mark Zuckerberg also seemed to prioritize AI and dump his metaverse ambitions. As the latter proved to have a long sales cycle, given its massive world of untapped use cases, NFTs seem like a closer milestone, with quicker returns on investment.
On March 16, DeGods announced 500 NFTs minted with Bitcoin. According to the Ordinals Theory, a count of 500 one-hundred-millionth of a Bitcoin will carry individual identities allowing them to be tracked, transferred, and imbued with meaning – in this case, an avatar. The flight to Bitcoin seen over the past month, coupled with NFT inscriptions on the network, have all contributed to Bitcoin’s resistance and showcasing the scalability of the network.
