Weekly Top Stories - 10/18

This week in the newsletter, we discuss a renewed sense of optimism in markets, the commencement of the token sale for Trump's DeFi project, World Liberty Financial, and a new battle royale video game with NFTs on Avalanche that is doing big numbers.

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Election Politics, Macro Push Bitcoin Higher

Bitcoin is up 15% over the last 7 days and Ether is up 6.1% as a broad market rally sees total market cap rise $210bn over the last 7 days. Bitcoin is trading at $67.8k at the time of writing, up 15.5% WoW from last Thursday when it traded as low as $58.7k. BTCUSD seemed to break out of a monthslong descending channel early in the week, and it has held those gains and appears to have turned a descending resistance into support.

The biggest lift came Monday, with BTC rising almost 6%, driven partially by reports of positive comments on crypto from Vice President Kamala Harris, which later materialized in a speech and campaign materials. On Monday, Harris unveiled a plan focused on the needs of black men, including providing forgivable business loans to black entrepreneurs, studying diseases that disproportionately affect African American men, and pledging to support a regulatory framework for cryptocurrency, which her campaign said 20% of black men own or have owned. A graphic Harris tweeted specifically listed the bullet "protect cryptocurrency investments so Black men who make them know their money is safe" under a list of priorities, while her website says her administration will "support a regulatory framework for cryptocurrency and other digital assets so Black men who invest in and own these assets are protected."

On the other side, Trump seemed to be gaining steam. RealClearPolitics' (RCP) "No Toss up Map," which assumes the current RCP state-by-state polls hold on election day, currently shows Trump winning the electoral college 312-226. Trump is heavily favored on prediction markets, with Polymarket showing Trump as a 61% favorite, though some analysts have noted heavy betting in Trump's favor by a small number of whales. Bettors on Kalshi, the non-crypto prediction market that recently won a federal court case against the CFTC to allow it to list political even markets, have Trump winning the electoral college 291-247 at the time of writing.

Several other factors have been supportive of a rising Bitcoin price, including rising gold prices (+3% this week), a rising global M2 money supply, and the resolution of many Bitcoin supply overhangs, most recently with the U.S. Marshals acknowledging that Bitfinex is likely the only claim holder to the BTC recovered from Razzlekhan and a pushback of the deadline to repay remaining Mt. Gox creditors by 1 year. The Bitcoin ETFs have seen more than $2bn in net inflows over the last 5 trading days, which is near what physical gold ETFs have taken in over the past year.

OUR TAKE:

While Harris's mention of cryptocurrency, the first time we can find that she's used this word (previous mentions had said "digital assets" or "blockchain"), came in the context of a plea to a specific voter bloc, the outreach did not go unnoticed within the cryptocurrency community. Trump remains a steadfast supporter, even launching his token sale this week (see the story below). Earlier this week, I tweeted our Crypto Policy Scorecard, which we included in a private note to Galaxy clients and counterparties a week ago and which rates the Biden administration against the Harris and Trump campaigns on various crypto political issues. The key takeaway here is that, while Trump is undoubtedly the more favorable candidate issue-by-issue for crypto-only voters, Harris is likely to be meaningfully better for the industry than the Biden administration has been. Crypto has come a long way and the two leading contenders in the U.S. presidential race range from tepid support to full-throated advocate. This has helped give markets a lift, particularly bitcoin, which is less dependent on a change in U.S. regulatory posture to succeed than altcoins, which are likely to see outsized benefits from a Trump victory.

The world's central banks have mostly embarked on simultaneous easing, leading to increased liquidity and higher risk appetite, with the European Central Bank cutting by a quarter point Thursday. Markets are eyeing economic and inflation data for hints as to both the direction and magnitude of central bank rates activity, and geopolitical tensions also remain high on the list of risks to markets.

All in all, though, the setup for BTCUSD looks pretty strong regardless of the election outcome. Seasonality and cyclicality are both supportive, with BTCUSD entering its strongest time of the year and trading in line with past post-halving and from-the-lows cycle performance. The policy outlook for altcoins is also improving modestly as Harris takes a more conciliatory stance. At the moment, it appears that absent a Democratic sweep, it's very possible that BTCUSD will make fresh highs after the election, if not sooner. It's worth remembering, though, that given about -18% of cumulative loss in purchasing power over the last 3 years, Bitcoin's 2024 "all-time high" of $73.8k should feel like $63.7k in 2021 dollars. In that sense, we haven't even hit a new all-time high yet. - Alex Thorn

Trump's DeFi Protocol World Liberty Financial Opens Token Sale

The Trump-affiliated DeFi protocol, World Liberty Financial, commenced its token launch on Tuesday, not with a bang, but a whimper. World Liberty Financial, a continuation of the aborted Dough Finance Protocol exploited earlier this year, launched with an initial token supply of 100bn, with 20% of that up for sale at $0.015 for a target raise of $300mm and a $1.5bn valuation. It was an irregular launch, where, unlike other ICOs, there was no auction methodology for price discovery, the team picked a valuation and did a direct offering to KYC'd market participants at that price. This backfired, with only $12mm raised of the $300mm target as of the time of writing.

The market's response suggests that the launch may have been premature, and the facts line up with that narrative. World Liberty Financial hasn't secured the licensing it needs to launch its protocol. WLFI posted a proposal on the Aave forums on October 9th looking to license Aave V3 for their implementation. The temp check response has been tepid, and the conversation hasn't progressed to a formal vote as of yet. The World Liberty Financial website also fell prey to a heavy traffic load on launch, going down for a couple of hours, leading to a pause in the mints. While not unusual, this does show a relative unsophistication of the buyers of the token launch, as no one was able (or incentivized enough) to execute the purchases directly onchain with the webpage down.

While demand for tokens has been lackluster, more details on the tokenomics of the project did emerge with the release of a "gold paper." As described, there is explicitly no value accrual to the token, no ownership rights to the protocol or code, and it is purely a governance token for the as-yet unlaunched protocol. The interesting tidbits come from the delineation of the sale proceeds and protocol revenue. The first $30mm raised through the sale or protocol revenue goes directly to the WLFI treasury as a war chest and for continuing operations. Of every dollar raised beyond $30mm, 75% goes directly to DT Markets DEFI LLC, Donald Trump's new DeFi Organization, and the remaining 25% goes to Axiom Management Group, run by Chase Herro and Zach Folkman, the principals from Dough Finance. According to the paper, the same revenue split exists for all protocol revenue above operating expenses in perpetuity.

OUR TAKE:

WLFI is more of an idea than a protocol. It's a governance token that has no value accrual for a project that doesn't yet exist. Details were scant leading up to the protocol launch and they remain so now. There has been no code released, no detailed project plan, just broad strokes of what the team plans to do with the project. The project's key dependencies are not guaranteed, with the Aave licensing still in the air, and the market is not convinced of the protocol's future even with crypto's tendency to lean more Republican (see Polymarket vs fivethirtyeight). We were skeptical of the project in the lead-up to this, and what we saw this week was not unexpected. - Thad Pinakiewicz

Web 3 Battle Royale Game Ranks First on Epic Games Store

Avalanche Subnet-based video game, Off the Grid, reached the top rank on the Epic Games store this week. Developed by Gunzilla Games, the cyberpunk-themed battle royale game features PVE (player versus environment) and PVP (player versus player) gameplay with AAA graphics and features a marketplace and in-game rewards powered by the GUNZ blockchain and token. Aside from the crypto features, the game is not unlike Call of Duty: Warzone. In the game, users compete to earn these rewards, which include skins and GUN (the currency powering the game's economy), which can be used to upgrade their characters, trade with other players, and buy in-game content.

The game's ascent to the number one spot on the Epic Games store is a major feat, as it competes with well-known and established video games like Fortnite, Rocket League, and EA Sports games. It was also able to reach the top spot while still in "early access," meaning its full gameplay and capabilities have yet to be rolled out. Notable creators in the gaming world have taken notice of Off the Grid, with Ninja and Dr. Disrespect streaming their gameplay.

OUR TAKE:

Off the Grid is a differentiated implementation of blockchain technology within a video game. Unlike previous iterations of blockchain-based video games, the game itself exists offchain with in-game elements being onchain as ERC-20 tokens and non-fungible tokens (NFTs). In the game, users receive the GUN token, which is an ERC-20, and NFTs as rewards at the end of each battle royale. They can then use the GUN token to unwrap, or claim, their NFT rewards or buy other content in the game which exists as onchain tokens. In this case, the blockchain is just validating and accounting for the state, distribution, and transactions of rewards, skins, and the like, instead of the state of the game itself or the player actions within it. The issue with the latter approach is the actions of the game are constrained by the underlying blockchain, as every move made by players must invoke an onchain action that is then executed and verified. This has been a hindrance to the adoption of previous onchain video games. Off the Grid's angle to the intersection of blockchains and video games lifts these limitations by allowing the developers to build an ordinary video game, while backing up the marketplace and "transactable" actions to a blockchain.

This approach also improves upon existing in-game marketplace architecture by making rewards and collectibles transferable and tradable between players. Most video games that exist today have limited transactability of rewards and collectibles and lack any market dynamic of in-game earnings. This brings an additional differentiating factor to the gameplay of Off the Grid and introduces the possibility of improving transactions downstream of the game itself (e.g. payments to content creators and onboarding fiat for in-game purchases). - Zack Pokorny

Charts of the Week

Uniswap Labs announced the introduction of Unichain on Thursday, October 10, 2024. Unichain, which was developed by a collaborative effort between Uniswap Labs, Flashbots, and Optimism, is an Ethereum Layer 2 (L2) built on the OP Stack and existing in the Superchain ecosystem. It is intended to serve as the liquidity hub for Ethereum's network of roll ups supporting native interoperability between other OP chains and ERC-7683, intent standard for cross-chain trade execution systems. The chain will also feature a decentralized validator network to add a layer of finality and reduce the risk of conflicting or invalid blocks, cheap fees, and, eventually, 250 milliseconds (ms) blocktimes.

The question around Unichain is if it will cannibalize liquidity and activity from Uniswap on Ethereum Layer 1 (L1) and/or dexes on other L2s (both OP and non-OP chains), or if it will generate entirely new demand given its unique architecture and mission. As part of the Superchain, Unichain will have native interoperability built in, allowing for single-block, cross-chain message passing among Superchain L2s; the implementation of ERC-7683 will introduce similar cross-chain user experiences (UX) between Unichain and any other blockchain as well. This allows Uniswap to better meet users where they are, which today is on Ethereum L2s and alternative L2s, with a central pool of liquidity on Unichain.

This can possibly have outsized consequences on Ethereum L1, whose fee generation and gas burn are heavily reliant on Uniswap activity. Today, Uniswap is responsible for 57% of Ethereum's total revenue (base fees plus priority fees) and 48% of all ETH burned daily. As a result, the impact of even a portion of Uniswap activity on Ethereum L1 leaving for Unichain can have outsized consequences for Ethereum validator revenues and ETH burns.

Global M2 money supply is rising worldwide. The chart below shows the aggregate of the world's four largest currencies: USD, JPY, EUR, and CNY. Prior growth in M2 has coincided with rising BTCUSD.

The Bitcoin ETFs have seen $2bn in net inflows over the last 5 trading days. Monday, October 14, saw the largest net inflow into the Bitcoin ETFs since June 4, 2024.

Other News

• Tesla moves $760m BTC, though onchain analysis suggests not selling

• FBI arrests suspect in SEC Twitter hack that pumped bitcoin during ETF approval week

• Mt. Gox postpones the deadline for remaining repayments into 2025

• CFTC appeals ruling that allowed prediction market Kalshi to launch political event markets

• Robinhood targets seasoned traders with bitcoin futures, new desktop platform

• Radiant Capital exploited for $50 million across BNB Chain, Arbitrum

• Kraken launches its own wrapped bitcoin token kBTC

• Securitize launches USDC conversions for BlackRock's Digital Liquidity Fund

• Coinbase is ending the direct crypto paycheck feature, and new wallet integration is in the works

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