Inflation Cools as Crypto Continues to Build

Macroeconomic indicators in the U.S. came in lower than expected, potentially modifying the trajectory moving forward, signaling interest cate to begin in May. Although Walmart beat expectations by recording 5.2% revenue growth, consumers are behaving more cautiously now and trying to save money, showing that the spending spree is finally coming to an end, which would also help cool down inflation. Crypto futures saw the most liquidations in three months, with ~300M liquidated on November 14, in both long and short positions. Bitcoin increased by 1.18%, while Ethereum fell by 2.02%. The biggest winners of last week’s rally were Avalanche (11.6%), Cardano (7.5% in total value locked), and Maker (5.85% in TVL).

In this report, we’ll break down inflation data announced last week and what it means for crypto. We’ll also discuss how Tether is doubling down on Bitcoin mining in three South American countries, and why Cosmos is exploring amendments to its monetary policy.

Figure 1: Weekly Price and TVL Developments of Cryptoassets in Major Sectors

Source: 21Shares, CoinGecko, DeFi Llama. Close data as of November 21, 2023.

5 Things to Remember in Markets this Week:

Inflation Was Flat in October

The consumer price index (CPI) came lower than expected, increasing by 3.2% year-over-year, however unchanged from last month. On the other hand, retail sales dropped for the first time in seven months by 0.1%, while the production price index (PPI) declined by 0.5%, the sharpest decline in three and a half years. Applications for jobless claims rose by 13K, the most in three months. What do all these figures mean for crypto? This, coupled with slowed consumer spending and a slowing labor market, would all be giving the Federal Reserve a better signal that rate cuts could be put to sleep however Susan Collins, President of the Federal Reserve Bank of Boston, argued otherwise. With the US dollar index declining to a two-month low, this uncertainty on the macro level is positive for alternative, risk-on assets like crypto and equities, which are historically resorted to as a hedge against currency debasement.

Figure 2: Comparison Between the Performance of the Dollar index, Bitcoin, Gold, and S&P500

Source: Yahoo Finance

Tether Targets South America for its $500M Investment in Bitcoin Mining

The biggest stablecoin issuer, Tether, is further diversifying its revenue streams by building Bitcoin mining facilities in Uruguay, Paraguay, and El Salvador, as well as investing in existing facilities. With each facility ranging between 40 and 70 megawatts, Tether is aiming to occupy 1% of the computational power running the entire Bitcoin network. To gauge the success rate of Tether’s venture, we need to draw comparisons with the world’s biggest Bitcoin mining capacities. Previously headquartered in Hong Kong, BIT Mining Limited has accrued $6.4M in service fee revenue in Q3, thanks to its 82.5-megawatt space in Ohio. The cost of electricity should also be a point of reference. As of March 2023, electricity costs for businesses in Uruguay were $0.118 per kilowatt per hour, Paraguay ($0.045), and El Salvador ($0.210), versus $0.142 in the U.S. While Chinese Bitcoin miners face potential crack down in the U.S., opportunities rise in smaller, crypto-friendlier economies, looking to benefit from this burgeoning asset class. Being the first country to adopt Bitcoin as a legal tender back in 2021, El Salvador’s sovereign bonds are surging by 90% YTD, inline with the rally speculating a potential spot Bitcoin ETF in the U.S.

Consensys Beginning to Decentralize Infura

As a refresher, Infura is a backend-as-a-service tooling that allows applications to transmit and connect their requests to Ethereum and other EVM-compatible blockchains like Avalanche, Polygon and others. That said, Consensys has collaborated with 18 companies, including Microsoft, Tencent, and crypto-native companies like Pokt network, Covalent, and Chainstack, to begin building Infura’s Decentralized Infrastructure Network (DIN). This is a vital development as the tooling offers a failover switch where users can reallocate their services between different providers if one fails to honor requests, thus helping to address the single point of failure plaguing crypto’s backend infrastructure. An issue which became apparent in 2022 when Metamask and numerous Ethereum applications encountered disruptions as a result of an outage experienced by Infura. While the full attainment of decentralization requires onboarding more truly crypto-native companies, this current initiative represents a positive step forward in fortifying the resilience of the crypto’s infrastructure.

Cosmos Exploring Amendments to its Monetary Policy

The Cosmos community is currently engaged in voting on a proposal aiming to decrease the network’s inflation from 14% to 10%. If approved, this adjustment would reduce the staking APR from the current 19% to 13.4%. While this proposal addresses the challenge of ATOM’s high inflation, which dilutes the token’s value, it highlights a utility conundrum. ATOM lacks a clear role in facilitating access to the Interchain security economy powered by its InterBlockchain Communication protocol (IBC). This absence of a distinct value proposition beyond its attractive staking yield may prompt some validators, especially smaller operators, to unbond, potentially leading to increased centralization and compromising IBC security. The voting period extends until November 25, and initial indications suggest a 55% approval rate. That said, the Cosmos network is experiencing heightened chain activity, evidenced by increased fees and active users, reaching a YTD peak, as illustrated in Figure 5, which we’ll be closely monitoring over the next few days.

Figure 3: Growth of Active Users and Fees on the Cosmos Network

Source: Token Terminal

Another Leading Exchange is Launching its Own Polygon-Based Network

OKX, The third largest spot and sixth derivatives exchange, will leverage Polygon’s modular Chain Development Kit (CDK) framework to launch its own blockchain. OKX has close to 50M users, with close to 23M active monthly users, and processed a rough daily average of ~$1B throughout 2023, which could bring about significant growth to the on-chain ecosystem if it bridges this substantial capital and user-base. This integration positions OKX alongside Kraken and Coinbase as the third exchange to become part of the Ethereum ecosystem to tap into the extensive liquidity and user base.

Beyond diversifying revenue streams, akin to Base’s success with $5.4M in accrued profits since launch, OKX’s move contributes to Ethereum’s revenue collection from anchored networks paying security costs. Further, the use of CDK modules benefits Polygon, allowing network stakers to bond POL and earn increased revenue amid rising network usage, creating a positive demand loop for the POL token within the new Polygon 2.0 network staking layer design. Finally, Polygon’s efforts to onboard various companies are starting to materialize as it just surpassed BNB and Ethereum in the number of new applications it supports on top of its network, as depicted in Figure 4 below.

Figure 4: Total number of New Applications on the Five Leading Smart-Contract Platforms

Source: Artemis

What You Should Pay Attention To Argentina’s New President

Bitcoin rallied back to pass the $37K mark as Argentina elected a pro-Bitcoin, right-wing president, Javier Milei. Although the president-elect made no promise to make Bitcoin a legal tender, the volumes indicate some hope that Milei’s appointment could mean economic revitalization for South America’s second-largest economy with the help of Bitcoin, a la El Salvador. El Salvador’s GDP is expected to reach $33.4B by the end of 2023, which would be a ~20% increase from when it declared Bitcoin as a legal tender in 2021. With an inflation rate exceeding 140% in 2023, Argentina’s GDP growth has been sluggish, averaging at 0.51 percent from 1993 until 2023, as shown in the figure below. “The central bank is a scam. What Bitcoin is representing is the return of money to its original creator, the private sector,” Argentina’s president-elect said as part of his presidential campaign, vowing to shut down the central bank, replacing the Argentine peso with the US dollar, and embrace decentralized finance. Indicators of whether Milei’s plan will work in Argentina’s favor are yet to be discovered.

Figure 5: Argentina’s GDP Growth Rate

Source: Trading Economics

Avalanche Aiming to Position themselves as the Platform for Financial Institutions

In the past week, Avalanche has been the focal point of multiple pilot projects, showcasing its aptness for financial use-cases tailored to institutions. For instance, Citibank, Fidelity, and T. Rowe Price Associates collaborated to unveil a foreign FX exchange solution operating on a private permissioned Avalanche Subnet.

Subnets, akin to Optimism’s OpStack or Polygon’s CDK framework, denote application-specific networks launched atop Avalanche to meet distinct business needs. Unlike traditional frameworks, subnets possess a unique hybrid architecture, enabling companies to construct a private instance of their applications aligned with regulatory requirements. Simultaneously, they leverage the benefits of being anchored to a public network, ensuring immutability and interoperability with broader ecosystems, such as DeFi.

The pilot project, initially focused on USD/SGD trading, underscores the blockchain’s superior value proposition in enabling instantaneous settlement and cost-effectiveness, a stark departure from the traditional financial infrastructure burdened by delayed transactions and significant intermediary costs for international transfers.

In another noteworthy initiative, JP Morgan and Apollo Global collaborated on a network and asset-agnostic portfolio management solution. This proof of concept empowers fund managers to tokenize portfolios using JP Morgan’s ONYX and the Oasis Pro asset-issuing platform. Leveraging Axelar and Layer Zero interoperability protocols, fund managers can seamlessly exchange and rebalance portfolios across various blockchains, bridging EVM and non-EVM, private and public chains, as shown below in Figure 6.

Figure 6: Overview of the intricacies of the multi-asset Portfolio Management Solution.

Source: JPMorgan

Although conducted In a testnet setting, the experiment demonstrated a breakthrough by automating over +3000 operational steps through smart contracts. Further, despite involving multiple parties in the asset management process, it successfully reduced costs by almost 20% by expediting programmatic settlement and minimizing cash drag. Notably, the experiment showcased remarkable interoperability, providing a holistic solution for trading and managing both traditional and alternative assets in a single discretionary portfolio. This addresses a crucial gap in traditional finance, enabling the creation of diverse portfolios spanning multiple disparate asset classes.

In summary, both initiatives play a crucial role for Avalanche, highlighting its unique value proposition through Evergreen subnets tailored for financial institutions. This positions Avalanche as a standout choice among smart-contract platforms. Further, the Evergreen model, preconfigured for compliance with KYC and AML checks, offers native privacy and customizability, delivering enterprise-level blockchain support without the drawbacks of a siloed private blockchain system. Moreover, it marks a pioneering connection between TradFi’s proprietary software and native crypto railways, potentially sparking synergies and expediting ecosystem integration. The enthusiasm generated by these integrations is evident in Figure 7, as Avalanche achieved its highest transaction volume since its inception.

Figure 7: Total number of transactions on the Avalanche Network

Source: Subnets.avax.network

Bookmarks

• Insights from our last newsletter were featured on CoinDesk.

• Get a digital copy of State of Crypto issue 10!.

Next Week’s Calendar

These are the top 3 events we’re monitoring for next week.

• 24th of November: ECB President Speech

• 26th of November: OPEC Meeting

• 28th of November: Chainlink Staking Migration

Source: Forex Factory, CoinMarketCal

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

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The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.