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Welcome back to 0xResearch. Here's what we’ve got for you today:

• Day 2 ETH ETF flows disappoint

• Bitcoin strategic reserve talks

• AAVEnomics fee switch update

• PayPal USD incentives

Following what was regarded as a very successful first day of flows for the spot ether ETFs, day two was much more bleak. Across the board, flows netted out to negative $133M with far more muted inflows to the major players in Blackrock’s ETHA and Bitwise’s ETHW. Outflows from Grayscale ETHE were significant once again with another 3.5% of the total $9.2B seed amount out the door. This does not come as too much of a surprise as GBTC also saw consistent, large outflows over the first several months following the launch of the spot BTC ETFs. Grayscale attempted to entice investors to remain in their ETH products with the announcement of a minimal fee ETH mini-trust, but in the immediate term this plan has failed to plug up outflows.

Strategic BTC Reserve

Senator Cynthia Lummis has hinted at a Bitcoin-related announcement, and there have been discussions of both Donald Trump and Lummis hinting at a move to build a US strategic reserve of Bitcoin. These rumors have not been officially announced as of yet, but the implications of official US government support of Bitcoin as a reserve asset would be incredibly impactful for the crypto industry. The gradual shift towards pro-crypto sentiment from US politicians over the past several months has been exciting to see, and a move of this magnitude would likely signal other nations to consider doing the same - in much the same way that gold reserves are held by many nations today. With that said, while Trump has been openly pro-crypto as of late, it’s up for debate as to whether a Democratic candidate would feel the same about this initiative. 

AAVEnomics Fee Switch

Marc Zeller dropped a temp check proposal to the Aave governance forums this morning related to implementing a fee switch for AAVE via a “buy and distribute” program. AAVE has already surged nearly 10% off of the back of this proposal as many within the community are likely excited about the potential for fee revenues to return to token holders, as has been a contentious issue with Uniswap and the UNI token. This proposal comes at an interesting time and may provide further signal as to the warming regulatory environment in regards to decentralized crypto protocols. However, could it also be too soon for a fee switch implementation? While it is easy to understand token holders' motivations in demanding fee switches, they must also consider the potential impact a fee switch may have on future protocol growth. Some of the most successful businesses of the recent decades, Amazon for example, forgo the use of dividends to return capital to shareholders and instead choose to reinvest profits towards ongoing development and growth of the business itself which tends to lend itself towards higher valuations. This dynamic is at play for DeFi protocols as well - is it worth appeasing token holders in the short term if it may also hamper long term protocol success?

— Danny K (X: @defi_kay_)

Brought to you by:

re.al is the permissionless L2 for tokenized RWAs built on Arbitrum Orbit, bringing off-chain yields onchain. re.al is the first L2 to return chain and protocol fees back to users in reETH, ensuring they benefit from the growth of the ecosystem. We’ve just launched a fully-transparent rewards program returning 10% of $RWA supply to early users. Get started, trading, borrowing, and leveraging a diverse selection of RWAs. Not investment advice or product solicitation and not aimed at US persons.

Polymarket Hype is Overblown:

Hype around Polymarket’s prediction markets platform has reached new highs thanks to excitement around US Presidential Election outcomes trading. Sentiment related to Polymarket has run hot, but it is far too early to call the app a dominant success. Today’s chart of the day provides a breakdown of Polymarket category volume, and as of today over 70% of volumes have flowed to Political markets on the platform. Of this, a large majority of this activity is specifically centered around 2024 US Presidential Election outcomes. In a post-election environment, Polymarket will need to find additional exciting narratives in order to sustain the growth path they’ve been on this year. 

— Danny K (X: @defi_kay_)

PayPal USD Liquidity Farming

The PayPal USD (PYUSD) lending market on Kamino Finance is being incentivized with 490k PYSUD in weekly rewards in addition to earning a 3x points boost for Kamino Points Season 2. At the current level of supply this equates to 16.3% APY for PYUSD lenders, nearly double the going rate for USDC lending. Similarly, the PYUSD-USDC liquidity vault is also being rewarded 33k PYUSD weekly with a 7D trailing APY of 15.6% where over 11% of this is currently supplied by the PYUSD incentives.

PayPal announced the launch of PYUSD on Solana two months ago and the incentivization on Kamino appears to be an attempt to improve liquidity and further encourage the use of PYUSD as a cross-platform stablecoin. In their announcement, PayPal emphasized their blockchain-agnostic focus of PYUSD, indicating that PayPal and Venmo wallets can show PYUSD as a unified balance regardless of the blockchain it is held on.

As for the liquidity incentives, neither PayPal nor Kamino have provided any indication of the expected duration. It is questionable to what extent PayPal will be comfortable subsidizing the adoption of this new token. That said, onchain farmers interested in a relatively safe and high yield opportunity for stablecoins should definitely check out the PYUSD rewards on Kamino. 

— Danny K (X: @defi_kay_)

Why Solana Mobile Should 100x Their Phone Production

Solana Mobile is a highly ambitious foray into the mobile consumer hardware market, seeking to open up a crypto-native distribution channel for mobile-first applications. The market for Solana Mobile devices has demonstrated a phenomenon whereby external market actors (e.g. Solana-native projects) continuously underwrite subsidies to Mobile consumers. The value of these subsidies, coming in the form of airdrops, trial programs, and exclusive NFT mints, have consistently covered the cost of the phone and generated positive returns for consumers. Given this trend in subsidies, the unit economics in the market for Mobile devices, and the initial growth rate and trajectory of sales, it should be expected that Solana mobile can clear 1M to 10M units over the coming years. As more devices circulate amongst users, Solana Mobile presents a promising venue for the emergence of killer-applications uniquely enabled by this mobile-first, crypto-native distribution channel.

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Metaplex: A Comprehensive Token Creation Suite on Solana

Metaplex, the leading NFT protocol on Solana, has established a dominant position due to its comprehensive suite of tools. It has a functioning economic model with a buyback program that enhances its value through revenue generated from SOL-denominated fees. While initially focused on NFTs, Metaplex is diversifying its offerings to include non-NFT services, indicating a promising future as a comprehensive token creation suite on Solana.

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Empire Newsletter: How US presidencies map to crypto markets

Plus, breaking down Donald Trump’s shifting crypto stance

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Mt. Gox customers to receive crypto assets after 10-year wait

Markets are holding relatively steady despite the supply shock

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The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.