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🟣 The good ship Transitory was a crowded one
Market whiplash following Powell's remarks at Jackson Hole
Macauley Peterson & Donovan Choy
August 23, 2024
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Welcome back to 0xResearch. Here's what we’ve got for you today:
Fed murmurs and Bitcoin DeFi
Conduit Marketplace
Eth L2 profitability
Maple’s sweet yields
Federal Reserve Chair Jerome Powell spoke of “dialing back on policy restraint” at the Jackson Hole Economic Policy Symposium Friday morning.
He detailed how data torpedoed “the good ship Transitory” — the Fed’s thesis on what would happen to inflation following the Covid-19 supply shock in 2021 — and forced them to reconsider their view on the urgency for a monetary policy response.
Powell attributes the increase in inflation at the time, to a “collision” between “overheated and temporarily distorted demand and constrained supply.”
“A consensus seems to be emerging which I see as attributing most of the rise in inflation to this collision,” he said.
But now things are back on track, thanks to the consistent work of policymakers to anchor inflation at 2%, which has entrenched disinflation — a decrease in the rate of inflation — in recent years.
The market reaction has been volatile: bitcoin, gold and tech stocks all initially rallied on the news, but have retraced those gains in the hour since. BTC was knocked right back where it started the day below $61,000, before bouncing (currently $61,600).
The dollar — as measured by the DXY index — has been more consistent in direction, currently registering its largest hourly drop (about -0.6%) since the Yen carry-trade began to unwind on Aug. 2, as a September interest rate cut from the FOMC is now all but certain.
The prospect of a further dollar breakdown is arguably the most bullish piece to emerge out of Wyoming today. DXY is now retesting its yearly open below $101.
Bitcoin DeFi
Activity is stirring in the Bitcoin DeFi neck of the woods.
The Paradigm-backed self-custodial Bitcoin staking protocol Babylon launched its mainnet yesterday, quickly reaching its staking cap of 1000 BTC. Some of the biggest stakers included Solv Protocol, which contributed 250 BTC; PumpBTC, which staked 118 BTC; and Lorenzo Protocol with 250 BTC.
The well-hyped launch spiked the Bitcoin network’s average gas fees per transaction to above $130. About 53.4 BTC ($3.2 million) was spent in transaction fees across five blocks.
While the rush to stake with Babylon was ongoing, existing bitcoin used as collateral to back DeFi assets are seeing a bit of a shake-up. Onchain data yesterday found Tron sending 12,000 worth of BTC collateral backing its USDD stablecoin to the Huobi exchange. That’s about 1.2% of USDD’s stablecoin backing, while the rest is backed by TRX.
Tron founder Justin Sun, who also owns a stake in Huobi, quickly took to Twitter to explain that the change was done to improve the capital collateralization efficiency of the stablecoin, and that it was all “part of the basics of DeFi 101.”
Finally, WBTC’s market cap has stayed relatively still at $9.4 billion, despite the backlash surrounding last week’s BitGo’s organizational restructuring, which promptly led to the collateral being delisted by Maker governance.
The centralization risks of WBTC appear to be serving as a major tailwind for some of its new competitors. FBTC, launched by Ignition just slightly more than one month prior, has recently crossed $100 million in TVL across all the chains where it is deployed (Ethereum, Mantle, BNB Chain). Ignition also announced a one-month points campaign on Wednesday, contributing to its growth.
Aave meanwhile, is in the process of onboarding Threshold Network’s TBTC — the second-largest tokenized bitcoin on Ethereum with 2.1% market share — based on a May 2024 Snapshot vote.
When asked on the Bell Curve podcast about Aave’s position surrounding WBTC (for Ethereum), Aave-Chan Initiative founder Marc Zeller said the DAO was still in the phase of risk assessment and considering alternatives.
Aave notably delisted WBTC from its deployment on Avalanche in favor of the more decentralized BTC.b (Bitcoin Avalanche Bridged). At a market cap of $329 million, BTC.b’s market cap forms a fraction (3.5%) of WBTC’s liquidity.
— Donovan Choy (X: @donovanchoy | Farcaster: @donovan)
Scaling gets practical
Conduit, which now calls itself an “onchain compute company,” has launched the Conduit Marketplace, a platform designed to simplify the development process for rollups. This new tool allows rollup teams to find, buy, and deploy various integrations directly from the Conduit app, streamlining a process that previously required multiple providers.
Before the introduction of the Marketplace, rollup teams often had to piece together solutions from different sources to build and maintain their chains, an inefficient and costly process. Conduit would manage the chain itself, while other providers were needed for components like bridges, account abstraction, and more.
The Conduit Marketplace addresses these challenges by bringing together 48 partners, Privy, Dune, RedStone Oracles, and thirdweb, in a single platform, for faster integration.
This new approach has the potential to significantly reduce the time required for rollup development — Conduit estimates on the order of 3-6 months saved.
— Macauley Peterson
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Ethereum L2 profitability:
Source: Galaxy Research
L2 rollup profit margins are on the rise. This is largely due to the significant savings cost from EIP-4844, part of the Dencun upgrade in mid-March 2024, which allowed L2s to cheaply post data availability.
Arbitrum, for instance, spent a cumulative $20.09 million on operating expenses from January 2024 to March 2024. After Dencun went live, operating expenses from April 2024 to August 2024 dipped to $782,480.
Similarly, Base’s operating expenses for January 2024 to March 2024 was $9.34 million, which drastically reduced in the following five months to $723,000. Despite that, blob data is still at 76% of capacity usage.
However, while operating costs have seen a reduction, revenue capture by rollup sequencers, too, have dropped. Based on Galaxy Research, daily average revenues of rollups today are $691,300, compared to “daily averages of $2.33m in the 30-day period, $1.46m in the 90-day period, and $1.2m in the 150-day period leading into the implementation of EIP-4844.”
— Donovan Choy
As summer winds down, DeFi yields have compressed due to lower trading volumes and reduced borrower demand. However, Maple’s Secured Lending strategies, including Syrup, continue to attract strong inflows, driven by high yields.
Maple generates yield by issuing short-duration, overcollateralized, fixed-rate loans to institutions, with the Maple Direct team adjusting the loan book to maintain optimal yields. In lower demand periods, shorter-term loans enhance liquidity and offer flexibility to adapt quickly to market changes. During high-demand periods, longer loans lock in favorable rates, sweetening yields.
Source: Maple Finance
Access to Syrup or Maple’s services generally depends on your location and accreditation status.
— Macauley Peterson
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Blockworks Research is conducting a survey to gain insight into the institutional staking landscape. This data will help industry leaders adopt their strategies as the industry matures.
If you're an institutional staker, we want to hear from you (and if you’re new to Blockworks Research, get 20% off of our service while you’re at it!)
A war is being fought over blockchain mindshare by two of Wall Street’s largest operators.
With its unmatched security, stability and emerging layer-2 solutions, Bitcoin is uniquely positioned to lead this charge.
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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.