Takeaways from Permissionless Conference

This week, we discuss the recent market volatility as well as our impressions from Blockwork’s Permissionless Conference.

May 20, 2022

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At a glance

In the wake of the collapse of TerraUSD (UST) last week, topics related to stablecoins were top of mind at the conference, ranging from the varying resiliency of different forms of stablecoins to the implications of forthcoming regulatory clarity.

Key takeaways

  • Broader markets continued their sell off this week after poor earnings results in the consumer equity sector and hawkish comments from Federal Reserve Chair Jerome Powell.
  • Stablecoin markets have continued to de-risk and exhibit a flight to safety, as the market caps of Tether (USDT) decreased by ~US$7B, while the market caps of USD Coin (USDC) and Binance USD (BUSD) increased by ~US$3B and ~US$1.6B, respectively.

Written by

  • David Duong, CFA, Head of Institutional Research

Introduction

This week, we attended Blockwork’s Permissionless conference from May 17 to 19, and some of our key takeaways are included below. In the wake of the collapse of TerraUSD (UST) last week, topics related to stablecoins were top of mind at the conference, ranging from the varying resiliency of different forms of stablecoins to the implications of forthcoming regulatory clarity. Accordingly, in this report we examine the recent fluctuations in stablecoin market caps and what they may suggest about current market sentiment. Other highlighted topics from the conference include the alignment of incentives throughout Web3 and broader secular trends related to technological development, scaling solutions, and product roll-outs.

Weekly Market Call

View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.

Market View

Markets continued their sell off this week after poor earnings results in the consumer equity sector and hawkish comments from Federal Reserve Chair Jerome Powell, signaling higher risks for future U.S. economic activity. However, the moves were relatively orderly suggesting that we’re not quite seeing capitulation just yet. Meanwhile, in the crypto space, the moves in BTC and ETH were fairly range bound compared to the depreciation of the previous week, which at that point had been exacerbated by the events surrounding TerraUSD (UST) and LUNA.

Stablecoin markets have continued to de-risk and exhibit a flight to safety, as the market caps of Tether (USDT) decreased by ~US$7B, while the market caps of USD Coin (USDC) and Binance USD (BUSD) increased by ~US$3B and ~US$1.6B, respectively, over this past week (May 12 to 19). Further, the overcollateralized crypto stablecoin DAI lost roughly 25% of its market cap, now totaling ~US$6.5B, although DAI maintained its dollar peg relatively well and the decrease in market cap was largely driven by liquidations across the protocol resulting from the declining value of collateral assets. In our view, the increase in USDC and BUSD market caps reflects a vote of confidence in stablecoins with better reserves transparency and redemption procedures.

Stablecoin market capitalization (US$B)

Stablecoin market capitalization (US$B)

The topics of stablecoins and the weak market environment featured prominently at Blockwork’s Permissionless 2022 event, which was sponsored by Coinbase. These are some of our takeaways from the conference’s panel discussions:

  • There was a lot of retrospection on the damage caused by the Terra situation across various panels. The fallout is still not fully known particularly with respect to institutional involvement, though for now, there appears to be no major systemic risks. Many acknowledge that such stress tests are necessary to expose important issues for the asset class and ultimately make it more resilient in the long term. For now, these events will likely reinforce the existing dominance of fiat-backed (fully collateralized) stablecoins like USDT and USDC.
  • The regulatory implications stemming from these developments are also still as of yet unclear. The President’s Working Group on Financial Markets only addressed fiat-backed stablecoins in its report last November, which wouldn’t have included an algorithmic stablecoin like UST. Senator Patrick Toomey’s proposal from April 6 focuses on the transparency of stablecoin reserve assets, audits by registered public accounting firms and the maintenance of clear redemption policies.
  • Despite the sharp sell off we have seen in crypto markets, the broader secular trends on technological development are still in place. Moreover, data such as funding rates of perpetual swaps still suggest that participants are a little bit leveraged here, though with no reference rate like in traditional financial markets and amid a downcycle environment, this is subject to some interpretation.
  • Web3 was a prominent topic focused on how web2 helped lower barriers to entry for content creators (i.e. the build out of a top down creator economy) while web3’s principal innovation is more about better aligning incentives among creators, the platform and consumers. Entrepreneurial interest in this space is strong, comprising more than half of new startups, according to Andreessen Horowitz.
  • There were also multiple discussions surrounding layer 2 scaling solutions as more features are expected to roll out in the next six months to make them more production and mainstream ready. However, as these resources get built out, there may be more debates about supply vs induced demand to fill that block space.
  • One panel was dedicated to discussing the industrialization of maximal extractable value (MEV), which refers to the value captured by the ability of miners and validators to order transactions within a block. The MEV supply chain has become more refined since its inception, particularly since Flashbots inserted a layer between wallets and searchers directly to create transaction bundles to execute those transactions onchain.
  • There were also some key announcements at the event, including Coinbase’s initial rollout (for a small set of users at first) of new functionality which will allow them to access Ethereum-based dapps directly from the Coinbase app (via an integrated hot wallet and dapp browser).

Coinbase Cloud also announced an enterprise-grade liquid staking standard, which is discussed on our blog here. Liquid staking refers to the tokenization of a user’s staked position to make staking more capital efficient and reduce economic opportunity costs.

Crypto & Traditional Overview

Crypto & Traditional Overview chart may 20 2022

Coinbase Exchange and CES Insights

Exchange

Coinbase Exchange chart through may 20 2022

After reaching the highest levels since January exchange volumes have started to retrace again as BTC was consolidating around the $29-30k area. Interestingly, even during the height of the sell off on May 12th volumes were lower than during the sell off on January 21st - even though during the current sell off a bigger relative intraday move was observed and we broke through an arguably more important psychological level at $30k.

In terms of the volume breakdown there hasn’t been much change compared to the previous week with a heavy skew towards BTC and ETH still indicating that we still firmly remain in risk-off territory.

WLUNA was unsurprisingly a relatively large part of overall volume traded although due to the price collapse going forward this should be much lower while its buy ratio wasn’t as bad as one would have expected. Another interesting coin is USDT where the buy ratio was fluctuating very widely indicating that after the UST implosion there were moves to reduce allocations to USDT.

pie chart showing most traded crypto coins week of may 14
chart showing buy ratios for different crypto coins week of may 15 2022

Coinbase Execution Services

It was another very busy week on the trading desk and similar to the previous week we have seen continuous selling across the board by both tradfi and crypto native firms as well as all other client segments. One important thing to note is that this selling was and is going ahead in a very orderly fashion though and there is no panic while we have also seen some buying activity from crypto native accounts in longer tail high quality L1s such as SOL and ATOM. Another topic that came up often in client conversations this week is concerns about the USDT peg which after depegging marginally for a brief period of time is back at ~$1. This has led to some shifts in the stablecoin landscape with USDC (backed by Coinbase) winning market share.

Bitcoin Technicals

bitcoin technical chart up to may 19 2022

After hitting a YTD low of $25,373.27 on May 12th, BTC is now on its 5th consecutive day of rejecting the EMA9 and the chart remains extremely bearish. BTC would need to rally and reclaim its 23.60% FIB as support ($35,500) before the bearish structure is invalidated. It is worth noting the recent bounce came on support from 12/20/2020 and was not strong at that time. If BTC can't successfully turn the EMA9 ($30,500) into support and have consecutive days of closing above this level, we are likely to see sub $20k prices. The next level of strong support is $19,200 where BTC bounced off its EMA9 on 12/15/2020.

Financing Rates

financing rates chart as of may 18 2022

Over the past 6 months, BTC and ETH have both been widely used as “general collateral” for secured transactions and rates have been relatively steady.  The market declines over the past two weeks triggered margin calls that led to increased demand for both coins.  This led to an overall tightening of supply and a subsequent increase in rates: both had historically traded closer to the CeFi minimums, but have spiked to the 4% - 6% range.  This temporary squeeze has also resulted in lower yields on secured cash as the cost to raise collateral has significantly increased.

Notable Cyrpto News

Institutional

  • A16z Launches First Gaming Fund With $600M Commitment (Coindesk)
  • Robinhood launching DeFi wallet to rival Metamask (The Block)

Regulation

  • UK Proposes Regulations That Would Recognize Stablecoins As A Form Of Payment (The Defiant)
  • German Regulator Calls for New DeFi Laws (Coindesk)

General

  • Terra community seems dead set against Do Kwon’s fork proposal (The Block)
  • Elon Musk: Twitter Deal 'Cannot Move Forward' Until CEO Shows Extent of Bot Activity (Decrypt)

Coinbase

  • Access web3 with the Coinbase app (Coinbase Blog)
  • Coinbase Commerce expands merchant access to crypto payment acceptance with Primer (Coinbase Blog)
  • Enterprise-grade Liquid Staking Standard with Support of Coinbase Cloud and Figment (Coinbase Blog)

View From Around the World

Asia 

China's contribution to the bitcoin mining network from September 2021 to January 2022 was second only to that of the U.S., according to the CCAF's Bitcoin Electricity Consumption Index. China’s share was initially reduced to 0% in July and August after the crackdown on bitcoin mining, but swiftly rebounded to the 20% range from September onwards. The increase in mining activity despite the crackdown suggests that there may have been underground mining activity going on, with off-grid electricity and geographically scattered small-scale operations the major means to hide operations from authorities, according to the CCAF. (Coindesk)

The Week Ahead

chart showing upcoming crypto and macro events for may 23 - may 24 2022

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