Q9 Weekly | Layering Up for Autumn
12 October 2023
· Layer-2 and Liquid Staking activity explodes
· VC funding in crypto hits multi-year low
· Caroline Ellison testifies in court
Despite all the gory detail emerging in the court case against Sam Bankman-Fried, Q3 has largely been a quiet and forgettable quarter for crypto.
On the Ethereum mainnet, activity was largely muted with low transaction totals, fees, and volumes. However, over on Ethereum Layer-2s, transactions boomed with L2s accounting for 61% of all Ethereum transactions this quarter.
The growth in L2 adoption largely came from Base’s explosive launch (see green band in the chart below) and the virality of friend.tech. Over a brief period near the end of the quarter, Base alone was doing more transactions than the Ethereum Mainnet.
Optimism also saw a lot of growth over the quarter, with a 40% increase in transactions. It appears that Base and Optimism cannibalized some of the activity on Arbitrum, where transactions fell by 36%. Despite that, Arbitrum still remains the largest L2 with 600,000 average daily transactions, compared to ~400,000 for Optimism and Base.
Source: Messari
Meanwhile, Liquid Staking has become far and away the largest sector in DeFi, with TVL recently hitting all-time highs, proving itself to be the most resilient part of crypto.
This indicates a noteworthy shift in DeFi lending as users opt for liquid staking tokens (LSTs) as opposed to native ETH as their desired currency. As the supply of stETH begins to rival that of native ETH, Lido’s 32.2% market share of all staked ETH will continue to raise concerns around decentralization and the health of the Ethereum ecosystem.
Source: Messari
In spite of (or because of) the activity on Ehtereum Layer-2’s, Bitcoin’s market dominance has risen to 51.2%, near a 26-month high of 52% reached at the end of June. BTC has gained 66% year to date, compared with ETH which has gained 32%.
ETH’s underperformance against BTC is partially due to Ether’s recent “healthy increase” in Ether supply over the past month. Decreased transaction activity on Ethereum (which has moved to the Layer-2’s) means less ETH being burned, which has translated to an increase in the overall supply as a contributing factor to Ether’s underperformance.
Bitcoin Dominance Increases to 51.2%
Source: TradingView
Digital asset investment funds witnessed inflows for the second week totalling $78mn according to data from CoinShares. Bitcoin investment funds saw the largest proportion of inflows, totalling $43mn.
Source: CoinShares
However, VC funding for crypto startups has dried up this quarter:
Source: Bloomberg
Sweet Caroline, Good Times Never Seemed so Bad
Caroline Ellison, the star witness in the trial against Sam Bankman-Fried, said the FTX founder had directed her and her ex-colleagues to steal roughly $10bn of customer deposits from the exchange to fund risky investments and repay loans.
The damning testimony from Ellison, the former head of Bankman-Fried’s trading firm Alameda Research and his one-time girlfriend, is set to be a pillar of the government’s criminal case against the former cryptocurrency tycoon.
“He directed me to commit crimes,” Ellison told the jury. “He was the one who directed us to take customer money and repay our loans.” She previously pleaded guilty to fraud and agreed to co-operate with prosecutors.
Caroline Ellison arrives at court in New York on Wednesday
“Alameda took several billion dollars . . . from FTX customers,” Ellison said. She admitted to sending “balance sheets to [Alameda] lenders at the direction of Sam . . . that made Alameda’s balance sheet look less risky than it was”.
Ellison revealed SBF was in talks with Saudi Prince Mohammed Bin Salman about backstopping FTX losses, and was regularly briefed on the amount of money Alameda had drawn against FTX customers.
Bankman-Fried also told her there was a “5 per cent chance he’d become president one day”. Asked by prosecutors what she had meant by president, Ellison said: “of the United States”.
Court sketch of Caroline Ellison testifying as SBF watches during his trial in New York
Lawyers also released images of the $35 million penthouse where Sam Bankman-Fried and his fellow co-workers resided
Source: SDNY
Source: SDNY
Source: SDNY
Source: SDNY
Anthropic AI
One unsettled question is whether SBF’s lawyers can probe Ellison about FTX’s investment in AI startup Anthropic, which was recently backed by Amazon. DOJ prosecutors say bringing up the investment would misleadingly suggest FTX customers can be made whole.
The AI startups valuation has exploded since FTX invested $500mn into it’s Series B and led the round.
Founded by former OpenAI VP of research Dario Amodei, Anthropic has emerged as one of the best-funded rivals to OpenAI in generative artificial intelligence. The company’s flagship model is Claude 2, a chatbot with capabilities similar to ChatGPT, billed as “a friendly, enthusiastic colleague or personal assistant who can be instructed in natural language to help you with many tasks.”
In March, Anthropic closed a bumper $450mn round that saw participation from Google, Salesforce Ventures, and Zoom Ventures. Amazon has also pledged to invest up to $4bn in Anthropic in September, giving it a minority stake in the high-profile startup, which could be valued at between $20bn and $30bn.
It’s likely that the FTX shares in Anthropic can be sold on the secondaries for an amount that could make FTX creditors whole (and then some). But still, the judge is reticent to bring this information into the criminal proceedings against SBF.
In the News…
· Hamas-linked crypto accounts frozen by Israeli police
· Crypto is still the Wild West almost a year after FTX collapse
· Stablecoins ‘a better product’ than local currencies in emerging economies, Carrica says
· Here’s how crypto firms are bracing for new rules in the UK
· JPMorgan debuts tokenized BlackRock shares as collateral with Barclays
· Nomura-backed Komainu joins UK crypto register
· Blackbird, crypto restaurant app, raises $24mn in funding led by A16z
· Cicada, bringing credit risk on-chain, raises $9.5mn seed round
