Venture market update l 15.02.23

Market context

BTC regained a foothold comfortably above $22,000, despite January U.S. CPI data, which rose more than expected, being a potentially negative sign of what’s in store for risk assets as the Federal Reserve tries to tame inflation through a campaign of interest rate hikes. NYDFS ordered Paxos to stop minting new BUSD tokens. Coinbase launches a defense of its staking services.

The largest cryptocurrency by market capitalization was recently trading over $22,200, a more than 3% gain during the past 24 hours. BTC had been lingering below $22,000 for the previous five days amid growing investor concerns about stablecoin regulation and U.S. central bank inflation-fighting measures.

January’s CPI rose 0.5% versus 0.1% a month earlier, in line with economist forecasts. But on a year-over-year basis inflation ran hotter than hoped, arriving at 6.4% pace versus 6.5% in December and against predictions for 6.2%. Year-over-year core CPI – which strips away more volatile food and energy costs – was faster than forecast at 5.6% versus 5.5% expected and down from 5.7% a month earlier.

The data suggested that the Federal Reserve would remain hawkish with more interest rate hikes in the offing at upcoming Federal Open Market Committee meetings. The CME FedWatch tool currently shows that around 90% of traders see the FOMC raising rates by 25 basis points in March.

Investor reaction fluctuated significantly in the immediate aftermath of the CPI release with bitcoin initially dropping on the news and quickly surging by $700 to trade as high as $22,300 before retreating slightly to its current level.

Ether, the second-largest cryptocurrency in market value, surged nearly 5% from Monday, same time, to trade above $1,550, regaining losses from recent days. The CoinDesk Market Index, which measures the overall crypto market performance, was recently up 3.7% for the day.

Equities markets were mixed, with the S&P 500 index recently rising 0.1%. The Dow Jones Industrial Average (DJIA) was down 0.2%, while the tech-heavy Nasdaq Composite was up 0.6%. Cardano's ADA soared 10%, and Polygon's MATIC jumped 7.2%. Binance's BNB remained below $300, down another 3%.

Bitcoin mining stocks were higher on Tuesday, with 16 gaining and three declining. Here is a look at how the individual miners performed today:

The correlation between the crypto market and the tech-heavy Nasdaq equity index has turned positive, indicating the digital asset investors' renewed focus on risk appetite on Wall Street.The 90-day correlation coefficient between the crypto market's total capitalization with Nasdaq has risen from -0.12 to 0.74 in four weeks, reaching the highest since early November, according to data sourced from charting platform TradingView.In other words, the crypto market is again moving in tandem with technology stocks. On days when technology stocks trade higher, cryptocurrencies, including bitcoin (BTC) and ether (ETH), are likely to do the same. Conversely, a decline in technology stocks could drag the crypto market lower.

Correlation is determined by comparing the returns or general movements of two assets or products over a specific period. A correlation close to 1 suggests the two assets are moving in lockstep, in the same direction. Meanwhile, a negative correlation means the two assets move in opposite directions.

In the meantime, on early Monday, the New York Department of Financial Services ordered Paxos to stop minting new Binance USD tokens (BUSD), saying the token wasn’t being administeredin a “safe and sound” manner. The order resulted in BUSD – a fiat-backed stablecoin with a 1:1 value against the U.S. dollar – falling to 0.9950 cents against its rival tether (USDT) on the Binance exchange.Tether saw its flagship token, USDT, grow by nearly $1 billion in market cap, which started out at $68.47 billion on Tuesday, before rocketing upwards to roughly $69.23 billion at about 9:10 a.m. EST. Meanwhile, the Paxos-issued BUSD has experienced a nearly equivalent decline from $16.14 billion on Monday to $15.46 billion on Tuesday.

Paxos, the company behind the token, confirmed that it would stop minting new units of the stablecoin beginning next week, following orders from the New York Department of Financial Services (NYDFS).

BUSD’s losses may show that those seeking stablecoin liquidity are fleeing to the longtime king, Tether, to escape future regulatory crackdowns in the US. Unlike Paxos and Circle – issuer of the second largest stablecoin, USDC – Tether is owned by the Hong Kong-based company, iFinex.

Data from DeFiLlama shows that Tether’s latest gains bring its stablecoin market dominance to 50.77%.

On a positive note, decentralized borrowing protocol Liquity was Monday’s biggest winner among over 160 assets in the CMI, with its native LQTY token surging 46% to trade at $1.01 from 69 cents from the previous day, same time.

The price jump followed Liquity’s integration with Aztec network, the privacy-focused ZK rollup on Ethereum where users can borrow its U.S. dollar-pegged stablecoin LUSD on layer 2 and save on gas fees, according to its announcement.

And now back to the FUD: U.S. crypto exchange Coinbase has launched a defense of its staking services, after the future of the practice was thrown into doubt by the Securities and Exchange Commission’s enforcement action against Kraken last week.

Coinbase CEO Brian Armstrong tweeted on Sunday that the company’s staking services are not securities.

It comes after the SEC hit rival exchange Kraken with a $30M fine for offering its staking-as-a-service without registering it. Just before the announcement, Armstrong warned that he had heard rumours of a wider crackdown on staking in the pipeline.

Venture market: what’s new?

Overall January has seen a decline in venture capital funding: from $884M in December to $631M in January, vividly showing that the rally in the beginning of January has not been well supported by the VC sector.

A particularly interesting detail is that January saw deals in the NFT/Gaming sector decline from 40% in December to 26%, however it's still premature to suggest that it's lost its appeal to crypto investors, citing previous lulls that led the way to pickups in funding. On the other hand we have seen an increase in the share of Crypto financial services funding and Web3 funding.

We’ll have to wait and see what data will be observed in February. Let’s take a closer look at the deals being made and the news happening in the VC field.

Crypto Startup Monad Labs Aims to Create Next ‘Ethereum Killer’ After Raising $19M

The Monad blockchain will launch on a testnet in the coming months, with the mainnet deployment planned for later this year, according to a statement. The blockchain will employ the proof-of-stake consensus mechanism and will be EVM-compatible. As such, projects on Monad will be able to interact with the EVM software platform, where developers from many other blockchain projects also create interoperable decentralized applications on the Ethereum network.

Over the few years, builders in the space have often been held back by high-cost and low reward on many layer 1 blockchains. This, in turn, affects innovation and mass adoption of the decentralized applications (dapps) by the developers.Monad plans to address these issues through its new layer 1 protocol, which it claims will be able to process a total of 10,000 transactions per second. To do so, Monad made some key changes to the consensus and execution layers – two major mechanisms of a blockchain.

Ethereum, the original smart contract blockchain, still holds the majority of the market share among layer 1 projects. However, there have been several new blockchains – dubbed “Ethereum Killers” – that are looking to improve Ethereum's processing time, fees and scalability. Some of the more popular layer 1 blockchains include Cardano, Solana, Avalanche, Algorand and Internet Computer.

As more traditional financial entities enter the space, focus is turning increasingly into scalability and speed of blockchains. Monad’s team is seeking to capture this opportunity to build an improved version of a layer 1 blockchain.

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Bain Capital Crypto leads Orb Labs' $4.5 million raise

Founded in 2022, Orb Labs is blockchain interoperability startup, which develops tooling and protocols that enable blockchains to communicate with one and other. It has built two products Earlybird, a cross-chain messaging protocol, and MagicLane, an omnichain token and messaging platform built on top of Earlybird. Both products will be released in the coming months.

Many developers still struggle to find messaging protocols that 'push the limits of both usability and security,' said Richard Adjei, co-founder of Orb Labs. The startup is hoping to solve this problem with fast, gas-efficient messaging protocols, he said.

The funds from the recent raise will be used to expand the team, accelerate product development and perform security audits ahead of the launch, the company said.

'We are thrilled to partner Orb Labs on their mission to enable a multi-chain future that is cheaper, more secure, and significantly more gas and capital efficient' said Carl Vogel, partner and head of research at 6th Man ventures. “Crypto needs cross-chain infrastructure that can support mass market adoption, and we believe Richard and Felix possess the right engineering experience, ingenuity and perseverance to unlock 10x+ improvements in scalability and interoperability.”

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Uniswap Vote on BNB Deployment Ends with Silicon Valley’s A16Z on Losing Side

Community members of Uniswap, the leading decentralized crypto exchange (DEX), voted to deploy to Binance’s BNB blockchain using the Wormhole bridge, the culmination of a behind-the-scenes political battle that ended with the big Silicon Valley venture-capital project backer Andreesen Horowitz (a16z) on the losing side.

This week’s vote by the Uniswap DAO – a decentralized autonomous organization that allows Uniswap (UNI) token-holders to weigh in on protocol changes – closed Friday with 66% in favor of deploying Uniswap onto BNB Chain, and 34% opposed.

The lead dissenter was a16z, Uniswap’s largest investor, which had pushed instead for one of its own portfolio companies, LayerZero, to be used as the cross-chain bridge. LayerZero lost a previous community poll to become Uniswap’s official Ethereum-to-BNB bridge service – a piece of infrastructure necessary to keep Uniswap’s governance process up and running on BNB Chain.

This week’s followup vote, which was open from Feb. 2-10, officially ratified Wormhole, a LayerZero competitor, as Uniswap’s partner. The vote turned contentious after a16z elected against it and raised issues with Wormhole’s security in a Uniswap community from Uniswap community forum post. Separate allegations were made about deficiencies in LayerZero’s security. A16z’s 15 million “no” votes did not ultimately block the BNB-deployment from passing, but they nonetheless raised questions in the broader crypto community around the venture firm’s influence within Uniswap’s governance system.

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Tron Launches a $100M AI development fund

Smart contract blockchain Tron is leaning into the artificial intelligence revolution with the launch of a new $100 million AI development fund.

The aim of the fund is to encourage developers to create applications on the Tron blockchain using emerging AI tools such as OpenAI’s ChatGPT, both in the backend and frontend of development.

Tron’s AI development fund will initially focus on four key areas: an AI service payment platform, an AI-infused oracle, AI-informed investment management services, and AI-generated content.

The integration of Tron’s DeFi infrastructure with AI promises to enable “self-learning, on-the-go, adaptable capabilities in all aspects of decentralized commerce,” according to a Tron spokesperson, including the creation and deployment of smart contracts, payment layer protocols, AI payment gateways and currency settlement.

Tron aims to integrate AI-infused oracles with its layer 1 blockchain, its data-focused layer 2 blockchain, BitTorrent Chain, and its decentralized BTFS file storage system. Here, Tron envisages AI strengthening data-related tasks including underlying calling SDKs and API communication, as well as automated adjustments for optimized user experiences and data transactions within decentralized applications.

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Exploring crypto: what’s the point in making new L1s?

An upgrade to improve security and interoperability features on the Cardano blockchain was pushed live in early Asian morning hours on Wednesday.

Dubbed Valentine - the upgrade will make enhancements to cross-chain functionality for decentralized finance (DeFi) applications building on the network. It was proposed earlier in February and voted favorably by network validators. The upgrade is said to bring enhanced cryptographic features to Cardano while improving cross-chain decentralized application (dapp) development on Plutus – the smart contract platform of the Cardano blockchain.

One may ask: what is the point in developing more and more Layer 1’s and enhancing the built network? A quick dive into the system and why this is actually one of the most important fields in blockchain a breakthrough.

The blockchain space is expanding rapidly as new solutions and applications are constantly being launched on various networks, many of which face the scalability problem. Scalability is one of the elements of the famous 'blockchain trilemma,' which poses that it is extremely difficult for a blockchain network to achieve sufficient scalability, security, and decentralization simultaneously.

As postulated by Vitalik Buterin, the founder of Ethereum, the term “scalability trilemma” refers to a blockchain’s capacity to juggle three key organic features – security, scalability, and decentralization.

The trilemma states that any blockchain system can only feature two properties out of the three at once. Thus, the current blockchain technology will always have to compromise on one of the fundamental properties. An excellent example of this is Bitcoin. While its blockchain has managed to optimize decentralization and security, it has had to compromise on scalability – through no fault of its own.

Blockchain scalability is the expansion of a network in digital space in terms of transaction processing speeds and processing power to accommodate the addition of new applications and the increase in user operations. By scaling, blockchain networks can compete with centralized networks for transaction volumes, application buildup, and user engagement if they offer higher processing capacity. From a technical standpoint, “scaling” refers to an increase in the throughput rate, measured in terms of the number of transactions per second.

One of the fundamental approaches to tackling the scalability problem is introducing layer-1 solutions. A layer-1 blockchain is the base protocol itself, and improving this ground-level infrastructure can make the system much more scalable. The two most popular layer-1 improvements include modifying the consensus protocol and introducing sharding functionality.

Layer 1 is the fundamental base network of a blockchain platform. It executes all on-chain transactions and therefore acts as a public ledger’s source of truth.

Processing a transaction, for most networks, consists of logging a user’s cryptocurrency wallet via asymmetric key pairs and its corresponding coin or token balances. The deal passes through a consensus mechanism — which will be distinct to each platform — to verify and finalize the trade or sale. Additionally, layer 1 blockchains host their own native token, which is used to cover transaction costs, or gas fees.

Layer-1 blockchain protocols have to be decentralized, secure, and scalable. To achieve this, network architects and developers rely on several methods to increase the system's scalability.

Consensus Protocol

Proof of work, PoW, is the original consensus mechanism used in Bitcoin and Ethereum, although the latter has recently migrated to proof-of-stake (PoS), described further below. PoW aims to achieve validator consensus and network security by incentivizing miners to commit computing power to solve complex cryptographic puzzles. However, PoW struggles with two main issues: it can be comparatively slow and resource-intensive.

Proof-of-stake, or PoS, is a different mechanism for reaching a distributed consensus in a blockchain network. Validators authenticate block transactions based on their holdings of the blockchain's native token, or their 'stake' in the network. While in PoW-based systems it is the expanded computational power that ensures that validators have sufficient 'skin in the game' and are disincentivized to game the system, in PoS it is holding a sizable amount of the blockchain's token whose value can drop if the decentralized consensus is breached.

Switching from one consensus mechanism to another can massively improve a blockchain's throughput and help it scale. Yet, such a dramatic change can be challenging to implement as it requires a broad consensus among the network's participants.

Sharding

Sharding is another approach to improving scalability that has been ported from the distributed databases sector and adapted for layer-1 blockchains. Sharding entails the breaking up of a blockchain network into a series of separate database blocks known as “shards” – hence the term “sharding.” This approach also eases the default requirement for all nodes to process all transactions to maintain the network, allowing the shards to work in a parallel sequence. This helps to increase the network's overall capacity.

A key takeaway: Scalability is one of the challenges in the way of global crypto adoption. As demand for cryptocurrencies increases, pressure to scale blockchain protocols will also mount. Since both blockchain layers have certain limitations, the solution in the future will be to build a protocol that can tackle the blockchain trilemma.

Let’s take a look at L1 blockchains, conducting their fundraise at the moment:

Conferences

Conferences are a great opportunity to grab the attention of the whales in the crypto industry, spread the word about your project and win some funds! A quick line-up of the upcoming conferences below!