🐼 Merge Me
We have Merged. It took some six-plus years, an incalculable amount of developer resources and brainpower, and even more patience but Ethereum actually did it. If you thought this was the week for brevity … I just lol’d.
The most consequential software upgrade in Ethereum’s (crypto’s?) history came through late Wednesday night. The event itself was … boring? In a really, really good way. It happened, everybody tweeted that it happened, then everybody checked the logs and submitted transactions and … everything was working. Never in doubt.
The Merge is a testament to the power of human ingenuity, technological dedication, and a massively positive example of decentralized coordination. The execution of something so complex was not only done seamlessly, but its success also helped avoid what otherwise would have been a potentially catastrophic failure – billions of dollars and hundreds of years of engineering work wiped away. If you want to hate on that … your life needs more fun.
Enough words, you want the highlights. Since the Merge:
The Ethereum network now uses over 99% less energy. Estimates put the reduction in worldwide electricity consumption from Ethereum’s transition to proof of stake at 0.2% – or on par with stopping all energy consumption in Chile overnight. ESG truthers rejoice. In reality, while Ethereum itself uses far less energy now, all of the mining equipment previously focused on validating its blockchain didn’t vanish overnight – it simply moved to other uses, eg mining other (smaller) proof of work blockchains or repurposed for personal gaming.
The narrative is the narrative, though, and Ethereum really is out of the mining game –a single truth that will do more for Ethereum’s mainstream public image (and probably crypto as a whole) than anything else in its history. I generally think the ‘people won’t invest because it hurts the environment’ meme lacked teeth – I think the people who hated crypto last week because of the environment will hate it next week because of something else – but it’s undebatable that the elimination of that talking point is a net-positive. Institutions wary of getting Greta Thunberg’d, you are free to join the party now.
Ethereum issuance may (and likely will) become deflationary – less new ETH hitting the streets means less demand needed to maintain the current price. Picked that up from The Wire. Ethereum’s supply issuance ran negative for the first few hours post-Merge as the network produced deflationary blocks under the cover of (western hemisphere) darkness, though issuance has since turned positive … for now. What do you think will happen to demand for the eco-fabulous settlement layer of the internet now that it accomplished the monumental technical feat that had been hanging over its head for half a decade?
Block times have become a lot more stable and consistent. Stability and consistency is good!
Welcome to the era of the infinite duration ultra sound deflationary ESG-friendly recyclable internet bond. Ethereum, your redesigned settlement layer for the internet. Bernstein concurs.
The Merge made it to the front page of the internet Financial Times. We’ll give them a pass for asking if arguably the greatest accomplishment in community-driven, open-source history is ‘just another crypto hype.’ Mama we made it. Photo from the incomparable Frank Chaparro.
Tech celebs hit the streets (Twitter) to chime in on the big event. So did the governor of Colorado. Pretty casual.
🤷 Now What?
Well, maybe we can all get back to addressing the challenges that sit in front of us, like high gas fees and a user experience that still feels technically complex. Pop some champagne, make the cork an NFT, sell it for $37 on OpenSea, then it’s back to building.
For diehard decentralites and those who shared fears about increased validator centralization post-Merge, it’s probably not ideal to see that almost two-thirds of all staked ETH is controlled by only five entities. And worse yet, more than 40% of Ethereum’s blocks since the Merge have been added by just two organizations: Coinbase and Lido. One of the oft-stated arguments against proof of stake is the (alleged) increased risk of centralization, especially when large staking aggregators build dominant market positions. We’re less than two days into this so let’s pause it on the pitchforks. If this staking centralization remains months or years from now, alternative solutions will grow in importance and the rationalizing we see today won’t age so well.
⛏️ What About Bitcoin?
This is as good a time as any to get way ahead of the proof of work assault that is undoubtedly coming Bitcoin’s way. Two quick facts, then I promise to not bring this up again for at least another week. Global Bitcoin mining consumes less than 0.2% of the world’s energy production – in line with other energy consumption purposes that the public wants outlawed like computer games and holiday lights. And nearly 60% of energy used to mine Bitcoin comes from sustainable sources; to put this in perspective, only 31% of all energy used in the US comes from renewable sources. I find it hard to believe we won’t see Bitcoin mining’s sustainable energy mix increase over the coming years.
Nic Carter, Partner at Castle Island Ventures and the unofficial king of Bitcoin mining debates and debunkings, shared his commentary on and annotated version of the White House’s recent study on the climate impacts of crypto mining. If you have any interest in this topic, set aside time to read his commentary – it’s superb and informative. An important read even amidst the celebration of the Merge.
I will share a brief summary here only because I’m a realist when it comes to attention spans in 2022. But it is a disservice to Nic and your understanding of the government’s (mostly) anti-mining position to skip his work for my paltry rundown.
The report presents as if it was written to work toward a specific conclusion rather than aggregating new, relevant, and scientific data and allowing its opinion to be formed by the resulting analyses. Because mining is assumed as a ‘bad’ usage of power, the promotion of grid stability, use of renewables, or off-grid mining with stranded resources doesn’t matter. While other industries are celebrated for those types of environmental innovations, Bitcoin mining receives no such recognition.
The Prohibition of Privacy | The US Treasury Department released new FAQs in response to its controversial Tornado Cash sanctions, notably sharing that users with trapped funds can apply for withdrawal and that the sanctions don’t stop people from copying and sharing open-source code. This is like a teacher saying: ‘You can’t use your textbook during the test but if you happen to write all the pertinent information on your hand, I won’t do anything.’
Bitcoin | Michael Saylor may be squarely in the scope of the DC attorney general, but MicroStrategy is still vacuuming up bitcoin: the company announced this week it sold more stock to buy another $500M of orange coin, the last meaningful bastion of its proof of working breed … Fidelity is considering offering bitcoin trading on its brokerage platform, one that *yawns* has more than 34M accounts.
Regulatory | It took less than a day for Gary Gensler to make Ethereum’s monumental achievement all about him. The SEC Chairman said that Ethereum’s latest software upgrade could trigger securities laws. Despite previously (like a week ago, previously) agreeing with the CFTC that ETH acts more like a commodity than security, Gary’s party line is now that ETH’s new asset staking model ‘looks very similar … to lending’ which is a perfectly valid misconception to have … if you weren’t the SEC Chairman with access to all relevant information on the topic, including years of notice that this transition would happen and publicly-available educational materials on the technological advancements getting built in your self-appointed corner of regulation. Gary Gensler: the guardian who guards against innovation but not corruption, one who demands transparency from his subjects but offers only opacity and obfuscation in return, he who insists on leading us but shares no guidance of his path …
Gensler also spent this week sharing that he wants his SEC staff to work with token projects on a ‘flexible’ pathway to registering as securities. Because (1) everybody who has worked with him proactively would recommend the experience and (2) every token project agrees with Gaslightin’ Gary that their tokens are or will be securities. Did you pick up on the sarcasm? Too much or just right? …
The White House published its first-ever comprehensive framework for crypto, a fact sheet focused on six principal directions for crypto regulation in the US. None of those directions addressed one of the country’s largest crypto-regulatory problems: which regulators are responsible for what? Because it was so insightful to read another document highlighting the administration’s focus on consumer protection, financial stability, illicit activity, environmental concerns, and a possible US CBDC.
Macro | It’s Merge week; who cares about the macro? Ethereum just shipped shipped and I’m going to talk about a possible currency intervention in Japan, how Argentina hiked their interest rate by 550 basis points to 75%, or that August showed stickier, broadening inflation here at home in the US? That’s for somebody else this week, fam … Okay, one thing to highlight: finance professor-turned-blogger Noah Smith penned a new essay outlining how the advent of ‘Cold War 2’ could spur mass crypto adoption. Noah is by no means a crypto zealot but he makes the case that instability in Russia, China, and elsewhere could create waves of economic refugees looking to flee with their assets. He also writes on Substack; it is important that I shill for my fellow ‘stacking brethren.
NFTs | Starbucks unveiled its new Odyssey program, which will allow customers to purchase digital collectible stamps in NFT form that offer benefits and immersive experiences. Props goes to Polygon, the chain chosen for this mission. Despite evidence mounting to the contrary, the haters are probably right: NFT technology is useless and going nowhere which is why the coffee king of the world and one of the largest shadow consumer banks is tapping into it for a non-speculative, enhanced replacement of its existing loyalty program. Loyalty points on the blockchain is actually pretty boring, which has me downright giddy – when innovation gets boring, mass adoption typically follows close behind … Metadee, a London-based NFT marketplace, is selling unique digital copies of five volumes of the oldest handwritten Qur’an manuscript. Who says an old religious text can’t learn new tricks? … A $70M art collection held at the Museum of Modern Art (MoMA) in New York will be auctioned off and some of the proceeds may go toward funding NFT purchases … Epic Games, the developer of Fortnite, has listed its first crypto-based game (Blankos Block Party) on its marketplace. The game is built on a private, permissioned blockchain (ugh), but at least it’s a start. Crypto-based gaming is a tsunami of user adoption bubbling under the surface.
Financings & Fundraises | 776 Ventures and FTX Ventures joined together to lead a $54M financing for Doodles, the colorful NFT project, at a $704M valuation. Major news outlets won’t do this so we will: while 776 Ventures is Reddit co-founder Alexis Ohanian’s shop, his founding partner Katelin Holloway is the one who led and won this deal for the firm, and now sits on the Doodles board … UK venture capital firm Northzone raised $1B to invest in fintech and web3. The firm called out web3 as a ‘core sector’ for this fund. If you invest in innovation, you’re past the point that you can ignore crypto … Seattle-based crypto venture capital firm Bloccelerate is back in market, looking to raise $100M for its new fund … The NEAR Foundation is launching a $100M venture capital fund and venture lab in partnership with Caerus Ventures. Caerus is a newly launched firm led by an IMG exec … FTX Ventures is taking a 30% stake in SkyBridge Capital, the firm founded by Anthony Scaramucci. SkyBridge will use part of the cash infusion to buy some $40M in crypto to hold on its balance sheet as a long-term investment. I wonder what exchange they’ll use … Not a financing nor a fundraise but private equity giant KKR has tokenized its Health Care Strategic Growth Fund via the Avalanche blockchain. The firm is hoping this will increase accessibility to individual investors. That’s a hit for Use Case Bingo …
The latest Y Combinator batch saw its highest number of crypto startups ever. Broken record time: crypto is a one-way street right now for innovators, builders, and capital. If you think crypto ‘won’t become a thing’ you should probably dig a deeper hole in the sand when burying your head.
Exits | Bolt has closed and bolted the door on Wyre, citing ‘investor concerns.’ The $1.5B acquisition would have been the largest non-SPAC acquisition in crypto’s history. First BitGo, now Wyre … Ethereum might just be the only thing capable of merging in these conditions.
Bits | An All-World team of financial heavyweights is coming together to start a digital asset exchange: Charles Schwab, Citadel, Fidelity, and others are launching EDX markets. Gone are the days of big players subtly hinting at their desire to productize crypto; everybody wants in … CME Group announced the launch of options on ETH futures … Coinbase CEO Brian Armstrong announced that the company would be integrating their crypto policy efforts into their app. Coinbase has taken a lot of heat for its missteps in the last year, but has received negligible praise for its (many) accomplishments and rejuvenated focus on crypto ethos … Fireblocks has achieved ‘Centaur’ status, crossing the $100M annual recurring revenue milestone. Fireblocks was just an ember three years ago … We’re really going to tokenize diamonds? What a simulation …
A South Korean court has issued an arrest warrant for Terra co-founder Do Kwon … Merriam-Webster has (finally) added ‘metaverse’ and ‘altcoin’ to the dictionary. There is hope for young readers after all … Why anyone wonders why trust in institutions and government officials is declining is beyond me: between 2019 and 2021, 183 current senators or representatives reported stock trades, with more than half of them sitting on congressional committees that potentially gave them insight into the companies whose shares they were buying or selling. I leave you with this screenshot.
Source Code
Ethereum Already Showing Signs of Increased Centralization
Global Bitcoin Mining Data Review Q1 2022
Comments on the White House report on the climate implications of crypto mining
Treasury says sanctions on Tornado Cash don't stop people from sharing code
MicroStrategy Files to Sell Up to $500M of Stock to Fund Bitcoin Purchases
Fidelity Weighs Bitcoin Trading on Brokerage Platform
Ether’s New ‘Staking’ Model Could Draw SEC Attention
SEC to recommend 'flexible' pathway for token registration
Japan signals chance of yen intervention; market unconvinced
Argentina hikes interest rate by 550 basis points to 75% after inflation overshoots
Starbucks Brewing Revolutionary Web3 Experience for its Starbucks Rewards Members
Digital collectibles company produces NFTs of all five volumes of 1400-year-old handwritten Qur’an
$70M Art Collection at MoMA To Be Sold, Proceeds Could Fund NFT Buys
Reddit’s Ohanian Leads $54 Million Doodles Capital Raise
Venture-Capital Firm Northzone Raises $1B Fund for Fintech, Web3 Investments
VC firm Bloccelerate aims to raise $100 million for new fund
Blockchain Supporter NEAR Unveils $100M VC Fund Targeting Web3 Culture and Entertainment
Crypto Investor FTX Ventures to Take 30% Stake in SkyBridge Capital
Investment Giant KKR Puts Portion of Private Equity Fund on Avalanche Blockchain
Latest Y Combinator batch focuses on web3 infrastructure amid bear market
Bolt's $1.5 billion deal to buy Wyre dies
Schwab, Citadel Securities, Fidelity, Other Wall Street Firms Start Crypto Exchange EDX Markets
CME Group Announces Launch of Ether Options
Fireblocks proclaims 'centaur' status with $100 million in annual recurring revenue
Stock Trades Reported by Nearly a Fifth of Congress Show Possible Conflicts
[Disclaimer: Any opinions expressed are solely my own and do not express the views or opinions of my employer. Because the information included in this newsletter is based on my personal opinion and experience, it should not be considered professional financial analysis or advice.]