Week In Review | Week #3, 2021 | by Ilya Abugov
This was another busy week for the crypto industry. ETH hit a new all-time high, as the ecosystem found itself debating over the question of sustainability. As dapps grow in strength and number, questions about general economic principles and actor alignment are bound to become more pressing.
Here, potentially, decentralized governance will get a major test as disagreeing parties will need to find a resolution in order to maintain a healthy community environment and continue to grow and expand.
The burning question
The cryptocurrency industry was born during the challenging times of a financial crisis. So, it is no surprise that the word “inflation” elicits fears and general disdain from many in the community. Many projects try to function using a hard cap supply, and even create value for users using token burns.
Most recently, Binance announced that its 14th BNB BURN was the largest ever, and amounted to over 3.6M BNB or over $165M.
The Ethereum community is looking to use the burn mechanism to both alleviate the gas cost issues on the network and create a deflationary dynamic for ETH. If implemented, EIP 1559 would result in dynamically adjusted fees and the BASE FEE being burned. Naturally, not everyone in the community is happy about this, as this may hurt the bottom line for miners.
The update should not be included in the Berlin fork, and the community should have some time to discuss the benefits and risks of the proposal. It is worth noting, that the macroeconomic implications of a deflationary cryptocurrency, have not been widely addressed in the crypto industry. While inflation carries a definite stigma in the community, the potential negative effects of prolonged deflation have not been thoroughly discussed.
Finding incentment alignment
While the broader Ethereum community is debating whether to burn, the Yearn community is arguing about the need to mint. The proposal to mint 6,666 new YFI tokens and use a third of that to reward key contributors (the rest would go to the Treasury), has led to a lot of disagreement within one of the key communities in the Ethereum DeFi space.
The supporters have been arguing that this is vital for the project to maintain top talent. Yearn has pioneered the fair launch model, but it left out many of the top developers from benefiting from the project’s growth.
In traditional startups, top talent is often rewarded with equity options to ensure that it is motivated to stay and be productive for the long-term. Many DeFi projects have tried to emulate this by setting aside some of the total token supply for the team. Yearn was launched with its entire supply distributed, and this has left many of the core developers without these incentives.
The opposition wants to defend the “untouchable” nature of the total supply number. Token inflation is seen as a negative by many, and this creates a risk of the divide in the community. If token holders push away core developers it may lead to a major crisis for the project.
Growth brings indexes
The crypto industry and traditional finance have a complicated relationship. On one hand, DeFi is looking to break free from the control of the centralized institutions, on the other hand, the space as a whole celebrates the arrival of institutional money. So, while DeFi pushes ahead with its vision, it keeps looking over its shoulder to figure out what traditional finance players use and want.
Indexes are one such example and are gaining more attention. For instance, COTI’s Crypto Volatility Index, lets investors bet on volatility, similarly to VIX in the traditional markets. The concept of indexes has been growing in popularity, so it is particularly interesting that the CVI index will also have an associated governance token GOVI.
Sector indexes have also been getting some attention. Recently Binance Futures launched the DOTECO Composite Index. The instrument is currently composed of DOCK, REEF, AKRO, KSM. The index is limited to projects trading on Binance, and it will be interesting to see if and when the list of Polkadot projects trading on Binance expands if and how the index will be adjusted.
It is only natural to expect that as the number of offerings for these types of tools grows on centralized platforms, more similar DeFi instruments will appear as well.
The stablecoin space has become a major area of competition in the industry. With a number of different algorithmic and custodial alternatives springing up all over the place, there is a lot for users to consider. Typically stablecoins track USD, but Celo is preparing to offer a EUR alternative.
Regulation around the sector remains unclear, but at least President Biden’s halting of “new or pending” Trump-era regulations, gives the industry more time to build their opposition to the proposed private wallet rules. With there being other regulatory dangers like the STABLE Act, the industry needs to be able to articulate its message in a convincing manner.
Government entities are putting effort into deploying their own digital currencies. For instance, the French Central Bank recently made a transaction with its CBDC variant. If governments become serious players in the stablecoin sector it will become even more important that the industry makes a convincing argument against over-regulation.
Games make some noize
Art and collectibles have captured a lot of headlines over the past few weeks. From Crypto Punks and NBA Top Shot posting spectacular sales numbers to the impressive crypto art auctions, the sector has been showing that blockchain is not only for DeFi.
DappRadar has been working to provide greater insight into this segment and is now piloting its NFT Value Estimator.
Now games are starting to catch up. ENJ got authorized for trading by the Japanese Virtual Exchange Association and will become listed on Coincheck starting January 26.
Mirandus continues to make headlines with another impressive asset sale. This time it was the first of the game’s banks, which went for 30.1 ETH to Gemini. It is interesting that the big game items are going to centralized entities. One of the major ideas behind decentralized gaming is giving power to the players. So, if big companies control key real estate and are thus able to control game dynamics, players may be pushed away from the universe.
Decentral Games, on the other hand, is looking to create a DAO within the Decentraland virtual world. This shows the extension of the crypto stack. While projects are typically considered in terms of L1 and L2, the appearance of a DAO within Decentraland could be a sign of a kind of L3 emerging, signifying the growth of virtual world ecosystems.
Also, it is worth noting that gaming projects are appearing on Ethereum rivals as well. With gas costs high, games have had to look for solutions and alternatives to stay viable. Some, like Axie Infinity, have decided to go with their own chain, others are looking to L2s like Matic Network for help. Still, alternative L1s are getting some attention.
For instance, recently, Star Atlas announced that it has chosen Solana as the platform for the MMO. Solana has mostly been associated with DeFi to this point, with Serum being the most well-known project. However, gaming may provide an easier path to adoption for competing L1s. Since games are capable of sustaining standalone universes, a successful title can catalyze usage, and in turn, lead to the growth of other sectors.
The information provided here is for informational purposes only. This is not investment advice and should not be treated as such. Strategic Round Capital and/or the author of this article holds a position in BTC, ETH, YFI.