Original title: Blockchain's "Dial-Up To Broadband" Moment

Original author: Franklin Bi (General Partner of Pantera Capital), Jonathan Gieg (Senior Platform Associate) and Nihal Maunder (Junior Partner)

Original translation: Yvonne, Mars Finance

The moment of "from dial-up to broadband" for cryptocurrency has arrived.

The early Internet was slow, clumsy and unstable. When broadband replaced dial-up connections, new activities and new products on the Internet exploded. The substantial upgrade in bandwidth has unleashed the full potential of the global information network. Today, the same upgrade is happening on blockchain networks.

In the past two years, the Ethereum ecosystem has expanded by about 10 times, driven by L2. L2 achieves faster speeds and lower costs by batching transactions settled on independent blockchains (i.e. L1). This method of expansion is called "rollup chain".

Currently, the total transaction throughput of Ethereum-based L2 exceeds 140 TPS (transactions per second), while L1 has only 14 TPS (see figure).

The current leading L2 is Arbitrum. Since its launch in 2021, Arbitrum has led the L2 field in all important indicators: from transaction volume and developer activity to on-chain fee income.  

The L2 protocol is designed with Ethereum compatibility as a top priority. Users and developers can get the same use and building experience on Arbitrum as on Ethereum, but at a lower cost and faster speed.

This makes Ethereum's scalability a big step forward. In the past 30 days, the Arbitrum network has processed four times the transaction volume of Ethereum. Compared to a year ago, Ethereum's 7-day transaction volume increased by 20%, from 7.7 million to 9.2 million. Similarly, the 7-day transaction volume of the L2 network increased by 850%, from 18.6 million to 163 million. The "broadband moment" of blockchain networks has arrived.

Arbitrum

At the second Pantera Blockchain Summit in 2015, we gathered a small group of industry friends at our lakefront home in Lake Tahoe. Among them was a Princeton professor named Ed Felten. Dr. Felten is a distinguished computer scientist and technology policy advisor known for his pioneering work in cybersecurity and digital content protection. But it was his growing interest in Bitcoin that drew him west.

At the time, Ed Felten was actively conducting Bitcoin research, often collaborating with other academics, including two postdoctoral fellows, Steven Goldfeder and Harry Kalodner. The three of them had been working on the security of Bitcoin wallets until they turned their attention to the industry’s most pressing problem: how to scale blockchains to enable mass adoption. The key insight was a concept that Ed Felten proposed 10 years ago, which now defines an entire class of scaling solutions: interactive fraud proofs.

In 2018, Steven, Harry, and Ed publicly shared a research paper titled "Arbitrum: Scalable Privacy Smart Contracts." The paper was pretty straightforward. But achieving this important work required a much greater effort, so we reunited with Ed, who is now a co-founder of Offchain Labs alongside Steven and Harry.

After meeting the three founders of Offchain Labs, it became clear that they had much more to offer than just technical brilliance. They brought:

· A strong passion for blockchain to build a better world;

· A deep commitment to open source development and community;

· And a focus on creating the best developer experience for Web3 creativity to flourish.

From there, it was an easy decision to write their first check and ultimately lead a seed round in late 2018, kicking off Day 1 of Ethereum’s scaling journey.

Arbitrum Ecosystem

Since its launch in 2021, Arbitrum appears to have become the L2 of choice for leading Web3 projects and developers. Much of its early growth came from DeFi activity. Arbitrum ranks third in transaction volume among all blockchains, behind only Ethereum and Solana.

Today, the rapidly growing Arbitrum ecosystem includes:

· 500+ projects (more than any other L2).

· 1800+ monthly active developers (more than Solana).

· $16B in assets bridged from other chains (tops among all L2s).

· $3B in value deposited into Arbitrum’s DeFi projects (3x more than the next closest L2).

Many established teams have expanded from Ethereum and other L2s to Arbitrum, and have generally had more success than any chain before. For example, Uniswap, the market-leading decentralized exchange, now handles the majority of its L2 volume on Arbitrum, despite originally being built on Optimism. Recently, Uniswap’s Arbitrum instance became the first to reach $1B in daily volume on an L2.

One of Arbitrum’s most remarkable strengths is its native team. From DeFi to gaming, the Arbitrum-first team has made impressive progress across multiple verticals. Here are some of the leading projects in the Arbitrum ecosystem:

DeFi

· Robinhood: The investment platform announced the integration of the Arbitrum DEX for Robinhood wallet users.

· GMX: Decentralized perpetual futures exchange; cumulative trading volume of $190 billion.

· Camelot: Decentralized spot exchange; cumulative trading volume of $12 billion and 900,000 users.

· Radiant: Cross-chain lending protocol; total lending volume exceeds $120 million.

Games

· InfiniGods: Mobile-first Web3 game studio, creator of "King of Destiny"; over 25,000 downloads worldwide.

· Treasure: Decentralized game distribution platform; total market transaction volume of US$280 million; 150,000 players across 15+ games.

· Hytopia: Open source world inspired by Minecraft; over 1.1 million players pre-registered.

· XAI: Web3 gaming infrastructure; over 100,000 transactions per day, over 600,000 connected wallets.

Tokenization of Real World Assets

· Kinto: An industry chain focused on financial services, with KYC for users, in over 80 countries.

· Plume Network: A real-world asset tokenization protocol; over 100 projects have joined.

Arts & Entertainment

· AnimeChain: A decentralized anime IP ecosystem; partnered with Azuki, a top 3 NFT project.

· ApeChain: A dedicated network supporting two of the top 3 NFT projects, Bored Apes and CryptoPunks.

· RARI Chain: A creator-centric chain that enforces NFT royalties.

· Reddit: Previously selected Arbitrum in the “Scaling Bake-off” of the Community Points Program.

As Arbitrum continues to attract top teams and projects, we believe the growth of its ecosystem will accelerate further. The roadmap includes key developments to expand the developer base and onboard new builders, including:

· Arbitrum Stylus: A custom programming environment for writing smart contracts in Rust, C, and C++, minimizing the need for aspiring Web3 developers to learn new languages like Solidity to start building on Arbitrum.

· Arbitrum Bold: An improved, permissionless version of fraud prevention technology that speeds up transaction processing.

From a cornerstone of DeFi to a thriving blockchain ecosystem, Arbitrum embodies its technical prowess and the high-quality community behind its rapid growth.

Performance by the Numbers

Active community engagement, best-in-class developer experience, and technological breakthroughs have positioned Arbitrum as a leading contender in the L2 space. The data proves it.

Let’s look at the fundamental metrics driving L2 adoption:

TVL measures the value of assets deposited into a blockchain to support liquidity or lending activity. 39% of L2 rollup TVL is in Arbitrum. Arbitrum holds $4 billion in its DeFi protocol, while its closest competitor, Blast, has $1.4 billion locked up. This metric makes sense because TVL is an indicator of trading activity, liquidity, and the overall health of a project. High TVL indicates high user engagement and confidence in the platform.

Arbitrum has consistently led in revenue compared to other L2 scaling solutions. While other chains experience fluctuations in their ability to generate revenue, especially in anticipation of token airdrops (as is currently the case with zkSync), the activity of the Arbitrum community ensures predictable revenue that is not impacted by external dynamics. Arbitrum has done this by carving out niches like DeFi, where they have fostered protocols like GMX and Uniswap so that they can cultivate their brand as the go-to chain for DEX swaps and Perp trading.  

Putting current dominance aside, the reason we believe Arbitrum is well positioned to continue to be the go-to scaling solution for Ethereum is its focus on developer activity. As shown in the table above, Arbitrum has built the most attractive platform for developers seeking to deploy decentralized applications. Users will ultimately gravitate toward the ecosystem where the best applications reside, and by doubling down on the developer community, we believe Arbitrum is ensuring its long-term sustainability.

UNISWAP CAPITAL ALLOCATION INFLECTION

Original author: Cosmo Jiang, Erik Lowe

Original title: UNISWAP CAPITAL ALLOCATION INFLECTION

For us, a clear thesis is that tokens are a new form of capital formation that is replacing equity in a generation of businesses. The emergence of protocols that can generate real revenue, have product-market fit, are guided by strong management teams, and have sustainable unit economics enables fundamentals-based valuation frameworks to be applied to digital asset investments. We believe we are at an inflection point for this asset class.

Sustainable governance through economic alignment

Uniswap is one of the largest decentralized exchanges in the DeFi ecosystem, with $5.8 billion in TVL and generating $1.8 billion in transaction fees annually.

In February, the Uniswap Foundation proposed a major overhaul of the protocol’s governance system that would allow token holders to earn a return on capital, directly tying tokens to the value creation of the protocol. If passed, a portion of transaction fees would be distributed to token holders, but only to those who actively contribute to the protocol by participating in protocol governance.

“This proposal seeks to bolster and strengthen Uniswap’s governance system by incentivizing active, engaged, and thoughtful delegation. Specifically, we propose upgrading the protocol so that its fee mechanism rewards UNI token holders who have delegated and are holding tokens.”  Erin Koen, Head of Governance, Uniswap Foundation, March 1, 2024

In our view, this is a big deal for both the credibility of the token and its path to current or future value accrual. We believe that our view is becoming increasingly correct. Following in Uniswap’s footsteps, other revenue-generating protocols that might have previously been reticent now have a template for pursuing capital return plans. We believe this will further enhance the credibility of the DeFi ecosystem, and more investors will gravitate toward applying basic valuation frameworks to digital asset investments as a result.

To understand the details of the company’s governance, it is important to note that this proposal was made by the Uniswap Foundation as a representative of the Uniswap DAO, which is responsible for governing the Uniswap protocol. Uniswap DAO is a separate entity from Uniswap Labs, a US business based in Brooklyn, New York, whose team spun out over a year ago as a third-party service provider to the protocol and was not involved in this decision. We can assume that the Uniswap Foundation conducted a legal analysis and determined that this was a path that would be acceptable to regulators. Legal considerations likely played a role in the cautious approach of returning protocol value to token holders before this. The regulatory landscape for DeFi is complex and evolving, but we view this as a positive signal for protocols seeking to implement value accrual mechanisms for their underlying tokens.

Pantera’s Liquid Token Fund has invested in a number of protocols that have begun to examine Uniswap’s proposal and are considering building similar value accrual mechanisms of their own. We believe this would be a positive and fundamental step forward for our investments.

Market Reaction

We believe the market’s reaction to this news highlights the importance of proper economic alignment and incentives for token holders, particularly as this may translate into long-term sustainability and continued growth of the protocol through strong governance. Trading volume for the UNI token surged 60% in the hours following initial news of the proposal and is currently up 50%.

Who Pays for This Opinion?

Original Author: Erik Lowe

Original Title: WHO PAYS FOR THIS DRIVEL?

In November 2022, shortly after the collapse of FTX, the European Central Bank published a not-so-prescient article titled “Bitcoin’s Last Stand” predicting that Bitcoin would soon be on the “road to irrelevance.” This was not the case. In fact, Bitcoin’s trading volume is 320% higher than when the article was published.

In a recent blog post, far from throwing in the towel, the ECB revisited some of the arguments cited in the 2022 article and doubled down on their skepticism.

We wanted to take a moment to respond to these claims, including other points they make in their latest blog post, to provide an alternative perspective.

ECB View 1: Bitcoin is barely used for payments outside of darknet criminal activity.

First, the misconception that Bitcoin is a useful tool for financing terrorism or money laundering stems from Bitcoin’s early association with Silk Road and darknet markets. As the world learned about Bitcoin, it quickly became clear that an open public ledger was not the best way to discreetly move funds. Bitcoin’s traceability and traceability are coveted by financial fraud investigators. The U.S. Department of Justice was able to successfully track down those responsible for the 2016 Bitfinex hack because of Bitcoin’s public ledger.

Today’s arrests, and the largest financial seizure in the department’s history, show that cryptocurrencies are not a safe haven for criminals. In a futile effort to maintain digital anonymity, the defendants laundered stolen money through a maze of cryptocurrency transactions….  “Today, federal law enforcement has proven once again that we can follow funds through the blockchain and that we will not allow cryptocurrency to become a safe haven for money laundering or a lawless zone in our financial system....".  - Deputy Attorney General Lisa O. Monaco

According to Chainalysis’ 2023 Crypto Crime Report, illegal activity conducted via cryptocurrency accounted for only 0.24% of transactions in 2022. Not to mention, according to a senior legal official at the Counter-Terrorism Committee Executive Directorate (CTED), cash remains the primary means of conducting terrorist financing.

The ECB is actually correct on their second point about Bitcoin not being a successful means of payment. But they missed a point.

Yes, the original promise of Bitcoin as a “peer-to-peer electronic cash system” was first and foremost to enable fast, cheap transfers of value without third-party involvement.

Another benefit of Bitcoin is that it should be a hedge against inflation and currency debasement due to its limited supply. Governments continue to print money, eroding the hard-earned savings of citizens. Holding Bitcoin promises to solve this problem - and it has solved it well, currently storing $1.4 trillion in global wealth. During the exploration phase, Bitcoin has become “digital gold”, and its simple design optimizes Bitcoin’s robustness.

We should note that various layers of Bitcoin, such as the specialized payment layer Lightning Network and the programmable layer Stacks for smart contracts, may eventually enable payment functions in the future. The analogy is sometimes made that Bitcoin is like Fedwire, the base payment layer where all transactions are ultimately settled, while additional layers such as Lightning are similar to Mastercard or Visa. Layer 1 Bitcoin has proven to not be the preferred payment method for your morning coffee, and certainly not for your pizza. In our view, Bitcoin does not need to be a payment instrument. What will fill this gap are stablecoins built on faster, higher throughput networks, whether Bitcoin Layer 2 or other blockchains. You can read more about this in detail here.

ECB View 2: Bitcoin is still not a suitable investment.

It is a fancy way to say that an asset, especially one that has doubled in value almost every year for the past 11 years, is still not a suitable investment. Beyond that, in our view, the fact that Bitcoin does not generate cash flows, lacks the social benefits of items like jewelry, or cannot be subjectively appreciated for its outstanding ability like a work of art does not disqualify Bitcoin from being a suitable investment.

In fact, most stores of wealth or mediums of exchange, including the US dollar, do not have much intrinsic value. One could argue that governments require dollars to meet their tax obligations, thereby giving them some value. But if you actually tried to get the true intrinsic value of US currency by melting coins, for example, to get the value of its mineral components, it would actually be a felony. Some might argue that the US dollar itself is a trust scheme, and the US national debt as a percentage of GDP has reached record levels, so confidence in the value of the dollar may not be as rational as confidence in the value of Bitcoin.

There are also very significant assets with very low intrinsic value, such as Jackson Pollock paintings. The actual value of the paint and canvas in a Pollock painting is $40. They trade at $100 million because people believe that they will be sold for at least that much, or more, in the future. This is the case with Bitcoin; people can store wealth in Bitcoin and expect it to be worth at least as much, or more, in the future.

As for cash flows and dividends, protocols that generate real income are emerging, such as Uniswap, which allow traditional and more fundamental valuation frameworks to be applied to digital assets.  

ECB View 3: Bitcoin’s price is manipulated.

In our view, concerns about price manipulation go far beyond what is justified. Just as the outdated stereotype that Bitcoin is used for illegal activities. We believe that the same is true for market manipulation. We have not seen any evidence that manipulation in the Bitcoin market is more serious than in any other market of its size. Over the past 30 days, Bitcoin's daily trading volume has averaged $47 billion. By comparison, only one stock, Nvidia, among the "Magnificent Seven" has exceeded this number. The total market value of Bitcoin is $1.4 trillion.

Small exchanges outside the United States and Europe sometimes exaggerate their trading volume to push themselves up the leaderboard in an attempt to attack new customers. Fake trading volume obviously has no directional impact on the market. Most importantly, it is not present in the activities reported by regulated exchanges such as Coinbase and Bitstamp.

New Records in Bitcoin Price Action

Original Author: Erik Lowe

Original Title: NEW RECORDS IN BITCOIN PRICE ACTION

In February of this year, the price of Bitcoin saw its largest increase ever in a month. The price of a single Bitcoin increased by $18,600. It took nine years for Bitcoin to reach this price for the first time in December 2017, and just a year ago, the price of Bitcoin was $18,600.

In addition, Bitcoin also set a record for the longest consecutive good performance in history, seven months. The previous longest consecutive rise period was six months, which occurred three times in the past 14 years.

Regulatory Update

Original Author: Andrew Harris

Original Title: A REGULATORY UPDATE

U.S. state regulators and federal courts continue to be active in the cryptocurrency space. The Securities and Exchange Commission (SEC) continues to investigate crypto asset platforms, this time targeting Kraken. Binance has reached a staggering settlement agreement with multiple regulators, including the Commodity Futures Trading Commission (CFTC) and the U.S. Treasury Department, but not with the SEC. In addition, the New York Attorney General expanded its already serious prosecution of Genesis, Gemini, and Digital Currency Group, now alleging that investors were defrauded of approximately $3 billion through lending programs.

Regulatory actions outside of the courts also continue at the state and federal levels. The SEC’s attempt to clarify the definition of “dealer” under the Securities Exchange Act of 1934 will almost certainly require many crypto market makers and trading firms to determine whether they need to register with the SEC and FINRA. The Consumer Financial Protection Bureau (CFPB) published a proposed rule that, if finalized, would bring certain large non-bank companies that facilitate “covered consumer payment transactions” through digital wallets, payment apps, and other payment features under the CFPB’s regulatory scope. California finalized a broad rule regulating entities that engage in “digital financial assets” that could embroil many gaming and other cryptocurrency companies.

Key Points:

· The SEC is continuing to prosecute crypto trading platforms, most recently Kraken, and the Commission’s prosecutions of Binance and Coinbase are also ongoing.

· State regulators, particularly in New York, have also been active, with the New York Attorney General recently expanding his prosecution of Gemini, Genesis, and Digital Money Group. The trend of regulators taking action against crypto-asset market participants looks set to continue in the short to medium term.

· In addition to enforcement, federal and state regulators continue to propose and finalize rules that have significant impacts on cryptocurrencies. Recent examples include: the U.S. Federal Reserve Board’s (CFPB) proposed rule targeting large entities that provide wallet and payment functionality; the U.S. Securities and Exchange Commission’s (SEC) adoption of a final rule defining which entities, including cryptocurrency trading entities, constitute “dealers” under the Exchange Act; and California’s wide-ranging new law around digital financial assets.

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