Coinbase Earnings Beat, Again

EigenLayer pros and cons I Starknet token valuation | Worldcoin price action | Ethena's stablecoin

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Decential Media
February 23, 2024

Decential Media
A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

  • EigenLayer pros and cons

  • Coinbase earnings

  • Starknet token valuation

  • OFAC sanctions

  • Worldcoin price action

  • Ethena’s stablecoin

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The Latest

EigenLayer pros and cons

There’s a fantastic spy novel called The Eiger Sanction by Trevanian that has some of the best mountain-climbing assassin hijinks you’ll find in the English language. Speaking of a different language -- i.e. Solidity – I can’t help but think of Trevanian’s masterpiece when I hear of the EigenLayer, an improvement upon the Ethereum ecosystem that was released last year but isn’t quite live yet. As if you needed more scent that we’re out of the bear market, the people behind the project just raised $100 million in a series B fundraising round from sole investor a16z Crypto. We’re still very early into this rebound, but it’s on.

The reason EigenLayer has attracted so much attention is because it offers a way for heavy applications to live within Ethereum – ones that need lots of computational power and consume a lot of Ether in the process. Similar to The Merge, when the most-used blockchain transitioned seamlessly from proof of work to proof of stake, the EigenLayer is a testament to the serious and pragmatic way Ethereum developers are going about upgrading the network. It’s even more impressive when you realize these advances are done in real time without Ethereum going down. Long may that record continue.

EigenLayer is a re-staking protocol, meaning it allows a secondary use of the cryptocurrency Ether that is pledged – or staked – as collateral to secure the Ethereum network. Let’s say I have a node on Ethereum and I’ve pledged my 32 Ether to get the chance to organize the next block of transactions and therefore earn free Ether for my trouble. Now let’s say I have 100 nodes and 3,200 Ether locked in the protocol — valued at $9.5 million at current prices. Maybe I’d like to use some of that to help secure other protocols. That’s where EigenLayer comes in – to free that capital burning a hole in my digital wallet.

I get it that it’s a tough hit to have so much potential earning power sit idle in a staking account. But I’ve been through a few financial crises by this point, and the implicit leverage afforded by EigenLayer gives me pause. It sets up a domino situation where if a shock came and margin calls went wide it’s easy to imagine people yanking Ether from re-staking protocols out of prudence or necessity. That panic can crash any market in a heartbeat.

“All of the recent hype around EigenLayer comes before the platform has even launched any of its actively validated services (AVSs) – the third-party networks that will use EigenLayer to power their security, and will ultimately pay out ‘restaking interest’ to the platform's depositors,” CoinDesk wrote this week. As of now, more than $10 billion has been pledged to EigenLayer and other re-staking services, an amount that will only grow in a bull market.  

In traditional finance this is referred to as rehypothecation, one of my favorite words. It can get ugly when collateral is allowed too much freedom. It only adds risk to the system and has to be managed with extreme care – something I’ve never seen in finance. So it’s a mixed bag for us here at Decential. We love that a16z is going so hard on a vital piece of infrastructure. But we just hope that vital piece doesn’t catch fire and burn the house down. – Matthew Leising, editor in chief, Decential Media

Quarterly earnings dept.

Coinbase Earnings

Bald CEOs keep winning. This time, we’re back to Brian Armstrong, whose company, Coinbase, posted fantastic Q4 earnings that blew analyst predictions out of the water. EPS came in at $1.04, vs the consensus estimate of $-0.09. Wall Street analysts are really struggling when it comes to valuing crypto equities. Perhaps they should spend some time on Twitter to get a better read on market activity.

Transaction-based revenue came in at $529M, representing a 64% YoY increase. Consumer made up $493M of that, with a 59% YoY gain. This could be attributable to BONK and JTO which generated a significant amount of volume for Coinbase in Q4, even more than BTC and ETH on some days, and mainly existing users trading significantly higher volumes QoQ. For those who are still wondering whether fees will eventually get compressed as the CEX landscape becomes more competitive and more ETFs are launched for other assets, that is still very far from the case for Coinbase, which manages to charge an average fee of 1.7% for its retail users.

On the institution front, Coinbase saw $125B in volume in the quarter, the same as a year ago. However, the company managed to generate $36.7M in transaction revenue off the same transaction volume compared to $13.4M a year ago. In addition, Coinbase has managed to generate $320M of transaction revenue through February 13th, vs. a total of $529M of transaction revenue generated in Q4 2023. So, all signs are there for even higher earnings in Q1 2024.

For much of the bear market, Coinbase has seen its subscriptions & services revenue be an ever-growing portion of its total revenue. At the peak, subscriptions & services were more than 50% of its total revenue. With a turn in market conditions and a return of crypto activity, that trend has finally reversed with subscriptions & services revenue returning back to 40%. Expect that share to continue to decrease as transaction volume continues to pick up. For context, Coinbase retail volume is still 80% below last cycle’s peak and a mere 3x from the trough. In the last cycle, retail volume 35x’d from the trough to peak, meaning if history repeats, Coinbase has a lot more in store.

Lastly, Coinbase has accounting on its side in 2024. A slew of changes will allow the company to measure the majority of its crypto assets at fair value, reporting unrealized gains and losses in net income. This FASB rule change would allow Coinbase to record $780M in unrealized gains as of prices on December 31, 2023. That’s a staggering $3.25 EPS. Coinbase bought the dip, increasing their BTC exposure from $22M EOY 2022 to $127M EOY 2023 when measured at cost basis, with a similar trade for ETH, where exposure increased from $47M to $129M at cost basis. — Joseph Cooper, Decential Media

Quick Bits

Starknet token valuation

  • Starknet’s token is live and on day one, had a fully diluted valuation of nearly $20B. Is that pretty ridiculous for a rollup that has seen nearly zero activity? Yep. But that’s probably the least ridiculous thing about this airdrop.

  • For example, Starknet stealthily launched its token onchain in November 2022, way before the airdrop occurred. This means that investors and team will vest their tokens a mere two months after the airdrop. Hello exit liquidity?

OFAC sanctions

  • The Treasury’s Office of Foreign Assets Control has added new wallets to its specially designated nationals list. This time, the ten wallet addresses are tied to Russian nationals who were indicted on charges related to ransomware deployment.

  • The crypto game of whack a mole of hacked funds, either from exploits, hacks, or scams, will continue for the foreseeable future. And as the bull market returns, expect to see large hacks occur again as developers get complacent alongside users.

Worldcoin price action

  • Worldcoin is up an astonishing 130% in the past seven days. The reason? OpenAI’s release of Sora, a text to video model, which, quite frankly, can produce stunningly realistic videos.

  • In a future with AI generated content infiltrating every corner of the Internet, could a proof-of-personhood solution that integrates a biometric identity component be the solution? The market seems to think so.

And last but not least

Ethena stablecoin

What is Ethena, and why is it causing an uproar on Twitter? Ethena is a protocol that has developed a new stablecoin, USDe. Users can mint the stablecoin by depositing stETH, and in return, minting USDe. Unlike other CDP backed stablecoins, e.g. I deposit ETH, and borrow DAI, Ethena does something a little differently. They take your ETH and stake it, meaning users receive the staking yield generated. Furthermore, they delta hedge the spot ETH position with a short on various CEXs and DEXs through perps, and then pass on the funding to the users. Putting some numbers to it, a user deposits 1 stETH, which yields ~3% these days, Ethena takes that 1 stETH and puts it on a CEX/DEX, and then shorts ~1 ETH through perps. Then, the protocol mints some USD for the user. Ta-da, suddenly, you have an almost delta-neutral position as you have 1 stETH long and 1stETH short, which means that theoretically the collateral + position value should not fluctuate significantly. And thus, this setup is great for a stablecoin as it’s not exposed to price movements, all while stablecoin holders get to receive 27% in yield.

So, what’s the catch? Well, first of all, the position isn’t exactly truly delta-neutral. There is 1 stETH in long exposure and 1 ETH in short exposure. That’s normally delta neutral, but suddenly becomes not so delta neutral when stETH depegs, which has happened before. Or, for example, what happens if the perps positions on CEXs aren’t maintained with the proper amount of collateral, or even worse, one of the CEX/DEXs shuts down or gets exploited? And this is all fine and dandy in a bull market when shorts get paid as demand for long exposure remains high, but what happens in a bear market if funding turns negative for a consistent amount of time? Who wants to hold a -5% yield bearing stablecoin? Leave that to European bonds. There’s a whole host of questions that really only time can answer. But one thing is certain: Ethena is a victim of its own success. If the stablecoin supply ever grows too large, then realistically, Ethena will put significant negative funding pressure on the perps markets, which means that barring any new demand for longs, the stablecoin supply cannot grow without lowering the yield provided to holders. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.