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:

• Money laundering scale

• Prices going down

• Paxos expands to Solana

• Alameda drops their Grayscale lawsuit

• Socket recovers funds

• Client diversity in the spotlight

The Latest

Money laundering context

Price go down dept.

What happened to prices?

I was told that a spot BTC ETF approval would be the most bullish event for the industry and that it was not a sell-the-news event. Since the approval, BTC is down ~15%. I thought there was going to be billions upon billions of inflows from institutions that have been waiting for years to get get exposure to Bitcoin safely.

There’s one culprit for this move lower: GBTC. Coindesk recently reported that the FTX estate has sold ~22M GBTC shares, amounting to nearly $1B. Grayscale has seen more than $3B in outflows, and not all of those outflows have resulted in inflows into new BTC ETF products. This is important because as shareholders redeem shares in GBTC, they receive back BTC, which they can then choose to sell. Given its bankruptcy, the FTX estate is likely to do just that and sell, resulting in net downward price pressure. However, if one simply transfers their exposure from GBTC to one of the new ETFs for lower fees, then that should theoretically equate to no net buy or sell pressure.

Much of these outflows can likely be attributed to the widowmaker trade, which was the single reason for many of the cycle blowups, including 3AC, BlockFi, FTX, etc. In this trade, when GBTC was trading at a premium, many funds bought BTC on the open market, gave it to Grayscale in return for GBTC shares, waited for the one year lockup to end, and sold GBTC to capture the premium. This trade worked spectacularly when GBTC traded at a premium but became pretty disastrous when that premium became a discount. On top of paying an increasing amount of interest cost, that interest cost was on a leveraged undercollateralized borrow. Many of these funds likely had corresponding short positions so that they could remain delta-neutral. But after blowing up and defaulting, they would’ve likely closed that short position, while the remaining GBTC position was stuck before unlocking and was still trading at a mass discount. And so whenever these unlocks finally occurred and with GBTC finally trading at near parity with the underlying BTC, the only pressure on the market is sell pressure, which is what is partially occurring today and resulting in all this BTC sell pressure from the GBTC trade unwinding.

All in all, Bitcoin ETPs have seen a net inflow of ~$700M, including inflows into new US ETFs, and outflows from GBTC and BITO (a futures-based BTC ETF). Bitcoin ETFs have been off to a raging start by all metrics, including AUM and trading volume, vastly outshining gold ETFs when they launched. I expect that once this Grayscale GBTC overhang is behind us, and net inflows result from long-term institutional investors seeking to gain exposure to this nascent asset class, then prices will start going up again.

Where do the horses stand in the AUM race? With $1.62B in AUM, BlackRock is ahead, with Fidelity a close second at $1.37B. Next on the list and much smaller is Bitwise, sitting at $448M. I think most of us expected such market dynamics, with old-school TradFi firms dominating the AUM war, given their brand and reputation. — Joseph Cooper, Decential Media

Quick Bits

Paxos expands to Solana

• Last week, Paxos fulfilled its promise of bringing its stablecoin, USDP, to Solana. Notably, this expansion was blessed by the New York Department of Financial Services, representing a significant stamp of approval for Solana.

• Before the Solana expansion, Paxos was only permitted to issue USDP on Ethereum. Such news may not be important to us, but regulatory approval for products such as stablecoins is crucial for a network’s ability to support institutional activity.

Alameda drops lawsuit against Grayscale

• Alameda has finally dropped a largely unjustified lawsuit against Grayscale. The original lawsuit, filed last year in March, accused Grayscale of charging high fees and refusing to allow investors to redeem GBTC shares.

• The lawsuit alleged that “If Grayscale reduced its fees and stopped improperly preventing redemptions, the FTX Debtor’s shares would be worth approximately 90% more than the current value today.” You can’t exactly blame this one on Grayscale when you conveniently borrowed billions in customer assets for malicious use.

Socket recovers 1032 ETH

• Last week, Socket, a cross-chain interoperability protocol, suffered an exploit amounting to $3.3M. Socket powers the cross-chain bridging functionality of a large number of wallets, including Coinbase Wallet, Metamask, and other blockchain networks.

• In combination with various security experts, they have managed to recover 1,032 ETH (~$2.3M). As usual, bridges are proving tricky to secure and continue to suffer from large exploits.

And last but not least

Client diversity. What gives?

On Sunday, Ethereum once again ran into some client snafus. This time, it was Nethermind that experienced some client errors that resulted in roughly 10% of Ethereum validators missing their block attestations. This comes on the back of Besu, an execution client that encountered a bug roughly two weeks ago. These two instances again reaffirm the importance of client diversification, which allows a network to operate safely even if a major bug exists in one of the execution or consensus clients. However, today, a large number of Ethereum node operators use Geth as their client. 44.69% of node operators use Geth. However, within this 44.69% statistic lies large operators such as Coinbase and Lido, meaning that over 80% of staked ETH relies on the Geth client. Furthermore, these operators do not run backup clients. As a result of Geth client dominance, CT has continuously tried to advocate for these large node operators to run backup clients. After months of shouting into the abyss, Coinbase finally responded on Monday, stating that they are conducting an updated technical assessment with the goal of adding another execution client to their infrastructure. It’s likely that node operators running backup clients will become the norm, especially since one does not want to be on the receiving end of a slashing event, and this makes sense for Ethereum where each client has a relatively similar performance. But what about an ecosystem where that is not the case?

The prime example to talk about here is Solana, but in its future state. Today, Solana validators mainly run two clients, the Solana Labs “default” client, and Jito’s MEV-optimized client. However, Jito’s client is a derivation of Solana Lab’s clients, so they might as well be the same thing for all intents and purposes. However, Jump is working on a highly software-optimized client called Firedancer. This new, fully independent validator client is optimized for performance so the client will operate at a capacity only limited by the validator’s hardware. Firedancer, if it works, could offer a few orders of magnitude performance improvements for Solana and has the potential to deliver 1M+ TPS for the network. Given that level of performance, it will be a far superior validator client than any other, which begs the question, should there even be any client diversity at that point? If everyone is running a validator client that supports 1M+ TPS, while you run a validator client that only supports 1,000 TPS, then evidently, you are putting yourself as a validator at a significant disadvantage, both in terms of value to the network and your potential earnings. As the Internet has progressed, we see that various standards and methods to execute packet transmissions have converged over time, both for performance and composability reasons. It’s not hard to imagine that, over time, one validator client will prove supreme in terms of security, safety, and performance. At that point, perhaps client diversity won’t be as important to everyone, and instead, validators can simply run a backup client just in case things go south. — JC

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