The RWA Narrative, Here Comes Larry Fink

BTC ETF outflows | Base execution woes | DOJ charges KuCoin founders

Author

Decential Media
March 28, 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:

  • BTC ETF outflows

  • Base execution woes

  • DOJ changes KuCoin founders

  • SEC seeks $2B from Ripple Labs

  • London Stock Exchange ETNs

  • Ondo and the RWA narrative

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The Latest

ETF outflows

Last week, the industry saw the first significant ETF outflows since their approvals. In total, BTC ETFs saw $890M in outflows. As with many who have attached their daily feelings to ETF inflows, I’m sure many of us thought that it was truly over last week. However, what many failed to realize is that, for starters, as much as we all love it, the ETF can’t keep on experiencing net inflows forever. At some point, individuals will take profits and the ETFs will see some net outflows. In addition, no one knows how much of this GBTC unwind is intertwined with the Genesis bankruptcy proceedings, along with the fact that weak market participants were likely decreasing their risk exposure given FOMC uncertainty.

However, as is most things in life when you zoom out a bit, all is well. Jerome Powell said some magic words and the market turned dovish. Tuesday and Wednesday of this week have respectively brought $418M and $243.5M in inflows, so it appears the party is back on. In other news, it doesn’t seem GBTC’s fee strategy of having the highest fee by a wide margin is working considering that the ETF has now seen $14.7B in net outflows. Maybe customers weren’t as sticky as they thought they would be. Just as a side note, the halving is expected to occur in 3 weeks or so, with a tentative date of April 20 (what timing). There’s a lot to get excited about, whether that’s the Coinbase premium returning, rumors of an ETH ETF, or being at the brink of a global cutting cycle. But as always, let’s not get too ahead of ourselves. – JC, Decential Media 

Scaling dept.

Base execution woes

We may have spoken too early regarding the success of the Dencun upgrade in reducing the cost of transacting on L2s. The culprit? Base, which is Coinbase’s L2s. Post 4844, transaction fees on L2s decreased for most rollups, including Arbitrum, Optimism, zkSync, and even Base itself. However, in recent days, Base has become a victim of its success. As a result of overwhelming demand to trade memecoins, the chain is constantly hitting the block gas limit, which has resulted in L2 execution fees increasing exponentially. For example, on March 20th, the median gas fee spiked up from below 1 cent to above $1, not something you want to see when 4844 promised a 100x reduction in L2 transaction fees.

Did lower transaction fees increase transaction demand? Maybe, but only to a limited extent. The larger factor is probably Base native memecoins such as DEGEN taking off and trading at record volumes. What does this mean for Base? First of all, sequencer profits have greatly increased. If L2 transaction fees increased by orders of magnitude while data posting costs decreased by orders of magnitude, then Base stands to make a lot of money. And by a lot of money, I mean a huge amount. For example, on March 26th, Base generated $1.73M in transaction fees while only paying $4K to Ethereum. If you annualize that, it adds a cool $2.26 to COIN’s EPS, vs the 2023 fiscal year EPS of $0.37. If this trend continues, then Coinbase is going to blow earnings out of the water, again.

What is Base planning to do about this? Surely $1.0 transaction fees are a suboptimal user experience. For starters, Base has decided to increase its gas target by 50% to 3.75 mgas/s. Following that, there are plans to increase it further early next week. Numerous bottlenecks would prevent Base from increasing it further, including expensive node infrastructure and sequencer hardware demands. In addition, increasing throughput results in a faster rate of state growth.

Base has less than 500K unique active addresses today, so how is it expected to bring the next billion users on-chain? They cannot continue to increase the gas target by any significant amount without breaking anything. At this point, data availability is no longer the bottleneck, all eyes now turn to execution. — JC

Quick Bits

DOJ charges KuCoin founders

  • On Monday, the DOJ charged two of KuCoin’s founders, Chun Gan and Ke Tang for flouting US anti-money laundering laws to grow KuCoin into one of the world’s largest crypto exchanges.

  • The charge alleges that KuCoin and its founders deliberately sought to conceal the fact that substantial numbers of US users were trading on KuCoin’s platform. I think we all knew this was coming, and this will likely happen for other exchanges that don’t have a KYC policy.

SEC seeks $2B from Ripple

  • The SEC officially filed its proposed final judgment in its case against Ripple Labs. The filing asks to impose a fine of $1.95B against Ripple Labs.

  • The SEC and Ripple have been head to head in a multi-year battle, including a battle on whether a sale of unregistered securities took place. This battle will continue as it likely sets the precedence for whether many other token launches can be considered to be unregistered securities or not.

London Stock Exchange crypto ETN listing

  • The London Stock Exchange will enable a market for BTC and ETH exchange-traded notes on May 28. This comes after the stock exchange opened up applications earlier this year on April 8.

  • With this, London will finally be able to follow the US’ suit in making Bitcoin, and also Ethereum available to various classes of investors. The stock exchange would only consider physically-backed BTC and ETH ETNs with assets “wholly or principally held in cold storage.”

And last but not least

Ondo and the RWA narrative

Ondo Finance is a RWA protocol. But what does that even mean? In the simplest terms, Ondo’s goal is to bring institutional grade financial products and services on-chain and make them available to everyone, and most of the time, they are achieving that by tokenizing off-chain assets and making them accessible on-chain. Their two key products today are USDY, which gives individuals and institutions access to US dollar yield through a stablecoin, and OUSG, which is tokenized US treasuries. In total, the protocol currently boasts ~$200M in TVL. Ondo recently announced Ondo Global Markets, a platform set up to provide native access to traditional securities and associated exchange liquidity for on-chain investors and protocol developers. The platform will include a broker-dealer with accounts at traditional trading, clearing, and settlement venues, which will enable users to execute buy, sell, and transfer orders in public securities using public market liquidity via smart contract calls. Ondo also recently announced instant, 24/7/365 subscriptions and redemptions for its OUSG product. This will be facilitated through a new token, rOUSG, which rebases, meaning yield is distributed as new tokens. As part of the evolution, a significant amount of OUSG’s assets will also be reallocated into BlackRock’s newly announced USD Institutional Digital Liquidity Fund (BUIDL).

As the market becomes more risk on, and as Larry Fink continues to shill tokenization as the future of finance, it is only natural that the RWA narrative as a whole has caught a significant bid. Notable outperformers of the recent RWA narrative include Ondo’s token, ONDO. The promise of faster near-instant settlement, in comparison to TradFi’s T+2 settlement, is enough to lure the boomers. Oh, and the obvious cost benefits involved from removing the middleman and having a public, transparent ledger that tracks all transactions too. However, most successful attempts at tokenization so far have been US treasuries and money markets. In comparison, for example, tokenized equities only represent less than 0.03% of the RWA TVL on-chain. One reason for this could be the low liquidity that such assets have on-chain, which is likely costly and difficult due to regulations. Ondo is an interesting player in the RWA space because it is attempting to own the entire stack, including tokenized debt, tokenized DeFi platforms, and tokenized equities. — JC

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