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:

• Crypto’s risk-free rate 🔬

• Tether doubling down and mining Bitcoin ⛏

• The debt ceiling and crypto 💸

• Crypto <> AI 🤖

• Blockchain definitions… and the truth 👀

The Latest

The U.S. debt ceiling dept.

Crypto’s Risk-Free Rate, What Should It Be?

Last Friday, MakerDAO’s risk core unit team proposed to increase the stability fee (interest rate) of several collateral types and hike the DAI savings rate from 1% to 3.33%. This was part of a proposed endgame vision to align MakerDAO’s interest rates with the risk-free rate. The risk-free rate is the theoretical rate of return of an investment with zero risk. Most of the finance world considers the interest rate on U.S. Treasury bonds as the risk-free rate, as they are backed by the full faith and credit of the U.S. government, whatever that means.

Throughout much of crypto’s history, DeFi interest rates have traditionally been disconnected from TradFi’s risk-free rate. In the bear market, interest rates of lending protocols have consistently been below the risk-free rate, and this isn’t even taking into account the humongous amount of additional risk DeFi has. Short-term T-bills are paying out 5+%, while stablecoin lenders on AAVE have been receiving 2-3% interest for the past few months.

Crypto lacks the ability to capture this changing dynamic in what has been an increasing-rate environment. MakerDAO’s proposal is a step in that direction. Another method is to hold tokenized T-bills, which provide access to Treasury yields, albeit in a permissioned and KYC’d manner. (Arca is one such provider of tokenized T-bills, as we wrote about here.)

This discussion begs the question, what is crypto’s risk-free rate? Many proponents would say it’s the ETH staking yield, but that isn’t denominated in US dollars. Perhaps there’s a different risk-free rate for different types of “money.” Or perhaps there’ll be a crypto-native US dollar risk-free rate.

All that is to say, we haven’t figured out crypto’s risk-free rate, yet. Much of this depends on social consensus. The world deems the US dollar as the safest form of money, and hence the issuer of US dollars determines the risk-free rate. Crypto may disagree with that view and come to its own risk-free rate, separate from traditional finance. — Joseph Cooper, Decential Media

Crypto charting

Here's a deeper look into the economics and mechanics of web3 and crypto courtesy of charts by Pyth Data Association. To see more Pyth research click here.

US Debt Ceiling $SPY $EUR

The US seems to be slowly creeping away from a federal default as President Biden and House Speaker McCarthy reached an agreement that will have to be passed by the House and Senate before becoming law. However, while this was bullish for the equity markets in general (SPY was up 1.4% over the last week), the market increased bets for further rate hikes from the Federal Reserve to combat inflation which hasn’t cooled down as quickly as hoped. With further rate hikes from the Fed back on the table, EURUSD had a terrible week dropping 1% below 1.0700.

Coinbase was in the news last week $COIN $QQQ

They filed a Mandamus Petition in response to the SEC, ex-employee Ishan Wahi reached settlement with the SEC, and Brian Armstrong predicted that China will benefit the most keeping in mind restrictive US crypto regulations.

The stock rallied 4% over the week, which is great, but underperformed the Nasdaq which was up 4.90% over the last week which was buoyed by the crypto-like one-day increase of 25%+ in Nvidia stock.

Quick Bits

Tether Doubling Down on Bitcoin

• In addition to buying Bitcoin using interest income, Tether is set to launch a Bitcoin mining operation in Uruguay. The company is actively hiring to support the initiative. Tether stands to replace Microstrategy as the poster child of Bitcoin and could be the first entity to both buy Bitcoin and mine it.

• ESG is still in trend, so Tether is committing to leaving a minimal ecological footprint from its mining operation. Either way, Bitcoin may take a step back from the energy usage spotlight as GPUs are used in mass to train AI models.

Debt Ceiling Deal and Crypto

• Over the past few days, voting on a debt ceiling deal has been in progress. The deal suspends the $31.4 trillion borrowing limit until Jan 2025, requiring that non-defense spending remain flat for 2024, and cancels $10B in IRS funding (this doesn’t mean the IRS won’t come after you for unpaid taxes).

• Without going too much into treasury general accounts, the treasury will need to shore up cash and issue new debt to refill their books. Regardless of who the marginal buyer of this new debt is, it will likely result in liquidity taken out of the markets, which has historically been bearish, so pay close attention.

AI Crypto Tokens

• Last week, Nvidia stock soared 30% on the back of an earnings beat, powered by the AI trend and the need for GPUs to train generative AI models. Crypto has various AI tokens too. AGIX/RNDR/FET offers exposure to various AI use cases, such as utilizing idle GPUs or smart agents.

• Crypto VC firm Paradigm got a lot of flack last week, when they removed crypto/web3 mentions from their front page, having generated the bulk of their returns from crypto. They will now invest in “frontier technology,” including AI.

And last but not least

Definitions and The Truth

I’m sure most of us have always considered a blockchain a single verifiable source of truth. An article on Friday afternoon prompted a great thought experiment about what the truth really is. A simple example is if Ethereum hard forks one day, and Circle decides to recognize USDC on one chain but Tether decides to recognize USDT on the fork. At that point, what is the real canonical chain? Blockchains are sometimes more complicated than we think, especially when we start connecting them to each other, and building them on top of each other. Like the real world, there are often different versions of the truth depending on who’s looking and through what view.

Inspired by the same article, CT had a massive argument about what rollups are and what defines them. As an industry, we love to have endless arguments about semantics and definitions. I can guarantee that the next billion crypto users (if we ever reach mass adoption) will not be asking, “How do we define a rollup’s security properties?” So why do we spend so much time debating these definitions? To the researchers, builders, developers, VCs, and executives, could we spend a little more time building and funding products that provide value to the real world instead of beefing at each other on Twitter? — JC

Out of the Ether: Special NFT Edition

Have you read the definitive history of Ethereum? No? Well then get your special edition of Out of the Ether while you can. There are only 1,000 that were printed and each copy is an NFT that can be registered on the Lukso blockchain’s Universal Profile protocol.