New in Digital Assets: April 2023

After a volatile March which saw the prices of crypto assets surge, April saw relatively muted price activity despite high-profile developments in technology, adoption, and the regulatory landscape. Bitcoin (BTC) and ether (ETH) gained 2.7% each, outperforming most coins, and increasing the total crypto market capitalisation by about 0.8%.

The main event during April was Ethereum’s Shanghai Upgrade, which was executed successfully. Shanghai marked the final milestone in Ethereum’s transition to a proof-of-stake (PoS) consensus mechanism, with validators now able to withdraw their staked ether (ETH) and any accrued staking rewards from the Beacon Chain. The Shanghai Upgrade is a crucial step in Ethereum’s development, as removing the restrictions on staking withdrawals fundamentally changes the risk and liquidity considerations associated with staking.

Ethereum staking following the Shanghai Upgrade enables both the deposit and withdrawal of ETH. The Beacon Chain is responsible for the PoS consensus engine, where it handles the flows of partial withdrawals, full withdrawals, and new deposits. The Beacon Chain also rewards validators with newly minted ETH in exchange for proposing and validating honest blocks, thus incentivising network participants to contribute towards network security.

Full withdrawals represent the withdrawal of a validator’s principal stake from the Beacon Chain. Partial withdrawals represent staking rewards earned by validators in exchange for providing security services to the network. The withdrawal of these rewards does not affect a validator’s staked principal.

The stacked bar chart demonstrates an increase in both partial and full withdrawals over the two-week period following the Shanghai Upgrade. The orange line reveals a steady and continuous rise in deposits, exceeding full withdrawals since April 15, 2023. While the trend only reveals part of the story, it lends credence to the hypothesis that the unlock of staked ETH served as a major de-risking event for potential depositors concerned about execution and liquidity risk.

Moreover, partial withdrawal activity may indicate a simultaneous re-investment of validator staking rewards back into the Beacon Chain. The trend seems to suggest that many Ethereum holders remain committed to staking their assets, highlighting the confidence in the Ethereum network’s potential and the attractiveness of the yields provided by the staking mechanism.

If you wish to learn more about Shanghai’s details, please refer to our blog post, The Shanghai Upgrade: Finalising Ethereum’s PoS Transition.

News & Headlines

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Equities

Coinbase Global, Inc. (COIN) Expands Globally and Takes Legal Action Against the SEC

Coinbase, the second-largest exchange by trading volume, has been actively seeking to expand its international presence amid a lack of regulatory clarity in the U.S. CEO Brian Armstrong has suggested that the exchange could shift its focus away from the U.S. if conditions do not improve.¹ In April, Coinbase secured a license from the Bermuda Monetary Authority (BMA) to open a derivatives exchange, increasing the company’s global footprint. The exchange is also in talks with Emirati regulators to potentially establish a presence within the crypto-friendly Abu Dhabi Global Market (ADGM) and has held encouraging meetings with the Bank of England, the Financial Conduct Authority (FCA), and the Economic Secretary Andrew Griffith in the U.K.

In addition to its global expansion efforts, Coinbase has taken legal action against the U.S. Securities and Exchange Commission (SEC). The exchange filed a lawsuit requesting the court to compel the SEC to respond to a rulemaking petition submitted last year. Coinbase’s petition called for clarification on how securities laws apply to cryptocurrencies and requested a formal notice-and-comment process for public input. The lawsuit follows the SEC’s issuance of a Wells Notice to Coinbase and highlights the ongoing tension between the exchange and the regulatory body.

Marathon Digital Holdings (MARA) and Riot Platforms, Inc (RIOT) Expand Their Operations in Q1 2023

On April 3, 2023, Marathon published its March 2023 BTC production and mining operations update. Marathon experienced a 64% increase in its operational hash rate during Q1 2023, reaching 11.5 exahash per second (EH/s).² Technological upgrades improved hash rate consistency, resulting in a 41% increase from the prior quarter to a record 2,195 bitcoin in Q1 2023.³ The company produced a monthly record of 825 BTC in March, up 21% from the previous month.⁴ Furthermore, Marathon reduced its debt by $50 million and increased its unrestricted BTC holdings by 3,132 BTC by prepaying a long-term loan and terminating credit facilities with Silvergate Bank.⁵ The company now possesses $124.9 million in unrestricted cash and cash equivalents, alongside 11,466 BTC.⁶ Similarly, on April 5, 2023, Riot Platforms shared unaudited production and operations updates for March 2023 as well. Riot Platforms saw a 36% increase in BTC production compared to March 2022, producing 695 BTC.⁷ The company now holds 7,072 BTC, all obtained through its mining operations. Riot added 6,912 mining rigs to its fleet, totaling 94,176 miners with a hash rate capacity of 10.5 EH/s.⁸ With three new buildings completed at its Rockdale Facility and a fourth nearing completion in April 2023, Riot expects to deploy additional rigs and boost its overall hash power.⁹

Adoption

Franklin Templeton Expands its U.S.-registered mMutual Fund to Polygon

Franklin Templeton’s adoption of asset tokenisation illustrates how enterprises are beginning to integrate public blockchains into their businesses. Franklin Templeton announced that its U.S.-registered mutual fund, the Franklin OnChain U.S. Government Money Fund (FOBXX), will expand to the Polygon blockchain, a layer 2 (L2) solution designed to enhance Ethereum’s scalability. FOBXX is the first U.S.-registered mutual fund to use a public blockchain for transactions and share ownership recording. The fund is currently active on the Stellar blockchain with over $270 million in assets under management.¹⁰

Google Cloud Expands its Web3 Startup Program with the Addition of Polygon

Google Cloud continues to cement its presence in the Web3 community by partnering with Polygon. The collaboration is anticipated to empower developers to tap into Polygon nodes in order to create and deploy dapps. Google Cloud also plans to dedicate technical resources to developing tools such as zero-knowledge technology. The collaboration adds to Google’s Web3 startup program, which includes prominent names such as Alchemy, Aptos, Base, Celo, Flow, Hedera, Nansen, Near, and Solana.

Orders for Solana’s Crypto-Ready Smartphone “Saga” Start on May 8, 2023

Solana has announced the upcoming launch of its smartphone, “Saga,” scheduled for May 8, 2023. The first-of-its-kind device is designed both as a regular Android device and a “cold-storage” hardware wallet. It can offer seamless integration with the Solana blockchain, providing users with a smooth and secure experience managing cryptocurrencies and accessing an ecosystem of decentralised applications (dapps).

Saga could potentially be a game-changer in the mobile device market, promoting mainstream adoption of blockchain technology and decentralised applications. Importantly, its custom dapp store will list crypto applications with 0% fees on downloads and in-app transactions.¹¹

Regulation

EU Parliament Approves Crypto Licensing and Funds Transfer Rules

The European Union (E.U.) Parliament has voted in favor of the Markets in Crypto-Assets (MiCA) regulation and the Transfer of Funds Rules. MiCA is a new crypto licensing regime framework set to take effect in 2024, including licensing requirements for crypto service providers and mandates that stablecoin issuers maintain sufficient reserves. The Transfer of Funds Rules is a measure requiring crypto operators to identify their customers to combat money laundering.

This vote marks the first major jurisdiction to introduce a comprehensive crypto law, providing regulatory clarity and consumer protections. Stefan Berger, the lawmaker leading negotiations, commented the rules put the E.U. “at the forefront of the token economy.” Berger added, “the European crypto-asset industry has regulatory clarity that does not exist in countries like the U.S.,” and believes that with the measures, “the sector that was damaged by the FTX collapse can regain trust.”¹²

Crypto & Web3

Enter the zkEVMs – Ethereum’s Next Generation Layer 2 Scaling Solutions

Matter Labs’ “ZKSync Era” and Polygon’s “Polygon zkEVM” have deployed on Ethereum and are now available to the public. Both are a type of layer 2 (L2) scaling solution known as zkEVMs, which uses validity proofs to settle transactions on Ethereum and can support Ethereum smart contracts.

Many refer to zkEVMs as the pinnacle solution to scale Ethereum, as they offer advantages over other solutions, such as faster settlement speeds, high security, and trustlessness. With the launch of the first two zkEVMs, Ethereum appears to be entering a new paradigm of scaling solutions, utilising zkEVM technology to accommodate increased demand and offer more efficient, scalable, and cost-efficient alternatives for transaction data.

While both zkSync Era and Polygon zkEVM use validity-proof technology for settlement, they have major differences. zkSync Era is expected to deliver better performance and lower fees for users, as well as potentially provide a better user experience, thanks to native account abstraction support, while Polygon offers full compatibility with Ethereum, providing seamless dapp portability into the Polygon ecosystem.¹³

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