In this issue
- Arbitrum: One piece at a time
- DeGods: So long, Solana
- Boao Forum: Considering crypto
From the Editor’s Desk
“Two steps forward, one step back” is arguably an accurate characterization of the cryptocurrency industry at the moment, particularly in the U.S., where recent collapses of crypto-focused banks and a series of regulatory actions have left the industry with much to ponder.
We’ll get to the two steps forward momentarily, but first let’s look at the step back. In the past few months, U.S. authorities have shut down access to crypto services, targeted banks providing services to the crypto industry, filed charges against crypto exchanges, sued celebrities for endorsing cryptocurrencies, taken legal action against Binance, the world’s biggest exchange, and made fresh accusations against disgraced FTX founder Sam Bankman-Fried.
Some might say these companies and individuals had it coming, given the disregard shown in certain parts of the sector for laws and regulations, and the dire consequences many investors have suffered as a result. Others, however, note the chilling effect this clampdown appears to be having on the industry stateside, and the Securities and Exchange Commission, in particular, is gaining a reputation for hostility to crypto.
Whether such a reputation is deserved or not will become clearer during the remainder of the year, during which we hope to see the regulatory scales tip in favor of enablement rather than only enforcement. However, it’s apparent that U.S. authorities’ actions may be having at least one unintended consequence: two steps forward for crypto businesses looking to take advantage of other jurisdictions’ more outwardly friendly stance on the industry.
One place that seems to be benefiting is our own back yard, Hong Kong, where, following the unveiling of a planned regulatory framework for digital assets and amid a push to make the city a crypto hub, digital asset companies from around the world are planning to set up. Even Chinese state-owned banks are getting in on the action.
Of course, the U.S. won’t cease to matter for the crypto industry, and it’s unlikely that Chinese authorities will extend the scope of their Hong Kong crypto experiment within the country’s borders, but Beijing’s blessing of Hong Kong’s plans, and its own ambitions in the Web3 space more broadly, are getting attention.
That, if nothing else, ought to spur U.S. authorities into action when it comes to honing a regulatory environment that fosters the industry’s growth and development. The industry has suffered enough backward steps. Regulators there and elsewhere need to ensure it can keep moving forward.
Until the next time,
Founder and Editor-in-Chief
1. Sum of its parts
Arbitrum Foundation, the company leading the development of layer-2 scaling network Arbitrum, has announced that it will split AIP-1, its most recent governance proposal, into multiple smaller proposals following a community backlash against its size.
- “AIP-1 is too large and covers too many topics,” Arbitrum said in a Twitter post. “We will follow the DAO’s advice and split the AIP into parts. This will allow the community to discuss and vote on the different subsections.”
- AIP-1, short for Arbitrum Improvement Proposal 1, covered numerous topics, including the creation of Arbitrum DAO, a decentralized autonomous organization governed by ARB token holders, allowing the Arbitrum Foundation to issue special grants and transferring 750 million ARB tokens to a newly created “Administrative Budget Wallet” controlled by the foundation.
- More than 76% of voters in the AIP-1 have voted against the proposal.
- The community outrage started after a blog post by Arbitrum Foundation employee Patrick McCorry highlighted that AIP-1 was a “ratification and not a request,” and that the foundation had already started selling ARB tokens for stablecoins before the governance vote was finalized.
- “We believe that a lot of the negative sentiment around AIP-1 was driven by confusion around the notion of AIP-1 being a ratification and not a request,” McCorry wrote on the blog. “For those that didn’t realize that this was a ratification, they may have been surprised to see that the Foundation’s tokens have already been separated and begun to be utilized.”
- The foundation said that “10 million ARB tokens were sold to fiat to fund pre-existing contracts and to pay for near-term operating costs,” adding that it had no near-term plans to sell more tokens.
- The 750 million ARB tokens being sent to the foundation will also be voted on in a separate proposal, with a potential four-year vesting period. The foundation will also propose transparency reports for the spending of the funds.
- The Arbitrum Foundation said it would issue the new proposals early this week.
- Despite the concerns in the community, Arbitrum’s ARB token rose 7.2% in the 24 hours prior to 4 p.m. Wednesday in Hong Kong, to trade at US$1.26, according to CoinMarketCap.
Forkast.Insights | What does it mean?
Governance is hard, and in crypto it’s particularly hard. That’s because foundations are trying to deliver on roadmaps, but communities want the ability to take projects in their own direction. Arbitrum has now experienced that first-hand, and it’s not the first foundation to struggle.
Ethereum Classic and Bitcoin Cash were the result of governance clashes between core community members, and most projects have suffered such issues in one form or another. Although DAOs were designed to organize communities and open up decision-making, research suggests the reality is less democratized.
When Chainalysis analyzed the workings of 10 major DAO projects, it found on average that less than 1% of all holders have 90% of voting power. The same report found that as few as one in 10,000 governance token holders had enough tokens to create a proposal. When it came to passing a proposal, only one in 30,000 holders had enough tokens to do so.
In Arbitrum’s case, the company came up against a community that had been airdropped more than 1 billion ARB tokens across more than 550,000 digital wallets little more than a few weeks ago. The community’s resistance to the proposal was focused on the foundation’s decision to flood the market with vast sums of tokens to raise funds, upsetting the price.
Arbitrum has agreed to try again, but the damage may already have been done.
2. Token transfer
DeGods, the largest Solana-based non-fungible token (NFT) collection by all-time sales volume, has started migrating to the Ethereum blockchain.
- Despite the migration, activity on the Solana network has been increasing, with the Forkast Solana Composite, a measure of the Solana NFT market, rising by 4% over the past week.
- DeGods was launched by Web3 developer DeLabs in October 2021 with a 10,000 NFT mint, and is ranked the 30th largest NFT collection by all-time trading volume, according to CryptoSlam, the data intelligence arm of Forkast Labs.
- On Wednesday, y00ts, another NFT project developed by DeLabs and the sixth-largest collection on Solana by all-time trading volume, began a move to the Polygon blockchain. More than 80% of y00ts have already completed the move, according to data from Dune Analytics.
- DeGods owners completed more than US$2.19 million in sales last Friday alone, marking the highest daily sales volume since the NFT collection’s launch, according to CryptoSlam.
- The rising activity may indicate that traders are expecting DeGods’ price to rise on Ethereum, just as it has for y00ts, whose floor price has moved up around 23% since its migration to Polygon, according to CoinGecko data.
- However, the DeGods’ floor price has been on a downtrend since its landing on Ethereum, falling from more than 12.5 ETH on Saturday to around 8.6 ETH at press time, according to CoinGecko.
- On Solana, the floor price of DeGods was 760 SOL midweek in Asia, down 20% from a high of 950 SOL last Saturday, according to CoinGecko data.
- DeLabs, the Los Angeles-based NFT firm behind DeGods and y00ts, announced the projects’ moves to their designated blockchains last December, the same month that SOL dipped below US$10 for the first time since early 2022. The startup received a US$3 million grant from Polygon to migrate blockchains, according to DeLabs founder Rohun ”Frank” Vora.
- DeLabs has partnered with zero-fee NFT platform Blur.io as its recommended marketplace for DeGods on Ethereum, according to a tweet from DeGods.
- The migration of DeGods from Solana is expected to drain around US$200 million, the estimated market capitalization of the NFT collection, from the blockchain.
Forkast.Insights | What does it mean?
In a stubborn bear market, blockchains are fighting to lure projects away from rivals, and projects are relocating to what they perceive to be greener blockchain shores. DeGods and its sister project y00ts’ departure from Solana to Ethereum is part of a growing number of such moves.
Doodles, a blue-chip NFT project, moved from Ethereum to Flow, and some bored Ape holders have been migrating their NFTs from Ethereum to Bitcoin’s burgeoning Ordinals NFT format. Yuga Labs meanwhile, has released an entire collection on Ordinals, ignoring Ethereum in the process.
While many see Polygon’s offer of a US$3 million grant as the key reason for the project’s departure, it appears that the long-term commercial opportunities of being on Ethereum and Polygon were what lured the projects to leave Solana, a network that has become increasingly plagued by difficulties.
In an interview, DeLabs founder Rohun “Frank” Vora said the offer of being able to work more closely with corporate giants such as Reddit, Disney and Nike was more compelling than Polygon’s cash incentives to y00ts alone. With user numbers flat, NFT projects are eyeing partnerships beyond crypto as a path to grow.
As Solana struggles to find its feet, this could be the start of a broader trend of projects aligning with healthier ecosystems to ride out the bear market.
3. Banking on blockchain, cool on crypto
Cryptocurrencies were on the agenda at this year’s Boao Forum for Asia, China’s answer to the annual World Economic Forum meeting in Davos, held on the island of Hainan. At the meeting, Xuan Channeng, the deputy governor of China’s central bank, criticized what he described as a lack of regulation in the cryptocurrency economy but said there was scope for technical innovation.
- Xuan pointed to frequent episodes of market manipulation, the embezzlement of investors’ assets, and other infringements in the crypto space, highlighting the collapse of crypto exchange FTX and regulatory woes involving Binance, according to a local media report.
- Xuan attributed the prevalence of fraud in the crypto industry to a lack of regulation and the centralized power of some crypto exchanges. “Services such as fiat-crypto convergence and leveraged trading are controlled by crypto exchanges, token issuers, market makers and dealers, which is a rather centralized process,” he said.
- Despite China’s ban on cryptocurrency trading and its scorn for related financial risks, Xuan lauded the convenience of stablecoins for cross-border payments, even as he warned that the asset class remained susceptible to scams and illegal trading.
- Xuan said China’s decision to ban financial institutions from providing crypto-related services had effectively protected investors, and he called for more regulatory efforts to safeguard digital finance. He also said there should be room for technological innovation, although did not specify how he thought cryptocurrencies should be regulated.
- In contrast with the forbidding tone that Chinese authorities typically take on the subject of financial institutions’ involvement with crypto, multiple Chinese state-owned banks have started offering services to crypto firms in Hong Kong, which is seeking to develop as a global Web3 hub.
- Also at the Boao Forum, Julia Leung, head of Hong Kong’s Securities and Futures Commission, said that cryptocurrency platforms were part of the Web3 ecosystem and had to be regulated from the perspective of investor protection, according to a local media report.
Forkast.Insights | What does it mean?
Although Xuan Channeng was careful not to point the finger too directly at the United States, his words reflected broader tensions between Washington and Beijing.
Xuan said the lack of regulation in the crypto industry was part of the reason for the implosion of FTX and the many episodes of wrongdoing endured by investors. He also blamed the ultra-loose monetary policies that Western central banks had adopted prior to their more recent hawkish turn for devaluing currencies and fueling the rapid growth of digital assets.
His solution, and indeed Beijing’s, is regulation and state oversight. This perspective was echoed by Julia Leung, head of Hong Kong’s Securities and Futures Commission. Yet both Leung and Xuan appeared optimistic about the role stablecoins could play in the future digital economy, mirroring a broader change of tune on the stablecoin segment. Recent sightings of Chinese officials reportedly mingling at Hong Kong crypto events, and Chinese state-owned banks offering services to crypto firms in the city seem to confirm that shift.
While authorities in the U.S. appear to have gone lukewarm on digital assets, China is taking the opportunity to offer an alternative vision, one of clarity and constant surveillance. Hong Kong’s proposed regulatory framework for the industry offers similar clarity, albeit with rather less intrusive surveillance. It’s a model that clearly appeals to many companies in the space, hinting at a potential shift in the sector’s center of gravity.