Top Stories of the Week - 8/18
This week in the newsletter, we write about a new social trading application on Coinbase’s Ethereum L2 Base, Zynga launching a web3 game, and Coinbase’s approval to offer crypto futures trading. Christine Kim also has notes on the latest Ethereum developer call.
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Crypto markets reeled Thursday evening with bitcoin trading as low as $25,250 on Coinbase and ether as low as $1,540 (-11% for the day). The 4 hours between 2:30pm ET and 6:30pm ET saw more than $400m in long BTC liquidations on futures markets, while ETH liquidations topped $255m. More than $1bn in long liquidations occurred on futures markets on Thursday, the largest BTC long liquidation event since June 2022 when Three Arrows Capital blew up, according to data from Coinalyze. Bitcoin and Ether open interest dropped to the lowest level since before BlackRock’s ETF filing was announced in mid-June. Markets rebounded slightly overnight, with Bitcoin trading in the $26.3k area and Ether around $1,678. Year-to-date, BTC is up 60% and Ether is up 40%.
The speed of the drop caught many off-guard and hunting for catalysts. Among those observed by market participants were the announcement of Chapter 15 bankruptcy filing by Chinese real-estate developer Evergrande, a WSJ story saying that SpaceX had already sold the totality of its $300m+ BTC holdings, and reports that Chinese authorities had asked banks and some funds to avoid net equity sales amid a slump. The decline was exacerbated by low liquidity and record-low volatility leading into the event. BTC implied volatility repriced higher, from the low 30s to ~60 during the event, though has retreated back to the mid 40s.
But broadly, bitcoin and ether had held up over the last couple weeks in the face of wild moves in bond markets that have had markets reeling. US 10yr yields hit 15-year highs at 4.27%, the highest since 2007, and foreign sovereign bonds also spiked (Japan 10yr at highest since 2014, UK at highest since 2008, etc.). The market has struggled to absorb significant issuance from the US Treasury both seasonal and as the government tries to refill its coffers following a crunch caused by the debt-ceiling debate last Spring. Treasury yields are now above S&P earnings yield, further reducing appetite for risk. Minutes from the July FOMC meeting showed a majority of members remain primarily focused on inflation, suggesting another hike is possible in the Fall. And China is becoming a significant question, with private data suggesting its real-estate slump may be worse than official data show, and bank interventions in yuan markets suggest cause for concern.
For near-term upside catalysts, eyes are on the DC District Court and a forthcoming ruling in Grayscale vs. SEC, as well as an increasing number of applications for futures-based ether ETFs piling up on the SEC’s desk. On the former, a ruling could come as early as today (and there was some speculation earlier in the week it would be released Tuesday), with Bloomberg Intelligence analysts suggesting a 70% likelihood that Grayscale prevails. Our view is that a best-case outcome for Grayscale is a finding that the SEC acted arbitrarily and capriciously in its rejection of GBTC’s ETF-conversion application and the panel orders the SEC to reconsider. That wouldn’t result in an approval for GBTC to convert, but merely kick it back into the ETF approval process with the other applicants. Meanwhile, Bloomberg reported Thursday night that the SEC “isn’t likely to block” a slew of futures-based Ether ETFs, and that several might list by October, according to people familiar with the matter.
-Alex Thorn @ 7:30am Aug. 18, 2023
Three Big Stories
Social Trading Platform Friend.Tech Launches on Base
Friend.Tech, a new social trading application enabling users to buy "shares" of other users, debuted on Base on August 11. The platform creates a market for valuing individual’s social presence and has achieved over 7,000 ETH in trading volume and attracted 30,000+ registered users within a week.
To access the application, users must link an existing Twitter/X account and deposit at least 0.01 ETH into a personalized Friend.Tech wallet address. During sign-up, users automatically receive one of their own shares at no cost. The application employs a Privy MPC wallet, enabling wallet export after creation. By employing Progressive Web Apps software, Friend.Tech bypassed Apple's app store approval process, allowing direct installation onto users' phones.
Share prices follow a quadratic bonding curve, determined by the number of outstanding shares (Share Price in ETH = share supply * 2 / 16,000). Transactions incur a 10% fee, with 5% allocated to the purchased share's account holder (i.e., the individual social account whose share is being purchased) and 5% to the Friend.Tech team. Post-launch, the Friend.Tech treasury holds over 400 ETH and the application has done nearly 2000 ETH in volume.
Currently, owning shares grants access to a private group chat with the account and its shareholders. The project plans a rolling airdrop of 100,000,000 “points.” with the initial distribution on August 18. Whether those points are ultimately a Friend.Tech application token or something else is unknown at this time. Airdrop eligibility and distribution method are also unconfirmed at the time of writing. Friend.Tech remains in closed beta, requiring an access code for account creation.
Friend.Tech is the latest incarnation of onchain applications attempting to financialize social media, differentiating itself from past iterations like BitClout and Rally by focusing on providing a simple interface for users to speculate on “clout” rather than a comprehensive social media platform. As was the case with its predecessors, the initial rollout was bumpy, with the app continually crashing, but it still managed to generate significant attention on crypto Twitter. Major accounts like Cobie set up profiles within 24 hours of launch and already a few third party applications have been deployed providing additional analytics and insights.
Turning this initial excitement into a sustainable model capable of retaining individuals' attention, however, is a more daunting task. Daily transactions and volume have decreased significantly and share prices of the most sought-after accounts have dropped 50% or more from the earlier values. Private chat access with high profile crypto influencers is only scalable to an extent and the value proposition is tentative at best. Smaller accounts, for example, have begun buying shares in higher valued ones and then sharing screenshots to attract new shareholders.
To avoid the same fates as its predecessors (Rally shut down in 2022 and BitClout activity has declined considerably), Friend.Tech will need to find a way to transform short term speculative interest into long-term demand for user shares. This requires ongoing experimentation with new features that enhance interaction between shareholders and accounts and a pathway for users to feel they are deriving value from building on the application. - Lucas Tcheyan
Mobile Gaming Giant Zynga Enters Web3 Gaming
Zynga, ranked sixth in global mobile gaming revenue, is marking its debut in the web3 gaming arena. Zynga, which was acquired by Take 2 Interactive in 2022 for $12.7bn, is launching a new play-to-earn mobile game on Ethereum named "Sugartown." Players can only access the game if they hold an in-game NFT pass, which will be available to mint later this year. This framework is not unlike Yuga Labs’ Sewer Pass NFT, which allowed holders to play Yuga’s dookiedash PC game. Zynga initially plans to release 10k in-game NFT passes, emphasizing exclusivity for early players. While the prospect of further game pass releases remains uncertain, Zynga's web3 VP affirmed intentions to cater to a wider gaming audience over time.
Zynga is tapping into resources from parent company Take 2 Interactive. One of the developers behind the iconic "Grand Theft Auto" series will spearhead the Sugartown project. This partnership gains further significance with the team currently behind Grand Theft Auto’s recent announcement about integrating play-to-earn features that offer fiat convertibility in the upcoming release of the next installment in the hit gaming franchise. Zynga will also collaborate with web3 gaming infrastructure company Forte to bring Sugartown to life.
During the bear market, Web3 gaming’s allure has declined, with investment in the NFT-Gaming realm plunging in June to a two-year low. However, a resurgence was noted last month when the sector garnered $177 million, marking a 65% monthly surge, as per The Block Research. The slump in web3 gaming investment is predominantly linked to a drastic drop in daily users and transaction volumes across all web3 games. The well for potential users has run moderately dry for the time being, although the prior cycle’s Web3 games left a lot to be desired (think Axie Infinity).
Despite the unfavorable environment to launch new web3 games, Zynga's foray into the space reflects their faith in the sector. Although Zynga is the first major mobile gaming studio in the West to venture into web3 gaming, mobile gaming giants in Asia have been active in the Web3 arena throughout the year. Nexon, the largest mobile gaming studio in South Korea, announced in March 2023 that they will be launching the next version of their popular MapleStory game on a Polygon-Supernet. Additionally, Mixi, the largest mobile gaming studio in Japan, announced in June 2023 that they are partnering with Japan's most popular gaming specific app-chain, Oasys, to collaborate on future web3 mobile games. Evidently, powerhouse web2 mobile gaming studios around the world are positioning themselves for the next cycle of web3 gaming.
Zynga and other major gaming studios have the opportunity to learn from the shortcomings of the failed web3 games in 2021-2022. They must focus on building sound game mechanics that everyday gamers understand and enjoy, and that keep players coming back. This will allow the next iteration of web3 games to maximize the intrinsic motivation for play by focusing on skill building, interaction loops between players, and driving organic demand for in-game assets. (To read more about how game studios can implement Web3 mechanics, read our whitepaper The History of Gaming and its Web3 Future.)
The last web3 gaming cycle made it abundantly clear that building games around speculative in-game tokens and inflated NFTs will only attract short-term, profit-driven players, not durable fanbases. If Zynga's upcoming play-to-earn game can facilitate an organic in-game economy where players can enjoy fiat convertibility of their in-game contributions, Sugartown could see meaningful adoption in the next web3 gaming cycle. - Gabe Parker
Coinbase wins approval to offer crypto futures trading in US
Coinbase approved by National Futures Association (NFA) to operate as a Futures Commission Merchant (FCM). The designation allows Coinbase to act as a broker for existing listing futures products, such as the BTC and ETH futures that trade on the Chicago Mercantile Exchange (CME), and offer those products to eligible retail users on its platform.
Today, there are only 60 Futures Commission Merchants total, and Coinbase is the first crypto-native firm to achieve the designation. Futures Commissions Merchants are not allowed to create and offer their own futures products, but they can facilitate trading in existing listed products, such as those offered by CME and Cboe. The designation could allow Coinbase to compete with traditional futures brokers like Interactive Brokers. Another crypto firm, FalconX, is the first and only crypto-native firm to receive a swap dealer license from the CFTC.
The National Futures Association (NFA) is a self-regulatory organization (SRO) to which the CFTC delegated FCM oversight in 1984.
Coinbase’s approval as an FCM is an important milestone for the largest retail-facing exchange in the United States. CME and Cboe listed bitcoin and ether futures, along with other futures listed on those exchanges, are largely institutional products. Most users are unable to trade futures of any type through traditional brokerage accounts, and may require account upgrades and new account agreements to enable them.
Offering bitcoin and ether futures adjacent to the largest bitcoin and ether spot market in the US will improve user experience for some users. The ability to hedge long or short positions with futures on an exchange like Coinbase will improve consumer safety, reducing counterparty risk exposure to on-chain or off-shore markets. The offering should help create more liquid futures markets, improving market efficiency overall. It’s hard to assess the level of interest in purchasing CME or Cboe futures through Coinbase, and while it may not be immense, adding adjacent products will make it easier for users to express their view on bitcoin and ether in a safe and regulated way.
Achieving approval for the FCM designation is also an important regulatory milestone for Coinbase, which is currently facing a lawsuit from the Securities & Exchange Commission (SEC) that alleges it is operating as an unlicensed securities exchange under the Exchange Act. The juxtaposition of Coinbase’s regulatory advances on the commodities side contrasts with the challenges it faces from the SEC. The approval for Coinbase to offer listed ether futures on its platform further entrenches the CFTC-driven view that ether is indeed a commodity (ether futures already trade on CME and Cboe with CFTC approval). While the SEC continues to demur on this question, the CFTC has made its voice heard, and the NFA’s approval of Coinbase’s FCM registration is just the latest shout from the commodities side of the world. – Alex Thorn
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