Su Zhu, the disgraced crypto trader, has obtained a restraining order against a somewhat unlikely critic: Arthur Hayes, the BitMEX co-founder who pleaded guilty to financial crimes and alleges he is owed $6 million following the collapse of Zhu’s hedge fund Three Arrows Capital (3AC). The order, given by a court in Singapore, where both crypto founders have lived, prohibits Hayes from communicating with Zhu “by any means” and making public comments that would cause the grantee “alarm or distress.” Hayes, a budding financial blogger, has tweeted unconfirmed information about Zhu and co-founder Kyle Davies, including that the duo’s latest venture, the bankruptcy claim exchange OPNX, was backed by Bahraini funders. In other news of crypto’s market makers, Jane Street and Jump Capital, two TradFi firms with DeFi wings, are downsizing their crypto efforts. Jump Crypto, a major investor and market maker, said it is pulling out of U.S. markets due to regulatory uncertainty – though plans to continue scaling internationally.
Custody Battles
The U.S. Securities and Exchange Commission (SEC) is being criticized for a proposed update to the so-called “custody rule” that would require investment advisers to hold client assets only with “qualified custodians.” During a two-month public comment period, the far-reaching proposal has been lambasted by a slew of not-usually-aligned entities including JPMorgan Chase and the Small Business Administration (SBA). Entities including the Blockchain Association and venture capital firm a16z have spoken out against the rule, which would have particular impacts on crypto exchanges. Meanwhile, the European Union is close to passing a new data sharing rule meant to crackdown on tax evasion. The amendment to the Directive on Administrative Cooperation, which allows government institutions to share information about people’s crypto holdings, received “unanimous” approval.
Enterprising…
Tether, the issuer of the world’s largest stablecoin, reported a $1.48 billion profit in Q1 2023, double the previous quarter’s result, according to an attestation published Wednesday. The company benefited from a run up in bitcoin’s price, banking failures and its largest competitor Circle’s depegging. There is $81.8 billion of USDT in circulation, backed by an equivalent amount in cash, cash equivalents and according to the court-ordered attestation at least $1.5 billion of bitcoin and $3.4 billion of gold. Meanwhile, although some treat crypto as a hedge asset, ratings agency S&P Global said that “the track record for crypto is too short to prove this,” in an interview. Finally, professional services giant EY has started an enterprise-grade Ethereum-based carbon credit tracking platform as publicly-traded BTC miner Marathon Digital partners with a startup backed by Abu Dhabi’s sovereign wealth fund to create two new bitcoin mines in the Middle East using bespoke liquid-cooling tech.
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“What we find is a lot of DeFi protocols are not really ready for prime time.”
– Vega Protocol co-founder Barney Mannerings, discussing the platform’s mainnet launch, on CoinDesk TV’s “First Mover”
The Takeaway: Fee Fight
Many bitcoiners have been up in arms about high fees amidst a surge in new activity on the original blockchain. Fees, which are set dynamically by a competitive bidding process, spiked to a staggering $30.19 for a simple bitcoin transaction on May 8, after hovering around $2 since July of 2021 – nearly two years.
The situation is dire enough that some bitcoiners, particularly so-called “maximalists,” have gone so far as proposing censorship of BRC-20 tokens and other assets based on the “ordinals” issuance method. Those assets use new features to inscribe data in bitcoin transactions, and appear to be driving the price spike. There’s an immense amount to be said about the moralistic debate around BRC-20 issuance, but in one surprising development, maximalist figurehead Michael Saylor (the former chief executive of MicroStrategy) has now declared their emergence “bullish.”
Bitcoin isn’t scaling, and blaming ordinals doesn’t change that fact. The chain would be facing the same scaling issues if only a slightly larger fraction of the world were using it for monetary transactions. That means the BRC-20 kerfuffle, ironically, is ultimately a blow to the very “maximalist” vision held by those currently railing against non-monetary uses of bitcoin.
The explosion of interest in BRC-20 tokens on Bitcoin has driven a huge spike in transaction volume on the base layer network, and in turn driven up transaction prices. There are many different ways to put this congestion in context, but one very good metric is congestion in the Bitcoin mempool – viewable on this visualization tool by Certora researcher Jochen Hoenicke. The mempool is where transactions wait to be validated, and are ordered according to the fee bid attached to them. A fuller mempool means more competition to get your transaction into the next block.
First, by sheer transaction volume, Bitcoin’s mempool has seemingly never been this full – not by a longshot. The last major peak in April of 2021 saw 200,000 transactions waiting in line, but yesterday that number peaked at 450,000. (Hoenicke’s node only tracks back to 2017, but prior to that bull market, Bitcoin congestion and fees were negligible.) Just as notable, these transactions are often tiny. You can also see, courtesy of bitinfocharts, that the average bitcoin transaction size has plummeted in recent days.
That exploding volume of small transactions seems to confirm that the demand spike has been driven by speculators (and/or future rug-pullers) frantically issuing and minting tokens using the experimental “BRC-20” standard. There’s hype around the tokens right now, and degens seemingly want their $pepes and other casino tokens right now, not in 12 or 14 blocks. Coinmarketcap claims that a staggering 8,500 tokens have been issued on Bitcoin in the mere weeks since the BRC-20 standard was first floated.
Given that these are largely “memecoins” that amount to little more than gambling, the bidding war seems likely to be short-lived. And in fact, fees by May 10 had already declined a bit from their May 8 peak. But here’s the thing: if even a few million people wanted to actually use Bitcoin to send money peer-to-peer on a regular basis, we’d be in exactly the same position – only permanently. Bitcoiners upset at a temporary fee spike driven by degens may be better off focusing their energy on solutions to the imminent problem of sustained higher fees driven by everyday users.
Most fundamentally, as Castle Island Ventures co-founder Nic Carter pointed out in these pages yesterday, “high prices are the cure for high prices.” We are seeing this in real time, particularly with Binance integrating the layer 2 “Lightning network” into its bitcoin withdrawal flow. Lightning is purpose-built for removing the load of smaller transactions from the base chain, but it does require a fairly arcane setup for peer-to-peer use. At the same time, Lightning service firms, such as David Marcus’ Lightspark, have a suddenly target-rich environment for making Lightning easier for average Joes.
In this respect, the BRC-20 fee spike seems likely to be a blessing in disguise: A warning shot that should trigger a frenzy of preparation for a sustained barrage.
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Crypto Has a Fix…
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