Weekly Stories - 8/2

This week in the newsletter we write about major takeaways from the Bitcoin 2024 conference, Tether's latest financials, and an activist governance proposal (attack?) on Ethereum's Compound, one of the oldest DeFi applications.

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Bitcoin's Big Music City Moment

The Bitcoin 2024 conference in Nashville marked a major milestone for the world's oldest cryptocurrency. Conference organizers estimated that more than 35,000 attendees converged on Nashville's Music City Center from Thursday, July 25 through Saturday, July 27. Nearly 1.5m people watched 444 speakers take part in 193 talks across 6 stages.

Politicians were center stage in Nashville. Candidates or currently-serving representatives who formally appeared in various capacities included: Former President and Current Candidate Donald J. Trump (R), Presidential Candidate Robert F. Kennedy Jr. (I), Former Presidential Candidate Vivek Ramaswamy (R), Former House Member and Presidential Candidate Ron Paul (R), Senator Bill Hagerty (R-TN), Rep. Wiley Nickel (D-NC), and Rep. Ro Khanna (D-CA), and several others.

Other than the political discussions, major topics included Bitcoin mining & Artificial Intelligence, Bitcoin L2s, decentralized networking (NOSTR), the state of Bitcoin markets, and many other topics. Immediately following Fmr. Pres. Donald Trump's Saturday keynote address, Bitcoin Magazine announced that Bitcoin 2025 will occur in May next year in Las Vegas, NV.

OUR TAKE:

I've attended every single annual Bitcoin conference hosted by Bitcoin Magazine, starting with Bitcoin 2019. That conference was held at an old car dealership at the intersection of San Francisco's Mission District and Union Square neighborhoods in June 2019 as Bitcoin was rising to its annual high of just above $13k, and it had a jovial and cheeky atmosphere. Just a few vendors supported Bitcoin's Lightning Network, an impressive feat given that the network was just over a year old at the time. A Bitcoin ATM company demonstrated the strength and security of their machines by having a large man attempt to destroy it with an axe. While perfectly sufficient, and even irreverently interesting, the venue was spartan and a bit bleak. The roof was sufficient to house the entire conference attendee roster (~2000 max, would be my guess) for drinks, many of whom were the casual early Bitcoin users you might expect (or remember): libertarian-leaning, tech-savvy, niche. There were no politicians in sight.

Oh, the places you'll go! After a 3-year stint in Miami characterized by ever-professionalizing stagecraft, Bitcoin Magazine landed in Nashville like a meteor, shaking the very foundations of Demonbreun Street (indeed, police were widely dispersed to safely guide enormous throngs of people through intersections). The impeccable venue was populated with massive screens, beautifully designed light and art shows, enormous skyboxes, major corporate sponsors, and heavy security.

Yes, the biggest story from Bitcoin 2024 is that venue security was assisted on both Friday and Saturday by the United States Secret Service. Robert F. Kennedy Jr., currently polling nationwide at ~10% for the presidency, was recently afforded Secret Service protection, necessitating heavy security on Friday (and RFK gave a great speech this year-he also gave a great one in Miami last year). Of course, the main event was Fmr. Pres. Donald Trump's keynote on Saturday was actually delayed an hour due to some minor security shenanigans.

Ultimately, Trump's speech ticked almost all the boxes Bitcoiners wanted (though the audience waited approximately 3 hours for it and was forced to endure a large middle portion characteristically comprised of a rambling Trump stump). "Hello, Bitcoiners" he boomed from the massive main stage. He said that the U.S. government would learn from Bitcoiners' cardinal rule: "Never sell your Bitcoin" and create a "strategic national bitcoin stockpile" comprised of bitcoins already held by the U.S. government. His loudest applause of the afternoon came when he pledged to fire Securities & Exchange Commission (SEC) Chairman Gary Gensler. He pledged to defend Americans' right to self-custody, a key red-line issue for Bitcoiners (and crypto users generally). Trump promised to shut down "Operation Chokepoint 2.0," block any attempt to create a central bank digital currency (CBDC), make America a "bitcoin mining powerhouse," and end the "war on crypto" undertaken by the current administration and its allies in Congress. Trump raised $21m in political donations on the sidelines of the event (a fitting number). (For a condensed 12-minute version of Trump's speech that only includes relevant statements about Bitcoin or crypto and includes timestamps for each statement, watch my video here).

With all the fanfare, you could be forgiven for thinking Bitcoiners are simping for Trump. That is not my intention. For Bitcoin to ever become widely adopted around the globe, whether as a reserve currency as a final settlement asset for global trade, or even just as "digital gold," governments are going to be involved. Our task as Bitcoiners is to ensure the long-term integrity of the system by maintaining the core properties that make bitcoin valuable-scarcity, its permissionless distributed network, uncensorable transactions, the right to self-custody, etc.-even as the game theory of bitcoinization plays out at increasingly higher and higher levels.

There's a lot more I could say about the conference, but I suggest you read this excellent short overview by Galaxy Research intern Ella Hough for more details. Instead, I'll just say that Bitcoin has become a very big deal. Bitcoin is not just a blockchain, a cryptocurrency, an open-source technology project, or even a monetary good. Bitcoin is a movement. Bitcoin is a movement that commands the attention of at least 10 sitting U.S. Senators, 2 of 3 major presidential candidates, and more than 30,000 people willing to travel to a somewhat out-of-the-way airport. The people who attended Bitcoin 2024 don't just own or use Bitcoin; they believe in it. And there are more of them every year. "Tick tock, next block." - Alex Thorn

Another Record-Breaking Quarter for Tether

Tether releases Q2 financials, achieving record-high US Treasury ownership. According to the quarterly attestation report by auditor BDO, Tether's US Treasury holdings (both direct and indirect exposure) reached $97.5bn, another all-time high for the leading stablecoin issuer. If ranked among countries, Tether's $97.5bn would position it as the 18th largest owner of US debt, ahead of countries including Germany, UAE, and Australia. Tether also highlighted in its press release that, during the first half of 2024, it ranked 3rd in purchases of 3-month US Treasuries after the UK and Cayman Islands, adding that it "sees the potential of becoming 1st in the next year" given the trajectory of USDT adoption.

Other highlights from Q2:

• Tether's net operating profit, which primarily stems from managing its stablecoin reserves, was $1.3bn in Q2 (down from the prior quarter's record high of $4.5bn which saw significant MtM gains in bitcoin positions vs. a loss of $653m in this quarter).

• US Treasury holdings now make up 68.3% of Tether's reserves, another record high.

• More than $8.3bn in USDT was issued during Q2, bringing the total circulating supply to $112.7bn.

• Excess reserves (exceeding the value of liabilities) reached $5.3bn, while Tether Group's equity (which includes investments not included in reserves) reached $11.9bn.

Bitcoin holdings included in Tether's reserves totaled $4.7bn (down 12% q/q due to the decline in bitcoin price). Note that Tether's reported financials did not show any change in the amount of bitcoin held in Q2 (holding at 75.3k BTC). However, Tether's CEO Paolo Ardoino claimed that his company continued its quarterly purchases of bitcoin under Tether's investment arm.

OUR TAKE:

Tether continues building on its financial position and improving the composition of the reserves that collateralize its market-leading stablecoin. Tether makes a strong case that stablecoin issuance can be one of the most efficient business models, generating over $1bn a quarter solely in interest income while employing fewer than 100 staff. Even with its margins expected to be impacted by rate cuts later this year, Tether and other stablecoin issuers have historically benefitted in these scenarios they can drive an expansion in supply.

New capital inflow via stablecoins is an important indicator for the broader crypto market - it represents investor risk appetite and adoption of the technology. With another 8bn in USDT added this quarter, Tether continues leading the market in inflows while its dominance has held steady throughout 2024 at 70% of the entire stablecoin market. However, Tether's global dominance may be impacted by the MiCA's implementation in the EU, where Tether has not been granted a license from the European Banking authority to operate in the region (unlike Circle - Tether's closest competitor).

Looking ahead, we are hopeful that CEO Paolo Ardoino will continue to advocate for improved transparency around reserves by following up with clarity around the claimed bitcoin purchase for this quarter (recall, Tether previously committed to allocating up to 15% of its NOP to buy bitcoin starting 3Q22). Tether's identified bitcoin address is currently ranked the 8th largest holder of bitcoin with a balance of 75.3k BTC (worth nearly $5bn), so this will be an important question for the leading stablecoin issuer to address. - Charles Yu

Compound Governance Attack or Investor Activism?

Compound saw an activist governance proposal (or governance attack, depending on who you ask), by a group called the "Golden Boys." They put forward a proposal to delegate 5% of the Compound treasury (~$25 million their governance token COMP) to a yield-bearing Balancer strategy. Variations of this proposal had been submitted and denied by the community before, but on this iteration, the Golden Boys had accumulated enough of Compound's governance token (COMP) in the run-up to the proposal to pass it regardless of the pushback. One of the Golden Boy's members, Humpy, had previously earned notoriety in a similar governance battle, known as the veBAL wars. In that instance, Humpy employed a similar strategy of acquiring a large enough stake in the Balancer's governance token to overcome the weight of votes against their proposals. The Golden Boys and Humpy accumulated enough of Compound's governance token to reach a quorum and pass their proposal, with only 57 total wallets voting, 22 in dissent.

Following the vote, the dissenting voters reacted by proposing a transfer of the timelock admin ownership to buy some time to respond to the Golden Boys' proposal. Additionally, Gauntlet, Compound's economic risk manager, suggested a precautionary parameter change regarding COMP as collateral in the protocol, fearing the situation might lead to a sharp drawdown in COMP's price. While this was occurring on the forums and in governance, negotiations were taking place behind the scenes between the Compound team and the Golden Boys. This culminated in a post and counter-proposal by Compound's Head of Growth, Bryan Colligan. The counter-proposal suggested that, in return for the Golden Boys canceling their proposal, Compound would start channeling 30% of current and net new market reserves to COMP stakers. Humpy accepted and subsequently canceled the activist proposal. This assuaged the community concerns about giving the Golden Boys direct treasury token control by keeping the solution within the Compound ecosystem and achieved the Golden Boys' broad goal of increasing the economics of holding the COMP tokens through direct protocol yield passthrough rather than their proposed LP strategy.

OUR TAKE:

This was not a governance attack but classic shareholder activism in a crypto-native context. A large, savvy investor group saw a protocol that was not making the most of its treasury and wanted to increase the returns on its holdings in a measured way. They pushed the subject in public governance forums and negotiated privately with the team to achieve their goal of enhancing the economics of their investment. Compound was a good target given its consistent fee stream, strong TVL base, and very inactive pool of governance voters. While governance in DeFi is broadly not well attended, Compound's founders have largely moved on from the project, and the majority of governance interactions come from Gauntlet, which is paid to maintain and update the protocol's economic risk parameters, not its tokenomics. The economics of holding Compound's governance token compared to its main competitor, Aave, was poor, and the development of the protocol has become broadly stagnant. Humpy and the Golden Boys engaged a torpid set of governance token holders in corporate activism and won a payout for themselves and other COMP token holders.

The inertia and lack of focused governance is the main weakness of DAOs compared to centrally managed entities on-chain. Continued activist governance will weed out and extract value from protocols with lethargic voting bases in a Darwinian fashion, but it will leave us with a more lively, resilient, and robust on-chain ecosystem. - Thad Pinakiewicz

Charts of the Week

On July 31, 2024, Bitcoin's mining difficulty adjusted upward by 10.5%, the eighth largest positive adjustment over the last five years. In absolute terms, it was the largest upward adjustment in Bitcoin's entire history. The positive adjustment that took place this week can be attributed to miners powering up machines that were purchased late 2023 and earlier this year.

A rising hash rate leads to positive difficulty adjustments. The combination of the two creates 1) increased competitiveness between miners to find blocks, and 2) the network's subsequent reaction of making BTC more computationally intensive to mine. The latter is done to maintain steady policy around issuance (i.e. the network throttles miner power to ensure a precise amount of new BTC is mined per day, a critical component to enforcing Bitcoin's monetary policy). As a result, the gross revenue generated per unit of hash power online also referred to as "hash price," experiences downward pressure as difficulty adjusts upward. However, the hash price is calculated as (Block Subsidy + Fees Paid to Miners) / Network Hash Power. So, increased activity on the network can generate significant fees that offset the negative pressure resulting from increased difficulty.

The chart below highlights the change in Bitcoin's BTC-denominated hash price (or the gross revenue generated per unit of hash online measured in BTC) following the seven positive difficulty adjustments that were greater than the one on July 31, 2024. Six of the seven positive adjustments experienced negative changes in hash price leading into the next adjustment. On average, hash price declined -11.8% following these adjustments, with the negative changes averaging -15.6%. Additionally, six of the seven were immediately followed by another positive adjustment. Given this history, a decline in hash price can be expected between now and the next adjustment that is slated to happen at block height 856,800. Read more about hash price in our Mid-Year Mining Report.

Other News

• MicroStrategy raises holdings to 226,500 bitcoin, introduces BTC yield metric, announces new $2bn at the market equity offering

• Fidelity International lists bitcoin ETP on the London Stock Exchange

• Jersey City municipal pension plan will invest in Bitcoin via ETFs

• Mt. Gox moves over $2 billion worth of bitcoin to fresh address

• US Sen. Cynthia Lummis (R-WY) introduces "bitcoin reserve" bill

• University of Wyoming launches first Bitcoin research institute

• Solana-based PayPal stablecoin supply closes the gap on Ethereum PYUSD

• US government-associated crypto wallet transfers $2 billion of DOJ-seized bitcoin

• Hong Kong's largest online broker launches Bitcoin trading

• Bitcoin hashrate and difficulty hit all-time highs

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