Ethereum is absorbing Bitcoins, but who is going to absorb Ethereum?
It’s been a positive start to 2021: Not only have Bitcoin, Ethereum and especially DeFi “blue chips” like Uniswap and Aave all surged in value, but many big names have made their “crypto coming out,” declaring their interest in crypto currencies and even discovering the NFT space.
Going Mainstream
“I do at this point think Bitcoin is a good thing. I am a supporter.” — This phrase from Elon Musk was a real surprise for remaining sceptics. Elon’s twitter account bio contained #bitcoin hashtag for some period of time and this pushed BTC price to $38000 area. Further news about Tesla’ investment in Bitcoin pushed the price to the > $50000 levels.
Mark Cuban, best known as the billionaire owner of the National Basketball Association’s Dallas Mavericks, told Coindesk: “I like ETH. Obviously it’s a primary foundation for DeFi and we will see what happens with ETH2.0”.
Meanwhile, businesses continued to build solutions that will drive the adoption of cryptocurrencies. USDC backer Circle announced Automated Clearing House payment integration, allowing customers to easily transfer between the USDC stablecoin and fiat US dollars.
At the same time Visa CEO Alfred Kelly says the card scheme is preparing its payments network to handle a full range of cryptocurrency assets. Visa will work with “wallets and exchanges to enable users to purchase these currencies using their Visa credentials or to cash out onto a Visa credential to make a fiat purchase at any of the 70 million merchants where Visa is accepted globally”.
Ethereum is absorbing bitcoins
We believe Ethereum is being strengthened by the growth of the DeFi sector in its ecosystem. At the same time, other Layer 1 networks — i.e., alternative blockchains to Ethereum — are trying to grow decentralized communities and applications. We will give our views on this in the the section titled “Ethereum domination”
A major recent trend that affects our view of the investment landscape is the significant inflow of tokenized Bitcoin into the Ethereum network (and other networks as well). This inflow allows Bitcoin wealth to be used within more complicated and more performance-dependent activities, such as DeFi.
As of the middle of March 2021, the volume exceeded 145,000 BTC ($8 billion) tokenized BTC on Ethereum. Thus, over 0.8% of all BTC is circulating within the Ethereum ecosystem — mostly as wrapped BTC (wBTC).
According to various estimates, up to 10–20% of BTC will be tokenized in the coming years, adding value directly and through derivative financial products. If the BTC price stays at $50,000, the projected value of the tokenized Bitcoins will exceed $100 billion. This would lead to a BTC supply squeeze in the open markets, further pushing the price up: even $200,000 per 1 BTC would not seem too far-fetched.
The launch of Badger DAO in December 2020 was a big step, as this decentralized community is focused on increasing the circulation of Bitcoin in the Ethereum’s DeFi ecosystem. The success of the Badger DAO (which has a total value locked of $1.4B at the time of writing) will depend not only on the acceptance of the products under development, but also on the ability to provide a high level of security. After all, tokenized Bitcoin has the potential for yielding, but it also has custody risks.
Also interesting to mention is the rebase currency experiment from the Badger DAO, called DIGG. It was the first BTC-price targeted rebase token on the market. Improved stability mechanics such as incentives, vaults and arbitrage strategies will show us if it is possible to sustain the peg with the most profitable asset of the last decade. Note that every rebase token is a risky play, but DIGG is definitely worth attention with attractive farming opportunities.
We believe that the DeFi industry will continue to develop quickly as investors’ trust in this segment increases and the total value locked in DeFi products grows. BR Capital plans to maintain its focus on this market.
The consolidation of BTC ownership
On-chain metrics show that outflow of Bitcoin from exchanges was continuous in early 2021. At the same time the number of addresses with balance >1000 BTC grew. What does this tell us? As BR Capital is very active in high-frequency trading, we need to take into account the possibility of the lack of liquidity for HFT traders on spot markets that can lead to further growth of futures markets.
Meanwhile, the on-chain volume of stablecoins saw an insane increase during 2020, turning digital assets as a whole into a trillion-dollar market and causing even central banks to pay attention to them.
Ethereum domination
The success of a blockchain network is determined not only by the speed of block generation and number of transactions per second, but by other factors too. First of all, it is a product for users, and in the case of blockchain, developers are a primary class of user. The more useful, secure and reliable applications there are in the networks, the more users (both private and corporate) can be expected to join the ecosystem.
Comparison table of the number of transactions and number of dApps (decentralized applications) in the different blockchain networks*:
*on 15.03.2021
** data provided by https://dappradar.com/
As we can see, Ethereum remains the dominant blockchain network by these usage parameters. With a perspective to ETH 2.0 upgrades and monetary policy improvements (EIP-1559), Ethereum’s dominance isn’t going anywhere soon.
Nevertheless, there are still important questions about how the Ethereum blockchain will evolve in the next few years: Will Ethereum (ETH 2.0) become the only one Layer 1 network or will we have Ethereum and strong competitors with their own alternative set of applications? In both cases interoperability can succeed as the Bitcoin blockchain will continue to exist for sure.
Demand for the fast and cheap transactions will grow as we see “gas wars” and $100 fee for a DEX trade as a bottleneck for the current ecosystem. This is where Layer 2 comes and we do think that products in this space will be a key landscape in 2021.
Although it’s further down our table of usage parameters, it’s hard not to notice the rapid growth of Binance Smart Chain (BSC). In just a few months since the network began its work in September 2020, its market cap has reached an impressive $39 billion.
Full compatibility with EVM made it possible to easily transfer many projects from the Ethereum blockchain to the BSC blockchain, and the significant amounts of daily turnovers of the most popular dApps in this network are many times higher than their progenitors. For example, only Uniswap from Ethereum got into the TOP5 dApps with a daily turnover of about 1 billion (putting it in fourth place). The leader is the Venus protocol (a fork of Compound and MakerDAO) with a turnover of 40.5 billion, the second place is Belt Finance (the twin of Curve) — 30.2 billion. By the way we can expect it will be hard to maintain such high indicators for a long period of time without strong incentives, which may lead to price pressure for “harvested assets”.
Another striking representative of Ethereum’s competitors is the Cardano blockchain, which has increased its Market Cap 10 times over the past 3 months. Such a rapid growth was due to the addition of the Mary upgrade, which allows the creation of native tokens (like ERC-20), which opens a direct path for dApps — we will definitely watch the development of this ecosystem.
Ethereum, on the other hand, continues its steps towards 2.0, new network updates aimed at increasing bandwidth and reducing gas fees cause an ambiguous reaction from miners — on April 1, a so-called strike of miners is planned, designed to lead to the capture of 51% of the hashrate and the ability to make changes to the blockchain. However, we should not take this initiative too seriously, since the negative dynamics of the ETH price is not profitable for miners.
Pipeline Update and HFT volume results
Based on the facts outlined above, the fund continues to adhere to the Ethereum ecosystem focus strategy, but paying attention to efforts of alternative Layer 1 networks who work on interoperability solutions. The new assets in the Fund’s portfolio include: Nansen, Delta Exchange, Arweave, Nodle, DAOsquare, Dora Factory as well as portfolio diversification with Cosmos, Polkadot, Kusama, Solana, NEAR and also index solutions by Powerindex.
You are welcome to visit the portfolio section on our website to see the full list of Fund’s investments and DAO involvements.
Our quantitative trading fund continues its growth in trading volume, both in the Bitcoin and USD equivalents.
