Okay, you’ll have to excuse the title of today’s edition. I mainly just liked the symmetry of “DeFi is dying”.
But, DeFi kind of is dying.
At least, according to the latest data.
The supposed future of finance is going backward.
The amount of money stashed in decentralized finance, or DeFi, protocols has dwindled to the lowest level since February 2021, according to data compiled by Defi Llama. Specifically, total value locked, or TVL, has slumped to $37.5 billion, slipping below the previous post–bull market nadir of $38 billion set in December.
And if you look at the actual data from DeFi Llama cited in that article, well, it don’t look great:
And it’s not just DeFi.
DeFi might be down to 2021 levels. But NFTs are dead. Like fully dead:
You can see the decline even more clearly in OpenSea’s NFT volume, which is the largest and most well-known NFT marketplace:
And, as Axios points out:
OpenSea is no longer the only game in town, but its competitors all give away a token to promote volume. This leads to wash trading — people trading with themselves to get those tokens.
These days, OpenSea represents about 24% of overall volume. It was once basically all the volume.
Just shy of half of the total NFT market is thought to be wash trading these days (it varies by token promotions out there). Another estimate puts it at just over half.
Because OpenSea doesn't offer any promotion for people to trade on it, it stands to reason that volume on that marketplace reflects people who really want to trade these digital items — for the sake of the items themselves.
In other words, OpenSea volume is the benchmark for actual demand for NFTs, whereas demand on other marketplaces is maybe not about NFTs at all.
So, what’s going on, is crypto dead again?
Well, the weird thing is crypto prices are up this year.
Bitcoin is up 56% Year to date. And Ethereum – which the overwhelming majority of DeFi and NFTs run on – is up 32%.
So it kind of seems like we’re back in the old days of crypto, where prices aren’t pumped by actual usage, but by pure speculation.
Wall Street is speculating hard on crypto this year
Despite the Securities and Exchange Commission’s (SEC) best efforts, the big boys of Wall Street are speculating hard on crypto this year.
Case in point, all the spot Bitcoin ETF applications.
Those have been back and forth a bit since BlackRock tossed its hat into the ring. But arguably the biggest development came this month, when Grayscale won its lawsuit against the SEC.
For a very long time now, Grayscale has held the biggest bitcoin fund in the world, with roughly 623,000 Bitcoin under management, or around 3% of Bitcoin’s circulating supply.
In fact, Grayscale was just revealed as the second largest holder of Bitcoin in the world by Arkham Intelligence.
(And it’s also the second largest holder of Ethereum. More on that in a second.)
Anyway, Grayscale has been trying to turn its trust into a spot Bitcoin ETF for years now. And the SEC has been slapping down every application it makes.
As I (and just about every other crypto publication in the world) have pointed out many times, the SEC’s reasons for refusing Grayscale’s applications don’t make logical sense.
The SEC says it won’t allow Grayscale to convert its trust into a spot Bitcoin ETF because Bitcoin’s price is too open to manipulation.
Yet, the SEC has allowed a large number of Bitcoin Futures ETFs to launch.
Logically, if Bitcoin’s spot price is too open to manipulation then its futures price is as well. Actually, it’s even more open to manipulation.
Everyone knows this, including the SEC – they aren’t dumb. But everyone also knows they can’t do anything about it. What the SEC decrees goes.
Or, at least it did, until Grayscale took them to court… and won.
In fact, the court slapped down the SEC for a change, calling its denial of Grayscale’s application “arbitrary and capricious”.
Here’s what the judge said:
It is a fundamental principle of administrative law that agencies must treat like cases alike. The Securities and Exchange Commission recently approved the trading of two bitcoin futures funds on national exchanges but denied approval of Grayscale’s bitcoin fund. Petitioning for review of the Commission’s denial order, Grayscale maintains its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca.
We agree. The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore grant Grayscale’s petition and vacate the order.
If you follow the link above, there’s actually a lot of interesting stuff in the court document.
Here’s a particular highlight (emphasis mine):
The Commission [the SEC] neither disputed Grayscale’s evidence that the spot and futures markets for bitcoin are 99.9 percent correlated, nor suggested that market inefficiencies or other factors would undermine the correlation.
The Commission faults Grayscale for failing to provide other types of evidence. Without further explanation, however, the Commission’s assertion that “information in the record for this filing does not support [the] claim” that “any fraud or manipulation in the underlying [spot] market will affect both products in the same way” is unreasonable.
The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision making.
It is important to note that this doesn’t mean the SEC has to approve the Grayscale spot Bitcoin ETF application. It just has to reconsider it.
What happens now?
Both parties have 45 days to appeal the ruling, in which case it would either go to the U.S. Supreme Court or an en banc panel review. It is unclear if the SEC will appeal. The regulator did not immediately respond to requests for comment on Tuesday.
If Grayscale ultimately prevails and the SEC does not appeal, the court would specify how its decision should be executed. That could include instructing the SEC to approve the application, or to revisit Grayscale's application, in which case the SEC could still reject the proposal on other grounds.
However, the SEC is running out of arguments for why it won’t approve. And it doesn’t have many options left.
The Wall Street Journal notes:
Potential options [for the SEC] include appealing to the Supreme Court, granting Grayscale’s application, denying it again based on some other justification, or rescinding its prior approval of bitcoin-futures ETFs.
But it really seems like we could be only months away from a slew of Bitcoin spot ETFs.
If that happens, will the huge amount of interest and speculation they draw lead to actual usage and adoption of DeFi… who knows?
But surely it won’t hurt.
Oh, and if a Bitcoin spot ETF does get approved, then spot Ethereum ETF are inevitable.
In fact, this month Ark Invest filed an application to create the first ever US spot Ethereum ETF.
And Grayscale already has an Ethereum trust – which is currently the second largest holder of Ethereum in the world – ready for conversion into an ETF.
So, although spot Bitcoin ETFs might not lead to DeFi adoption, you’d think that Ethereum ones would.
Although crypto rarely follows logic. So again, who knows?
Next month’s deep dive – into TON – may be delayed by a week
This month’s premium edition is a deep dive into a coin that’s been grabbing a lot of headlines lately – The Open Network (TON).
It has a really interesting origin story, so it should make for a fun deep dive.
However, it might be delayed by a week (so it might go on the 8th of October instead of the 1st) depending on my jetlag.
If you want to make sure you get it straight to your inbox, you can get premium membership here.
And, as always, remember these deep dives aren’t about the crypto’s price or investment potential.
I leave that kind of stuff to the investment professionals – TikTokers, SnapChatters and YouTubers.
My deep dives are about what the project is, how it came to be, what it aims to do, how it aims to do it, how its tech stacks up, and what the world might look like if it succeeds in its mission.
But, of course, you already know that, don’t you?
Okay, that’s all for today.
Thanks for reading.
Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.
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