DECIL Insights — Issue #1, market outlook, ETH merge, ZKP, blockchain regulation, and more (Oct. 2022)

A monthly newsletter about the Digital Equity market trends, resources, and DECIL activities, including SustainaDAO Non-Fungible Talk Podcast and SustainaDAO Accelerator: Crypto + Mobile.

Market Outlook & Sentiment

Following a tumultuous Q2 2022, crypto investors and builders continue to work through a bear market. US inflation remained high in September, at 8.2%, and the consumer price index increased by 0.2% in the same month. ETH fell as low as $1,190 in October, but crypto markets generally stabilized in Q3 2022. Total crypto market cap rebounded 4% in the quarter, outpacing both the S&P500 (-5%) and Nasdaq (-4%). A bounce back seemed inevitable given the widespread selling and liquidations that occurred in the previous quarter. That said, crypto is still down ~65% from the November ’21 all-time highs, with many altcoins down 80% or more and some more than 90%. The catalysts for this sustained macroeconomic drawdown in web3 originate from across a broad spectrum: geopolitical factors, tech sector headwinds, traditional finance macro, and high volatility of risk categories such as idiosyncratic protocol risk, to name a few.

More and more corporations adopted crypto:

On the corporate front, Disney put out a job post on LinkedIn in September to hire a transaction lawyer to explore emerging technology opportunities, including NFTs, working at an accelerated and aggressive timeline.” The listing also mentions vetting NFT projects, blockchain networks, third-party marketplaces, and cloud providers, as well as providing legal guidance on digital currency and blockchain technology. In June, the company brought on former Apple gaming executive Mark Bozon as its vice president of next-generation storytelling. Disney was quoted as saying that its metaverse strategy would span digital, physical, and virtual experiences. In July, Disney announced that its Accelerator program would be focused this year on “building the future of immersive experiences,” including augmented reality, NFTs, and artificial intelligence characters. So it looks like Disney is very pedal to the metal for web3 despite the price chart for crypto right now.

META is continuing its web3 streak and announced that American users will now be able to connect their crypto wallets, such as Metamask, to their Instagram as part of the app’s new digital collectibles. NFT functionality on Insta has been in beta since May and is now opening to all U.S. users. Zuck kicked it off, shilling his own NFT, a childhood baseball card, for $105k. Meanwhile, on Oct. 11, Meta announced a partnership with tech giant Microsoft to bring a range of Microsoft Office 365 products into Meta’s virtual reality (VR) platform to try and coax other companies to work in virtual environments. Strike took on $80M in new funding to go toe to toe with VISA and Mastercard for point-of-sale transactions. Jack Mallers, CEO, referenced Starbucks and Wendy’s in the Fortune article.

BNY Mellon’s talk about getting into digital currency custom turned into reality this fall. Per WSJ, they’re the first U.S. Bank to begin the custody of Bitcoin and Ether for clients directly. They won the approval of New York’s financial regulatory body and will store the keys required to access and transfer those assets and provide the same bookkeeping services as they do for other assets. BNY Mellon has been working closely with market-leading fintech. The firm tapped digital asset technology specialists Fireblocks and Chainalysis to integrate their technology in order to meet the present and future security and compliance needs of clients across the digital asset space.

The Merge happened!

Yes, this is a very late update… But there have been some really interesting things happening since.

For one, EIP-1559 (the gas market congestion pricing) got much less volatile thanks to fixed block times, see the tweet.

Post-Merge, the proposer-builder separation design philosophy got one step further with mev-boost, where block proposers summon an external network of block builders to make the block on their behalf. The market is organized around builder bids, which the proposer chooses from. There are many questions related to the principal-agent problem such a separation may induce, such as the censorship resistance of the network as a whole or the content of blocks built by builders vs. proposers. This website has a nice overview of aggregate statistics about it: mevboost.

Zero Knowledge Proofs

Zero-knowledge technology is a subset of cryptography that is helping blockchain projects overcome the scaling and privacy limitations inherent to many networks. The technology can be applied to a number of use cases: scaling transaction throughput, supporting complex computations, protecting user data, and protecting the intellectual property of organizations and enterprises. Zero-knowledge proofs (ZKPs) are the core component for all of these use cases. ZKPs enable someone to prove they know or have a piece of data without revealing the underlying information. For distributed systems and web3, this is incredibly valuable for two core reasons:

(1) Privacy: ZKP is the only solution for reaching consensus on-chain without exposing usersʼ information. Unfortunately, at the moment, we havenʼt seen significant demand for private consumer payments, potentially very far out, especially with the recent Tornado Cash debacle. Anonymous payments are mostly completed research, and innovation has stagnated.

(2) Scale: ZKPs can reduce the cost of consensus significantly: one node computes while other nodes verify the computation. This is also how zk-rollups work (e.g., Scroll, StarkNet, zkSync, etc.). Instead of re-executing 10,000 transactions, the validators only need to verify a single ZKP execution that contains those 10,000 transactions. All excitement with zero-knowledge technology sits with scalability solutions. That said, zkVMs and zk-rollups arenʼt truly using zero-knowledge technology — they are compressing transactions, and the act of compressing doesnʼt require you to hide data.

ZK Learning MOOC

If you would like to know more about Zero Knowledge Proofs, ZK Learning is a collaboration MOOC program between Stanford, UC Berkeley, Georgetown University, and Texas A&M. The MOOC starts on January 17, 2023.

Regulation

Regulation is definitely on the minds of founders and investors like us as we try to understand how the framework will emerge and make good decisions along the way. On August 3, 2022, the Digital Commodities Consumer Protection Act of 2022 (S. 4760) was introduced, which aims to establish a comprehensive regulatory framework for digital assets. The bill creates a new digital commodity asset class, excluding securities, and would empower the CFTC to regulate spot markets for such assets. The bill would require all digital commodity platforms and companies — including trading facilities, brokers, dealers, and custodians — to register with the CFTC through several new registration categories.

Some venture firms have also spoken out against the DCCPA and urged for an open debate and thorough discussion, as this has the potential to hurt nascent tools, especially DeFi.

On October 12, 2022, the Financial Accounting Standards Board (FASB or the Board) recommended that companies report certain crypto assets and digital currencies at fair value. This is in contrast to the current guidance requiring companies to account for their crypto holdings as an impairment. The change is likely to go into effect within the next six months or so and should be all geared up for whenever the next bull cycle hits!

The IRS launched a program called “Operation Hidden Treasure,” a partnership between its Office of Fraud Enforcement and Criminal Investigation Division that seeks to uncover crypto tax avoidance. They are now starting to pair that effort with some much-requested guidance in the new IRS 2022 Tax Guide. One crypto favorable clarification worth noting is a decision not to classify NFTs as “collectibles,” raising a tax rate to 28% alongside art, antiques, or gems but leaving it on par with stocks and bonds.

Conferences and events:

Devcon, the largest Ethereum conference, took place from Oct 11th to Oct 14th in Bogotá. Some super interesting talks were given virtually on every topic you can think of. Find the video recordings here.

SF Blockchain week took place this week, UC Berkeley RDI CESC offered Zero-Knowledge Proof Workshop and CESC sessions in cryptography, zero-knowledge proof, scalability/ consensus, DeFi & DAO, Security, Privacy/Decentralized Identity/Data sovereignty, and Crypto Economics. Berkeley Xcelerator Demo Day follows the CESC conference session. Please follow the link to find session recordings.

GAM3R Forum, Oxpo Crossroads, ETH San Francisco (World’s biggest Ethereum hackathon), and Network Effects Hackathon (Multichain &ZK Hackathon) also takes place this week in SF.

Our podcast:

Latest episodes:

• Ryan Nesbitt, General Partner of Flori Venture, shares his investment theory on impact web3 investing. Listen to this Episode.
• David Packham, the CEO, and founder of Chintai, talks about the adoption of compliant digital assets that utilize blockchain technology. Listen to this Episode.
• Vera Wang, the co-founder of Sweetgum Labs, talks about decentralized decarbonization. Listen to this Episode.

Do you like our podcast? Leave us a review and rating here.

Our coming SustainaDAO Accelerator: Crypto + Mobile

Here is the teaser and startup application.

Stay tuned!