Blockwall - October 2024 - What happened in Web3?

Dear Founders, Investors, and Friends,

The citizens of the United States have voted and on January 20, 2025, Donald Trump will officially take office in the White House.

Additionally, the Republican Party is likely to hold a majority in both chambers of the U.S. Congress in the coming years, with many of the elected officials having a 'pro-crypto' stance, according to the website 'Stand with Crypto'.

But what exactly does this mean for crypto and web3? (On purpose I am not discussing macro perspective and global politics here.)

Let's take a closer look at what the election results mean for crypto and how they might set the stage for a more supportive environment in the U.S., fueling growth for our industry.

U.S. Election: Implications for Crypto & Web3

Based on the various statements made by Trump and other U.S. politicians during their campaigns, we can anticipate the following changes in the years to come:

Stablecoin Regulation Framework

A comprehensive framework to regulate stablecoins may be one of the first legislative measures to pass. This law would determine which organizations are authorized to issue stablecoins and outline necessary safeguards. The policy could allow issuers to bypass the fractional reserve system by granting them direct accounts with the central bank, greatly accelerating stablecoin adoption.

New SEC Chair

Trump has made it clear, notably at the Bitcoin 2024 Conference, that he plans to replace current SEC Chair Gary Gensler upon taking office. Gary Gensler already issued a statement that he will be stepping down as SEC Chair on January, 20, 2025. A new appointment could put an end to the "Regulation by Enforcement" approach of the Gensler era, which has led to multiple lawsuits against major crypto companies like Coinbase and Kraken and slowed industry innovation.

Reclassifying Digital Assets

Legislation that clarifies the classifications and regulatory responsibilities for cryptocurrencies would bring much-needed certainty to the industry. This new legal framework would establish clear guidelines on how different tokens should be regulated and registered.

Increasing Approval for ETFs

With a new SEC Chair and a revised regulatory framework, we could see a wave of crypto ETFs approved. VanEck and 21Shares have already filed for a Solana spot ETF, and ETFs offering staking options or in-kind redemption functions are likely to receive approval in the coming years.

End of Operation Chokepoint 2.0

The defeat of Ohio’s Sherrod Brown, one of the most anti-crypto voices in the Senate and Chair of the Banking Committee, signals the potential end of Operation Choke Point 2.0. With this policy lifted, crypto firms will find it much easier to access essential banking services.

Establishing a Bitcoin Reserve

Perhaps the biggest wildcard would be the establishment of Bitcoin as a U.S. strategic reserve. Trump has promised not to sell the nation’s current BTC holdings, while Senator Cynthia Lummis aims to introduce legislation enabling active BTC acquisitions. Such a move could signal a strong message internationally, potentially sparking a global race to acquire Bitcoin.

Repealing SAB 121

Repealing the accounting rule SAB 121 is expected under Trump’s administration, which would allow U.S. banks to offer crypto custody services more freely.

While all of this appears promising on paper, it's yet to be seen if these changes will come to fruition. Ultimately, it depends on how much attention legislation gives to crypto compared to other sectors, like Artificial Intelligence, the quality of proposed legislation, and the individuals appointed to pivotal roles in agencies such as the SEC, FDIC, and OCC.

Even so, the regulatory landscape for crypto in the U.S. has never been more promising, leaving us optimistic about what lies ahead.

Crypto x AI in the Spotlight

While debates on U.S. politics and regulatory outlook continue, another topic is drawing significant attention within the crypto industry: onchain AI agents.

The buzz kicked off with 'Terminal of Truths,' an AI bot launched in June by software developer Andy Ayrey on the social network X. In essence, the project's aim is to observe how the bot, which autonomously generates its own content, evolves over time through interactions with users.

The bot drew significant attention in July after convincing billionaire and venture capitalist Marc Andreessen of a16z to send it $50,000 in BTC, which the bot planned to grow autonomously.

In October, the bot made headlines again when a user sent a memecoin called G 0.00%↑ OAT to its Solana address, leading the AI to start mentioning the token in its posts. This, in turn, ignited a surge in $GOAT’s price, skyrocketing by over 5000% to a market cap exceeding $800 million, further intensifying interest in Terminal of Truths and AI agents.

The success of the token, along with the attention garnered by Terminal of Truths on X, spurred many developers to create their own AI agents. This, in turn, led to the emergence of platforms that provide the infrastructure for building and tokenizing AI agents. A recent announcement of an a16zcrypto investment in such an infrastructure provider has only added to the momentum around onchain agents.

But what are the immediate use cases for these agents, besides mere speculation?

Looking ahead, these agents could emerge as a new breed of influencers for brands and communities. In China, virtual influencers are already prevalent, securing partnerships with major brands like LOEWE and Tommy Hilfiger. This trend could easily spread to the West, with virtual AI influencers becoming the next brand mascots, helping companies significantly enhance their engagement and reach.

These developments serve as an early case study on the convergence of AI and crypto, an area we at Blockwall are particularly optimistic about due to its potential to redefine our digital interactions.

The true breakthrough, however, will happen when agents like Terminal of Truths move beyond simple social media engagements. Imagine a future where these agents can mint their own tokens or even develop entire protocols and applications. While this vision may still be some time away, the potential impact on productivity, the internet, and the digital economy is monumental.

Uniswap launches Unichain

Uniswap, the leading decentralized exchange, has made a surprising move by introducing its own layer 2 network, Unichain. Currently in testnet, Unichain is set to launch on mainnet later this year. As part of the Superchain - alongside Base, Optimism, and Worldcoin - it aims to serve as the protocol’s central liquidity hub, facilitating more efficient cross-chain communication between rollups. Furthermore, Unichain introduces two major technical innovations: the Uniswap Validation Network, enabling UNI token holders to stake, and ‘Verifiable Block Building’, developed in collaboration with the infrastructure provider Flashbots. These advancements are designed to accelerate transaction speeds while ensuring that Maximum Extractable Value (MEV) directly benefits users and apps, rather than being captured by a centralized sequencer, as is common practice today. With block times of just 250 milliseconds - faster than Solana's 400 milliseconds - Unichain promises a highly responsive user experience.

Unichain offers a glimpse into the future of successful applications and their evolving structures.

First, the concept of the 'Fat App' thesis, which suggests that value creation will increasingly happen at the application layer, appears validated. While value in recent years has predominantly been generated within infrastructure layers, we are now seeing leading apps like Uniswap establish their own chains to capture value directly and enhance user experience.

This trend also points toward vertical integration as projects look to control their entire tech stack. For Uniswap, this includes not only Unichain but also its suite of applications such as the Uniswap Wallet, Uniswap X, and the Uniswap Frontend.

However, this evolution also brings mixed implications for Ethereum. While Unichain's launch aligns with Ethereum’s rollup-centric roadmap, Ethereum could still face the long-term risk of losing a significant portion of its fee revenue if Uniswap's primary activity migrates to its own chain.

Going forward, we will closely keep an eye on how quickly trading activity transitions from Uniswap's current instances to Unichain, shedding light on the appetite for specialized, vertically integrated solutions within the Ethereum ecosystem.

Kraken Goes Onchain

Following in the footsteps of Coinbase, Binance, and OKX, Kraken, the sixth-largest crypto exchange, has unveiled its own layer 2, Ink. Ink is designed as a general-purpose layer 2 network, with a strong focus on DeFi applications. Like Coinbase’s Base, it is built on the OP Stack, making it a new addition to the expanding Superchain - an ecosystem that includes rollups like Unichain, Optimism, and Sony's Soneium. With the network’s testnet already being live, a mainnet launch is expected in early 2025.

Kraken's move reflects the rising success of similar layer 2s.

Take Coinbase's Base, for instance: in just 15 months, it has become the largest layer 2 network by transaction volume, generating more than $75 million in fees with a remarkable 80% profit margin.

Base: Key Economic Figures. Source: Dune

Coinbase has even indicated plans to shift portions of its core app functionality onto Base, underscoring its confidence in the long-term viability of the onchain economy. Now, Kraken aims to seize a similar opportunity by tapping into the growth potential of the onchain economy.

Moreover, Kraken’s decision to use the OP Stack underscores the increasing dominance of the Superchain as a leading rollup framework. By building on this infrastructure, Kraken has also committed to contributing a portion of its transaction fees to Optimism’s treasury, much like Coinbase. Additionally, Kraken will be involved in establishing shared interoperability standards, which are crucial for the ecosystem’s continued growth.

From a broader perspective, Kraken’s entry into the layer 2 space could have a significant impact on crypto adoption. According to a16z’s latest State of Crypto report, only 5-10% of crypto holders are active onchain users. Exchanges like Kraken, with their large user bases, have the potential to bring more people into the onchain economy, driving higher levels of participation and further mainstreaming blockchain technology.

Off the Grid: GameFi’s Time to Shine?

For years, gaming has been seen as the key to achieving mass adoption for web3. Despite becoming one of the most heavily funded sectors in the industry, the space has yet to see a major breakthrough. Yet last month brought renewed optimism with the launch of 'Off the Grid' (OTG), a blockchain-based shooter game that quickly became one of the top games on the Epic Games Store, drawing nearly 10 million new users to its own blockchain network within just a few weeks.

Off the Grid is the first AAA title from web3 game developer Gunzilla Games, which, coincidentally, is also based in Frankfurt. The game is a free-to-play battle royale shooter with gameplay similar to successful titles like PUBG and Fortnite. Developed over the past five years, OTG has raised $76 million in venture capital during this time. The game is built on GUNZ, Gunzilla's proprietary blockchain network, which serves as the infrastructure for the game's economic elements. When creating an account, players are automatically set up with a wallet on the GUNZ network. Through completing missions, players can earn $GUN, the network's native token, and mint in-game items, like weapons, as NFTs. These NFTs are fully tradable on marketplaces like OpenSea, giving players complete ownership of their in-game assets and delivering on web3’s core promise of eliminating third-party intermediaries. So far, the debut has achieved impressive results: since launch, it has been downloaded over 10 million times and briefly ranked among the most-streamed games on the streaming platform Twitch.

This success highlights the potential of web3 games to drive significant increases in transaction volumes and, by extension, demand for blockspace.

Generally speaking, the outlook for web3 gaming is quite promising, with many titles that secured major funding two to three years ago now approaching release, supported by an infrastructure that has evolved to meet their needs reliably.

Still, whether Off the Grid will be the true breakthrough for web3 gaming is yet to be seen, as the next few months will be critical in showing if it can sustain player engagement long-term.

Stripe Acquires Stablecoin Startup in Historic M&A Deal

In a landmark acquisition, Stripe has announced its purchase of stablecoin startup Bridge for approximately $1.1 billion, marking both Stripe’s biggest acquisition to date and the largest buyout in the crypto sector.

Why Bridge?

Well, Bridge offers two core services that strategically align with Stripe's mission: 'Orchestration APIs,' which allow users to seamlessly swap and transfer stablecoins (e.g., USDC, USDT, PYUSD) across multiple blockchain networks, and 'Issuance APIs,' enabling companies to create and issue their own stablecoins. Bridge manages the reserves by automatically investing them in U.S. Treasury bonds, passing the generated returns back to the issuing companies. Bridge’s client base currently includes major players like SpaceX and Coinbase, as well as select government agencies, and the company holds multiple Money Transmitter Licenses across the U.S. and Europe. Following the announcement, Stripe co-founder Patrick Collison declared that the company aims to build 'the world’s best stablecoin infrastructure.' For Stripe, stablecoins present an opportunity to offer faster, lower-cost payments and accelerate global expansion while also opening up new revenue streams beyond traditional transaction fees and merchant integrations. With direct blockchain-based processing, Stripe can now explore services such as stablecoin issuance, treasury management, on- and off-ramping, and international payments—eventually aiming to become ‘the world’s best stablecoin infrastructure,’ as stated by co-founder Patrick Collison.

This acquisition is also likely to encourage other major fintech and financial institutions to develop their own stablecoin strategies, as Stripe’s global reach is expected to significantly accelerate stablecoin adoption. The Bridge integration could make stablecoins more accessible to a larger audience and encourage further strategic moves in the space.

Additionally, it is another clear indicator that blockchains are emerging as the backbone of the next generation of the global financial system. With more assets and activity moving onchain, we may soon see seamless connections to DeFi platforms like Uniswap and Aave, fostering the growth of the onchain economy and the convergence of TradFi and DeFi.

Crypto Investments Reach Record Highs

As the likelihood of a Trump victory grew throughout October, so did capital inflows into crypto-related investment products. CoinShares data reveals that since the beginning of the year, these products have attracted over $29 billion, hitting an all-time high.

Bitcoin spot ETFs alone saw cumulative flows of over $8 billion, bringing their total to $24 billion in just nine months - a milestone that took gold ETFs more than five years to reach.

These figures underscore both the growing investor interest in digital assets as a distinct asset class and the confidence that a Trump presidency could further accelerate growth in the sector.

Among the institutions recently reporting crypto investments was the Michigan state pension fund, which drew attention by disclosing new ETH ETF holdings in its 13F filings, positioning it as one of the top 5 holders of Grayscale’s Ether ETFs.

U.S. universities have also joined the ranks of crypto ETF holders. According to an SEC filing, Emory University holds nearly $16 million in Grayscale’s Bitcoin Mini Trust, marking it as the first U.S. university to officially hold BTC.

Additionally, the state of Florida is increasingly embracing crypto. The state’s CFO disclosed holdings of approximately $800 million in crypto-related investments and suggested that a portion of Florida’s pension fund could also be allocated to crypto, as proposed in a letter to the Florida Board of Administration.

Microsoft Considering a Bitcoin Investment?

Microsoft may soon join the list of Bitcoin holders. According to a new proposal, Microsoft shareholders are set to vote on December 10th on whether the tech giant should consider investing in Bitcoin to diversify its treasury reserves. The proposal comes from the conservative think tank, the National Center for Public Policy Research, which is recommending that Microsoft allocate 1% of its treasury to Bitcoin. Their argument hinges on Bitcoin’s potential as a stronger long-term hedge against inflation compared to bonds, whose returns have lagged behind inflation rates. Microsoft’s board has already issued a clear stance, advising shareholders to reject the proposal. The board stated that they have reviewed investments in Bitcoin and other cryptocurrencies and will continue to do so internally, but without the need for another public review.

Even if the proposal gains some support, a swift move to add Bitcoin to Microsoft’s treasury is unlikely. However, the real significance of this news is that the tech giant is even contemplating an investment in Bitcoin.

Going forward, we may see an increasing number of public company boards consider Bitcoin as a viable reserve option, as part of their fiduciary duty to explore avenues for increasing shareholder value.

Although Bitcoin's volatility has traditionally deterred such decisions, recent developments may reshape how companies evaluate Bitcoin as a treasury asset.

Updated U.S. accounting standards, effective December 15, will allow companies to record Bitcoin at fair value, enabling them to report gains instead of only impairment losses when the price drops.

Additionally, institutional acceptance is rising. Spot ETFs have bolstered Bitcoin's credibility as an asset class, and BlackRock recently recognized its value as a hedge against inflation and geopolitical risk - an attractive trait for corporate treasuries.

We’ll have to wait until December to see if these factors are enough to sway Microsoft's board toward a Bitcoin investment.

Blockwall Portfolio Update

This month, we’re excited to share some updates on our portfolio with you.

First, our portfolio company Validation Cloud has secured an additional $10 million in funding, led by True Global Ventures.

As a leading infrastructure provider, Validation Cloud offers node and staking services, along with access to a wide range of blockchain data. Over the past year, their staking business has expanded by 400%, with staked assets now surpassing $1 billion.

Secondly, we’re pleased to welcome River as the newest addition to our portfolio.

River is a unique events platform that allows global brands to let members of their community host events on their behalf. River introduces a new concept of "crowd-sourced" hosts, enabling fans/community members to organize their own events without data-sharing concerns or significant effort from event managers. This empowers brands to scale events globally, engage more deeply with their fan base, and unlock the economic potential of their communities. So far, River has powered over 2,000 events, organized by 3,000 crowdsourced hosts, with 55,000 attendees in more than 150 cities - all achieved with a fraction of the effort compared to other event platforms.

If you'd like to understand why we invested in River, we recommend reading the article by our Investment Manager, Rajeevan Rajendran.

Key events of the last few weeks

1. VanEck launches VanEck Ventures. For the first fund, the $118 billion asset manager aims to raise around $30 million. The funds will primarily be invested in early-stage companies in the areas of fintech, digital assets, and AI. (Source: VanEck)
2. VanEck introduces staking rewards for the European Solana ETP. VanEck will retain 25% of the accumulated rewards, while the remainder will be reinvested daily into the $VSOL product. (Source: VanEck)
3. MoonPay announces integration with Venmo. This allows Venmo's approximately 60 million U.S. users to purchase cryptocurrencies directly using their balance. (Source: MoonPay)
4. UBS enters the tokenization space. The Swiss bank announced the tokenization of its first money market fund. For more details, see Dominic’s post on LinkedIn.
5. Argentina introduces ZK-based identity solution. In the future, residents of Buenos Aires, the capital of the Latin American country, will be able to store and use all documents, such as birth certificates and vaccination records, through a ZK-based identity solution on the ZKSync Layer-2. (Source: ZKSync)
6. MicroStrategy announces its '21/21' plan. The company aims to raise a total of $42 billion over the next three years to purchase Bitcoin by issuing $21 billion in equity offerings and $21 billion in fixed-income securities. (Source: Forbes)
7. Deutsche Telekom explores Bitcoin mining. The company’s goal is to utilize surplus renewable energy for Bitcoin mining and to collect valuable data to support future initiatives in this area. (Source: Telekom)

What we’ve been reading

1. Zero-Knowledge Proof Report Q2/2024
   This comprehensive 34-page report covers the key developments in the field of Zero-Knowledge technology.
2. a16z State of Crypto Report 2024
   In its new 'State of Crypto' report, the venture capital firm highlights the key figures and developments in the crypto industry. See Dominics LinkedIn Post for the key insights.
3. Alliance Crypto Startup Trends H1 2024
4. The leading New York-based crypto accelerator highlights the most important trends in the crypto startups space.
5. The distributional consequences of Bitcoin
6. In this paper, two members of the European Central Bank discuss Bitcoin’s distributional effects, arguing that the cryptocurrency’s price growth is detrimental to the global economy and even suggesting that it could pose a threat to democracy. In a LinkedIn post, Dominic shared his thoughts on this critique.
7. Galaxy: Quarterly Venture Capital Report
8. In this quarterly report, Galaxy analyses crypto's venture capital landscape. See Dominic's LinkedIn Post for the most important takeaways.

‍