Commentary from the Desk: August 10,2022

This week, we are closely following 3 key themes:

1. Economic indicators plow through inflationary concerns
2. The Goerli testnet, the Merge's final curtain raiser
3. On-chain activity hums, but doesn't surge

**Before we jump in: on Monday, Cumberland’s Global Head of Trading Jonah Van Bourg joined the Blockworks’ Empire podcast to discuss the anatomy of a trade and the broader crypto liquidity engine. Listen to it here.

1. Economic indicators plow through inflationary concerns

This week the main release was today’s CPI print at 8.5% vs forecasts of 8.7%. This has led to a rally in risk assets, with ETH up 7% today and Nasdaq up 2.5%, as the market begins to price in inflation declining going forward and as such, Treasury yields have declined across the board.

Last week, the main macroeconomic event was Friday’s U.S. Bureau of Labor Statistics jobs report. Key takeaways:

● Total nonfarm payroll employment rose by 528,000 in July, and the unemployment rate edged down to 3.5%;
● Job growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care;
● Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels;
● Labor force participation rate is still down from 63.4% pre-pandemic levels to 62.1% last month.

This is certainly a vast improvement from the height of the pandemic, however there are still ~628k less workers in the workforce, which is a contributing factor to wage inflation as the demand for workers is elevated. However, there are two sides of the coin:

1. The positive: the economy is healing;
2. The negative: it gives the Fed room to potentially hike interest rates more aggressively.

Traditional markets fell off the back of this news with SPX and NDX edging lower during Friday’s trading session. US 10-Year Bonds ticked up from 2.66% to 2.85% leading to a peak in yield-curve inversion with the 2-year notes sitting at 3.25% (roughly a -41bp spread). (NB: this is the largest spread since the 2000s dot-com bubble, and typically a signal of a potential recession). The spike occurred post-jobs report, but has since contracted.

2. The Goerli testnet, the Merge's final curtain raise

As we discussed last week, all eyes are on the upcoming Ethereum Merge. In terms of major infrastructure events in the crypto ecosystem, the Merge is certainly right at the top.

The Goerli testnet merge, the last technical blocker before the full Merge, is happening this week, with some estimates pointing to August 10. The upcoming final testnet merge will only impact the node operators and testnet participants; ETH holders and stakers won’t have to make any changes from their end.

Once Goerli is completed, it’s more or less assured that the Merge will occur in September. Indeed, if you’re putting a discount on the Merge, that discount will be materially reduced by the end of this week. While there have been detractors against the Merge like ETH miner Chandler Guo, who are pushing for a forked proof-of-work ETH, optimism for the new proof-of-stake mechanism remains high. Given the volatility this year, some investors want to get ahead of it, but not for several months and not with taking on too much risk. With Goerli’s likely completion, investors can comfortably predict the final technical ‘hiccup’ will be overcome and clearly today’s positive CPI release provides a more supportive macro environment for risk appetite.

3. A surge in Merge-focused derivative activity

Despite the broader recovery activity across the macro and crypto economies, we have not seen much of a recovery of on-chain activity (i.e. using Ethereum network for trading, leverage, etc.).

The clearest indicator of this is gas prices, which remain reasonably depressed. Currently, gas is 23 gwei. For example, when activity spikes considerably, prices can get up to 200, but can go sub 10 gwei. Recently, despite the recovery, it’s been reasonably low. It’s rare that we have seen a strong rally without a follow through around underlying activity, animal spirits and retail trading.

We also track smart money activity on Nansen each week and this week have seen roughly $10m of net buying activity in altcoins. This is roughly in line with the past few weeks and so we are yet to see a material breakout in terms of institutional capital inflows into altcoins, ie the highest risk assets. Ideally we would like to be seeing flows into these assets as confirmation for a sustainable rally.

Other Going-on ICYMI:

● The U.S. Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash;

● A new bill in the US Senate would make the Commodity Futures Trading Commission (CFTC) the direct regulator of the biggest cryptocurrencies.

o The measure, introduced by the top Democrat and Republican on the Senate Agriculture Committee, would give the CFCTC exclusive jurisdiction over BTC and ETH as well as any other crypto products that are determined to be commodities;

● The Solana wallet hack last week affected thousands of wallets, with loss of around ~4.5 in funds (one user lost up to $500k). The attack affected users who created or imported a set of private keys on Slope Wallet. These private keys were stored in plain text and not encrypted;

● In other Solana news, it was revealed that Ian Macalinao, founder of Saber, a stablecoin exchange built on top of Solana, faked a vibrant developer community on Solana.

o Macalinao disguised himself as 11 different developers and built two protocols Saber (Stableswap AMM) and Sunny (DeFi Yield Aggregator).
o The TVL was often double counted, bloating the TVL on Solana. This is incredibly worrisome, considering at one point they comprised $7.5 billion of Solana’s $10.5 billion TVL at their peak

● Crypto bridge Nomad recovered $22m of $190m in a recent hack.