Data & Insights Recap - August 7, 2023

HomeBase

Source: The Block

• Coinbase’s new layer 2, Base, has not even launched to the public yet (but it will on August 9th), but that hasn’t stopped the new network from gaining a lot of traction as of late. 
  • Memecoin mania hit Base early last week, with Base posting over 600,000 daily transactions on July 30th and 31st. Previously, transactions had never exceeded 80,000. 
  • Base opened for developers in mid-July, but people have still been able to move assets over to the optimistic rollup by using a portal proxy contract or other third party bridges. 
  • The influx of activity naturally caused the profits (layer 2 transaction fees generated minus fees paid to publish data to the mainnet) Base was generating to grow, as well. On July 30th and 31st, Base was posting more revenue than Arbitrum and Optimism combined. 
  • Over $100 million has already been bridged over to Base, and it hasn’t even been open to developers a month. 
• This is all a good sign for Base, which is already looking like a strong competitor to the already existing optimistic rollups in the space, but the short time that Base has seen such prominent activity has not been without scandal. 
  • The most prominent of the memecoins, BALD, crashed spectacularly after its developer pulled 6,800 ETH of liquidity for the token out from LeetSwap, a decentralized exchange on Base. The token was trading just above $0.080 at midday on Monday and is now trading around $0.005. The head of research at Wintermute has found that the developer has potential ties to Alameda Research. 
  • And speaking of LeetSwap, it had to halt trading due to exploit fears after on-chain analysts found that liquidity pairs on the exchange had been drained of 340 ETH.
  • So while the layer 2 is founded by what many consider the poster child of compliance, their rollup is quickly proving to be just as murky as the broader world of crypto.

A quarter is a COIN

Source: Company Filings

• Coinbase’s Q2 earnings dropped last week and it was a pretty promising picture for the U.S. crypto heavyweight.
  • While the company’s revenue did drop in comparison to Q1 of this year ($773 million) and Q2 of 2022 ($808 million), the $708 million in profits between April and June beat analyst estimates of $629 million.
  • Trading volume on Coinbase slumped to $92 billion over the course of the three months, the lowest they’ve been since Q4 2020, but it did mark the second quarter in a row that the share of volume coming from retail traders inched a bit higher, the first time we’ve seen that behavior. For the most part, the institutional dominance on Coinbase has been growing since it first went public. Monthly transacting users also dropped off to the lowest they’ve been in a while, since Q1 2021. 
  • Since volumes were so, transaction revenue also took a hit, and the share of Coinbase’s revenue coming from business assets that aren’t trading reached a new high of 53.8%. One example of the alternate profit generator is interest income, which Coinbase earns on USDC. While the $151 million in interest income the exchange got this quarter is significant, it was down from Q1 due to the contracting supply of Circle’s stablecoin. 
  • What was also quite interesting was Coinbase reported $327 million in total transaction revenue but also $108 million in transaction expenses. For comparison, in Q1, the exchange racked up $375 million in total transaction revenue versus only $96 million in expenses. This fall in total revenue against a rise in expenses pushed the ratio of profit to total revenue on transactions to about 67%, which is the lowest it has ever been since Coinbase went public.
• Much of the decline in volumes (and thus transaction revenue) and users was to be expected as we move through a slower crypto market. Many exchanges besides Coinbase have also seen volumes slump amidst regulatory uncertainty and fears about centralized exchanges post-FTX fallout. 
  • But despite all that, Coinbase's Q2 earnings were alright, and the exchange proved itself resilient to fluctuations in volumes with its other revenue sources. 
  • This all comes as the firm is involved in a legal battle with the SEC after it sued them in June. Just last week, Coinbase filed for a dismissal of the lawsuit, citing the ruling on the Ripple case as a reason why the case should be let go.

Kicked to the Curve

Source: The Block

• July turned into one of the largest exploit months we’ve seen in a while and the highest amount of dollar value exploited on Ethereum since last August.
  • Arcadia was exploited for about $455,00 and Conic Finance lost over $3 million.
  • But what was the most significant hack of July, both in terms of monetary amount as well as impact on DeFi as a whole, was Curve being initially drained of over $60 million as a result of reentrancy vulnerability in an older version of the Vyper compiler.
  • Curve alone only lost about $24 million, but other protocols like Alchmeix, Metronome, and JPEG’D that rely on Curve to provide liquidity for their ETH-pegged assets also had funds drained. 
• While nominally, this doesn’t even break into the top 8 largest DeFi exploits, it was still a shakeup due to the prominence of Curve as a protocol. 
  • Curve is one of the original decentralized exchanges and trails only Uniswap in terms of volume on Ethereum. In crypto, generally, the longer a protocol has existed, the more safe it is perceived to be due to the fact that no one has yet taken advantage of it. Curve launched in the summer of 2020, so it had gone three years with no issues. As DeFi researcher Ignas pointed out, the recent hack “makes us question how safe other blue-chip protocols like Aave, Compound, or even Uniswap are.” 
  • Even JPMorgan weighed in on the issue, saying the contagion from Curve had been contained on Thursday but also noted, “the overall DeFi ecosystem remains in shrinking or stalling mode."
• Things got a bit better for Curve after the hacker returned $12.7 million of what was stolen. The exploiter sent 4,820 alETH and 2,258 ETH back to Alchemix Finance. 
  • While funds making their way back to the victims of an attack is typically a good thing, the return came along with a bit of an ominous tone. In one of the transactions sending alETH, the exploiter attached a message saying, “I’m smarter than all of you,” and clarifying that “I'm refunding you not because you can find me, it's because I don't want to ruin your project.” 
  • Alchemix actually got all its stolen funds back by the end of the weekend, as did Metronome and JPEG'd. As of now only about $18.5 million is still outstanding.
  • Curve issued a 10% bug bounty if the hacker returned 90% of the assets they stole by Sunday, but the time passed and Curve moved to issue a bug bounty to the broader community for any tips as to who hacked the protocol. 

Broader impacts

Source: The Block

• Curve’s exploit had a bit of a ripple effect in the crypto community. In particular, Aave v2 on Ethereum saw its total value locked drop to $4.02 billion on August 5th, the lowest it has been since April 2021. On July 29th, the lending protocol had over $1 billion more in TVL at $5.26 billion. 
  • The reason people were concerned was because Michael Egorov, Curve’s founder, had a large USDT loan out from Aave v2 that was using CRV tokens as collateral. 
  • Previously, Egorov supplied even more CRV to Aave to fight off liquidation when the token’s price slipped before. Back in June, the amount of CRV he had backing his loan amounted to 32% of the token’s total supply. 
  • There was even a proposal to freeze CRV on Aave and set its loan-to-value ratio to 0 (which essentially means CRV would not be accepted as collateral) as a means to help minimize Aave’s exposure to the asset and also the risk associated with Egorov’s loan. The proposal failed, though. 
  • But last week, as we saw CRV’s price slide after the hack, briefly dropping all the way down to $0.50 after sitting at $0.73 just two days earlier, the threat of a large liquidation became very real again. 
  • In the event of a liquidation, the collateral deposited by the person being liquidated (in this case CRV) would be sold for the asset being borrowed (in this case USDT), putting further sell pressure on Curve’s governance token and likely leading to a chain of bad debt. 
  • Egorov has been paying back his loan using USDT he’s acquired in over-the-counter deals selling CRV tokens. He has also paid back some debts on other platforms like Abracadabra. 
  • And while Egorov is now working to lower his risk of liquidation and CRV’s price seems to have mostly stabilized, the threat of this mass liquidation seems to have people pulling their money out of Aave v2. Aave’s outstanding debt on Ethereum has also been declining since the hack, but it’s primarily USDT debt that’s declining and part of that is coming from Egorov's repayments.

Up and down

Source: The Block

• June was a brief period of resilience for the Ethereum NFT market. While volumes did continue their decline from February, the first month of summer marked a turnaround for both the number of NFT traders and the number of actual trades being done.  
  • Now that July has come to a close, we can see that we have not quite reached an inflection point, as both traders and the number of trades sank again in the seventh month of the year.
  • The number of NFT transactions in June came in at 895k in June compared to 532k this month. That is still higher than the 504k in April, though. On the other hand, the number of traders fell even below May levels. The number fell from 232k in June to 188k in July, which is only slightly lower than the 195k of May.
  • On a daily level, though, while there are still fewer NFT traders than we saw in 2022, the number has still not dropped below the 7.19k low that happened in March. 
• It makes sense that despite low volumes we still saw a jump in NFT sales and traders in June. At the end of the month, we saw the highly contentious Azuki Elementals mint, which triggered a mass selloff of the original Azuki collection and caused its floor price to plummet. 
  • So there were a lot of NFT sales going on, but since the sales were happening at low prices and also there was not that much other volumes in June, it was not enough to push the notional amount of NFT transactions to rise. But it was enough to spark a rebound in other metrics. 
• But despite a one-off event, it seems the NFT space is still following its broader cooling trend.
  • Kraken is committed to bolstering the NFT spirit, though, hosting a promotional sweepstakes to allow the winner to pick which non-fungible token will appear on a Williams Racing Formula 1 race car that will compete in the U.S. Grand Prix.