April 8, 2022
Access our research on the Bloomberg Terminal with ERH GXY <GO>
gm -

this week we published two new reports. the first one examines one of the most perplexing phenomena in crypto: bitcoin transaction fees are at all-time lows despite significant user activity and price volatility. i explain how that is possible and why it matters in this report. the second report dives into ethereum's transition from a proof-of-work consensus protocol to proof-of-stake, dubbed 'the merge'. in this report, Galaxy Digital Research Associate Christine Kim breaks down what investors can expect from ethereum's most complex and radical code change to date.

also in today's newsletter, bitcoin payments app Strike is partnering with three of the world's largest payments providers, Shopify, NCR, and Blackhawk; Terra's UST reserves are expanding to include AVAX in addition to BTC; Binance.US raises over $200mn at a $4.5bn valuation.

welcome to another edition of the galaxy digital research brief.

alex
NEW REPORT: What to Expect from Ethereum's Merge Upgrade
The Merge upgrade is Ethereum’s long-awaited transition from a proof-of-work (PoW) consensus protocol to proof-of-stake. As the network’s most complex and radical code change to date, the Merge is expected to strengthen the value proposition of ether (ETH) in three main ways. 

Key Takeaways
  • Narratives around ether as an environmentally sustainable cryptoasset are expected to take off in a way that has never been possible for bitcoin, the world’s first and largest cryptoasset, due to Bitcoin’s reliance on PoW mining.
  • In addition, the Merge’s impact on network issuance is likely to strengthen the narrative around ether as a store of value.
  • Finally, the Merge is also anticipated to bolster the narrative around ether as a productive asset able to generate profits and cash flow through staking yields.

Market Update
The total implied network value (market cap) of the digital assets market stands at $2tn, down 2% from last week (when it stood at $2.04tn). Bitcoin’s network value is 6.53% of gold’s market cap. Over the last 7 days, BTC is down 5.74%, ETH is down 5.51%, SOL is down 9.47%, and AVAX is down 8.14%. Bitcoin dominance is 41.46%, unchanged from last week.
Data current as of 11:21 pm ET on April 4, 2022. Prices and Data via Messari.
Three Big Stories
💳 Strike CEO Jack Mallers Announces Partnership with Shopify, NCR, and Blackhawk 
On Thursday, Jack Mallers, the CEO of bitcoin payments app Strike, announced partnerships with three of the world’s largest payments providers: Shopify, NCR, and Blackhawk. Speaking at Bitcoin 2022, an annual Bitcoin conference hosted in Miami, Mallers emphasized that not only would e-commerce merchants on Shopify be able to accept payments in BTC, but also major retailers that operate physical stores and rely on in-person point-of-sale solutions such as Whole Foods, McDonalds, Macy’s, Walmart, and Chipotle. 80% of all payments are completed in-person, Mallers pointed out during his presentation. Mallers then shared a video of himself purchasing items with bitcoin from a grocery store in Chicago using multiple different cryptocurrency wallets including Zap, CashApp, and Muun Wallet.

A key nuance about the execution of payments through Strike’s new partnerships is that merchants don’t need to accept bitcoin in order for consumers to pay in bitcoin. The payments are automatically converted back into dollars during the point-of-sale. In addition, consumers using Strike’s new integration with merchants do not need to pay in bitcoin. They can use a fiat currency that is then converted into bitcoin and transferred through Bitcoin’s Lightning Network. The funds can then be converted once more from BTC into dollars before reaching the merchant. The technical innovation that enables conversions of currency into and out of BTC is one that Strike has used in the past to support stablecoin payments through the Bitcoin Lightning Network. (Read more about Strike and stablecoins in this previous newsletter issue.) Now, this innovation enabling the Lightning Network to underpin payments in bitcoin and fiat is being rolled out to thousands of retailers and online merchants across the U.S.
OUR TAKE: The announcement by Mallers about Strike’s new partnerships with NCR and Blackhawk is significant for two main reasons. The first reason is because it offers merchants on a large scale an easy way to take advantage of the instantaneous settlement and low-cost features of Bitcoin’s Lightning Network. By accepting payments processed through Lightning, merchants avoid settlement delays that range between 2-15 days, as well as fees charged by traditional credit card payment networks that are on average 3% per transaction.
 
The second reason the announcement is significant is that the new integrations of Strike’s payments platform with merchants across the U.S. manifests an open payments standard that cannot be controlled by centralized financial intermediaries such as banks. Through Strike’s integration, consumers can purchase the goods and services of major retailers like Whole Foods and McDonalds using a digital payments option that doesn’t rely on a bank-issued debit or credit card. In lieu of cash, consumers today need to rely on traditional banks and payments networks that require its users to reveal personal identifiable information about themselves to make purchases. By redirecting and processing sales through the Bitcoin Lightning Network, Strike’s payments technology enables the optionality for consumers to transact in a permissionless and pseudonymous way by enabling payments directly from bitcoin wallets.
 
Strike’s integration with merchants on Shopify, NCR, and Blackhawk by no means makes paying with bitcoin an easier option for consumers than others. The video of Mallers making a purchase with BTC at a grocery store in Chicago highlighted the reliance on QR codes and bitcoin-native applications, both of which are not familiar practices to mainstream audiences when paying for goods and services. That said, the very existence of an infrastructure widely adopted by major retailers in the U.S. for supporting transactions processed through a permissionless blockchain like Bitcoin is a major step forward in terms of creating an open payments standard that supports both payments through legacy financial institutions and bitcoin startups. Bitcoiners and other privacy-minded individuals especially are sure to take advantage of Strike’s new integration with major retailers and in doing so spread awareness about the use cases for non-sovereign money. And there are more bitcoiners every day.
🤝AVAX Added to UST Stablecoin Reserves
Terra expands UST reserves with AVAX as part of strategic partnership with Avalanche. The Luna Foundation Guard (LFG) is buying $100m of Avalanche tokens to add to Terra's decentralized forex reserve to support the TerraUSD ("UST") peg. The purchase was conducted through an OTC trade. This makes $AVAX the second asset to be added in the UST reserve after bitcoin, which currently carries a balance of ~35,768 BTC (~$1.56bn) in the LFG wallet.

In a separate transaction, Terraform Labs ("TFL"), the team behind the Terra blockchain, executed a $100m treasury swap for $AVAX with the Avalanche Foundation. In total, $200m of AVAX was purchased across the two $100m transactions, one funded by LUNA tokens and the other using UST. These moves are part of a broader strategic partnership between the Terra and Avalanche ecosystems. TFL now includes plans to support new $UST-native protocols on the Avalanche ecosystem. Anchor, Terra's primary savings and lending platform, expanded to Avalanche just weeks ago. The two parties also plan on collaborating on a new gaming subnet built on top of Avalanche, though further details will be shared at a later date.

The founders behind both platforms shared comments in support of the other's blockchain (while also dragging Ethereum):
  • Terra's Do Kwon: “Avalanche is still a growing ecosystem...a lot of it is fueled by loyalty to the AVAX token and users feel a lot of affinity with an asset that aligns itself with AVAX…whereas for the average Ethereum user, aligning yourself with Ether doesn’t really mean that much.”
  • Avalanche's Emin Gun Surer: "I wish that more and more coins would look for ways to grow the crypto space as opposed to compete for the same set of people."
OUR TAKE: Terraform Labs has committed to expanding the cross-chain footprint of UST as part of a much larger mission for UST to quickly scale and become the world's largest stablecoin. The addition of non-LUNA assets like BTC and AVAX to the LFG reserves not only serves as a liquidity backstop for UST, but also as marketing dollars for Terra to align itself with the overall crypto ecosystem. Do recognizes the importance of building user confidence in the stability of Terra's decentralized algorithmic stablecoin, which often faces initial skepticism from outside communities. The initial decision to add bitcoin to UST reserves was very intentional given bitcoin is generally accepted among crypto communities as a hard reserve currency. But the decision to add AVAX as the second reserve currency to bitcoin was noteworthy as it came before ETH, the second largest cryptoasset. The ETH community often finds itself at odds with other crypto communities including bitcoiners and other smart contract platforms and Do Kwon and Emin Gun Surer's comments reflect some of that tribalism.

Still, even though LFG has not added ETH to its reserves, the Terra community intends to expand UST's presence on Ethereum through more strategic collaborations and incentive programs with some of leading DeFi projects including Curve and Convex (through 4pool, a new stablecoin pool also consisting of USDT, USDC, and FRAX) as well as Synapse, Aave, and Ondo Finance as detailed in this proposal.) These integrations and partnerships facilitate broader expansion of UST to all EVM chains and layer 2 platforms where Curve operates including Arbitrum, Optimism, and Fantom. LFG will likely add the native tokens of some of these other platforms to the UST reserves, though in order for any additional assets to serve as effective backstops to UST's stability, they must have also some diversifying effect to improve on the overall risk profile of the reserves. UST's expansion across different chains will make it increasingly difficult for other algo-stablecoins to compete especially against the 19.5% yields offered on UST deposits by Anchor.

Lastly, Terra's commitment to collaborating on a gaming subnet built on Avalanche serves as validation to the technology of subnets. It builds on top of the recent launch of the DeFi Kingdoms subnet, which has seen some meaningful traction after just one week. With the demonstrated success of dedicated gaming subnets and new large partnership announcements like with Terra, Avalanche is quickly becoming the top-of-mind platform for gaming, which will attract retail users and developers, and will likely drive more NFT activity to Avalanche where it's been relatively lacking compared to other major platforms.
💰 Binance.US Completes First External Funding Round
Binance doubles down on US presence. The US-based affiliate of the world's largest crypto exchange, Binance, announced on Wednesday that it has raised $200 million in a fundraising round valuing Binance.US at $4.5 billion. The round was participated in by RRE Ventures, Foundation Capital, Original Capital, VanEck, and Circle Ventures (there was no lead investor). This injection of capital is the first-ever for Binance.US dating back to its inception in 2019. According to Binance.US CEO Brian Shroder, the capital will be used for hiring and potential acquisitions.

Today, Binance.US operates in 45 states with a stripped-down product offering aimed at complying with US regulations as a separately-licensed entity owned by Binance. Binance.US offers its users 198 markets and 88 coins compared to Binance’s 1,660 markets and 396 coins. On a typical day this past week, Binance.US transacted $420m in daily volume compared to $24b in volume for Binance (approximately 1% of Binance’s global volume). Binance.US’s headcount currently stands at 350 people, and this is expected to double with the new funding. Shroder also publicly stated a desire for Binance.US to go public within 3 years. This fundraise signals that Binance is serious about following-through with those plans.
OUR TAKE: The most interesting thing about this fundraise is the valuation that Binance.US was given. In spite of the fact that Brian Shroder publicly stated the round was “oversubscribed”, it seems that Binance.US did not command as high of a valuation as peer exchanges have raised recently. For comparison, Gemini raised $400m at a $7.1bn valuation in November, 2021 and FTX.US raised $400m at an $8bn valuation in January, 2022. However, during the span of March, 2022, FTX.US did $5.2bn of trading volume and Gemini did $3.88bn of trading volume compared to Binance.US’s $9.22bn of trading volume during that same timeframe. Interestingly, it appears Binance.US is commanding approximately half the valuation with double the volume of these two peers. Either Binance.US is being undervalued by the market or current market conditions in the crypto sector have suppressed valuations from the highs seen in late fall/early winter.
 
The other interesting development to pay attention to with this news is what impact this will have on BNB going forwards. BNB is the native token of Binance’s product suite and is used for trading fees on Binance, trading fees on Binance’s DEX, transaction fees on BNB Chain, and transaction fees on BNB Smart Chain (BNB Chain is the non-EVM compatible governance protocol for Binance and BNB Smart Chain is the EVM-compatible Layer 1 blockchain). BNB can also be used to pay for goods and services via Binance Pay (though this service is not available in the US market). As Binance expands its US presence, BNB might see increasing utility stemming from an increase in US demand for trading discounts available to BNB holders on Binance US. This increasing utility coupled with BNB’s standing the only widely-used deflationary cryptocurrency in the world (with a market cap ranking of 4 at ~$70B according to CoinGecko) may result in BNB’s market cap growing even more. In many ways, BNB paved the way for loyalty tokens on trading platforms as seen in Crypto.com and FTX. It will be interesting to watch BNB as Binance competes more heavily in the US market.
 
Ultimately, the most obvious takeaway here is that the US market, in spite of its regulatory challenges, is still an incredibly important market for crypto. With Binance’s move, it is clear that global crypto juggernauts are perfectly content to create bespoke product offerings outfitted with separate legal operating entities solely for the US. In spite of what many may suggest, the US is not losing its relevance or importance in the crypto industry any time soon, and that is a very bullish signal for crypto adoption and maturation in the US market overall.
Other News
  • MicroStrategy purchased an additional 4,167 BTC for $190m
  • LFG purchased another 5,040 BTC for ~$231m
  • Coin Metrics raises $35m in Series C led by Acrew Capital and BNY Mellon
  • NEAR Protocol raises $350m in new funding round led by Tiger Global
  • Boba Network raises $45m in Series A at $1.5bn valuation
  • Blockchain security firm CertiK raises $88m Series B3 at $2bn valuation
  • Worldpay to offer merchants direct settlement in USDC
  • OpenSea adds support for Solana-based NFTs in new beta
  • Cash App announcess “Paid in Bitcoin” feature
  • Bolt to acquire Wyre in $1.5bn deal to expand crypto payments 
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
What to Expect From Ethereum's Merge Upgrade
In this report, Research Associate Christine Kim breaks down what investors can expect from Ethereum's Merge upgrade, the network's most complex and radical code change to date.

Why Bitcoin Transaction Fees Are So Low
In this report, Head of Firmwide Research Alex Thorn examines one of the most perplexing phenomena in crypto: Bitcoin transaction fees are at all-time lows. The last 9 months are the only time in Bitcoin history that a price bull run was not accompanied by a spike in transaction fees. Alex explains how that is possible and why it matters.

Galaxy Digital Research Podcast
In the fourth episode of our weekly podcast series, Galaxy Brains, we discuss the USDN stablecoin breaking its peg, Binance.US' first external funding round, and the finalization of a new Ethereum token standard for DeFi vaults.

Charts of the Week
Since the genesis of the Bitcoin blockchain back in 2009, 19 mn coins coins have been mined. In order to reach Bitcoin’s maximum supply cap of 21mn coins, the remaining 2mn coins will take an estimated 118 years to mine because of the network’s gradually diminishing rate of new supply issuance. At the same time, mining on Bitcoin is becoming increasingly more competitive. Mining difficulty reached a new all-time this week at 28.5tn, up 4.1% since the end of March. 
One of the major impacts from the forthcoming Merge upgrade on Ethereum, which will replace the network’s proof-of-work consensus model with a proof-of-stake consensus model, is the increase in validator rewards. Validator rewards are expected to more than double post-Merge as a result of transaction tips and maximal extractable value being redirected towards validators instead of miners. 
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research
Legal Disclosure:
This document provides links to other websites that we think might be of interest to you. Please note that when you click on one of these links, you may be moving to a provider's website that is not associated with Galaxy Digital. These linked sites and their providers are not controlled by us, and we are not responsible for the contents or the proper operation of any linked site. The inclusion of any link does not imply our endorsement or our adoption of the statements therein. We encourage you to read the terms of use and privacy statements of these linked sites as their policies may differ from ours. This document, and the information contained herein, has been provided to you by Galaxy Digital Holdings LP and its affiliates (“Galaxy Digital”) solely for informational purposes. This document may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Galaxy Digital. Neither the information, nor any opinion contained in this document, constitutes an offer to buy or sell, or a solicitation of an offer to buy or sell, any advisory services, securities, futures, options or other financial instruments or to participate in any advisory services or trading strategy. Nothing contained in this document constitutes investment, legal or tax advice. You should make your own investigations and evaluations of the information herein. Any decisions based on information contained in this document are the sole responsibility of the reader. Certain statements in this document reflect Galaxy Digital’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Galaxy Digital’s views on the current and future market for certain digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance may vary substantially from, and be less than, the estimates included herein. None of Galaxy Digital nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or any other information (whether communicated in written or oral form) transmitted or made available to you. Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of this information. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Galaxy Digital and, Galaxy Digital, does not assume responsibility for the accuracy of such information. Affiliates of Galaxy Digital own investments in some of the digital assets and protocols discussed in this document. Except where otherwise indicated, the information in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. The foregoing does not constitute a "research report" as defined by FINRA Rule 2241 or a "debt research report" as defined by FINRA Rule 2242 and was not prepared by Galaxy Digital Partners LLC. For all inquiries, please email contact@galaxydigital.io. ©Copyright Galaxy Digital Holdings LP 2021. All rights reserved.