Ethereum: Who’s Running the Show?

The world’s second-largest cryptocurrency project has been on quite a rollercoaster over the last few months. On the one hand, it’s had the SEC sniffing around, while simultaneously menacing big players in its ecosystem. On the other, spot ETH ETFs are now likely to be trading in the US by the middle of summer.

Given these headlines, it’s perhaps easy to forget just how massive and sprawling Ethereum and its ecosystem are. Thousands of developers are building thousands of dapps, while upgrades to Ethereum itself are an ongoing process. It’s not yet ten years old, but already it’s impossible to imagine the wider crypto space without it.

This begs the natural question - all the more pertinent in the light of that SEC scrutiny - of who exactly controls Ethereum. Who is making the decisions about the project’s future? How decentralised is it really? And should we be worried?

A recent report from Galaxy Digital set out to answer these questions and more besides. It made for fascinating reading - so much so that we decided it would be the ideal topic for today’s video. We go through the report and dig out its key findings, so, if you hold ETH, or indeed have any interest in crypto as a whole, then this is one not to be missed.

You can watch that video here.

📈 Crypto Market Forecast 📈

It looks like it’s going to be a quiet week for the crypto market. There aren’t any obvious crypto or macro factors that could cause volatility. That said, there are a few lurking beneath the surface. For starters, spot Bitcoin ETF inflows seem to be slowing. While there were a few days of positive inflows last week, the overall trend appears to be down, signalling weak demand.

On the supply side, it appears that Bitcoin miners have been selling their BTC due to increased mining costs. To put things into perspective, some sources estimate that the break-even cost for mining BTC is around 74k. It’s important to note that this is for the average miner. Some miners, namely larger ones, have more efficient operations, so their mining costs are lower.

There also seem to be clouds brewing over Ethereum’s ecosystem. For starters, it appears that the CRV that Curve Finance founder Michael Egerov used as collateral for enormous loans is starting to be liquidated. The practical effect of this is that it could cause shortfalls on DeFi protocols which, given DeFi’s connectivity, could spread the rest of Ethereum’s ecosystem.

Similarly, it seems that the SEC isn’t letting up when it comes to scrutinising Ethereum. This is evident in the fact that Uniswap Labs recently hired a former Coinbase executive as legal counsel. It stands to reason that Uniswap Labs wouldn’t be hiring additional lawyers if it wasn’t expecting the SEC to follow through with its threatened lawsuit. It seems it’s a question of when, not if.

On the macro front meanwhile, the main factor to be aware of seems to be geopolitical uncertainty. Over the weekend, a peace summit was held in Switzerland to end the war in Ukraine. The irony is that Russia wasn’t invited. It’s possible that there has been some kind of escalation by the time you read this newsletter, as it’s possible Russia may escalate to try and negotiate on its own terms.

At the same time, it’s possible that we could see an escalation between China and Taiwan, specifically around Taiwan’s Matsu islands. For those unaware, Taiwan has many islands close to China with only a few people on them. Some geopolitical experts believe that China could take one of these islands as a show of force, though that would be unlikely to lead to a kinetic conflict.

In terms of domestic politics, there’s growing speculation that President Biden will bow out of the upcoming presidential race. This is evidenced by all the recent articles about who could replace him if he does step down. The top contender seems to be California governor Gavin Newsom, who travelled to China to meet Xi Jinping personally last year. Makes you think.

Whatever the case, in stark contrast to Biden, Newsom is reportedly pro-crypto, having passed crypto regulations in California late last year. The question is whether this will be sufficient to woo voters who believe that most of the rest of the Democratic party is anti-crypto, despite their recent bi-partisan votes. The answer is that it could be. Biden may take the blame, so to speak.

Meanwhile in Europe, the recent EU elections seem to have shaken up the continent. That’s because right-wing parties gained significant ground. In France, the gains were so large that a snap election was called. It’s too soon to say how this could affect the crypto market, but the consensus seems to be that there won’t be any major changes.

In sum then, a quiet weak with the potential for some loud moments. Keep those earplugs on hand just in case!

🔼 Prediction Markets: Up Only? 🔼

The popularity of prediction markets, especially the crypto-native ones, has been in an uptrend lately.

For instance, the decentralised prediction market platform Polymarket has been seeing record-high increases in users, volume, and TVL. A Dune Dashboard by rchen8 shows that the average monthly volume on Polymarket has seen a 10x increase since the start of this year. Last month in particular saw Polymarket achieve $63 million in monthly trading volume - the highest since its creation.

The same is true for its number of users. At the time of writing, the monthly active traders on the platform stand at roughly 17,000. This is almost a 3x increase from its previous peak of approximately 6,000 users in December 2021. It’s the same story with TVL as well: Polymarket is experiencing an all-time high with almost $30 million locked on its platform.

Couple this with the fact that Polymarket is currently the largest and most liquid prediction market platform globally for the 2024 US Presidential Election, you’ll see why it was able to successfully raise $45 million for its Series B from Founders Fund, Vitalik Buterin, DragonFly, and others.

In fact, with trust in mainstream media at an all-time low, few have come to rely on the outcomes displayed on prediction markets as their primary source of truth about public sentiment.

All of this seems to indicate that it is “up only” for platforms like Polymarket.

That said, we’ll caveat that election season is typically the peak season for these platforms. However, this still doesn’t take away from the fact that the extent of their popularity is higher than ever this time around. The question now is whether this growth in user base can be proportionally sustained, or if it will fade into the background once the elections are over. In other words, will prediction markets finally become part of mainstream financial markets?

To answer that question requires a fundamental understanding of why they haven’t been popular in the past. Let’s take a look, shall we?

Many theories exist. The most popular among them is that prediction markets are simply victims of regulatory persecution. Admittedly, there is some truth to that argument. Last year in particular saw the exit or closure of many prediction platforms in the US. These include platforms such as PredictIt and Polymarket.

However, when it comes to adoption, we believe greater insight can be gained from analysing the market participants themselves.

On that note, Nick Whitaker and Zachary Mazlish’s recent article is an essential read for understanding how these dynamics unfold.

The TLDR is that the authors believe the current implementation of prediction markets is not suited to attract the broadest range of market participants.

You see, for mass adoption, you need sufficient liquidity. Without appealing to the broadest range of market participants, this liquidity isn’t possible.

On that note, Whitaker and Mazlish categorise market participants into three types: the ‘savers’, the ‘gamblers’ and the ‘sharps.’ The unique characteristics of each type influence how they interact with prediction markets. The lack of overlap in their interaction explains why prediction markets have been struggling in the past.

For instance, the savers – a type that enters markets to build wealth, are naturally risk-averse. Prediction markets are not a natural savings device, they don’t attract money from pensions, 401(k)s, bank deposits, or brokerage accounts. But, most importantly, prediction markets are zero-sum. In fact, once you factor in platform fees, they become negative-sum. For most participants, a loss is more likely than profits.

Gamblers, on the other hand, enter markets for thrills. Logically, the ability to gamble on real-world outcomes should naturally attract gamblers to prediction markets. However, various factors, including the long time horizons of certain prediction markets, make it less appealing to the most prolific gamblers. In other words, they rarely attract sports betters, day traders, or r/WallStreetBets users.

According to Whitaker and Mazlish, quick resolutions and popular topics are key things that make a bet attractive and exciting for gamblers. This is why live, in-game betting is becoming the most popular type of sports betting. This is also where regulation plays a role in driving away gamblers. For example, the US frowns upon prediction markets that allow betting on the result of political processes, i.e., elections. However, elections are one of the biggest markets for prediction market platforms.

Finally, we have sharps – market participants who use analysis and data to gain the edge on their bets.  Sharps are professionals who spend all their time investigating the probabilities of these events. However, prediction markets lack savers who can flood security markets with capital and create profit opportunities. This makes them orders of magnitude smaller than other financial markets, which in turn makes prediction markets much less appealing to sharps who want to profit using their expertise. When sharps trade only against sharps, the rewards for being right are smaller.

These very same factors also explain why crypto-native prediction markets have done comparatively better. After all, compared to most other industries, crypto has a larger concentration of gamblers and risk-takers (aka degenerates). Decentralised platforms are also, for the most part, not bound by the same regulatory pressures as their centralised peers.

That said, whether these decentralised prediction markets can continue growing is dependent on whether they can continue to innovate with methods to bring in more attention. Thankfully, the unique infrastructure of public blockchains makes a few solutions only viable on decentralised platforms. This includes platforms like fantasy.top, which is arguably a type of prediction market built on predicting creator popularity and activity.

On that note, a few of the more recent ideas have been to either integrate prediction markets with social media platforms or to allow UGC content creators to profit from their participation in driving traffic/liquidity to these markets. One example is to allow Tiktok creators to monetize the traffic driven by their content towards certain prediction markets.

That said, which of these ideas will make prediction markets mainstream is anyone’s guess. Anyone want to bet which one will make it big?

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🔮 Video Pipeline 🔮

* Celebrity Memecoins: All you need to know!
* Bitcoin Price: What to expect!
* BIS CBDC: You know what’s in this report!
* Larry Fink Letter: His thoughts and how these could impact you

🏆 What's New at CoinBureau.com This Week? 🏆

* Xcoins Review 2024: Should You Trust This Crypto Exchange?
* 8 Best Crypto AI Trading Bots: Our Top Picks!
* What is a Sidechain?
* Keystone 3 Pro Review: The Air-Gapped Hardware Wallet

📖 Quote of the Week 📖

Everyone is looking for the 1-in-1000 coin that will 100x. But, far fewer are looking for the 1-in-10 coin that will 3x. There is a lesson in that.   

“I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” - Warren Buffet

Team Coin Bureau

Disclosure: Authors may own cryptoassets named in this newsletter. These are unqualified opinions, and a Coin Bureau newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor.