BTC Price Approaches Production Cost as Difficulty Increases

🌅 Welcome!

The world’s largest DAO will be using Coinbase to custody its funds and the world’s largest company ensures it gets its piece of the NFT pie. Apple pie, that is. 

Today, we explore Bitcoin’s production cost and our Research team provides insights into Euler Finance.

This is the Delphi Daily. Let’s dive in.

🚨 In Case You Missed It

• MakerDAO has approved a proposal to custody up to $1.6B in USDC with Coinbase Prime to earn a 1.5% yield.
• Apple refuses calls to exempt NFTs from its 30% app store fee and has codified rules for iOS apps that handle NFTs.
• Near Foundation recommends winding down USN. The entity is also spending $40M to shore up a “collateral gap” and facilitate redemptions.
• The Texas State Securities Board clarifies that FTX is not facing any enforcement action yet.

📊 BTC Price Approaches Production Cost as Difficulty Increases

• Bitcoin mining difficulty increased by 3.44% on Oct. 23 to hit an all-time high. This comes just two weeks after a 13.55% increase on Oct. 10, the largest increase of 2022.
• Since the end of Mar. 2022, the difficulty has increased by a total of 29%. Over that same time period, BTC price decreased by 57%.
• This suggests that miners may be experiencing a significant decrease in profitability from just six months prior. However, Bitcoin’s hash rate has been oblivious to these numbers, marking an all-time high of 262 EH/s.
• Moreover, BTC price is approaching the estimated production cost of electricity once again. Currently, the production cost sits at $16.9K while the BTC price sits at $19.8K, a 17% difference.
• In the past five years, the production cost of electricity has consistently marked a price floor for BTC. The price has reached the production cost just three times in the network’s history: in Dec. 2018, Mar. 2020, and Jun. 2022. After each of these instances, the price has rallied.
• It is worth noting that the production cost of electricity is only an estimate based on calculations by Capriole Investments. These estimates vary across the industry, depending on inputs and assumptions.

⚡Can Euler Finance Carve Out a Moat?

• Aave and Compound have paved the path for the basic money market design space in DeFi. Both protocols have dominated the landscape and weathered numerous threats from newer, more agile competitors.
• In the process, they’ve had to compete with protocols that employed lucrative liquidity mining incentives to attract users. Yet, they have undoubtedly reigned as the top money market protocols in all of DeFi.
• While Aave has been continually shipping new features, Compound has made improvements and added token markets at a slower rate. It also suffered a well-publicized hiccup last year.
• Along with the overall crypto market, both protocols have been in decline. Aave’s TVL is down 70% from all-time-highs and Compound’s is down 80% from its peak.
• Amidst the doom and gloom of the broader market, Euler Finance has been a standout for its escalating growth as well as core design differentiations.

• Euler is a non-custodial, permissionless lending protocol built from scratch by the team at Euler Labs. It is designed to handle the risks associated with borrowing and lending risky assets.
• Unlike Aave v2 and Compound v2 where all the assets exist in one interconnected money market, Euler doesn’t allow cross-borrowing for most assets.
• In order to ensure safety and allow permissionless listing, Euler has taken a more systematic approach to risk management and made several design choices to decentralize the protocol.
• For instance, they have applied both borrowing and lending LTVs to every asset, meaning that the LTV of a user’s loan is dependent on the collateral used as well as the asset being borrowed.
• This is unlike other money markets that only consider the LTV of the asset being borrowed, while ignoring the volatility of the borrower’s collateral when calculating a loan’s LTV.
• Euler was initially designed to rely solely on Uniswap v3 TWAP for their price oracles, a decentralized and on-chain oracle solution that reduced the need for centralized intervention whenever a new market was created.
• With Uniswap v3’s price feed, any asset that has a WETH pair can be added on Euler by any user immediately and in a permissionless manner. 

• For more on Euler Finance, Delphi members can read our Delphi Pro report here.

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Read this to get up to speed quickly 🧵

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