🔍 SEC vs. BUSD by Paxos

Stablecoins are one of crypto’s most impactful innovations. It’s one of the rare products made possible by this technology that has actual utility. In many parts of the world, stablecoins have been used to retain purchasing power, transfer funds in a permissionless manner, and access on-chain financial products among other use cases. Despite last year’s bear market, the total stablecoin market cap is down only -18% while the total crypto market cap is down -55%.

Ever since the market’s reversal at the start of 2023, the total stablecoin market cap has remained unchanged as the total crypto market cap increased by 32%. More and more market participants are getting comfortable with holding stablecoins instead of exiting the crypto ecosystem entirely during bear markets.

BUSD or Binance USD is the third largest stablecoin by market cap, and the SEC has just alleged that it constitutes an unregistered security. BUSD is a fiat-collateralized stablecoin issued by Paxos, which licenses the Binance brand name to issue BUSD. The company publishes monthly attestations on it’s website that state it holds at least $1 in US treasury bills and bonds for each BUSD issued.

Paxos is a company regulated by the NYDFS. As the SEC announced plans to sue the company, the NYDFS directed it to stop issuing any new BUSD tokens. Currently, BUSD has a 9% market share but the circulating supply has decreased by 8% since the news. The circulating supply of USDP, another stablecoin also issued by Paxos, has also decreased by 11%. USDC supply is relatively unchanged, however, USDT supply is up 2%.

This suggests that the fear of regulatory action is driving users away from US-domiciled issuers of stablecoins like Circle and Paxos towards issuers based abroad like Tether. While users have long looked toward foreign issuers with skepticism, the narrative shift seems to have strangely recast their low vulnerability to US regulators into an advantage. Binance CEO, CZ has also suggested that the industry could move to non-dollar pegged stablecoins over time.

BUSD circulates primarily on Ethereum, where it is natively issued by Paxos, and the BNB Chain, where the token is bridged by Binance.

Currently, 68% of the BUSD supply is on Ethereum while the remaining 32% has been bridged to the BNB Chain. When Binance wraps the BUSD token and bridges it to the BNB Chain, it is then called Binance-peg BUSD. Previously, the crypto exchange has admitted to problems in maintaining the collateral for Binance-peg BUSD. The stablecoin was regularly undercollateralized by more than $1B on three occasions in 2020 and 2021. This revelation may have contributed to the SEC’s decision to move against Paxos. Binance says that it has since corrected the issue.

For a week before the news, almost 84% of the DEX trade volume for BUSD took place on the BNB Chain, a figure that has since moved down to 64% as users on Ethereum rushed to react.

Liquidity for BUSD on Curve has been steadily inching down since the start of the year, indicated by the declining reserves of 3CRV in the BUSD-3CRV pool. The proportion of BUSD in the BUSD-3CRV pool spiked from 70% to 86% immediately following the SEC news. As traders sell BUSD for other stablecoins, the proportion of the pool in BUSD increases. Currently, the pool has 81% of reserves in BUSD.

The regulatory move against Paxos only reinforces the need for decentralized stablecoins. A decentralized financial system needs a permissionless and censorship-resistant stablecoin. Since the news, FLX and LQTY have rallied up 34 and 24% respectively. FLX and LQTY are governance tokens issued by Reflexer (RAI) and Liquity (LUSD), which demonstrate high censorship resistance as they are over-collateralized only by ETH. While the circulating supply of DAI, FRAX, and LUSD has stayed relatively stable since the news, the supply of MIM has increased by 7% while the supply of RAI has decreased by 5%.

📅 This Week in Delphi Research

Bitcoin’s New Narrative: Ordinals

Ordinals are the most interesting thing to happen to Bitcoin since El Salvador made it a legal tender. Ordinals are data that users inscribe to specific sats on Bitcoin. Since going live, these inscriptions have caused a minor frenzy around Bitcoin-native “NFTs.” In this piece, Aaron walks you through the technical underpinnings of Ordinals, the differences between an Ordinal and NFT, and their ramifications on the future of Bitcoin.

Defining Active Players Within Crypto Gaming

Crypto games have created an allure previously non-existent in traditional games for the average player – monetary incentives. These encourage in-game Sybil attacks for NFTs, akin to DeFi users hacking token airdrops. In turn, gaming metrics become heavily distorted. This deep dive by Jimin focuses on Castaways, Benji Bananas, and Crabada while exploring reasons for distorted metrics and arguments against sharing data publicly.

Another Year, Another Rally

This month’s edition of Chartbook with contributions from Jason, Joo, Teng, and YH is a collection of interesting charts and trends we’re watching across crypto and markets. The report primarily focuses on the macro outlook, crypto’s market structure, and on-chain observations across L1s, L2s, DeFi, NFTs, and gaming.

Exploring Land-Based Web3 Gameplay

A number of NFT land-based games have launched in early access, providing users with the opportunity to start testing out this emerging subgenre of Web3 gaming. This deep dive by Joseph addresses the role of land in Illuviam, Crypto Unicorns, and Axie Infinity. The report outlines how the asset interacts with the gameplay, the implications for gamers and the rest of the ecosystem, and the likelihood that these games will be able to attract a wider audience.

Deep Dive Into the Solana NFT Ecosystem (I): Marketplaces and Key Metrics

Solana, with its high-performance infrastructure and low fees, has established itself as a leading player in NFTs. Today, Solana is the second-largest NFT ecosystem after Ethereum in terms of NFT transaction volume. The Solana community has shown its resilience and bounced back strongly in the new year. This report by Teng covers how the Solana NFT ecosystem is just as vibrant as ever, despite the carnage left by the FTX collapse.

Ribbon Expands to Options DEX With Aevo

Options trading is dominated by CEXs, specifically Deribit, with only a small percentage being executed on-chain. Clearly, DeFi options have failed to take off. In this report, Joo goes deep into the one DeFi protocol that has the potential to change the landscape – Ribbon Finance. Initially gaining traction with its options vaults, Ribbon is now gearing up to launch Aevo, a unique derivatives DEX built on its own L2 called the Aevo rollup.

📖 Delphi Reads

This week, Blur’s airdrop went live, injecting nearly nine figures of wealth into the NFT ecosystem. Over 90% of the airdrop has been claimed so far, and NFT prices have been moving up following the community’s newfound wealth. 12% of the supply has been airdropped, and 40% of the supply will be distributed this year. Read through the full tokenomics here. You can also watch Blur’s founder Pacman on Bankless here.

With the SEC cracking down on centralized players, it’s time to refocus on decentralized stablecoins. A good stablecoin needs to effectively address the stablecoin trilemma – maintain the peg while ensuring censorship resistance and capital efficiency. Read through the mechanics of all decentralized options in this tweet thread here or dive deep into FRAX and crvUSD in this tweet thread here.

We recently hosted a Twitter Space on web3 gaming with participation from Axie Infinity, Sandbox, Illuvium, Immutable, Ember Sword, Naavik, Solana, and Polygon. You can listen to the recording here or catch the Cliff notes here.

🔥 Meme of the Week

LocalBitcoins, one of the longest-running Bitcoin exchanges, announced that it will shut shop after 10 years of operations. The platform offered P2P trading and escrow services for users looking to buy or sell BTC using traditional payment methods across multiple currencies.

In the early days of Bitcoin, the platform was instrumental in driving liquidity and BTC accessibility across the world.

P.S. Today, we released a sneak peek of our no-code analytics solution for charts and dashboards to a select few Delphi Pro members. If you’re a subscriber, check your email to find out if you’ve been selected to be among the first to experience and test our data product!