Top Stories of the Week

001 RNC Adds Crypto; Trump to Headline Bitcoin 2024 

Fmr. Pres. Trump will headline Bitcoin 2024 in Nashville after the Republican Party adds crypto planks to platform. Bitcoin Magazine announced this week that Trump will speak at the Bitcoin 2024 conference in Nashville, likely on the main stage on Saturday, July 27. His addition comes after months of contact between the Bitcoin industry and the Trump campaign. Speaking at the Libertarian Party’s national convention in late May, Trump said he would “keep Elizabeth Warren’s goons away from your Bitcoin” and pledged to commute the sentence of Ross Ulbricht. In mid-June, Trump met with representatives from Bitcoin mining companies at a Mar-a-Lago summit. As of July 11, the Fairshake PAC, which supports crypto-related causes, was the 2nd largest PAC by money raised ($177.8m, behind only Make America Great Again Inc. At $178.5m), and the 8th by expenditures ($13.4m).

Also this week, the GOP added a “crypto” plank to its official party platform, with the platform committee including the following language: “Republicans will end Democrats’ unlawful and un-American Crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control.” The language will become finalized if formally adopted at the Republican National Convention on July 15.

On Wednesday, at least one senior advisor to President Biden (Anita Dunn) met with more than a dozen crypto industry leaders in a meeting organized by several Congressional Democrats, in a move widely seen as attempting to blunt the impact of the Republican’s embrace of the crypto industry. The meeting was organized by Rep. Ro Khanna (D-CA), Rep. Joe Neguse (D-CO), and Sen. Kirsten Gillibrand (D-NY), and reported attendees included Mike Novogratz (Galaxy), Mark Cuban, Anthony Scaramucci (Skybridge), Brad Stephens (Blockchain Capital), Brad Garlinghouse (Ripple), Mike Brock (Block), and others.

Finally, the U.S. House of Representatives Thursday failed to override President Biden’s veto of the resolution disapproving of the Security & Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121), with the override vote receiving 228 in favor and 184 opposed (with 290 required to override). 17 of the 21 House Democrats who voted with Republicans May 8 to disapprove of SAB 121 voted again to override, while 3 voted Nay (Phillips, Veasey, and Sherrill) and one did not vote (Moskowitz). However, 4 Democrats who previously voted against the SAB 121 disapproval now voted to override the Presiden’ts veto (Jackson (IL), Khanna, Suozzi, and Thanedar). The bill was now referred back to the House Financial Services Committee for further consideration. As a reminder, SAB 121 suggests that publicly traded companies that safeguard crypto assets on behalf of clients must carry those client assets as balance sheet liabilities, relegating those clients to unsecured creditors in the case of a bankruptcy and, due to separate bank capital requirements, effectively blocking banks from custodying crypto assets.

Our Take

It’s possible the crypto industry has never had more influence in national policy than this very moment. Fmr. President Trump and the Republicans have substantially made crypto a genuine policy issue, and excitement is building for Trump’s appearance at the world’s largest Bitcoin conference in 2 weeks. Crypto-focused Super PACs are among the best funded this campaign cycle, and some signs are showing that Democrats are starting to take notice. Moderating stances on the FIT 21 bill, which 71 House Democrats including Rep. Nancy Pelosi (D-CA) supported, coupled with the policy roundtable this week that included a senior White House official, suggest the Democrats are not yet willing to completely cede the issue. In the Senate, Sen. Stabenow (D-MI), chair of the Senate Agriculture Committee, is apparently set to introduce her own crypto regulatory reform bill – an offshoot of the previously introduced “Stabenow-Boozmn Bill” previously introduced in 2022, although Sen. Boozman (R-AR) has not yet agreed to co-sponsor.

All this to say there is a lot of activity, and many on all sides of the aisle and issue are working aggressively this Summer to capitalize on the attention. The failure of the House to succeed in overriding Biden’s veto of SAB 121 was disappointing, though reticence to cause more political complications for the White House at a time when Pres. Biden’s candidacy is being called into question may have played a factor in tepid Democratic support. While some crypto policy advocates have voiced opposition to pushing legislation at this time, another camp believes that it may be more prudent to “play the game that’s on the field” by supporting common sense legislation rather than hoping for a more favorable field to play on, which of course may never come. - Alex Thorn

002 Gox Distributions & German Selling Pressures BTC

Bitcoin slumps below $60k as Mt. Gox distributions and German government selling weigh on price. On July 5, bitcoin price fell to a 5-month low of $53.5k, primarily driven by concerns related to Mt. Gox bitcoin movements to begin repaying creditors of the collapsed exchange. The Mt. Gox trustee issued a notice last Friday that said payments to creditors were beginning to be made in bitcoin and bitcoin cash. According to Arkham Intelligence, more than 47k BTC (~$2.7bn) was moved on Friday out of Gox-related wallets to repayments exchanges. A large portion of the transferred bitcoin was soon returned to Gox wallets, which now hold a total of 139k BTC (~$8bn) after starting with a balance of 142k BTC this week. The trustee aims to finish distributing to most major creditor groups by a previously stated deadline of October 31, 2024.

The German government added to the sell pressure on bitcoin, which remained suppressed below $60k throughout this week. German state authorities continued offloading their previously confiscated bitcoin supply (totaling 50k BTC ~ $3bn) from a movie piracy website earlier this year. Since they first started to sell three weeks ago, the German authorities have accelerated transfers to exchanges, moving a total of 35k BTC (~$2bn) so far this week. CoinDesk reported that the state was selling its holdings as per standard practice for assets seized during criminal investigations. As of Thursday evening, wallets linked to the state now hold a total of 9k BTC (~$520m).

Our Take

Mt. Gox distributions to creditors have been a long time coming (i.e., over 10 years). Although the Gox trustee recently noted that repayments would be made from the beginning of July, the initial wallet transfers from last Friday seemed to catch the market off guard as bitcoin price dropped sharply following their movement. Gox wallets, along with US government wallets (currently holding 213k BTC ~ $12.5bn), are among the most actively monitored bitcoin addresses so any onchain activity typically leads to some market volatility.

In our view, however, bitcoin's price reaction to Gox-related transfers may have been exaggerated. Gox wallets only transferred a small amount of bitcoin (3k BTC ~ $175m) and final distributions from exchanges to individual creditors likely have not yet occurred, suggesting market participants have been forward selling ahead of creditor distributions. Despite claim holders being up over 100x in dollar value since bankruptcy, we believe individual creditors to be more diamond-handed than the market expects for several reasons. NYDIG also published research that supports the claim that the recent bitcoin price action related to Gox may have been overblown based on transaction cost analysis for equity market analogs.

The timing of Germany's offloading of its bitcoin supply unfortunately added to the negative sentiment in the market. Some German lawmakers have criticized the hasty selling of state-owned bitcoin, which they claim should have been held as strategic reserves for the nation (we expect Gox creditors to be more opportunistic in their selling as they've had multiple opportunities to sell their claims over the past decade). Fortunately for bitcoin price (and unfortunately for Germany), 70% of the state-owned supply had been depleted just this week, so any related sell pressure will soon ease. Then, once we finally overcome the Gox-related headwinds in these upcoming months, it should be much smoother sailing ahead for bitcoin. - Charles Yu

003 $STRK Staking Could Go Live on Starknet by End of 2024

On Wednesday, July 10, StarkWare CEO Eli Ben-Sasson announced that his team has put forth a proposal to activate staking on Starknet, a zero knowledge (ZK) rollup built on Ethereum, by the end of 2024. Speaking to an audience at the annual Ethereum Community Conference (EthCC) held in Brussels, Belgium, this year, Ben-Sasson unveiled a phased rollout of staking on Starknet that would begin with minimal responsibilities for stakers and escalate over time to encompass more critical on-chain operations such as transaction sequencing and proving.

Out of a total supply of 10bn $STRK, approximately 1.3bn are in circulation at time of writing, with more tokens gradually scheduled to unlock over the coming months and years. (Read more about the $STRK emissions schedule in this prior Galaxy Research newsletter.) According to a post on X by the Starknet Foundation, neither the Foundation, Starkware, or owners of locked $STRK tokens will be able to participate in staking once it goes live. The motivation for activating staking on Starknet is to further decentralize the operations of the rollup and enhance the utility of the $STRK token.

Ben-Sasson said in a press release, “As Starknet continues its decentralized journey, StarkWare is excited to propose the first stage of staking. This is an important step in building the staking community and technology, offering new opportunities for users and developers.” More details on how staking will work on Starknet is shared in a Starknet Improvement Proposal (SNIP) document by the Starkware team titled SNIP 18. Starkware is currently sourcing feedback on their proposal from the Starknet community. In the coming weeks, there will be a governance vote among $STRK holders to formally approve (or reject) the implementation of SNIP 18 on Starknet by the end of 2024.

Our Take

There is little reason to think that SNIP 18 won’t be formally approved by token holders as the activation of staking on Starknet would introduce new utility for the token beyond governance. Staking enables $STRK holders to earn rewards from enforcing protocol rules and eventually participate in even more lucrative activities on the rollup such as sequencing transactions within a block. Starknet is among the top 10 rollups on Ethereum by total value locked. And though it is not as large as competitors like Optimism and Arbitrum, Starknet is one of the earliest ZK rollups launched on Ethereum that would, with the approval of SNIP 18, also become one of the first to enable staking on its network.

Staking is a critical step to the decentralization of most rollups as most rely on centralized operators to create blocks, sequence transactions, and post proofs of user activity down to a data availability layer like Ethereum for transaction finality. The activation of staking is one way that rollups can move towards a permissionless operator set. Other solutions include reliance on an existing validator set or pool of staked assets through restaking protocols like EigenLayer. However, due to the nascency of restaking solutions on Ethereum, the level of security rollups can rely on and at what they will cost remains to be seen.

Another solution for decentralizing rollup operations is shared sequencing networks like Espresso and Astria. However, like restaking, there is still much yet to be proven about the resiliency and reliability of these systems. Implementing a proof-of-stake (PoS) consensus protocol, on the other hand, can be safer for rollups as there are less unknowns to factor in when evaluating the impact of PoS on decentralized systems. PoS protocols have known weaknesses when it comes to securing blockchains, one of which includes the wealth concentration effect that hinders the distribution of tokens across a wide base of users if tokens become staked by large holders as large holders would accumulate even more tokens over time through staking rewards. This is likely why StarkWare, the Starknet Foundation, and users with a locked supply of $STRK are prevented from staking their assets as outlined in SNIP 18.

As restaking and shared sequencing solutions mature, Starknet’s staking roadmap may adapt to utilize the benefits of these in some way but until the unknown unknowns of these alternatives are more fleshed out, SNIP 18 offers Starknet users an immediate path forward to improving rollup decentralization. - Christine Kim

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