August at the beach and (pricing) headwinds

We also analyze Dogecoin and the launch of the controversial Worldcoin!

Good morning and welcome to the Whale Capital Newsletter!

This newsletter offers, in simple language, insights into the development of blockchain technology and digital assets as a new financial asset.

In today's entry, we discuss:

  • Beach in August and pricing headwinds

  • 🎓 Whale Crypto Academy: The Blockchain Trilemma (Part 3: Security)

  • 🔍 Did you know?: One of the largest cryptocurrencies in the market started as a joke and is now worth more than most companies on the Spanish stock index

  • 🔗 Use case: Worldcoin, the unique digital identity (and all its controversy)

But first, a review of the market  

🗞️ Brief News

  • Sam Altman's - creator of ChatGPT – launches its cryptographic project - Worldcoin. We discuss this in our final section. LINK

  • Paypal jumps into the crypto market with its own stablecoin (PYUSD) supported by the Ethereum network. However, the initial technical reports leave much to be desired. LINK

  • Crypto bill approved by the U.S. Congress committee. LINK

  • Robert F. Kennedy Jr. confirmed he is a Bitcoin investor. LINK

  • Bitcoin mining machines are 'flowing' into Russia. LINK

  • Litecoin (LTC) completes its third halving without any hitches. LINK

  • Coinbase launches Base, an Ethereum L2 network developed with Optimism. The network includes over 100 decentralized applications that allow minting NFTs and accessing ecosystems like Uniswap, Aave, and Compound. LINK

  • Another step towards Ethereum adoption; Visa is preparing a project to pay for gas (the platform's fuel) with a card. LINK

August at the beach and (pricing) headwinds

After weeks in which the crypto market has been characterised not so much by the pricing volatility we are used to, but rather by a summer lethargy carried over from July, there was an abrupt correction on starting on last Thursday. This drop was in line with what we have experienced in other asset classes during August.

July left behind a very lateral path, slightly tinged with a downward trend. After the SEC complaints and the Blackrock’s ETF filing in June, the headlines didn't cause big waves, leaving a calm sea. Too calm.

In the case of financial markets, the main reason for the August declines is due to expectations of greater economic growth and more persistent inflation. The publication of the latest consumption data caught investors by surprise, who were already discounting a current or imminent recession. This change in economic outlook led to a drop in bond prices. Also, given the likely additional rise in interest rates, investors have revalued risk asset prices downward, including the stock market. In the case of gold, however, the decline is due to the rise in real interest rates (interest that bonds pay less inflation), which does not encourage investment in this asset, as investors can maintain their purchasing power by investing in bonds.

In the case of the crypto market, macro news did not feel so heavy, leaving an atmosphere of uncertainty that maintained the slightly bearish sideways trend they had been dragging since July. Calm, but alert to potential sector news.

What caught our attention the most in recent weeks, perhaps quietly but insistently, was the marked decrease in market volume. When we analysed the volume of the 30 largest tokens by capitalisation, we found an average of less than $30 billion daily, a figure we hadn't seen since the pre-bull market of '19. Since its peak in 2021, when daily volumes easily exceeded $180 billion, this indicator has followed a continuous downward path, down 85%.

Daily trading volume of the top 30 (USD bn). Analysis; Whale Capital. Source; CCI30®

This lack of liquidity left the market in a very vulnerable position, which in the face of negative news could experience large movements.

That moment came on Thursday. The price of Bitcoin (BTC) dropped sharply due to several massive sales, triggering a slaughter in the futures and spot markets. Bitcoin reported one of the largest drops in recent months with a loss of up to 9%, dropping from $28,500 to $25,000 in Binance. This triggered a general drop in the market, leading other cryptos like Litecoin to fall by 14%, and the liquidation of more than $1 billion in cryptocurrency futures - a 14-month high.

It has been speculated that the cause of this drop could be due to alleged Bitcoin sales by the space company SpaceX or the potential collapse of China Evergreen. However, neither of these events justify the impact on prices, and they may have been a mere catalyst for what was already brewing. SpaceX had only reduced the book value of its Bitcoins on balance, as their market value had fallen below book value, a common action among companies.

Such movements point more to a response to the market's lack of liquidity, the macro environment, and the liquidations of leveraged positions as the likely cause of the sudden drop, rather than to a single cause.

Doubts about the potential sale by SpaceX, along with negative expectations about the resolution of Grayscale's ETF (stay tuned for that!), may have led to an early sale of Bitcoin, which driven below its price support triggered the liquidation of many leveraged long positions.

Total market liquidations. Yesterday at highs of long positions. (Source: Coinglass)

After the high volume of liquidation yesterday, the derivatives market has been left in a neutral state. Where the percentage of long positions (investors betting on a rise) versus short positions (investors betting on a drop) is almost tied, slightly weighted on the bears at the moment.

Ratio of long positions (green) versus short positions (red) in Bitcoin. (Source: Coinglass)

The market now awaits the decision on the Grayscale ETF, which could turn the market around or continue its bearish trend. All this related to the evolution of investor appetite for the asset class, but what about technological development?

Technological Development

Crypto is a technology asset class. This technology is still in incipient and developing. To date, the market has been merely driven by speculative demand. Investors in this technology expected much faster technical and adoption results than what has actually happened. But as we saw with the evolution of the internet; the technological development necessary for mass adoption takes years! (In the case of the internet, decades). That's why, after cooling expectations, the purchase volume has done nothing but decrease. On the other side, however, there is a constant sales offer; by the system's validators and miners, who, seeing their profits in crypto, have to undo part of their positions to meet the expenses of their structure (light, taxes, equipment, etc.). This imbalance of forces has meant that in recent months the market maintains a downward trend, which will not break until investor market expectations recover.

Entering August, our hopes turned to the SEC and its pending decision on one of the Bitcoin ETF applications, which, if approved, could have represented a strong demand boost. However, the expected "yes" turned into a "maybe later," leaving things as they were, postponing the decision until November 11, 2023.

But let's separate the wheat from the chaff. The market behavior (price evolution of tokens) is different from the development of technology and the industry. From a development perspective, not everything is so bleak. When we analyze transactions and events on blockchain networks ("on-chain" results), we see a picture far removed from investor appetite. For instance, as we've pointed out in previous issues, the current trend points to an increasing migration towards decentralized exchanges operating on a blockchain protocol, avoiding the dangers and disadvantages of a centralized entity like Coinbase or FTX.

Weekly trading volume of the top 20 decentralised exchanges (USD bn). Source: TokenTerminal

The volumes of these exchanges have remained stable over the past year, with significant spikes during crisis moments. This underscores both the technical sophistication of the market's investors and their growing distrust of the frauds or interventions by centralized exchanges.

Another notable metric of the industry's development and technical work is the number of full-time developers. That is, people fully dedicated to advancing and developing projects. The trend observed during the industry's various cycles shows a spike in these numbers months after market peaks, fueled by new capital entering the industry. The growth usually lasts a few months before correcting slightly. Reports about developers in the blockchain industry are once again promising.

The core developer count of the sector's main projects has consistently shown exponential growth until early 2023. Core developers of a crypto project are the programming team responsible for building, maintaining, and updating the project's source code. They handle the project's technical side, performing tasks such as performance improvement, bug fixing, integration of new features, and overseeing the network's security. This team can include the project's founders and other developers recruited to contribute to the platform. Throughout 2023, there's only been an 11% decrease in the number of developers, a result of project adjustments in the face of the persistent bear market we're experiencing.

Core developer count evolution in the industry. (Source: Token Terminal)

When analyzing the entire market, including application developers, the trend is similar. The industry's professional growth maintained an exponential trend until the beginning of the year. In 2023, there was a 16% correction in full-time positions, resulting from a slowdown in crypto development by companies entering the sector, deciding to delay projects due to regulatory uncertainty. But this is not unlike any other cyclical sector.

Crypto industry developer count evolution. (Source: Electric Capital)

We continue to pay attention and very optimistic about all developments and technological advances, especially those measures that make adoption easier, like Visa's recent announcement about Ethereum gas payments. At Whale, we maintain our optimistic outlook despite market fluctuations. We believe this technology will see widespread adoption in the near future.

Likewise, we take advantage of today's issue to give you an update on the US regulatory environment and our experience at the annual Ethereum conference, with very promising news.

Regulatory Update

After all the uproar caused by the SEC's allegations against Coinbase and Binance, the market has breathed a sigh of relief. The latest developments in the Ripple (XRP) case have been encouraging.

In December 2020, the SEC sued Ripple and its executives for raising over $1.3 billion through the sale of XRP without registering it as a "security."

Last month, Judge Torres ruled that Ripple should not be classified as a security and that each transaction should be considered individually to determine if they meet the "financial contract" conditions. Under this premise, she determined that sales to institutional investors did pass the Howey test and should therefore be registered under the SEC. However, the remainder of the secondary sales through exchanges (mostly to retail investors) should not be considered securities. This news immediately impacted the market, revaluing the once-forgotten XRP by more than 75% in a matter of hours.

The latest updates in the case are that, according to a letter sent to Judge Torres, the SEC plans to appeal and wants all proceedings to be halted until the appeal is resolved. The SEC relies on the opinion of another judge, who has rejected Judge Torres' decision, stating that the way tokens were purchased shouldn't affect their classification as a security. The SEC wants to close this matter as soon as possible since it impacts other pending cases, including actions against Coinbase, Binance, and TRON's founder, Justin Sun.

Ethereum Community Conference París 2023

Written by José García Rosillo, Head of Research at Whale Capital

This year marked the 7th edition of the annual Ethereum conference. A hallmark event organized by the Ethereum Foundation and that gathered over 10,000 attendees from around the world.

The main conference was attended by 5,000 participants, but what was even more impressive were the over 250 side events organized by various industry companies.

As is tradition, the conference took place in Paris, bringing together enthusiasts, developers, and experts in the field to discuss and explore the latest trends and advancements in the Ethereum ecosystem.

Among the mentions about Ethereum, it's essential to highlight the intervention of its main co-founder, Vitalik Buterin. He outlined how, in the near future, users will be facilitated to pay fees with "any currency they are transferring on the Ethereum network." However, that the main topic revolving around Ethereum during the conference was scalability solutions, meaning solutions that make transactions faster and cheaper.

One of the projects that had a significant presence was Polygon, a layer-2 scalability solution for Ethereum which we discussed on a previous issue in this newsletter. At the conference, the team introduced Polygon Matic 2.0, an upgrade that transitions from a sidechain-based scheme to one focused on Rollups, with the goal of ensuring that Polygon continues to lead in scalability solutions for Ethereum.

We can't overlook Chainlink, the leading decentralized oracle network, which introduced its Cross-Chain Interoperability Protocol (CCIP), already launched on Ethereum, Avalanche, Polygon, Arbitrum, and Optimism. And Uniswap, the decentralized exchange with the highest trading volume, which presented its UniswapX, an upgrade aimed at maximizing liquidity and reducing transaction fees.

It's important to mention the significant presence of projects based on decentralized computing or data storage networks, such as Filecoin, iExec, or This makes sense, as, given the current infrastructure, still in a very early stage of its development, these are some of the few viable use cases.

Additionally, the success of the recent updates, Capella and Shanghai, which allowed Ethereum to transition from the Proof of Work consensus protocol to Proof of Stake, showcases the commitment of the Ethereum team to meeting deadlines.

In conclusion, ETHCC has established itself as the most relevant event of the year in the blockchain industry, standing out for the multitude of participants and projects it brought together. This highlights Ethereum's leadership in terms of adoption.We will be closely monitoring the fulfillment of the next milestones in terms of scalability and, without a doubt, we will return to the conference in 2024, which will take place in Brussels for the first time

🎓 Whale Crypto Academy: The Blockchain Trilemma (Part 3: Security)

Written by José García Rosillo, Head of Research at Whale Capital

In today's issue, we move on to the third and final part of our Blockchain Trilemma analysis, focusing on a crucial aspect: security.

Security in a blockchain represents the network's strength to withstand and counter malicious attacks. These attacks target the network's weak points to profit, destroy, or take control. The most common attacks include:

  1. 51% Attack: As blockchain protocols often require majority consensus to validate transactions and blocks, the most common attack arises when a miner or validator controls more than 50% of the mining power or the locked collateral needed for validation (staking) of the network. With majority control, the attacker could attempt to manipulate the ledger or double-spend, using their coins for multiple payments.

    It's worth noting that some protocols, like Solana (SOL), are more vulnerable and allow network control with just 30%, while others, like Avalanche (AVAX), require more than 80%.

  2. Sybil Attack: Involves creating multiple fake identities on the network to try to control the majority of decision-making actors and thus manipulate the network, such as manipulating votes, gaining disproportionate processing power, or exceeding account limits.

  3. DDoS Attack: Common on web servers, it involves deliberately overloading the network with fake traffic, hindering its normal operation. It's as if during a game, many fans stormed the field; players would be so busy dodging fans they couldn't perform their main function. The system becomes overloaded and can even stop working.

  4. Oracle Attacks: Involve manipulating the data or feeding systems that oracles introduce into the blockchain for personal benefit.

  5. Smart Contracts Attacks: These attacks exploit errors or vulnerabilities in smart contracts operating within blockchain networks. Hackers try to find flaws to exploit for their benefit, as happened in the famous hack of Ethereum's DAO in 2016, resulting in the theft of over $50 million at the time.

Developers consider all these vulnerabilities when designing a blockchain network. However, as we've discussed in previous issues, a more secure design always comes with a trade-off in scalability/speed and/or network decentralisation. Key components considered when enhancing security include:

  • Robust Consensus Algorithms: We've already discussed the importance of consensus algorithms. They essentially define the mechanism by which the network agrees on the ledger's status, the validity of transactions, and their approval. The most widely used are Proof of Work (PoW) or Proof of Stake (PoS). These algorithms make the costs involved in executing a successful attack outweigh any potential gain, rendering the effort pointless. However, both have their sacrifices. With PoW, good performance always sacrifices scalability, as it requires a minimum work time for transaction validation. While with PoS, system decentralization is at stake, as without a randomness system, validators with larger stakes will always tend to be chosen for validation, growing and centralizing control over time.

  • Well-aligned Incentives: The system must design an incentive system to prevent the participation of malicious agents. If the reward for validating transactions is low, it won't attract validators, and the system will be "guarded" by a few, making it easy for hackers to control the network. On the other hand, high rewards may result in too high inflation levels for users, condemning its usability. These decisions fall under the term "tokenomics," combining the words token and economy. Designing these terms is crucial to ensuring an attractive system for validators but with product viability.

  • Code Update Mechanism Development: Since protocols are usually open-source, they must have agile and straightforward mechanisms to update. To strengthen security, many projects implement so-called "bug bounty programs." In these programs, "white-hat hackers" actively search for vulnerabilities, and if they find them, they report them and get rewarded.

    Once issues are found, the code update mechanism must ensure that; i) a malicious agent cannot make harmful code changes, and ii) legitimate changes are accepted by the network's majority. Here again, a balance between security and centralization is sought. A code where updates are centralized under one team's command can erode user trust and its project viability. Meanwhile, a mechanism requiring the acceptance of many validators can result in blocking and obsolescence.

The proper sizing, design, and combination of these elements strengthen the network's security and integrity. But as we know, it must be balanced with the other two fundamental challenges of the blockchain trilemma: decentralization and scalability.

In conclusion, the development's purpose is to find the perfect balance point, remembering that security is essential to preserving a blockchain's value and utility. A network vulnerable to invasions and fraud will diminish users' faith, who will choose to avoid transactions on blockchains that don't provide

🔍 Did you know that…?

Did you know that one of the largest cryptocurrencies on the market started as a joke and is now worth more than most companies in the main Spanish stock index?

If there's a story in the crypto universe that illustrates its volatile and often inexplicable nature, it's that of Dogecoin. What began in 2013 as a parody of the irrationality of the crypto market is now the 7th largest coin by capitalization with a value of over $10 billion, surpassing more than half of the companies in the main Spanish stock index.

Created in December 2013 as a satire by software engineers Billy Markus and Jackson Palmer, Dogecoin began using Litecoin's codebase. However, they made some key changes to keep Dogecoin true to its comedic nature, such as the infinite issuance of coins and the viral Shiba Inu meme ("doge") as its logo.

Dogecoin Logo

Dogecoin's creators never intended to create a legitimate cryptocurrency but rather to mock the incredible proliferation of cryptocurrencies alternative to Bitcoin and the lack of diligence by "investors". This reflected the bubble forming around this new market.

Despite its satirical origins, the cryptocurrency quickly began to gain popularity and acceptance among market enthusiasts, especially on Reddit where the community created the concept of Dogecoin's "tip bot", which allowed users to send small amounts of Dogecoin to others as a thank-you for their content or comments. Since then, the use of Dogecoin for tipping has spread to other platforms and social networks. The coin went so viral that in 2019 Elon Musk declared himself a fan, amplifying its popularity and valuation.

This first tweet from Musk increased the coin's value by more than 75% in a single day. After that, a series of tweets kept Doge in the spotlight, reaching a value of more than $70 billion, well above the value of Banco Santander, one of the world's largest banks.

After the latest bull market, the Dogecoin Foundation was relaunched with the promise of advancing the project more seriously. However, this shift has had little substantial progress, and it seems that Dogecoin's value remains largely based on speculation rather than its usability or technological development, a worrying reflection of the lack of diligence still prevalent in the market.

In recent weeks, Doge has been back in the headlines due to Twitter's relaunch. After its name change to X and promises to transform the platform into a multipurpose platform, Doge has been suggested as a possible payment method, something Elon Musk has not denied.

Despite everything, it hasn't all been laughter and wild speculation. The foundation has contributed positively on certain occasions. One of the most notable was when the Dogecoin community raised $30,000 in DOGE for the Jamaican bobsled team, which couldn't afford the trip to the 2014 Sochi Olympics.

A surprising aspect of Dogecoin's story is how a digital currency designed as a joke has demonstrated the simple reality of perceived value. In an environment as speculative as the cryptocurrency market, it seems any project with an effective marketing strategy can achieve astronomical valuations, even if its original purpose was to satirize the very concept of the market. Only time will tell if the usability and technological design of projects will put each value in its place.

🔗 Use case: Worldcoin (WLC), unique digital identity

After years of speculation and publicity, the Worldcoin app was finally launched two weeks ago. Following the announcement, the value of its currency, WLD, doubled from $1.5 to over $3, before stabilizing at around $2.0-2.2.

What is worldcoin?

Worldcoin is a crypto project co-founded by Sam Altman, famously known as the CEO of OpenAI, the company behind ChatGPT. Worldcoin was born with a clear philosophy: artificial intelligence will generate immense wealth for humanity, but it can also eliminate many digital jobs while posing significant challenges to digitally distinguishing humans from AI robots (bots).

In response to this issue, Worldcoin launched its cryptocurrency WLD with a dual objective; (i) develop a "proof of personhood" system that verifies that a digital user is genuinely human and (ii) implement a universal basic income to offset the loss of competitiveness to machines.

Worldcoin positions itself against existing alternatives like Proof of Humanity, BrightID, Idena, and Circle as the only one that uses sophisticated biometry by scanning each user's retina with a device they have developed called "the Orb."

What is a proof of personhood system?

A proof of personhood system is a technological solution that ensures an online (digital) account is controlled by a real, unique individual within the system (distinct from all other accounts) without revealing that person's real-world identity.

Since the inception of blockchain networks, numerous teams have attempted to solve this issue, known in the jargon as "the unique-human problem." While challenging in concept, applying it to the blockchain world adds the complexity of solving it in a decentralized manner, meaning without a central government or entity verifying individuals' real identities.

In short, the goal of these projects is to provide people with a digital identity (an online account like your Instagram or email) that lets you identify yourself online, ensuring you are a human without revealing your actual identity. And all of this is done in a decentralized way, out of reach from authorities or companies that might misuse or intercept the data.

The applications for a system like this are endless. It's not just a tool of freedom for populations that lack identity due to resource limitations (both personal and governmental). It can streamline any administrative process, voting, identity theft prevention, and even the distribution of wealth, as Worldcoin intends.

Despite advancements in the field, this technology faces numerous challenges. Primary concerns include people selling or renting out their identity, the possibility of governments coercing individuals into registering their identity under their control, and the difficulty in ensuring everyone has access to a registration device (like Worldcoin's Orb). However, solutions are being sought to ensure these systems are secure, accessible, and respect privacy.

How does Worldcoin work?

Being big fans of this technology, we couldn't miss out. We sought out a Worldcoin point to experience and report on it firsthand.

Dispositivo “the Orb” de The Worldcoin en la Vaguada de Madrid.

Each Worldcoin user must install an app on their phone, which generates a digital wallet with a private and public key. Once registered, users have to visit a "the Orb" point in person to verify their digital identity. These points are present in over 250 locations in more than 34 countries worldwide, and they have already verified 2.2 million people.

The "The Orb" device comes with cameras that read the QR code from your app, allowing it to identify you. It then scans the user's eyes to verify that they are a real human and that their iris doesn't match any other user who has previously used the system. If you pass both tests, "The Orb" approves a special hash (code) from the iris scan, and you receive a unique ID card in your app. Like an ID, but digital. From that point on, the user has a "World ID" that allows them to prove they are a unique human without having to identify themselves further.

Additionally, as a launch promotion, Worldcoin is gifting 25 WDL (approx. $50) to all registered users, and every week they will continue to give away WDL until reaching 60% of their total emission.

What are the criticisms and risks of the project?

From its conception, many experts warned about the project's risks. Last year, after an analysis by a group of experts organized by MIT researchers, it was concluded that the Worldcoin model had significant ethical shortcomings and technological risks that outweighed any potential benefit of financial inclusion.

Since its official launch, the criticisms have only escalated, leading even to investigations by four countries.

The main criticisms and risks of the Worldcoin project relate to how people are identified and the currency's design:

  • User Privacy: There's no way to guarantee that your iris photo is deleted and isn't used or shared with third parties. Moreover, biometric data could be used to track or identify individuals without their consent. This can violate their privacy.

  • System Security: WDL wallets are digital wallets on internet-connected phones, making them prone to hacks. The same goes for the Orbs, which can be hacked to obtain users' biometric data.

  • Accessibility: To make it a global project, there should be Orbs everywhere, which is impossible.

  • Fraud: Many iris "purchases" from third-party users were detected, where they paid $20-30 to obtain the $50 from registration.

  • Centralization: Access to identity always goes through an Orb, which for now is a device created by a company, so its correct construction cannot be guaranteed, and it might have backdoors. Additionally, this makes the project dependent on this company for its continuity.

  • Currency Design: As with many crypto projects, a significant portion of the coins have been distributed among venture capital funds that financed development, which, according to the community, raises many ethical questions.

What now?

Worldcoin faces many technological and adoption challenges, but it has the means to keep working. After several funding rounds totaling over $500 million, they are trying to address some of the risks with regular audits to the Orbs and by opening up their code and manufacturing. They have also proposed allowing the option to retroactively disable accounts produced by certain Orbs if any act of coercion or abuse is detected. However, these solutions still face challenges regarding implementation, centralization, and potential resistance from various ecosystem stakeholders.

The reality is that in the digital world we live in, where we increasingly spend more hours immersed (be it for work or leisure), the need to solve the problem of human identification is growing more pressing. We must acknowledge the efforts of projects like Worldcoin and others in the field, which, while far from perfect, strive for an optimal solution.

There are numerous alternatives to the biometric identification method proposed by Worldcoin, and each has its strengths and weaknesses concerning privacy, accessibility, decentralization, and identity theft protection. The final solution will likely involve a combination of multiple methods, emphasizing the importance of constant monitoring, open code, external audits, and system checks to ensure its integrity.

What's clear is that without the development of these solutions, we risk falling into centralized, costly, and exclusionary identity solutions. In this regard, blockchain technology plays a vital role.


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See you in the next issue!

Whale Capital is the digital consultant of the fund Global Digital Asset Fund (GDAF), a professional vehicle established for investment in digital assets. GDAF is an alternative fund (NAIF) only available for Professional and Qualified Investors under the criteria of the European ESMA regulation. If you want to request more information you can do so through the following link.

DISCLAIMER: Nothing written here should be considered financial advice. This Newsletter is strictly educational in nature and is not investment advice or a solicitation to buy or sell assets or to make financial decisions. Please be careful and do your own research (DYOR).