Notes 5/15: Bitcoin Price Rebounds, Ethereum Staking Reaches Record Levels, and the Magic of Lido

Bitcoin price is rebounding after last week’s lows. The cryptocurrency fell below $26,000 over the weekend but has recovered sharply. As of this writing, it is changing hands at $27,428.55, up 1.2% from a day earlier. The cryptocurrency’s price action has defied rational explanations in the past and this time is no exception.

Choose Your Poison

Depending on preferences, it is possible to custom fit narratives for bitcoin’s latest movement.

There’s the case for fundamentals.

Bitcoin transaction fees, which skyrocketed to record levels at the beginning of this month, have plummeted. Ten days ago, they peaked at $31.145. They were at $3.762 yesterday. A decline in transaction fees means that it is possible to conduct cost-effective transactions on bitcoin’s network.

The surge in fees was a test run for the Taproot upgrade that enables batching of transactions together to make bitcoin’s payment system more efficient, meaning a reversal of the gains is good news for bitcoin’s evolution as a payment network.

Macroeconomic events could have also arguably affected investor perception of the cryptocurrency. A possible debt default by the U.S. government will damage the reputation for the world’s safest investment – the US treasury securities. It also makes upstart bitcoin look seemingly attractive in comparison.

Shaky Foundations

The key word here is “seemingly” because, despite this weekend’s price rise, bitcoin’s foundations are shaky. Illiquidity is rampant in its ecosystem. According to research firm Kaiko, bitcoin liquidity has declined by 50% since the start of this year even as its price reversed declines in the latter half of last year.

Another statistic that might be a marker of low liquidity: fewer active addresses. According to The Block’s research arm, the number of average active addresses on bitcoin’s blockchain declined to 754.2k, the lowest since July 2021, last Saturday. This means there are fewer entities conducting transactions on the network.   

Meanwhile, unregulated stablecoins, like Tether, account for most trades against bitcoin. Those trades occur at exchanges that are already under intense regulatory scrutiny.

The ratcheting up of enforcement actions against top exchanges and parties involved in bitcoin markets has further cramped its trading environment. This morning, the Department of Justice (DoJ) reiterated its intentions to go after bad actors in cryptocurrencies. Considering that bitcoin’s dominance of crypto markets is almost 45%, as of this writing, its price is likely to become collateral damage from future action by the DoJ.

Ethereum Staking Reaches Record Highs. How?  

The correction in bitcoin’s transaction fees is echoed in the rewards rate for ethereum staking. In the heat of meme coin mania, they skyrocketed to 8.6% last week. As of this writing, Ethereum is advertising an annual percentage rate (APR) of 5.5% for staking its tokens.

A consequence of the multiplication of rewards for staking is an increase in the amount of staked ether. According to some reports, it reached record highs of over 19 million, eclipsing its pre-Shapella numbers. Right now, it is at 18.3 million.

Many depositors flocked to Ethereum after last week’s rewards rate bonanza, according to reports. But that event also jacked up transaction fees on the blockchain.

Fortune magazine found that the transaction fees spike discouraged deposits. Staking $20 worth of ether became a losing proposition because transaction fees on the blockchain turned out to be higher than the promised rewards rate. That experiment, then, begs the question of who the depositors are and how much profit do they get from the transaction.  

Lido’s Magic Tricks

One of the biggest beneficiaries of the reported flow of depositors into Ethereum’s staking program has been staking platform Lido, the biggest and most magical place to stake ether. Deposits have surged by 9.8% on Lido in the last month, based on data from Dune Analytics. No doubt, investors are attracted to the high annual percentage rate (APR) for ether on the platform.

Those rewards, sometimes, outpace even that of Ethereum. Right now, Ethereum is advertising an APR of 5.5%. But Lido, which is unregulated, has a bag of tricks, one that includes questionable tactics like maximal extractable value (MEV) and rebasing, up its sleeve. The tricks enable it to pump yields up to 6%.

A Sleight of Hand and Final Act

The platform’s sleight of hand is such that it can delay ether withdrawals from its platform for more than a month after the blockchain’s developers have okayed them. Don’t look at the smoke screen right now. Lido is transforming into a new, improved “version 2” that is nothing more than its version 1. In the new version, the platform formerly known as a decentralized autonomous organization (DAO) will be referred to as a Grants Association.    

Lido’s governance token, LDO, has rallied after last week’s drama on ethereum. The ostensible reasoning here is that investor fervor for decentralized staking services propelled the rally. But investors in the token are actually selling it off in anticipation of Lido’s final trick after ether withdrawals on its platform: the Vanishing Act.

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