🟣 First Banks, What’s Next? The U.S. Government?

5 PM EST. Blockworks Research is joined by Reflexivity Research on a Twitter Space to discuss:

- Bitcoin miners

- ETH staking dynamics

- What's the next catalyst

- Ethereum consensus failures

Don't miss out

How worried should you be about a U.S. government default? Apparently, pretty worried. Yesterday, USDC issuer Circle added $8.7B in overnight repos to their reserves. In addition, Circle has removed any exposure to treasuries maturing after May 31st, stating that these actions were taken to “provide additional protection for USDC in the unlikely event of a U.S. debt default.”

Overnight repos are short-term loans where the borrower/dealer sells government securities to investors on an overnight basis and buys them back the next day. Hence, the term overnight.

Overnight repos protect one from a U.S. default because the Federal Reserve or dealers are the ones paying “interest”. Dealers have their own balance sheet, which they can pay interest out of, and the Federal Reserve can print as much money as they want without adding to the deficit.

On the other hand, the treasury pays interest on treasury bills, and the TGA balance is looking alarmingly low at less than $200B. The treasury department is set to run out of cash by early June unless the debt limit is raised, and so far, lawmakers are deadlocked in raising the debt ceiling.

Slightly less important news this morning. Jobless claims fell by 22K to 242K, coming in below the estimates of 254K. I think by now we’ve all gotten the point that the labor market is as strong as ever.

What happens if the U.S. government defaults? The global financial market would require a pretty hefty reshuffle, given that the “risk-free rate” will cease to exist. Some think this could be a positive catalyst for gold and BTC.

-purplepill3m

After Coinbase announced cbETH, their liquid staking token (LST) product, it quickly became the second largest LST in the space. With Coinbase accounting for >10% of all staked ETH, it made sense to offer this product as an additional revenue stream and as a way for their users to participate in DeFi. While a 25% take rate was more than double other LST providers like Lido, Frax, and Rocketpool, the brand moat and trust in Coinbase pre-Shapella was strong.

Now that ETH withdrawals are enabled, many assumed the liquid staked supply would continue higher due to increased confidence in the redemption process and the protocol as a whole. And we are seeing that across the board, with ETH staked in decentralized LST protocols up considerably over the past month (some up 40%+), yet Coinbase is down 2.5% over the same period!

I thought the brand moat was going to remain and cbETH would grow, but it seems the high take rate combined with low switching costs post-Shapella has put a damper on cbETH. In my opinion, Coinbase must see cbETH succeed. I would not be surprised if they decide to cut their take rate if cbETH continues to lose market share. As a COIN shareholder, this is what I’d like to see if this persists.

Following a 13% LDO pump earlier in the day, a mysterious account created just 7 hours prior posted a proposal to introduce LDO staking and a revenue sharing mechanism on the Lido forum. The proposal included LDO stakers providing insurance of last resort to recapitalize the node operators (NOs) in the event of a large slashing event. Isn’t it funny how the moment a fund manager pointed out the proposal was live on the forums 5 min after being posted that LDO precipitously dropped 7%+ over the next two hours? Sounds like a highly profitable trading strategy to me. Guess we will never know.

Internally we have discussed this proposal at length and still couldn’t agree on how best to distribute protocol revenue. While giving revenue back to token holders should be on the roadmap for all protocols in the future, at ETH's current prices and staking yield, this proposal would pay out at most $15M to all LDO stakers. Additionally, I personally would rather see LDO stakers get paid out directly in ETH (or stables) in the future instead of more LDO governance tokens. With the current regulatory regime cracking down on crypto “securities,” the risk is far too great for such little payout, and as an early-stage protocol, there must be better ways to allocate capital to grow the protocol’s TAM. I don’t want to see this proposal pass.

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One of the largest catalysts for Filecoin happened in 2023: the launch of the Filecoin Virtual Machine (FVM), which now enables smart contracts on the network.

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In theory, a reduction in supply should drive ETH’s value as an asset upwards over time

The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.

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