SEC vs DeFi: $50M Liquidity Provider Rule

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Happy humpday 🐪,

A lot is going on. Dymension goes live at $5 billion FDV. ERC-404 trend continues with Pandora token hitting ATH. SOL is back up after being down for five hours. Farcaster hits ATH number of daily active users. We’re really back.

In Today's Email:

• What Matters: SEC new rule 🏦 

• Case Study: Pandora ERC404 ◾️

• Governance & Features: EigenLayer $4B TVL 📈

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WHAT MATTERS

SEC $50M Dealers Rule Impact on DeFi

State of play: The SEC approved new rules requiring liquidity providers, including those in crypto, to adhere to federal securities laws. This regulation is set to impact DeFi, according to the final rule.

• The 247-page rule specifies that it applies to crypto asset transactions considered as securities or government securities, excluding entities with assets under $50M.

• Under the new rule, traders in crypto securities and DeFi activities must register as dealers if their trading regularly provides market liquidity, unless exempted.

• The rules take effect 60 days post-publication in the Federal Register, with a compliance deadline one year after the effective date.

The crypto industry opposed the SEC's March 2022 rule, particularly for DeFi, citing the lack of central control and stating that DeFi products are just software. 

• The DeFi Education Fund highlighted AMMs as smart contract-based liquidity protocols for crypto trading.

Republican Commissioner Hester Peirce, who voted against the rule, stated during Tuesday’s meeting that “an AMM is … just a software protocol, so how does it register as a dealer?”

• An SEC official countered Peirce by stating an AMM encompasses more than just software.

• Peirce inquired about the impact on AMM liquidity providers. An SEC official replied, acknowledging the lack of clear data due to the market's opacity and non-compliance.

• In his opening statement, Gensler stressed the rule's importance for investor protection, noting unregistered "de facto market makers" avoid data reporting and record-keeping duties.

Why it matters: If approved and implemented at a large scale, this will create additional compliance requirements for entities with large capital based in the US to participate in DeFi.

For builders and investors: More reasons to focus on non-US markets and entities first, especially if you’re dabbling in DeFi.

CASE STUDY

Understanding ERC404 Token Standard

Credit to blocmates for the original research.

State of play: In early February 2024, Uniswap Emerald ($EMERALD) gained attention for its unique design but was later revealed as a scam.

Despite this, a group took the idea to the next level and created Pandora, a new token aiming to innovate in the crypto space. Inspired by EMERALD but distinct, Pandora seeks to make a significant impact on the industry.

• The creator of ERC404, 0xacme, defines ERC404 as a mix of ERC20/ERC721 implementation with native liquidity and rationalization.

• Pandora is an experimental token with 10,000 tokens and 10,000 corresponding NFTs, known as "replicants."

• Pandora NFTs come in various rarities, with green being the most common and red being the rarest.

• Holding rare NFTs allows users to potentially sell them for profit and reinvest in Pandora tokens, following a "good ponzinomics" strategy.

• However, without clarity on the NFTs' utility, some users remain cautious.

• The fractionalization of NFTs, exemplified by projects like Fiesty Doge (NFD), shows demand for increased liquidity.

• ERC404, introduced by Pandora, appears promising for achieving these goals, despite being high-risk and unaudited.

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INSIGHTS

Solana Outage: BPF Loader Bug

@matthew_sigel explains the recent Solana outage in a thread. 

Here is the summarized explanation of his analysis:

Solana experienced an outage due to a bug related to the BPF loader, which is used to deploy and execute programs. This bug stemmed from a Solana Improvement Proposal (SMID).

• The fix involves rewriting the BPF code to prevent such bugs.

• The next steps of the fix include validators creating a snapshot, achieving consensus on the last block, and restarting the chain.

• The incident highlights Solana's experimental nature, but ongoing fixes are expected to mitigate future occurrences.

• After the restart, there may be a surge in DeFi activity as arbitrage bots capitalize on opportunities, potentially leading to further downtime.

• This could prompt more cautious consideration of future SMIDs and innovations on Solana.

FEATURES & GOVERNANCE UPDATE

EigenLayer TVL Surpasses $4B

Liquid restaking protocol EigenLayer temporarily removed its 200,000 ETH per-protocol staking cap, leading to a $750M+ surge in TVL within hours.

• EigenLayer saw a rapid influx of over 1M ETH within two hours of lifting its deposit cap, it also reported a TVL of $3.2B, marking a $1B increase from the previous day.

• EigenLayer's removal of caps on liquid staking tokens (LSTs) aimed to "invite organic demand," as stated in a recent project blog post.

• EigenLayer plans to reapply a new cap on Feb. 9, with intentions to eventually eliminate the deposit limit permanently.

• EigenLayer also announced plans for its mainnet launch for node operators and EigenDA

• Interest in EigenLayer has surged recently due to the emergence of projects like Puffer Finance and Ether.fi, which offer substantial rewards called "points" to users who restake with them.

Why it matters: Restaking is ETH liquidity blackhole. Expect more supply of ETH to be locked in restaking related capacity, potential reducing future sell pressure.

Other notable feature updates:

• Conic Finance launches V2.

• Blueberry Protocol goes live.

• AIP3 announces OEV Network.

• Swell Network launches rswETH.

• GammaSwap launches DeltaSwap.

• Router Protocol launches Router Nitro.

• ZKX launches on Starknet Mainnet with OG Trade live.

• Pike launches on mainnets including Ethereum, Base, and Arbitrum.

QUICK BITES

• Thailand waives VAT on crypto gains.

• Farcaster surge to daily active users ATH.

• OKX faces potential probe in South Korea.

• South Korea to enforce tougher crypto law.

• B2C2 gains Luxembourg virtual asset license.

• SEC adopts rule to have stricter oversight over DeFi.

• SEC delays decision on Invesco Galaxy Ethereum ETF.

• BlockFi and 3AC settlement deal approved by judge.

• Yellen asks Congress for oversight of spot crypto markets.

• Solana network restarts after outage that lasted five hours.

• HK calls for yuan stablecoin issuance in budget suggestions.

• ENS collaborates with GoDaddy to link web domains and (.)eth.

• Dymension fails to reach consensus because of bad validator set.

• Multicoin Capital is in talks to sell ~$100M in FTX bankruptcy claim.

NOTEWORTHY READS & MEME

• DLNews’ read on what is ERC-404.

• Knower’s read on L2s with and without liquidity.

• Jinglingcookies’ read on future of Farcaster Frames.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.