ETH’s ETF launch – how’d it do?

The markets have been so slow lately that we’ve been dying for catalysts to breathe some life back into this space.
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​The good news? Ethereum ETHs are finally live and money’s flowing in! Don’t get too excited yet because the ETH prices immediately took a nose dive.
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This shouldn’t be shocking because the same thing happened to Bitcoin after the ETFs went live. Extend your time horizons my friends.
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​Here’s what we got today:

• ETH ETFs are live. TradFi can now easily buy $ETH.
• Hats Finance Deep Dive. A better way for DeFi security.
• Around the web. TON Foundation introduced TON Teleport, dYdX website was hacked, and more.

Today’s email is brought to you by Hats Finance — the decentralized security protocol.

Here’s your Edge 🗡️!

Ethereum ETFs are LIVE!

Ethereum has entered the TradFi market. This means your parents can easily buy Ethereum without you worrying about their seed phrases getting lost.

Why are ETFs a big deal? Let’s think about last year. If a company wanted to buy Crypto, how easy would it be? Not so much. There would be regulatory concerns, friction, and security issues.
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The Ethereum ETFs allow TradFi users to buy ETH in just a few clicks and not worry about the hassle of managing private keys.

Was the Launch Bullish?

The short answer is yes. Read the below for the long answer.

There are three things that make a successful ETF product:

• Low fees. Nobody wants to lose money on each trade.
• Good brands. A combination of trustworthy brands like BlackRock and good marketing tactics is needed for people to buy ETFs.
• High trading volume. This attracts more market makers and thereby tighter spreads and better prices. It’ll attract TradFi whales as well because they need a ton of volume to make their moves unnoticeable.

​We have already checked two out of the three boxes that make a good ETF. 0.15% on the ETH from Grayscale is the lowest. Brands like BlackRock and VanEck convey trust for investors. Though I’m not sure they’ve nailed the marketing of Ether to boomers yet.

Let’s look at the third quality, trading volume.

On the first day, July 23rd, ETH ETFs attracted more than $1.1B in trading volume. Bitcoin ETFs had ~4.6B in trading volume on their first day. So, Ether attracted ~24% of the trading volume of the BTC ETFs.

Now, let’s look at net inflow – this helps us to understand how much net new dollars flowed into ETH.
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The chart below tracks the net inflow for various ETH ETFs.

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Here are the inflows / outflows.

The total net inflow is in the green: +$107.8M. This represents ~16.45% of the net inflow ($655.2M) of the BTC ETFs.

If we exclude the data for Grayscale’s ETHE and GBTC, the numbers look a lot better for ETH. ETH ETFs managed to attract ~79% (591.9M) of the inflow of the BTC ETFs (750.3M).
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​Why is ETHE at -$479m? ETHE = Grayscale by the way. Grayscale launched trusts before ETFs using $ETHE for Ether.
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​For those trusts, investors can only create new shares, not redeem them.

Then, they converted those into ETFs. But, they chose to keep their fees high. 2.5% for $ETHE and 1.5% for $GBTC. This is the highest amongst their competitors. The second highest fees are only 0.25%.

So, when the ETFs launched, investors had an incentive to sell Grayscale products and buy other ETFs.

Grayscale, therefore, saw an outflow of $95.07M from $GBTC. In contrast, $ETHE lost $484.1M. That’s almost 5.5x the Bitcoin outflow.

The second day was underwhelming for ETH ETF. Heavy outflow (326.9 million) from Grayscale ETHE continued. And the inflow wasn’t enough to make up for it.

So, Day 2 ended with a net outflow of 133.3 million in the net outflow. When we combine both days, we are seeing a net outflow of 26.7 million.

This isn’t necessarily a bad thing. We can see it as the market is just removing an overpriced product much faster.

Future Outlook
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It’ll take 2-3 weeks to get a clearer picture of the inflows and market shares of different ETFs. Right now, we can only make a few calculated guesses.

Comparing ETH ETFs with BTC ETFs is the best way to predict future inflows. What percentage of BTC ETF inflows can ETH ETF inflows attract?

Europe and Canada already have ETFs for $BTC and $ETH. We can take their ratios of their AUM and apply them to the US:

• $BTC to $ETH ETFs ratio in Europe: 78% to 22%
• $BTC to $ETH ETFs ratio in Canada: 77% to 23%
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The market cap is also instructive. The ratio of the market cap of $BTC to $ETH is 74% to 26%.

So, we can assume that ETH ETFs will receive about 22-25% of the inflow of the BTC ETFs.

BTC ETFs have attracted a net inflow of ~$17.46B. So, we can expect ETH ETFs to attract about $3.8412B of net inflow over the next six months.

There are more sophisticated models for predicting ETH inflows. For example, Matt Hougan from Bitwise is expecting $15 billion in the first 18 months.

The price impact of this inflow will be much greater than that for $BTC because:

• ETH’s market cap is 1/3 of BTC’s market cap.
• $ETH stakers have taken ~28% $ETH off the market.
• Another ~11% of the supply is locked in smart contracts.
• Compared to $BTC issuance, $ETH is deflationary or has negligible issuance.

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$ETH price has gone down since the ETF launch.
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One thing to note is that the U.S. stock markets suffered the worst day since 2022 with disappointing results from Tesla & Alphabet. So this could have an impact on the prices too.
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Looks like a lot of people are already getting excited for a possible Solana ETF.

Additional Resources:

• ​Coinglass is a good source for tracking ETF data. Here’s the link.
• Arkham has a dashboard to track the onchain addresses of ETH ETFs.

A Better Way to Improve Security in DeFi

It’s 2024. We all thought there would be greater crypto adoption by now. But what’s stopping more people from participating in the space?
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If I had to narrow it down to three things, they would be:

1. More dApps with product/market fit.
2. Better UI/UX across the board.
3. Bulletproof security.

Let’s focus on #3 today because I think it’s the most critical.

In 2023 alone, over $2B were stolen through hacks and exploits and this is showing no signs of slowing down.
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It’s hard to convince people to deposit money into a bank if they’re worried it is going to get robbed. The same thing’s happening in this space.
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So, how are we dealing with security now?
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Mainly, through audits. We see that a protocol has had an audit and trust that the auditors did their job. And you feel more trust if the protocol has gone through multiple audits, right?
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But what is the problem with centralized audits? They’re expensive. This leads protocols to work with the “cheapest” solution simply to say that they’ve been audited. And they risk that their report may not yield any concrete findings. That’s time AND money wasted.
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Kraken Exchange and leading crypto auditor, Certik, went to blows this year over $3m.

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Security is such a big issue that it’s dangerous for this responsibility to be centralized. Think of it like storing tokens on CEXes. You don’t control the funds and there is no transparency about their operations and solvency. It is the exact same thing with centralized audits. You don’t have any control.
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We’ve already tried to decentralize everything else. We should now also decentralize security.

Enter Hats Finance

Hats is pioneering the DeSec (Decentralized Security) movement. Their main product offers on-chain bounties for security researchers to audit protocols – therefore creating a contest-like environment.

This decentralized autonomous hub attracts security auditors who quickly solve vulnerabilities in exchange for incentives.

What is Hats Finance building?

Hats is setting a new standard in DeFi Security by implementing a community-driven vision.

Here’s how:

• Audit Competitions. Auditors worldwide review codebases to earn prizes and climb the leaderboard.
• Bug Bounties. Auditors can find and report bugs for rewards.
• Bounty Vaults. Stake $HAT tokens to participate in bounty rewards (we’ll talk more about this).

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DAOs, companies, community members, and stakeholders can add liquidity to bounty vaults and be rewarded in return. This creates a win-win-win scenario: White-hat hackers receive incentive-based requests, companies solve code vulnerabilities quickly, and normies earn a share of the prize.

Unique Advantages

• Pay only actual audit findings. Rewards are based on the extent of the discovered vulnerabilities.(no flat fees, and a payment structure that pays for tangible results).
• Attract Top Security Researchers. Fee-based and private submissions ensure only top talent is drawn to Hats.
• Everything is on-chain, ensuring transparency and trust in the audit process.

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Hats minimizes financial risks while incentivizing high-quality submissions from security researchers.
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Imagine that you’re investing in a protocol. Wouldn’t you feel safer knowing that protocol had a bug bounty program open to the public, instead of a simple audit done by a company? I know that I would!

Roadmap

Here’s what’s in store for the future.

Key upcoming features:

• TGE and DAO are happening this year.
• Fully integrate the MVP into an open-source flow.
• They plan to launch an AI Safety Competition this year.

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Team/Investors

​The Hats team is fully doxxed with deep experience across business and crypto.

They also have a long line of backers and partners.

Backers:

Partners:

Tokenomics

(You can read more about the token here and here.)

Or you can save yourself the trouble and check out a brief summary below.

Here’s the distribution for the 100M $HAT:

Note: The majority of early investors have a linear vesting of ~27 months. This is solid and reflects a long-term alignment.

Condensing this pie chart, we see the following breakdown:

• Community and Liquidity Mining: 50%
• Investment Round: 18%
• Team: 25%
• Partnerships: 7%
• Treasury: 15%

Not bad.

But what will drive demand for $HAT?

• Incentives. You can deposit $HAT into bounty vaults for yield.
• Gamification. Researchers stake $HAT to submit reports without paying a transaction fee. The more they stake, the higher they climb the leaderboard, becoming Lead Auditors.
• Growing crypto space. New protocols and developments equals greater demand for security solutions.

I’m a real fan of gamification. When it’s well-built, it can constitute a huge demand driver. So, I’m glad to see Hats applying this to their token.

$HAT value accrual will work in two phases:

• Phase 1: Focuses on network effects, using incentives like liquidity mining and airdrops to encourage vault creation and security services. Features like staking and governance will be introduced.
• Phase 2: Improves token participation across the ecosystem. They’ll implement a clear fee structure, continuing buybacks and revenue sharing.

Final Thoughts

There are three major things I’m looking for whenever I evaluate a new product:

1. Is this product useful?
2. Does this product have unique advantages over its competitors?
3. Does this product exist in a space that isn’t too competitive? (Blue Ocean)

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Hats Finance checks all of those boxes. It genuinely tries to solve DeFi’s biggest problem while keeping the decentralized ethos alive.

The $HAT token will play a crucial role as all of the processes, including vulnerability submission and payments, are on chain.

It’s clear that protocols and audit research will benefit the most from Hats. However, for us normies, participating by depositing $HAT into the best bounty vaults will help to attract top security talent and increase the generated yield.

Solving security in crypto is key to increasing trust in crypto from the rest of the world. Hats is doing a great job of moving us towards that vision.

Check out the launch of $HAT and Hats Finance →​

Note: This deep dive is sponsored by Hats Finance, but I’ve written this piece myself and it reflects my honest thoughts. As always, please do your own research before investing.

🚀 DeFi Catalysts

Polygon set the date for the migration of the MATIC token to the new POL token on September 4. They’ve already done the upgrade on testnet.

TreasureDAO launched the Magicswap v2. It’ll be the very first Game Exchange, DEXs that combines DeFi & games.

Karak Network added native staking functionality for MakerDAO’s $MKR. It’ll be automatically upgraded to NewGovToken as well.

Redacted Cartel (rebranded to DInero) has launched the $DINERO token. $BTRFLY holders can now migrate to $DINERO.

Ondo Finance has launched $USDY on Noble. Any IBC-enabled blockchain will have the ability to tap into USDY’s yield.

GMX is discussing transitioning from the “real-yield” model the to “Buyback $GMX and distribute $GMX” model.

TON Foundation introduced the TON Teleport. It should allow users to transfer $BTC between Bitcoin and TON without centralized intermediaries.

IoTeX introduced IoTeX 2.0. They’re upgrading from the L1 blockchain into an open Modular Infrastructure for all DePINs.

🐦‍⬛ X Hits

1. ETH ETF initial days considerations.
2. The U.S. was the early promoter of native internet companies.
3. Please be aware of inflated metrics.
4. ETH ETF volumes on day 2.
5. Crypto is progressively splitting into two markets.

🚀 New Launches

Avail DA, the modular data availability layer, is live on the mainnet. The AVAIL token is live as well.

Yearn Finance introduced Gimme. It is a yield aggregator powered by Yearn Vaults on Polygon Network.

Hermetica released USDh on Runes. It is the first Bitcoin-backed, yield-bearing stablecoin on Stacks and Runes. Users can earn up to 25% APY.

Y2K DAO has decided to build, launch, and maintain the Fractality Protocol. Users can lend crypto assets to Fractility, and it’ll be used to run arbitrage and yield strategies.

😂 Meme