In This Issue
- For this weeks portfolio tip, I’ll be talking about taxes
- Sam has a report for you on the expanding Yuga Labs empire.
- David breaks down Arbitrum vs. Optimism.
- Rebecca has this week’s top trending coins.
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Lark’s Portfolio Tips
So, I wanted to take a few minutes this week to talk about taxes with you. I would be lying if I said I wasn’t a little bit jealous of some of my buddies who live in Dubai and pay 0% tax, but for most of us, we live in places where the tax man always has his hand out. So here are a few of the big mistakes I made on taxes during the bull run. Hopefully, you can avoid making these same mistakes in the future!
*** note that crypto is treated differently between jurisdictions and this may not all apply to you. Talk with a local tax expert. This is not tax advice.
Loans – Usually if you take a loan against for example your house the tax man does not consider that you have sold your house. But in some jurisdictions like New Zealand that is how crypto is treated. I got a big tax hit in 2022 from taking a big loan versus my Bitcoin on Maker Dao. This loan was counted as a sale on BTC that I had been accumulating for years, so the “profit” even though I sold nothing was substantial. Meaning I had a whopper of a tax bill due to this one mistake. A lot of jurisdictions won’t do this, but make sure that is the case before you take a crypto loan using your assets like BTC or ETH.
Defi – If you ever use your Ethereum, Avalanche, or other assets in defi then you could be in for a nasty tax surprise. Because in some jurisdictions every time you enter or exit a defi protocol can be considered a taxable event. So while you just think you are innocently providing liquidity, the tax man might see this as a sale of your ETH for a liquidity provider token. Again, consult a local tax expert to know if this is the case where you live.
NFTs – This is one that I was fully aware of, but I want to make sure that you are considering. When you spend ETH to buy an NFT it counts as a sale of your Ethereum. So if you bought that ETH at $150 last bear market, and sell it now to buy an NFT at for example $1,500 per ETH. Then you owe the tax man whatever your rate of tax is on profits of $1,350 per ETH you spent to buy that NFT.
Wrapping Coins – This is again one of those things that is a real pain. Want to use your Bitcoin in defi? Then wrap it and put it on Ethereum via WBTC. Oops, taxable event because WBTC is technically a different asset that trades at a different price. Want to move that BTC to avalanche. Taxable event. This likely applies whether you buy the WBTC on an exchange or mint it directly.
Keep in mind for a lot of this stuff you can apply the reverse logic too. While I paid more in taxes due to using assets like Ethereum that I bought cheap, you can pay less by entering pools, buying NFTs, etc using Ethereum that you bought high. Thus registering a loss.
For example: You bought Ethereum at $3,000. Today you buy Wrapped Ethereum or maybe an NFT with the price of Ethereum at say $1,500. Then you will have registered a per coin loss of $1,500. Which may be tax deductible.
Final point. The tax man is out for crypto, so don’t mess around. Make sure your taxes are in order and beware of any areas of crypto that might result in extra tax bills.
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The Expanding Yuga Labs Empire by Sam
The two most famous NFT collections are Bored Ape Yacht Club and CryptoPunks. They’re the closest you’ll currently get to household names–or at least, household images–and behind both projects you’ll find the same entity: Yuga Labs.
The Yuga empire has expanded prolifically over the past year and a half, and attracted the attention of the US Securities and Exchange Commision (SEC) in the process, so let’s break it down and assess where it’s heading.
Image credits: Yuga Labs
Yuga Labs’ history
Yuga Labs was launched in April 2021 by four pseudonymous creators (later doxxed by Buzzfeed), and rose to fame through its Bored Ape Yacht Club (BAYC) NFT drop. By the way though, the idea that BAYC just happened to take off organically is not entirely accurate.
Flow chart from OMR digital media company
It’s a long story, but a network of influencers with celebrity connections enabled BAYC’s ascent. That’s fine, it’s a part of how media and commerce operate, but as a key factor in Yuga’s success is worth being aware of.
Yuga Labs then airdropped Bored Ape Kennel Club NFTs to BAYC owners (which showed pictures of companion pets), and then Bored Ape Chemistry Club NFTs, which are serums to be used in combination with BAYC NFTs to acquire Mutant Ape Yacht Club (MAYC) NFTs, which depict–as the name suggests–mutated apes.
An additional 10,000 MAYC NFTs were sold through a public auction, meaning there can be a total of 20,000 mutant apes, compared to only 10,000 original apes.
Later, a partnership of organizations that are officially distinct from Yuga Labs–Ape Foundation and the ApeCoin DAO–created a fungible token called ApeCoin, and BAYC, MAYC and BAKC owners received an airdrop of that.
Yuga acquired the IP to the CryptoPunks and Meebits NFT collections (both from Larva Labs) in March 2022, and subsequently changed the IP model on those projects to match that of BAYC, which is more permissive and allows NFT holders commercial rights over their NFT content.
Then, Yuga Labs moved into metaverse development through the Otherside project. This involved releasing virtual land plots in the form of Otherdeed NFTs, which were paid for when minting using ApeCoin.
Otherside looks like it will be a high quality gaming and metaverse environment, and is being developed in association with Improbable (specialist metaverse developers) and Animoca Brands (an influential web3 investment platform).
This is a stripped-down version of events, but what we end up with is a suite of Yuga Labs crypto products (deep breath):
BAYC, MAYC, and BAKC NFTs, some remaining serum NFTs, and Otherdeed NFTs representing land in the in-development Otherside metaverse. Also, there is ApeCoin, a fungible token which looks integral to future developments, but is technically distinct from Yuga. Additionally, we have Yuga Labs acquiring the rights to CryptoPunks and Meebits.
What is the best way to buy in?
Image credits: Yuga Labs
That depends on how much you have to spend, and how much belief you have in what Yuga is building.
If you have a large budget, like to flex, or want in at the top tier, then BAYC is the primary option. Below that, you have MAYC, which basically moves in unison with BAYC but is cheaper. BAKC is cheaper still (you’re not getting an ape, after all) but its price moves are also coupled with BAYC.
There’s an argument that having already hit crazy highs, BAYC/MAYC can’t experience explosive growth in future, but on the other hand, a ten or twenty percent move up on something initially expensive will bring significant profits, and there’s a clear possibility that previous highs on a growing brand can be approached again in a future bull market.
Also, in the context of NFT trading, which means keeping in mind that the entire NFT space is inherently risky, Yuga’s apes are at the relatively safer end of the market.
Image credits: The ApeCoin DAO
ApeCoin is the choice with the most liquidity, since it’s a fungible token rather than an NFT. If you just want to trade Yuga/Otherside news as quickly as possible, or to add Yuga exposure to an altcoin portfolio, ApeCoin makes sense.
Otherdeeds are arguably the most undervalued Yuga NFTs. It all depends on Otherside development and whether demand outstrips supply (there are 100,000 Otherdeed NFTs). Yuga has resources and top tier partnerships, so it’s reasonable to speculate that Otherside can be a high quality product, but that it might take a long time to develop.
What is happening with the SEC?
It was reported this month that the SEC is looking into Yuga Labs, raising the question of whether Yuga’s NFTs could be classified as securities, and there is also speculation around SEC interest in ApeCoin.
SEC action would have huge implications for the entire NFT space, opening the door to regulation. However, this is just speculation. Firstly, the SEC is reported as simply looking into Yuga, rather than accusing Yuga of wrongdoing.
Secondly, many NFTs can be regarded as artworks, perhaps including BAYC and its spin offs. The SEC doesn’t regulate traditional art markets, and you can make the case that there’s no difference–in regulatory terms–between physical art and digital art.
Image credits: Otherside
Where the SEC might have stronger cause for involvement is the Otherdeed NFTs. The argument would be that buying an Otherdeed amounts to investing money, in expectation of profiting from a shared enterprise (the Otherside metaverse project). That might constitute an investment contract, and so Otherdeed NFTs could be classed as securities.
That all said, if you take a look over the Otherdeed purchase agreement, the legal team anticipated this issue, and it’s made clear that Otherdeeds are not sold with a promise of future profits. Even besides that, Otherdeeds may have genuine utility as property in a virtual world.
Basically, this is a huge gray area, there are logical arguments on either side, and–as with the whole of the crypto regulation debate–no-one can say for sure how the situation will pan out.
Is it plausible that the SEC could go after NFTs, starting with Yuga in particular? Sure, it’s a possibility. But then again, it’s also true that NFTs are a sprawling sector that defies simple categorization.
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Arbitrum vs. Optimism by David
Arbitrum and Optimism are layer 2 (L2) optimistic rollup solutions for Ethereum. Launched in 2021, both sit at number one and two, respectively, in terms of total value locked (TVL) for all L2 chains that derive their security from Ethereum.
Given that Arbitrum and Optimism compose significant parts of the broader Ethereum ecosystem, today’s article will offer a deep-dive comparative analysis of both L2s. Specifically:
- What are they;
- How do they work;
- How do they compare in terms of market, performance, and product statistics; and,
- How do they compare in terms of tokenomics and governance?
Let’s get started.
What Are Arbitrum and Optimism
Arbitrum and Optimism are both L2 optimistic rollups for Ethereum.
L2s: L2s are blockchain networks built “on top” of underlying L1 blockchain networks – all for the purpose of improving the L1’s scalability and efficiency. Like a new highway stacked directly above a congested one, L2s execute transactions on separate network infrastructure, and then batch over compressed, synthesized transaction data onto the L1 for validation. Ethereum is the congested highway, and Arbitrum and Optimism are new highways stacked on top.
Optimistic Rollups: Hence the name – optimistic rollups assume that most economic actors, most of the time, are acting with honesty. Thus, optimistic rollups are L2 solutions which assume that the executed transactions on the L2 are valid and correct. This optimism creates efficiency – optimistic rollups do not expend energy resources to prove the validity of every transaction.
How Do Arbitrum and Optimism Work
Arbitrum and Optimism use L2 nodes (referred to as “sequencers”) to send over batched transaction data to Ethereum for validation. One prerequisite for sequencers is the requirement to post a bond on Ethereum. This bond economically disincentivizes sequencers to commit fraud or abuse.
After a sequencer sends transaction data to the L1, that data must first pass through a 7 day challenge “window” before validation. During the challenge window, anyone (referred to as “challengers”) can dispute a transaction they believe to be incorrect. To dispute a transaction, challengers must post a bond onto the L1, and submit a “fraud-proof”. The fraud-proof ultimately indicates the honest party, the liar, and the correct state of the blockchain.
Thus, whenever transaction data is sent from the L2 to the L1, there are three possible outcomes:
- The transaction data is not challenged during the challenge window. Thus, the transactions are deemed accurate and are validated on the L1.
- The transaction data is challenged, and the fraud proof contradicts the sequencer’s submission. Here, the L2 will re-execute the transactions and update the blockchain state accordingly. The sequencer is penalized and the challenger is rewarded.
- The transaction data is challenged, and the fraud proof corroborates the sequencer’s submission. Here, the transactions are deemed accurate and are validated on the L1. The sequencer is rewarded and the challenger is penalized.
The main difference between Arbitrum and Optimism is their respective utilized fraud-proofs. Each uses different types, which in turn has separate implications for each system.
Arbitrum = Multi-Round Fraud Proofs
Arbitrium’s multi-round dispute resolution process requires cooperation between both the sequencer and the challenger. After a challenge is submitted, the sequencer bisects their assertion, and then the challenger must identify which section has the problem. This process repeats until the dispute centers on one contentious step. This step is then re-executed on Ethereum to determine the correct blockchain state.
This reprocessing is extremely lean in terms of computational requirements, which has two second order effects:
- Lower fees for Arbitrum’s users; and,
- Arbitrum computations can exceed the limits of Ethereum (because the full Arbitrum transactions are never executed on Ethereum – worst case scenario is only micro-step must be re-executed).
Optimism = Single-Round Fraud Proofs
Optimism’s single-round fraud proof requires the challenger to re-process the submitted transactions on the L1 with a special fraud-proof contract. Essentially, this fraud proof contract re-processes the transactions on the L1. The reprocessing will either contradict or corroborate the sequencer, as the L1 outcome can be compared to what was sent over by the sequencer.
This single round-fraud proofing is more data intensive, which therefore means:
- Higher gas fees which create higher transaction fees for Optimism users; and,
- Optimism computations are capped by the limits of Ethereum (because all transactions might need to be reprocessed on Ethereum in the event of a dispute).
Arbitrum vs. Optimism: Market, Performance, and Product Statistics
The primary market purpose for using Arbitrum and Optimism is to transact on Ethereum while saving on gas fees. Thus, a good way to gauge and compare the performance of these platforms is to compare transaction costs.
Data from L2Fees indicates that Arbitrum has the edge over Optimism in terms of fees. This is logical and expected given the computational implications of single-round and multi-round fraud proofs.
With regards to a DeFi TVL 2022 market-share comparison for all chains, Arbitrum and Optimism have been steadily growing while Avalanche, Solana, and Polygon have been shrinking.
With regards to a DeFi TVL 2022 market-share comparison for all rollups, Arbitrum and Optimism dominate.
- DeFi TVL stands at $962 million.
- Demonstrated TPS capacity of 40,000.
- Protocols and dApps developed on the chain: 128
- TVL stands at $2.43 billion.
Notable dApps include GMX and Stargate, which are numbers 1 and 2, respectively, in terms of TVL on Arbitrum. GMX is a decentralized spot and derivatives exchange with an Arbitrum TVL of $393 million. Stargate is a cross-chain exchange and transport protocol with an Arbitrum TVL of $89 million.
- DeFi TVL stands at $908 million.
- Demonstrated TPS capacity of 2,000.
- Protocols and dApps developed on the chain: 82
- TVL stands at $1.47 billion.
Notable dApps include AAVE V3 and Synthetix, which are numbers 1 and 2, respectively, in terms of TVL on Optimism. AAVE V3 is a lending protocol with an Optimism TVL of $417 million. Synthetix is a derivatives trading protocol with an Optimism TVL of $127 million.
Arbitrum vs Optimism: Tokenomics and Governance
Arbitrum and Optimism diverge significantly in terms of tokenomics and governance.
Arbitrum has no native token as the protocol can use any Ethereum-based currency for transactions and fees. Arbitrum was developed by Off-Chain Labs, a New York-based blockchain company.
In contrast, Optimism’s native token, OP, is used for governance, incentives, and development. OP was airdropped in May of 2022 to members of the “Optimism Collective”, which comprises various companies, institutions, and private investors working to sustainably develop Optimism and Ethereum. The following shows OP’s current token allocation.
A group of Ethereum developers created Optimism and the protocol appears to be currently governed by the Optimism Foundation, a non-profit entity dedicated to scaling the Optimism Collective. The Optimism Foundation states that their ultimate goal is to make Optimism fully decentralized.
Arbitrum and Optimism have both experienced significant market success as L2 rollups for Ethereum. It’s difficult to assess which is “better”, but there are some qualitative differences between the two blockchains.
Arbitrum seems to have persistently lower fees than Optimism. This probably explains why Arbiturm has a larger TVL and ecosystem than Optimism. It appears that Arbitrum’s edge in terms of fees stems from its utilization of multi-round fraud proofs.
However, Optimism was developed by a group of dedicated Ethereum developers, and there is a clear commitment for the protocol to become fully decentralized. Anyone can have a stake in the protocol via the OP token. So far, there is no indication from Arbitrum that the project will take a similar path with regards to tokenization and full decentralization.
Trending Coins This Week by Rebecca
Here are my key takeaways from the trends this week, and it’s been upgrades galore across the market!
1 – Aptos is a Layer-1 blockchain established by ex-Meta employees that’s launched its mainnet with an airdrop of 20M tokens. This “Solana killer” has been heavily criticized for its controversial tokenomics but remains highly traded with $1B in volume in its first week.
2 – Evmos is an EVM on the Cosmos network that’s announced the DeFi protocol, StayKing House, as the winner of the recent Hackathon grand prize. Evmos has also partnered with Covalent to launch another Hackathon which begins in November.
3 – Axie Infinity is a play-to-earn (P2E) game that’s dropped 22% to a new 52-week low. This is due to an upcoming token unlock which will see 21M tokens released, putting massive selling pressure on the AXS token.
4 – ParaSwap is a DeFi aggregator that’s launched its 2.0 version of the utility token, PSP. PSP 2.0 is an overhaul of its tokenomics, reduces token emissions, and rewards users with protocol fees.
5 – Dogechain is a smart contracts system for DOGE holders built on Polygon Edge that’s seen its price triple in 7 days. Its community members are voting on a burn proposal, which will determine whether the token supply will be reduced by 80%.
6 – CANTO is a DeFi Layer 1 that’s announced the winners of its recent hackathon. The team has also successfully completed the Canto mainnet upgrade to version 4.0.
7 – Kujira is an L1 platform that migrated over to Cosmos after the Terra collapse. The Kujira team has released a bunch of announcements including its Name Service is in testnet, Cosmos IBC wallet integrates with the mainnet, and integration is coming to its USK stablecoin.
8 – Morpheus Network is a supply chain blockchain software that’s set to revamp its token smart contract. As part of this upgrade, Morpheus Network has launched its new token, MNW, to replace the old MRPH token.
9 – Polygon is an L2 Ethereum scaling solution that’s seen its QuickSwap DEX lose $220K in a flash loan exploit. The launch of Polygon-based Reddit NFTs has led to a surge of over 3M wallets created. Warren Buffet backed, Nubank, has chosen Polygon for its Web3 transition.
10 – Ethereum has launched its testnet for the Shanghai upgrade, called Shandong. Ethereum continues to be at the center of the centralization debate.
11 – Stargate Finance is a cross-chain DeFi bridge solution built on LayerZero. Stargate Finance has been integrated into the Rango multichain protocol. Read our in depth coin review about Stargate Finance Here!
12 – Hegic is a peer-to-peer options trading protocol that’s launched the Herge upgrade on Arbitrum. The updates include the HEGIC token used for collateralizing and options strategies, as well as new trading and staking interfaces.
13 – NEAR Protocol is an L1 network that’s announced it will be shutting down its Terra-inspired stablecoin, USN. USN recently became uncollateralized, meaning there isn’t enough backing for the token.
14 – GMX is a derivatives exchange on Arbitrum that’s completed its dashboard design contest in partnership with Dune Analytics. GMX has also sponsored the Arbitrum Hackathon that’s just come to an end.
15 – Gains Network is a DeFi ecosystem on Polygon that’s working on a DAI Vault upgrade which will allow users to maintain collateral through new incentives. Other protocols will also be able to build on top of the DAI Vault, providing users with more staking options.
Thank you so much for your support, and I truly hope that today’s issue will give you insights needed to help you master your wealth.
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