“That’s Our Two Satoshis” — OpenSea Is Creating Rough, Non-Navigable Waters

Jeff Dorman, CFA
Jul 11, 2022

What Happened This Week in the Digital Assets Markets?

Week-over-Week Price Changes (as of Sunday, 07/03/22)
crypto valuation week over week 7/11/22
Source: TradingView, CNBC, Bloomberg, Messari
Green Shoots
All eyes will be on this week’s CPI report, which meant another round of Fed jawboning last week before they go into their quiet period ahead of the end-of-month FOMC meeting. And right on cue, many Fed officials spoke out following the positive jobs report, indicating that we may need more job losses and negative wealth effects to curb inflation, helping to send risk assets lower in the process.
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So to be clear, 12 unelected Fed officials are openly trying to create job losses and induce a recession. Over the past 15 years, they have successfully trained investors to punish good news and reward bad news. With this backdrop, it’s not surprising that millions of citizens and investors are opting into a new, experimental, yet promising financial and monetary system. The existing financial system works well for the affluent, but the 99% who are most negatively impacted don’t always get air time. 
The future may still be bright for digital assets, but the present is very much in question. There are essentially three signs we're looking for before we think the coast will be clear:
  1. Macro: with a big CPI report coming this week, we may find out if we’re still in the beginning, middle, or close to the end of the U.S. central bank-induced recession. Leading indicators of inflation (commodities, car prices, home buyers, etc.) are all showing signs of weakness. Further, the Fed is increasingly pivoting from hawkish to less hawkish to even slightly dovish, leading to the Fed Funds futures market pricing in rate cuts as early as 2023. 
  2. Forced selling ends: Many digital asset market leaders have publicly stated that the end is near, and last week's price action backed this up as many assets showed strength, and finding offers was difficult. Still, it's impossible to know if we're in the clear or if more skeletons will jump out of the closet.
  3. Fundamental improvements: this is where it gets tricky. Most digital assets, regardless of sector, still thrive when we see user growth, transaction growth, and growth in trading volume. We’re not seeing it right now, but this can change on a dime. So we’re watching closely to see if some of these metrics improve.
In the meantime, however, we’re starting to see some green shoots that could lead to #2 and #3 above. Two weeks ago, we highlighted many green shoots developing in the market, including positive news and developments from DYDX, Binance, MakerDao, FTX, Axie Infinity, and Solana. All of these announcements were rewarded by the market, as the tokens of these companies/projects outperformed. This past week we’ve seen similar green shoots. To start, Aave saw its token jump +20% week-over-week after a new governance proposal was released to launch a native, decentralized, collateral-backed stablecoin called GHO. It was also a pretty busy week in the application platform space:
  • Flow became a real blockchain after announcing permissionless deployment of contracts without approval from Dapper Labs. 
  • The Celestia team proposed a fork of Optimism using Celestia (instead of Ethereum) for data availability (met with a mixed reaction on the forum). 
  • The highly anticipated privacy-focused zk-rollup Aztec launched on Ethereum mainnet with Aztec Connect. 
  • The Sepolia testnet successfully merged, with only the Goerli testnet left to merge before Ethereum mainnet. 
But perhaps no project was more active than Polygon, whose native token MATIC jumped +11% last week and is now slightly positive over the past 30 days (compared to ETH -24%). Additionally:
  • Robinhood's wallet integration with Polygon went live
  • Reddit announced an NFT marketplace on Polygon
  • HTC also launched the Desire 22 Pro phone, which comes with a digital asset wallet for tokens and NFTs on Ethereum and Polygon.
In general, the positive developments of the past few weeks are yet another signal that the worst may be behind us.
OpenSea is beginning to freeze over
Reddit announced they are entering the NFT race by launching a “Collectible Avatars” marketplace, following in the footsteps of social media giants Twitter and Facebook. These collectibles will be NFTs in the base definition of the term: non-fungible tokens built atop the Polygon blockchain. However, these collectibles are a bit different from the NFTs we have become accustomed to—the NFTs will be hosted on a custodial sandboxed environment, only stored within Reddit’s blockchain wallet, and the NFT marketplace will be U.S. Dollar-based. In essence, this is more of a Web 2.5 toe-dip than a Web 3 cannonball—a move that makes sense considering Reddit’s 861 million monthly active users (MAUs), per Statista. This project is an overall positive step forward for the space as we usher in a new class of NFT participants—albeit in a controlled environment.

Reddit’s approach using their own controlled environment rather than an existing public market place makes one stop to think about the recent issues plaguing the current leading NFT marketplace, OpenSea. Frustration continues to boil to the surface among many in the space over the recent developments regarding OpenSea’s blacklisting policies on assets reported as stolen. The dynamics are a bit complex, but in essence, if an NFT is stolen and then sold, that item gets blacklisted and cannot be resold again on OpenSea, even though this action does not help the person it was stolen from, does not punish the person who stole it, and unfairly punishes the innocent person who buys it.  There was precedent for this action, as there have been many incidents regarding stolen assets due to phishing (and other forms of hacks). However, there seems to have been a multipronged fallout from this initiative:
  • Unsuspecting buyers are now treated as collateral damage
  • Sellers can manipulate this feature by selling an asset, then immediately reporting it as stolen, and then buying it back at a discount
  • It has rendered the Collection Bid feature useless for those trying to act in best faith
Now, OpenSea is a company—they have no obligation to the user to be permissionless; instead, they have to act in the best interest of their shareholders. Thus far, their stance is, more or less, that this is out of their hands. Unfortunately, they won’t be able to get away with that position for much longer. They recently released their “Collection Bid” feature, which essentially asks bidders to be sitting ducks for any compromised assets (considering any stolen assets would be liquidated immediately at the best price). There has to be a line drawn to prove that the asset was stolen and find a way to rectify these situations without making the buyer foot the bill for the seller's mistakes. Having assets stolen is undoubtedly frustrating, and attempting to stop the movement of those assets by the nefarious actor is fair. But, once the asset has been sold, at what point do we stray from risk mitigation to unfair punishment?

Ultimately, this is not a world-breaking issue. Assets marked as frozen experience a liquidity discount but retain their true value within their respective ecosystems. There is a 5-10% discount to frozen assets, which we believe will eventually close as competitor marketplaces like Looks Rare (LOOK) emerge and distribute the liquidity dominance such that OpenSea's policies don't damage the asset's value in the eyes of the market. Better yet, OpenSea could revisit this policy and work to protect all of their users—buyers included.
Exploring Other Digital Asset Taxonomies
Last year, Arca introduced one of the first comprehensive digital asset taxonomies. Our goal was to help investors make sense of an industry that started with just a single cryptocurrency (Bitcoin) and has since evolved into:
  • Different issuer types (governments, DAOs, individuals, companies) 
  • Different sectors (DeFi, CeFi, Web 3, currencies, smart contract protocols, gaming, NFTs) 
  • Different token types (asset-backed tokens, currencies, pass-thru hybrid tokens) 
Others, like Messari, have evolved this effort with their asset screeners that allow you to filter by various metrics and characteristics. 
Recently, we came across another attempt to demystify the growing and evolving digital asset industry. While not comprehensive, it raised some interesting points, especially around the purpose of a token as “digital ownership” rather than as money. The list classifies 7 types of digital assets:
  • Digital art 
  • Data records
  • Game pieces 
  • Passports 
  • Social graphs
  • Messages
  • Governance
I think this is an extension of our original work than an entirely new classification. Perhaps it's a sub-token type, which helps to differentiate how a token is used rather than what it is. Regardless, we applaud the author’s take and are encouraged to see more investors thinking about how to categorize and explain digital assets.
 And That’s Our Two Satoshis! 
Thanks for reading everyone!   
Questions or comments, just let us know.  
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Hassan Bassiri, CFA - Portfolio Manager 
Sasha Fleyshman - Portfolio Manager
Alex Woodard - Research Analyst
Nick Hotz, CFA - Research Analyst
Bodhi Pinker- Research Analyst 
Wes Hansen - Director of Trading & Operations
Mike Geraci - Trader
Kyle Doane - Trader
David Nage - Principal, Venture Investing
Michael Dershewitz - Principal, Venture Investing
Michal Benedykcinski - Research Analyst
Andrew Masotti - Trading Operations
Topher Macpherson - Trading Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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