On this week’s episode of Galaxy Brains, I talked with Preston Byrne from Byrne & Storm, a lawyer who specializes in dissident technologies, particularly social media, messaging, and blockchain. This was a particularly timely conversation given the arrest of Telegram founder & CEO Pavel Durov, which we also write about below. Christine Kim talked about PeerDAS, the main code change in Ethereum’s next upgrade, on this week’s episode of Infinite Jungle.
In the newsletter, we write about Telgram founder Pavel Durov’s arrest in France, MakerDAO’s rebrand to Sky, and the SEC sending a Wells notice to NFT marketplace OpenSea.
Have a great weekend,
Alex
Market Update
Data via Messari as of 5:00pm 8/29/24
The total implied network value (market cap) of the digital assets market stands at $2.18tn, down 2.2% from last week (when it stood at $2.23n). Bitcoin’s network value is 6.77% of gold’s market cap. Over the last 7 days, BTC is down 1.9%, ETH is down 3.4%, and SOL is down 2.2%. Bitcoin dominance is 57.4%, up 46 basis points from last week.
Stories of the week
001
🚔 Telegram Founder Arrested in France
Telegram CEO Pavel Durov charged with crimes related to messaging app’s operation. Pavel Durov was arrested on Saturday by French authorities upon landing in Paris. On Monday, French prosecutors unveiled a list of charges that can broadly be sorted into 3 categories:
Complicity with a range of crimes presumably committed by users of the Telegram messaging application, including drug trafficking, child abuse imagery, computer hacking, money laundering, and organized gang activity.
Refusal to provide information to authorities in response to legal requests
The importation and use of “cryptology services” without proper registration and prior declaration
Durov has both French and UAE citizenship and is currently out of jail on bail (secured by EUR 5m) and prohibited from leaving France. This is the first time the CEO of a large messaging or social media application has been arrested and charged with crimes related to the actions of the applications’ users.
Separately, and apparently unrelated, The Open Network (TON), the blockchain project originally developed by Telegram, went down on Tuesday for about 6 hours, and then again on Wednesday night, apparently due to extensive transaction activity resulting from the launch of a dog-themed memecoin overloading validators on the network. At the time of writing, TON is operating normally.
Our Take
This is the first major arrest of a prominent global messaging/social media company CEO for failure to adequately police its platform, but it is unlikely to be the last. Governments have long been hostile to cryptography and encryption – from the U.S. government’s vilification of PGP in the early 90s to attacks on Apple’s iPhone encryption in the 2000s and so on. And they are becoming more hostile to social media. It is true that Telegram is widely used around the world by a variety of disparate groups, including political dissidents and warring factions (both state and non-state), and likely criminals or other unsavory characters. If Durov refused to cooperate with government investigations into illegal activity on Telegram, or was delinquent in doing so, as the second charge implies, he definitely makes himself a target of law enforcement.
However, beyond criminal activity, platforms are under increasing pressure to censor merely controversial speech. X CEO Elon Musk reported receiving a letter from a Thierry Breton, EU commissioner for internal markets, prior to his interview of Former Pres. Donald Trump on the X platform which warned Musk that X could be in violation of EU law if the interview resulted in the spread of hate speech. Both sides of the political spectrum in the U.S. accused social media companies of manipulating the 2020 election, and the Supreme Court recently ruled against dozens of Republican-led states in a suit challenging the Federal Government’s interactions with major social media platforms involving election security and the COVID-19 response. Meta’s Mark Zuckerberg recently wrote in a letter to the House Judiciary Committee that it was “pressured” by the Biden White house to censor content related to the pandemic. It is not much of a leap to wonder if enforcements against social media companies regarding crime mitigation eventually escalate into “misinformation” mitigation.
It’s important to note that both the First Amendment and Section 230 of the Communications Decency Act in the U.S. limit the liability of internet publishing platforms for the actions of their users. In contrast, the Digital Services Act in the E.U., as well as several national laws across the continent, specifically hold “very large online platforms” liable for the illegal activities of their users. Indeed, social media and crypto lawyer Preston Byrne told me on Galaxy Brains this week that he recommends “social media CEOs do not travel to Europe.” That such divergence exists even among allied “western” nations highlights the magnitude of the risk that the internet becomes even more siloed. Are we on the brink of a “great European firewall?”
The extent to which public blockchains become embroiled in this polarization and firewalling of the internet remains to be seen. Blockchain networks haven’t yet faced much scrutiny as content publishers like social media networks have, with financial regulations comprising the bulk of state actions on crypto. There have been some efforts to apply financial surveillance laws to public blockchain infrastructure in the US – like miners, validators, and nodes, though these have mostly stalled. A Nov. 28, 2023, letter from U.S. Treasury Deputy Secretary Wally Adeyemo to Sen. Sherrod Brown (D-OH), chair of the Senate Banking committee, requested expansion of Treasury power to apply Bank Secrecy Act regulations to blockchain infrastructure and allow the sanctioning of autonomous code (smart contracts). Several of that proposal’s most expansive requests were included by Sen. Elizabeth Warren (D-MA) in her Digital Asset Anti-Money Laundering Act (DAAMLA). Guidelines from the Financial Action Task Force (FATF) also suggested monitoring and travel-rule compliance by “unhosted wallets,” something that FinCEN in the U.S. has also explored (though recently dropped).
The extent to which TON can avoid being tied up with Durov and Telegram, or to which other blockchains can avoid becoming targeted broadly for their narrow use by criminals, likely depends on their level of decentralization. While a nation state might still prohibit the use of a decentralized network, the extent to which the state can actually halt its use or hold any one individual accountable in the manner of Durov will be mitigated by that network’s decentralization. -Alex Thorn
002
☁️ Goodbye Maker & DAI, Hello Sky & USDS
MakerDAO rebrands as Sky, introduces new USDS stablecoin to replace DAI. Maker rebranded to Sky Protocol on August 27. The rebrand aims to offer an improved UI/UX to access the protocol and its products, which includes the DAI stablecoin (3rd largest stablecoin behind USDT and USDC with over $5bn in circulation) and the DAI Savings Rate (DSR) which currently offers a 6% yield. According to Maker founder Rune Christensen, the rebrand is just one of the first steps of the "Endgame" plan to overhaul the Maker protocol to ultimately improve the sustainability of the protocol in a decentralized manner.
In addition to the new Sky.money website to interact with the protocol, the rebrand also introduces a new stablecoin, USDS or 'Sky Dollar', and governance token, SKY, which will run in parallel with the existing DAI and MKR tokens. Starting September 18, users will have the option to voluntarily convert existing DAI for SKY at a 1:1 ratio and MKR for SKY at a 1:24000 ratio. Maker's existing SubDAOs, the independent units that contribute to the protocol, will also be rebranded to 'Stars'.
Most of the protocol's existing characteristics will be retained, including the DAI's stability mechanism for backing the new USDS token. However, some DeFi community members have criticized the rebrand and the direction of the protocol, noting that the new sky.money website includes a VPN blocker for US residents while others pointed to a new 'freeze' capability within the USDS token contract that did not exist with DAI. Rune has acknowledged the existence of the freeze function, though he also noted that upgrading to USDS is optional and DAI's token contract is still immutable and cannot be altered.
Our Take
Maker, known for its pioneering work in designing a decentralized stablecoin and experimentation with DAO governance, will now leave its old brand name behind as the protocol moves in a new direction. Many have criticized Maker over the years for its decisions that seemed to prioritize profitability for the protocol over building a resilient, decentralized stablecoin as stated in its original mission. However, thanks to the DAO's direction to pursue RWA initiatives, DAI is no longer mocked for being 'wrapped USDC' and Maker is now envied as one of the most profitable protocols across all of DeFi. The protocol now looks to re-position its core offering from a leverage product to a high-yielding savings tool, which looks to be a more sustainable growth driver moving forward and a better reflection of Maker's evolution ('USDS' feels more fitting in this sense compared to 'DAI' or 'sDAI').
Adding 'freeze' capabilities with the new USDS contract doesn't set a great example for the rest of DeFi, but it's understandable given the protocol's heavy reliance on regulated bank partners to access T-bills & other RWA for yield. Now in its current state, Maker is in too deep with these heavily-regulated entities for Dai to reverse course back to its original mission. Dai can continue to exist for those that choose not to convert to USDS. But frankly, Dai was never that great at being a decentralized stablecoin and there are alternative protocols that are better suited to offer a censorship-resistant decentralized solution than Maker.
Maker's competitive edge nowadays is the business partnerships it has cultivated as part of the RWA initiatives (e.g., Huntington Valley Bank, SocGen, Coinbase Custody). In our view, Maker can deliver the greatest value to our industry by: (i) continuing to forge these partnerships to accelerate tokenization of financial assets, and (ii) experimenting with new DAO governance structures like with its subDAO units or other mechanisms as part of Rune's ambitious Endgame plan. The 'Maker' name has built up a lot of goodwill over the last 7 years since the protocol’s inception, but it still carries some baggage from its original stated mission. With the protocol's new strategic focus in mind, a rebrand makes plenty of sense (though they probably could have gone with something jazzier or more intuitive than 'Sky' and 'Stars' theme). - Charles Yu
003
🔎 SEC Poised to Sue OpenSea
The Securities Exchange Commission (SEC) sent OpenSea, the second largest NFT marketplace by trading volume, with a Wells notice. A Wells notice indicates that the SEC believes that OpenSea has broken securities laws and typically precedes the filing of a lawsuit by the regulator against the recipient.
While the SEC has sent Wells notices to individual NFT projects, this is the first known time that the SEC has sent such a notice to an NFT marketplace. OpenSea's CEO, Devin Finzer, wrote in a blog post that "by targeting NFTs, the SEC is diving into new, uncharted waters, with potentially harmful consequences for consumers, creators, and entrepreneurs alike," Although the details of the SEC's investigation remain to be seen, Devin Finzer claims that OpenSea is operating within the SEC's securities regulations. In response to the SEC's Wells notice, OpenSea pledged $5m to cover legal fees for NFT artists that receive a Wells notice from this point forward.
Our Take
The SEC's enforcement-only approach with NFTs started in September 2023 when the Commission sued the Stoner Cats and Impact Theory NFT projects. The lawsuits claimed that the purchasers of these two NFT projects had reasonable expectations of obtaining future profits based on the founders managerial and entrepreneurial efforts. According to the SEC, these efforts include project roadmaps, marketing campaigns, and real-world applications. For background, the “expectations of profit based on the efforts of others” are the last two prongs of the Howey test, an legal test from 1946 used by the SEC to evaluate securities law violations.
Notably, after Impact Theory settled for over $6m with the SEC, Commissioners Hester Peirce and Mark T. Uyeda voiced a strong dissent that could be applied to OpenSea's current situation with the SEC. The dissent highlighted the SEC's inconsistency; the agency typically refrains from regulating sellers of tangible goods (like watches or paintings) who may broadly promise to increase brand value for better resale prices. In this light, why should NFTs be treated differently? Additionally, if the SEC's approach is going after NFT projects, why should a global secondary marketplace for NFTs also be subject to the same securities law violations? Congressman Ritchie Torres (D-NY) drove this point home in a 2023 House Financial Services hearing when he asked SEC Chair Gary Gensler if the act of tokenizing a Pokemon card turned it into a security.
It is worth noting that OpenSea reported the Wells notice on the same day (Aug. 28) that Former President Trump announced a new set of digital trading cards (NFTs on Polygon), which themselves are listed on OpenSea. If nothing else, this juxtaposition highlights the clear divergence between the political parties on NFTs: Trump is selling NFTs while Biden’s SEC Chair is suing artists, issuers, and exchanges for offering them. - Gabe Parker
Alex Thorn (Galaxy) talks with crypto and social media lawyer Preston Byrne (Byrne & Storm) about the Telegram CEO charges, free speech in America, and much more.
Ethereum’s Dencun upgrade was successfully activated on March 13, 2024. In the upgrade was EIP-4844, offering a solution to reduce operating costs for Ethereum rollups.
Bitcoin’s blockspace is extremely scarce with the size of each block capped at 4MB. This scarcity presents a significant challenge for Rollups seeking to leverage Bitcoin as a data availability layer.
On August 9, 2024 a fork of Solana’s Pumpfun app was launched on Tron as Sunpump. Both apps let users launch and distribute tokens with less friction. All users have to do is input a name, ticker, image, and description of their token to launch it on their respective networks, significantly reducing the technical burden of creating tokens. Each app also has a social page, allowing users to search for and trade the tokens launched on them.
Pumpfun and Solana have been the center of memecoin activity since the app launched earlier this year, with nearly two million tokens being created through the app all time. Sunpump and Tron mark the introduction of their first major competitor.
There has been a sharp decline in tokens created on Pumpfun since Sunpump launched. In just three weeks more than 62,000 tokens have been created on Sunpump; and the daily amount of tokens created through it is nearly at parity with Pumpfun. Almost 40% of the memecoins created between the two apps have been launched through Sunpump over the last seven days.
The launch of Sunpump, and subsequent decline in tokens created on Pumpfun, has coincided with a steady decline in network fees paid on Solana. Solana averaged 10,883 SOL in fees paid daily in the 30-day period ending August 9, 2024. This compares to just 6,133 SOL in daily fees paid since August 9, 2024, representing a 44% decline in fees generated by the network. Additionally, dex volumes on Solana have dropped 46% using the same averages.
In Other News
Starknet introduces parallel execution for transactions in latest upgrade
Stablecoin market cap hits new all-time high, beating early 2022 record
Sony is launching the first public testnet for its Optimism-based Soneium blockchain
Aave Labs proposes integrating GHO stability module with BlackRock’s BUIDL
Solana daily transaction fees drop to multi-month low as memecoin hype cools
.png?upscale=true&width=1120&upscale=true&name=NL1%20(24).png)
.png?upscale=true&width=1120&upscale=true&name=NL2%20(20).png)
