Bitcoin Block Reward Halved for the Fourth Time

Bitcoin's block reward halved in the early hours of April 20th, Finnish time, after nearly four years of anticipation. This marked the fourth halving in Bitcoin's history, reducing the block reward from 6.25 bitcoins to 3.125 bitcoins in block number 840,000. At the time of the halving, 19,687,500 bitcoins had been mined, accounting for 93.75 percent of the maximum supply of 21 million bitcoins. Between the April 2024 halving and the next halving expected in about four years, a total of 656,600 bitcoins will be mined, representing 3.125 percent of the total supply of bitcoins.

April saw a shift from March's excitement to a decline in digital asset prices. Bitcoin experienced its first negative return in eight months (-14%). This was due to an excess of new alt-token supply, decreased on-chain activity, and regulatory pressures from U.S. authorities against self-custody. Smart contract platforms, excluding Bitcoin, dropped by 28% in the month, with trading volumes and on-chain revenues also falling sharply. Altcoins suffered the most, with an average return outside of ETH/BTC of -37%. Several names like Starknet and Aptos saw nearly a 50% decrease. The main narrative of the month revolves around the decrease in speculative fervor amidst concerning macroeconomic indicators, stagnant user engagement, and a worsening regulatory landscape in the U.S.

April's events:

• The U.S. Securities and Exchange Commission (SEC) sent a Wells Notice to the Uniswap foundation, indicating plans to sue the DeFi giant. Uniswap's founder, Hayden Adams, vowed to challenge this.
• The IRS disregarded industry feedback and unveiled a draft crypto reporting form, which included reporting rules for un-hosted wallets, posing challenges in many cases.
• The SEC revised its complaint against Justin Sun, highlighting his extensive travel in the U.S. from 2017 to 2019 while promoting certain tokens, hinting at increased efforts to hold him accountable.
• Consensys took a different approach by suing the SEC in the favorable 5th circuit before facing a lawsuit. This move, similar to the Coinbase case, aims to potentially create differing rulings from cases in other circuits.
• Media reports revealed Gary Gensler's shift in perspective, now considering Ethereum a security, contrary to his previous stance while at MIT. He evaded direct questions from lawmakers on this matter.
• Samourai Wallet developers, along with those behind a Bitcoin mixing protocol, were arrested and charged with conspiracy to commit money laundering and operating an unlicensed money-transmitting business.
• The FBI cautioned against using self-custody wallets without KYC information, as they might be involved in illegal money-transmitting activities.
• The DOJ updated its stance in the Tornado Cash case, suggesting that even decentralized, non-custodial services must implement KYC/AML procedures and register with FinCEN, which may not be feasible for many open-source projects.
• BlackRock revealed Citi, Citadel, Goldman Sachs and UBS are authorized participants (AP) in its spot bitcoin ETF in a regulatory form filed on Friday. The asset manager’s bitcoin-based fund now has a total of nine APs.

The actions outlined above indicate a rush by the Biden administration to effectively outlaw DeFi and self-custody practices in the United States before the November elections. There's a noticeable increase in correlation between Bitcoin's price movements and the odds of Trump's victory over the past six months. This correlation may strengthen further in the next six months until the Supreme Court or lawmakers can decisively tackle these matters.

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In April, the crypto market struggled with the burden of airdrops, as most of them quickly sold off after their launch. Notable disappointments include KMNO (-33%), REZ (-33%), W (-56%), PRCL (-33.4%), and SAGA (-54%). We observed $9 billion worth of new circulating token supply and anticipate over $70 billion to be unlocked/vested in the next 2-5 years, posing a significant challenge to many token prices. Additionally, the highly anticipated Eigenlayer project fell short of expectations, with its EIGEN token announcement leading to pre-launch markets valuing it at approximately $10 billion FDV, much lower than optimistic forecasts. While the Bitcoin Renaissance shows promise, it's still in its early stages.

The Bitcoin Renaissance and Runes

Despite BTC's lackluster performance (-14%), network activity hit unprecedented levels with transactions and on-chain revenue reaching all-time highs of around 927k and $81.6M on April 20th, right after the halving. This surge stemmed from the bitcoin halving event but traces its roots back to the development of new speculative assets on Bitcoin using "hacks" of its core software. Among these assets, Bitcoin Runes emerged as a standard for creating fungible tokens, aiming to improve upon the BRC-20 standard. Runes offer greater efficiency by utilizing a UTXO model, which reduces the network overhead associated with BRC-20 tokens. They derive their name from being created and transferred through a Bitcoin software component within Bitcoin UTXOs called "Runestones." These Runestones enable the minting of tokens on Bitcoin with customizable features such as name, minting ability, and total token supply.

BRC-20s and Runes reflect efforts by Bitcoin core developers to address long-term network security challenges. The Bitcoin network operates on a "security budget" derived from miners' economic incentives to secure the network, comprising transaction fees and inflationary rewards for producing Bitcoin blocks. Unless BTC's price continues on a steep upward trajectory, miners' security budget will shrink alongside BTC emissions. To counter this decline, increasing transaction revenues to the BTC network is crucial. While some BTC maximalists advocate for Bitcoin's use solely as a store of value and medium of exchange for BTC, a significant minority of core developers advocate for changes to stimulate transaction growth. This shift in the Bitcoin community signals uncertainty regarding a return to past community conflicts.

Bitcoin Layer-2 Blockchains

Apart from aiming to increase the security budget through transaction revenue, another fundamental purpose of BTC Layer-2 Blockchains (L2s) is to offer BTC holders the opportunity to earn yield using their idle BTC. Following the collapse of the BTC lending market and the substantial BTC losses in 2022, entities holding large amounts of BTC have sought ways to utilize their dormant capital. While BTC Eden monitors only 18 projects, we track over 50+ projects. The definition of Bitcoin L2s is more nuanced and flexible compared to L2s for Ethereum. While there is significant nuance even within Ethereum L2s, they usually rely on Ethereum to settle state differences (changes in token balances and smart contract updates). Ethereum L2s often submit compressed transaction data to Ethereum to verify state differences.

In contrast, Bitcoin L2s typically begin with a bridge connecting each chain to Bitcoin. This bridge serves as a value transport layer, locking BTC and creating a representation of that BTC on the L2. Some projects are constructing their own bridges from scratch, while others rely on existing bridges like tBTC and Interlay. There are various competing designs for Bitcoin L2s. Currently, Bitcoin is not designed as a settlement layer or a data availability layer, both of which are necessary for a true L2 roll-up to Bitcoin. Consequently, there are numerous approaches, including "merged mining," "sidechains," evolving towards a "roll-up," and more exotic security methods. Some Bitcoin L2s adopt multiple approaches simultaneously to secure their blockchains.

Merged mining involves miner pools participating in mining a blockchain alongside Bitcoin, submitting proof of work for multiple blockchains. An example is Rootstock. Another Bitcoin L2 type is the "side-chain," often secured by a separate group of non-Bitcoin miners, Proof of Stake validators, or a federation of Bitcoin/native token holders. The ideal Bitcoin L2 is a roll-up blockchain settling state transitions and/or proofs on a host blockchain alongside data to prove the validity of state transitions.

Currently, bridges rely on trusting other parties through a multi-signature approach, where a group holds key shards allowing for the unlock of "bridged" BTC when combined with a majority of signers. Although it's early, most Bitcoin L2s have additional or weaker trust assumptions compared to Ethereum L2s.

This landscape will change with the launch of BitVM, an open-source Bitcoin virtual machine, roughly 12-18 months from implementation on Bitcoin. BitVM promises Turing-complete logic to enable Bitcoin smart contracts, although the contracts won't reside on Bitcoin but on other blockchains. BitVM will allow Bitcoin to serve as a settlement and verification layer for Bitcoin roll-ups and trust-minimized bridging. BitVM v2 will further enable data storage on Bitcoin, making BTC L2s complete roll-ups.

Ethereum Re-Staking Game and Eigenlayer

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In our previous monthly reviews, we discussed the emergence of a re-staking game designed to support Eigenlayer, hailed as the next big thing for Ethereum. Eigenlayer's concept revolved around the idea that numerous service businesses could operate off the Ethereum blockchain while still leveraging the economic value of ETH to safeguard their services. However, many individuals outside of the crypto sphere find it puzzling why securing a business using ETH is necessary. This confusion arises because traditional off-chain businesses typically rely on legal recourse for breaches of business agreements and reputational consequences for poor business practices.

In the permissionless blockchain realm, depending on the rule of law or reputation is challenging due to anonymous parties and weak legal systems in some countries. Blockchain employs cryptography, consensus mechanisms, and computer code to ensure transactions adhere to immutable rules. Nevertheless, many businesses require additional trust beyond what Ethereum provides, or they involve processes that would be too costly to execute on the blockchain.

Consequently, several intriguing businesses that could appeal to blockchain users remain non-existent. Eigenlayer was developed to enable ETH holders to lend out their ETH as economic bonds in exchange for yield. This mechanism allows complex yet valuable businesses to attract users through economic bonds, which also serve as a form of compensation if a business agreement is not properly executed.

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Tether and Metaplanet's Bitcoin Purchases

In April, it came to light that Tether International Limited (Tether), responsible for managing the reserves of the stablecoin USDT, acquired nearly 8,900 bitcoins during the first quarter. This information was disclosed by Arkham Intelligence, a company specializing in blockchain analytics. Tether had previously invested in bitcoin, and with this latest acquisition, the company's bitcoin holdings surged to over 75,300 bitcoins, valued at over 4.2 billion euros by the end of April. About a year ago, Tether had announced intentions to allocate 15 percent of its profits to bitcoin investments.

Japanese investment firm Metaplanet, specializing in Web3 technologies, also made headlines in April by announcing its acquisition of bitcoin for its balance sheet. Metaplanet invested just over 6 million euros in bitcoin. This decision positively impacted the company's stock price, which saw a rise of approximately 50 percent in April following the announcement. According to Metaplanet, this move represents a significant milestone, positioning the company as a leader in cryptocurrency adoption in Japan.

Chainlink Releases Transporter Application

In early April, Oracle solution Chainlink launched the Transporter application, facilitating the transfer of cryptocurrencies across various platforms. Transporter utilizes Chainlink's Cross-Chain Interoperability Protocol (CCIP) technology, introduced in 2023, which enables smart contract operations, data transfer, and cryptocurrency transfers between different platforms. Initially, Transporter is accessible on eight platforms, including Ethereum, Polygon, and BNB Chain. According to Chainlink, Transporter aims to offer a cost-effective and secure solution for conducting high-value cryptocurrency transfers between different blockchains.

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