A Crucial Week

The Merge, Ethereum’s transition to proof-of-stake, is scheduled to happen within the next 12 hours. However, its success is far from guaranteed with so many moving parts.
And, as if we needed more drama, we also received a fresh CPI report on Tuesday. Considering the correlation between inflation and crypto prices, this is one of the most significant events of the month.
The Merge At Last
The final countdown for The Merge is here. Not just figuratively, but if you search “the merge” in Google, literally.
We’ve covered The Merge extensively (here, here, here, and here), so we won’t discuss what it is in this article. Instead, let’s talk about what you should be looking out for leading into The Merge.

Hopefully, you are just as excited for The Merge as we are. It’s not every week that an event of this magnitude takes place. Let’s hope it goes smoothly.
New CPI Print Runs Hot
It is well-established at this point that crypto prices follow the Fed. When the Fed hikes interest rates, crypto prices decrease. When the Fed lowers interest rates, crypto prices increase.
It is also well-established that the Fed makes interest rate decisions based on the Consumer Price Index (CPI), a measure of U.S. inflation. The hotter the CPI is, the more hawkish the Fed becomes.
For us crypto investors, this means that we want the CPI to be as low as possible. Unfortunately, that was not the case this month.
Even with falling gas prices, the CPI came in at 8.3% for August. Biden is attempting to spin this positively, but this is disappointing to see when the expectation was 8.0%.
Besides the crippling effects of persistent inflation on the average American, the hot inflation report also led to a stark sell-off in stocks and crypto. The Dow dropped 4%, the Nasdaq 5%, bitcoin 10%, and Ethereum 6%.
It doesn’t look like relief will come anytime soon either, with investors now pricing in at least a 75bps interest rate hike.
A lousy day any way you slice it.
Between a Rock and a Hard Place
The contrast between positive fundamentals from The Merge and the bad macro environment from hot inflation has resulted in a very tricky situation for investors.
Our opinion is that it is best to stay safe right now. Fighting the Fed is not often a good bet, and attempting to trade The Merge is risky, considering it is not yet successful.
The tides will eventually turn, but it is best not to try to force anything right now.

Starbucks Teams Up With Polygon

The NFT craze has officially hit the world’s largest coffeehouse chain.
Starbucks, a multinational company with $29 billion in revenue in 2021, announced the launch of Starbucks Odyssey on Monday. Under the program, participants can access “new, immersive coffee experiences” by earning and buying special Polygon NFTs.
Much to the delight of NFT investors and Polygon (MATIC) holders.
The Starbucks Odyssey
Starbucks already has a strong loyalty program in place. What Starbucks Odyssey does is enhance it through web3 technology. Specifically, Polygon NFTs.
Reward program members have the opportunity to participate in Starbuck Odyssey “journeys.” Journeys can be a range of things, such as playing a game or taking coffee knowledge quizzes, but they all have the same prize: a “journey stamp” NFT.
Journey stamps come in varying rarities. The rarer the stamp, the better the benefits. Benefits include everything from virtual martini-making classes to trips to the Starbucks coffee farm in Costa Rica.
All journey stamps are also tradeable on Starbucks’ built-in NFT marketplace. This means that if you aren’t keen on taking coffee quizzes, you can simply buy the stamp. Likewise, if you don’t care about virtual cocktail classes, you can sell the stamp and potentially make a nice profit.
We have to give credit where credit is due. This is a pretty cool idea.
With partnerships like these, it is hard not to be bullish on the future of Polygon NFTs.
And with Starbucks bringing NFTs and crypto to potentially millions of new users, it's one more positive sign for crypto as a whole as well.

A Return to Normal?

MakerDAO Considers Coinbase Partnership

MakerDAO, the creator of the dollar-pegged stablecoin DAI, is at a crossroads.
The Tornado Cash sanctions, which we covered here and here, have raised concerns over DAI’s exposure to USDC. Understandable, considering the new precedent of the government shutting down code at will.
How concerned are people? Rune Christensen, Maker’s founder, is advocating for Dai to “free-float” (have no peg) within the next three years. This would be unimaginable as recently as six weeks ago.
However, not everybody thinks that ditching USDC as soon as possible is the best way forward. The latest battleground in the fight for the future of DAI is an intriguing offer from Coinbase. What Maker ends up doing carries immense consequences not just for DAI, but the entirety of DeFi.
Dai and USDC
MakerDAO allows people to deposit collateral and mint the dollar-pegged stablecoin DAI. The most popular form of collateral used is USDC, the centralized stablecoin from Circle, and it’s not even close. More than half of all DAI was created from USDC.
This reliance means it would be game-over for Dai should USDC receive the Tornado Cash treatment. That doomsday scenario is scary enough for Rune and his supporters to pitch for the removal of USDC from DAI.
As expected, not everybody agrees.
Many envision Maker as a bridge between TradFi and DeFi. They want to increase exposure to USDC and related real-world assets (RWAs), not reduce it as Rune wants. An unpegged DAI would hinder this quest.
These are the two sides in Maker’s civil war: (A) Those who prioritize DAI’s security and (B) those who prioritize growth and revenue.
Coinbase’s Proposal
Last Wednesday, Coinbase proposed that Maker loan $1.6 billion of its USDC reserves into Coinbase Prime in exchange for an annual 1.5% return, which would net Maker a cool $24 million a year in revenue.
Predictably, the two warring sides had differing opinions of the proposal.
The anti-USDC party opposes the proposal. They argue that not only does this proposal not help wean Maker off USDC, but it exposes Maker to another real-world counterparty risk. Now, the government could destroy Maker by leaning on Circle or Coinbase. To them, that existential risk is not worth the financial gain.
The pro-USDC party liked the proposal. To them, an unpegged DAI is impractical in the short-medium term. Rune even admits that it will take years for his plan to bear fruit. Their argument is if Maker is going to hold USDC anyway, they might as well make some money in the meantime.
Going Forward
We’re not sure if Maker will accept Coinbase’s offer. What we are sure of is that it’s an important decision.
DAI is a foundational stablecoin. A failure in DAI would be disastrous for other DeFi protocols. This is an outcome that DeFi, still recovering from Terra, can ill-afford. We’re living in uncertain times, but as Rekt puts it, “crypto’s original crypherpunk ethos may prove to be a lifeline as we spiral into an ever more volatile future.”

Starting a New Business is Hard… Trends Makes it Easy

New Report Casts Fears Over Bitcoin Mining

The energy usage of proof-of-work mining, which crypto king bitcoin uses, has been highly criticized since the Biden Administration took over.
This was made even more apparent thanks to a new report on crypto’s energy usage by The White House Office of Science and Technology.
A Concerning Report
The report was created per President Biden’s March executive order to explore crypto and the possibility of a central bank digital currency (CBDC). The report’s goal is simple: examine crypto’s impact on the environment and America’s climate change goals.
Unfortunately, their findings were not great for us crypto enthusiasts.
The report singled out bitcoin mining as detrimental to America’s environmental goals. This isn’t surprising, considering the prevailing narrative around bitcoin mining, but it still is not what you want to see.
The report’s stance on crypto’s impact on electrical grids, in which it is argued that crypto mining puts undue stress on the grids and could raise consumer electrical costs, was slightly more surprising. Miners argue that by providing a base level of electricity demand, they actually make electrical grids more reliable. The report was unconvinced of this argument.
Some Good News
Thankfully, the report wasn’t all bad.
The report’s final section discussed crypto’s potential to assist climate efforts through vented methane equipment. Basically, miners that power themselves through methane-capturing machines are helpful to the environment.
It’s not much, but it does provide some guidance going forward on what the U.S. government wants to see from crypto miners.

Coinbase Takes Stand For Crypto’s Privacy

Chalk one up for the good guys.
On Thursday, Coinbase announced they are funding a lawsuit brought by six individuals challenging the U.S. Treasury's sanction of the Tornado Cash smart contracts. The announcement is a strong statement that regardless of their faults, Coinbase has crypto's best interest at heart.
Tornado Cash TLDR
If you're a bit behind the Tornado Cash situation, we previously covered it here and here. For those strapped on time, here's a quick TLDR:

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