Will NFTs save Bitcoin? Does a16z control Uniswap? Will Binance dominate the international crypto tax market?

In this issue, we’re answering these questions while giving you a refresher on Bitcoin’s revenue structure and DeFi governance. You’re welcome for making sense of the nonsense.

“Calc”-you-later,

Trevor

P.S. Welcome to our ninety-five (95) new subscribers since last entry! We have no red carpet, but if we did, we’d roll it out all special-like, just for you.

Will NFTs Save Bitcoin?

Last week, the largest bitcoin block in history was mined – “largest,” meaning that it contained a sizeable amount of data. Had the block consisted of typical Bitcoin transactions, it probably wouldn’t have raised any eyebrows. But the entire block was used to host a giant 4MB NFT – a poorly drawn JPEG of a bald, bearded wizard.

This is the most controversy a wizard has sparked since Dumbledore died (sorry for the spoiler alert, but you’ve had over a decade to read/watch Harry Potter). The recent launch of the Ordinals protocol, which allows for the storage of non-fungible tokens (NFTs) on the Bitcoin blockchain, has divided the community. Some advocate for sticking to the original purpose of Bitcoin as a financial tool, while others believe the network can accommodate a variety of use cases, including NFTs in the form of digital art. Bitcoin educator Dan Held voiced his support in a recent tweet:

Ordinals’ creator, Casey Rodarmor, explains that the protocol utilizes “inscriptions” to attach arbitrary content, such as text or images, to sequentially numbered satoshis (the smallest units in Bitcoin). These “inscriptions” produce unique digital artifacts that can be held and transferred on the network like any other sats.

As controversial as they may be, Ordinal NFTs may accidentally fix Bitcoin’s security budget problem. Bitcoin miners secure the network by validating transactions in return for a block reward: the block subsidy–the newly minted bitcoin–plus the cumulative transaction fees paid in a block. The problem is that the bitcoin algorithm cuts the block subsidy in half every four years in an event called the halving. For example, the current block subsidy is 6.25 bitcoin but it will decrease to 3.125 bitcoin in 2024.

A higher volume of transactions generally leads to increased transaction fees. Full blocks with a high number of transactions are more desirable than empty blocks, and a thriving transaction fee market is beneficial for the stability and sustainability of the Bitcoin network. Currently, miners primarily rely on the block subsidy for their revenue, but as the subsidy decreases over time, transaction fees will become miners’ primary source of income. Therefore, a strong transaction fee market is crucial for the long-term viability of Bitcoin – even if it comes in the form of gigantic wizard JPEGs.

A16z Burns a Bridge

Before we dive into this topic, allow us to give you a crash course on decentralized finance (DeFi) governance. If you already know this stuff, you get a gold star (and feel free to skip a few paragraphs).

Uniswap is a decentralized crypto exchange; think Coinbase but managed by a decentralized community rather than a board of directors, executives, and shareholders. Specifically, Uniswap is governed by the Uniswap DAO (decentralized autonomous organization). To vote on how Uniswap is run and to share a portion of transaction fees, you need to own UNI tokens. The more tokens you own, the more voting power you have.

On February 2nd, OxPlasma Labs put forward a proposal to deploy Uniswap on V3 on BNB chain, Binance’s smart contract platform. Since Uniswap is native to Ethereum, the two blockchain networks need to be connected by a bridge, a platform that allows for transferring assets or tokens between them. The proposal suggested using the Wormhole bridge, a popular bridge backed by VC fund Jump Crypto.

A16z caused a stir by using its considerable UNI holdings to cast 15 million votes against the proposal. Eddie Lazzarin, partner at a16z, later clarified in a forum post that they would have voted 15 million tokens toward using LayerZero, a competing a16z-backed bridge platform.

And if Crypto Twitter wasn’t already ablaze with the Bitcoin NFT drama, a16z’s vote caused critics to question Uniswap’s governance model.

Ultimately, a16z’s influence appears to have been overstated; though 15 million UNI tokens is a hefty sum, it represents roughly 2% of UNI’s circulating supply and 1.5% of the total supply. The situation does resurface a common criticism of web3, however. How decentralized is decentralized finance? Was Jack Dorsey on to something when he claimed that VCs own web3?

Binance Launches Tax Tool

In other news, Binance has launched a new tax tool that allows users to calculate the tax implications of their cryptocurrency trading activities. The feature is currently only available in France and Canada, but Binance plans to expand to other countries later in the year.

The tool can reportedly handle up to 100,000 transactions and produces a report showing a tax summary of gains or losses made on Binance. However, the tool currently only integrates with Binance Wallet and does not cover all types of transactions, such as futures trading and NFTs. It is also unclear whether the tool will be available for US traders before the tax deadline of April 18.

In response to the growing interest from governments in taxing the crypto sector, several countries have introduced more stringent requirements for the taxation of crypto assets. For example, Italy introduced a 26% tax on crypto trading gains over 2,000 euros in late 2021, while India has recently strengthened its crypto tax laws, including the possibility of jail time up to 84 months for non-compliance with reporting requirements.

Could this be Binance’s attempt at proving that – contrary to recent press coverage – it’s willing to play by the rules?

Spotlight – Something Big for Lunch…

The Water Cooler

Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

Featured Funding Finds:
Blockchain Debt Providers, Crypto Asset Recovery

We have two funding stories today united by a common theme: tradfi controls are starting to come to crypto, perhaps bringing some much-needed stability to the space.

#1 – Circle Ventures Backs $4M Round for Blockchain-Based Debt Provider Obligate

What is this?

Blockchain Ventures and Circle Ventures contributed an additional $4M to the seed round for Obligate, a startup offering blockchain-based regulated debt securities. This seed round extension, combined with the funds from initial seed investors Earlybird and SIX Fintech Ventures in late 2021, tops off Obligate’s total seed funding at over $8.5M. The funds will go toward scaling the Swiss startup’s debt platform, slated for go-live next month on the Polygon blockchain.

Why we noticed:

Obligate (formerly known as FQX, [which, lol]) is all about issuing bond and debt securities on-chain. The aim here is for companies to receive funding from investors in a regulated decentralized finance (DeFi) environment.

What does that get you? Ideally, efficiency and trust. To the first, Obligate allows blockchain-based bonds to be directly issued to investor wallets. To the second, “Obligate combines the benefits of DeFi with the trust and regulation of TradFi,” says co-founder and CEO Benedikt Schuppli in the linked article.

As we’ve often said in this newsletter, solving for the whole “trust” thing continues to be one of the biggest hurdles for legitimacy in this space, especially in recent months. Institutional VC firms and investors are understandably skittish after FTX et al, so we may see growth in alternate avenues for fundraising.

#2 – Framework Ventures Leads $4.91M Seed Round for Asset Reality, the Solution for Crypto Asset Recovery

What is this?

Asset Reality, self-described as “the world’s first dedicated asset manager for seized crypto assets,” has closed out its seed round with Framework Ventures, a VC firm known for being an early supporter of DeFi companies.

Why we noticed this:

So far as we know, Asset Reality is the only company doing what they’re doing right now, or certainly one of the few if there are some other upstarts in the space that we’ve overlooked. The London-based company plans to become a one-stop shop for tracking and recovering stolen digital assets. After a year like 2022, the time is more than ripe for something like that.

And these people know their stuff. The company is only turning three this year, but the team of asset recovery professionals and crypto investigators have already been VIPs on early and notable crypto asset recovery cases, including the “infamous Silk Road case.”

The company has three prominent directives – 1) digital asset recovery (obviously) 2) increasing transparency of the asset recovery process, and 3) supporting victims of crypto crime, like the recent example of Bitcoin Core developer Luke Dash Jr. waking up to a New Year’s Day present of compromised hot AND cold wallets, spelling losses of over 200 BTC.

Our take: both of these are exciting examples of much-needed stabilizing infrastructure for crypto. We’d like to keep an eye on these companies and see what other similar players start to trickle in.

Tom’s Transaction (aka ChatT.O.M.)

In our last Entry we introduced this newest section of Triple Entry, which may be of particular interest to those of you looking for brain-teasers during the accounting busy season. We call this Tom’s Transaction (aka ChatTOM – Transaction Observation Model).

Tom (pictured) is a real accountant and good friend of ours, and believe us when we say – Tom has seen it all when it comes to crypto accounting.

Tom’s Transaction features a scenario based on a real-life transaction Tom encountered on Etherscan. Your mission, should you choose to accept it, is to test your crypto accounting knowledge by solving Tom’s Transaction. Tell us a) what this transaction is and b) how you would account for it.

The summary and answers for last entry’s transaction are below. Meanwhile, here’s the latest example.

What is this transaction and how would you account for it? You can write in with your response, or (even better) jump on the Triple Entry Lunch Break Livestream this afternoon and drop it in the comments! We’ll reveal the answer in our next issue!

Speaking of answers, did you solve last entry’s edition of Tom’s Transaction? .

Solution: Gas Burn

Want to know why? ChatTOM has a very helpful explanation of both the transaction type AND the fair value accounting procedure in the video below!

US GAAP

Balance Sheet:
Credit to the digital asset account (deduction of fee spent)
P&L:
Debit network fee account (typically an expense unless an internal transfer)
Adjust unrealized capital gains/losses
Adjust realized capital gains/losses

Disclaimer: The transactions being used are publicly available information on the blockchain that were randomly selected to show certain types of crypto activity. The owners of the wallets involved, as well as the true nature of the transactions, are unknown. These are interpretations of transactions as they might relate to US GAAP. None of the tokens, wallets, or protocols are endorsed, and links (when available) are provided for educational purposes only.

Extraordinary Items

The tax season memes have begun. Maybe from now through the deadline we’ll only do tax memes. Maybe not. But we’re considering it.