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DeFi's First Step Toward Regulation (Without Killing it)
DeFi is a wild west.
A place where the US President and a North Korean hacker can trade on the same footing. No names, no KYC, no limits. That's exactly what cypherpunks love about it.
But let's be real — most people, and definitely most institutions can't roll like that.
Imagine trying to explain to your compliance officer why you transacted with a wallet sanctioned by OFAC. Not a great look.
Enter Coinbase Verified Pools. It's an attempt to build a safe zone inside DeFi's lawless frontier.
What is it? These are liquidity pools only available if you have "Coinbase Verification". Whether you just want to swap or to provide liquidity, you need to be verified by Coinbase.
This verification links the user's Coinbase account and wallet address. It's an easy way to KYC your onchain wallet addresses. Coinbase can prove for other things to the apps as well.
Here's the important point. The Verified pool isn't a centralized product where some authority can revoke transactions. Every transaction is still happening onchain. It's just that only KYCd wallets can swap assets.
This can open up a new sector in DeFi. Right now, it's only on Base.
Why is it important?
- Big money. Institutions have regulatory restrictions. Most of them cannot transact with shady characters. If they're caught transacting with some North Korean hacker, they'll be knee-deep in endless lawsuits.
Verified Pools solve that. Every participant has a known identity. It's DeFi, but with a compliance layer that makes institutions feel (legally) safe.
- New onchain assets. Many onchain assets can only be traded with certain verifications. Maybe you need to be an accredited investor. Or you only have to be KYCd.
Without a gated, compliant system, these assets couldn't exist onchain. With Verified Pools, now they can.
- Future potential. Right now, you have to access these through the normal onchain wallet and UX. But since users are verified, Web2-style fintech apps could eventually plug into this.
This is version 1 of a regulated, compliant slice of DeFi. And more will follow.
But Wait… Isn't This Against the Cypherpunk Ethos? Absolutely. This flies in the face of crypto's OG ideals — privacy, permissionlessness, resistance to surveillance.
But here's the thing: this is inevitable.
Also, the existence of regulated DeFi doesn't kill unregulated DeFi. As long as there's still an open ecosystem where anyone can participate, cypherpunks still have their playground.
Verified Pools just build a parallel lane for those who need compliance. And if we want mass adoption — real, global, institutional-scale adoption — we need lanes like this.
And while the Wild West will always have its cowboys, sometimes it helps to have a saloon with a bouncer at the door.
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Analysis
Is the Future of Crypto in the Hands of Just One Company?
BTC is the leading asset of crypto.
But what happens when a single company owns 2.37% of all BTC in circulation? That's not a hypothetical — it's already happening. The company in question? Strategy. Or as the slow ones still probably know it: MicroStrategy.
It is important to understand the nature of this company and its potential impacts.
So… what exactly is Strategy?
It's the brainchild of Michael Saylor, the man who decided in 2020 that fiat currencies were doomed and Bitcoin was salvation. So he pivoted the company, formerly known as MicroStrategy, from a boring software business to a full-on BTC accumulation machine.
The cheap capital playbook
To fund this aggressive buying spree, Strategy tapped into what Saylor calls "cheap capital." Here's how they got it:
Now here's the kicker: they don't have to repay most of this money anytime soon. So in the short term, it's practically free capital. The big bet? That Bitcoin's price will go way up in the long-term.
If that happens, Strategy wins. Big time. But if BTC crashes in the long term? They're toast. Burnt toast.
In 2024, everyone seemed to buy into this bullish thesis — and Strategy's stock went parabolic.
But while it's easy to idolize a big player who's going all-in on crypto, we need to be cautious. We need to keep the risks to the crypto ecosystem.
#1. Centralization risks. Strategy holds 2.37% of the total BTC in circulation. And this is set to increase.
If something wants to be a global store of value, it should have a massively decentralized holder base. If anyone has too much of it, they'll have too much potential market influence. So others won't accept is as SoV.
So BTC concentration in Strategy actually lowers the probability of BTC being an SoV.
#2. Strategy stock is ... overvalued? At a market price of $83,000, the market value of Strategy's Bitcoin is approximately ~$41.4B. The current market cap of Strategy is $78.6B. From this perspective, Strategy is overvalued by ~37.2B.
(I'm ignoring other parts of their business cuz it isn't significant. The software business generated about $463 million in sales in 2024. But it's not profitable. They have other assets as well. Even if we factor those in, Strategy is still overvalued.)
If Strategy stock massively crashes, it can create a negative for crypto. And it could end up becoming the catalyst that unwinds all the leverage in crypto.
#3. Liquidation risks. Currently, Strategy will not be selling their BTC anytime soon.
But in the future, there could be scenarios where they are forced to liquidate their assets. The reason could be anything from Saylor simply changing his mind to some need to cover expenses.
There isn't anyone else in the BTC market that can absorb sell pressure from Strategy. So it'll massively drag BTC prices. Afterward, other crypto prices will probably fall as well.
#4. Crypto pariah status. Imagine if MicroStrategy were to fail spectacularly.
Imagine if Strategy collapses in spectacular fashion.
That's the kind of event regulators love to point at while saying, "See? We told you crypto was dangerous."
It could turn Strategy into a cautionary tale. CFOs might avoid crypto like it's radioactive. Regulatory pressure could skyrocket. And institutional adoption? Delayed by years.
#5. BTC volatility & debt burden. Strategy's average cost for BTC is $66,384.56 USD per Bitcoin. Right now, the BTC price is ~$83k.
But crypto is volatile. A 20% drop? Suddenly, their entire BTC portfolio is underwater. That could freak out investors. If confidence collapses and they start selling, it could snowball.
If the dumping happens now, it won't be a big problem. But if it happens when Strategy has to pay back everyone, it can create big issues.
Let's be clear: none of this means Strategy will implode. They've actually done a lot to legitimize Bitcoin as a corporate treasury asset. They were the first to prove that a public company can hold BTC on its balance sheet and not get laughed off Wall Street.
They pioneered the idea of corporations holding Bitcoin as a store of value.
If Bitcoin keeps climbing in the long term, Strategy will be fine.
🚀 DeFi Catalysts
PumpFun introduced the PumpSwap. It's their native DEX that enables features like creator revenue sharing.
HyperLiquid introduced staking tiers. The tiers will be decided by the staked HYPE and the initial benefit will be reduced trading fees.
Mellow Protocol enables the creation of onchain structured products. Gearbox has used it to create a dedicated instance for wstETH.
Napier Finance released its v2. It's yield trading protocols that enable crowd curation of the yield markets.
Moonwell introduced its first vault on the Optimism chain. Users can deposit USDC to the vault and earn yield from the Moonwell app.
Uniswap DAO has allocated 20.32M $UNI (worth $120.5M) to support Uniswap v4, Unichain, and governance initiatives over the next two years.
Cryptex Finance has introduced the Arbitrum DeFi Index. It tracks the top DeFi protocols on Arbtirum like Aave, GMX, Uniswap, and Pendle.
Fluid shipped its Swap UI. It's powered by an aggregator that includes Kyber Network, 1inch, Paraswap, and others.
Solera is using Morpho to create a money market on Plume Network, an EVM-compatible blockchain focusing on RWAs.
f(x) Protocol has launched its wBTC markets. It enables up to 7x leverage on Bitcoin with zero funding fees and minimal liquidation risk.
Raydium announced that it'll create a launchpad competitor for PumpFun called LaunchLab. It'll offer three types of bonding curves.
ChainGPT, a Web3-AI infrastructure project, has integrated with Sonic. Its services like ChainGPT's AI NFT Generator will be available on Sonic.
📰 Industry News
Drift Protocol opened applications for Momentum. It's a 5-week program that will support 5-7 growth-stage (post-product, pre-Series A) DeFi projects.
EigenLayer announced a partnership with ZkSync's Elastic Network. It'll provide EigenDA and decentralized proving to the L2 ecosystem.
Spark completed the Tokenization Grand Prix. BlackRock's BUIDL, Superstate's USTB, and Centrifuge-Anemoy's JTRSY became winners.
🐦⬛ X Hits
- State of RWAs 2024-2025.
- Evolution of token launchpads.
- Why all your tokens should go to zero.
- First principles thinking about crypto.
- Haseeb's lessons from missed VC opportunities.
😂 Meme
Until next time,
Edgy
Today's email was written by Edgy and Yayya.
DISCLAIMER: I'm NOT a financial advisor. This content is for education and information purposes only. Crypto and DeFi are risky and speculative. Please do your research before investing.
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