[Daily] The bank run on Silicon Valley

Good morning! Welcome to The Daily Moon. In a week where things look grim, let’s start with something fun. The makers of Pokémon are drawing up plans to enter web3. Fans and others have been trying, in vain, to get the legendary game on blockchain but all efforts have since failed. Now, the Pokémon company (a Nintendo + Game Freak) is looking to hire a strategist to plan the next step forward. This could be big.

Moving on, today we talk about Bitcoin’s L2 and rollup projects and Silicon Valley Bank brings the mood down.

As of Sunday, 4PM IST

Crypto recovered even as equity markets were spooked by the Silicon Valley Bank collapse. Bitcoin gained due to growth in volumes. Ethereum turned bullish ahead of the Shapella upgrade on Tuesday. S&P 500 and Nasdaq fell on SVB's contagion worries. Back home, Sensex and Nifty ended lower on a selloff in bank stocks.

The BTC Blockchain Has Ballooned

Picture a packed auditorium. You have queued outside for hours and the ticket prices have skyrocketed. Say you get to view the event from the adjacent hall on a TV screen. Isn’t that a better option? You get to be part of the action while avoiding congestion. This is something that’s happening on the Bitcoin blockchain too.

It’s the most valuable crypto token so everyone wants to be on Bitcoin. At the same time, it cannot handle too many people on the L1 or main network. Enter side screens or L2 which can expand the use-cases of the blockchain without overloading it.

So far, there was a misconception that Bitcoin is only good for payments. But the success of Ordinals and Yuga Labs’ TwelveFold have proved otherwise. Developers are eager to build projects on top of Bitcoin.

FYI L1 is the main blockchain or Layer 1 while L2 is the secondary network or Layer 2 built on it.

What’s the need for L2?Bitcoin is a PoW crypto, meaning that miners use computational power to mine new tokens. It’s an expensive and time consuming exercise. Sometimes, one transaction can stay unconfirmed for hours on the blockchain, which in turn clogs the system.

The BTC network handles about seven transactions per second (TPS), so creating more projects in this L1 will overcrowd it. That’s where L2 comes into the picture. Developers build on L2 using the L1, Bitcoin in this case, as the blueprint. There are three advantages:

1. Transactions aren’t held up due to low TPS.

2. Attracting new users because of Bitcoin popularity.

3. The security protocols are strong.

Until now, only Lightning Network was considered the sole L2 possibility on the Bitcoin blockchain.

FYI Lightning Network is an L2 that allows Bitcoin payment off-chain, meaning between users who are not on the blockchain.

Who is building this?From NFTs, smart contracts, to DeFi, the Bitcoin BUIDL mode is on. Take Stacks, for instance. The L2 platform helps create smart contracts to build dApps on Bitcoin.

Work has already begun. Gamma.io, a Stack-based NFT marketplace saw a ~1000% rise in trading volumes. Unlike Ordinals on L1, Stacks and the likes are on L2 so that Bitcoin transactions aren’t held up.

They aren’t the only ones building. An entity called Rollkit has developed “sovereign rollups” for Bitcoin.

Similar to the ETH rollups, sovereign rollups are a bunch of transactions rolled together into a single transaction. But unlike ETH, the sovereign rollups don’t need a smart contract for validation. Rollkit claims that even the Ethereum Virtual Machine, a software unique to ETH, can also run on BTC using this feature.

With new revenue streams, DeFi is on the list too. Internet Computer, a decentralised cloud network, has introduced a Bitcoin DeFi where a token called Chain-Key Bitcoin is used for DeFi transactions. There’s also Mintlayer, another L2 that has planned a Bitcoin DeFi.

This is just the beginning. While it is still WIP, Bitcoin’s L2 projects have shown that it’s not just a payments blockchain. For all the taunts about Bitcoin not having enough use-cases, the king crypto finally has an answer.

Silicon Valley Bank Needs Saving

Over the weekend, Silicon Valley Bank collapsed. The story broke late on Friday night that the once prominent bank had become the biggest bank collapse since 2008. A quick rundown, ICYMI.

1. Rising interest rates cause funding winter across the world, especially for tech startups.

2. This causes startups who had money locked in the bank to make large withdrawals.

3. To fund these large withdrawals, SVB sells a portfolio consisting of US treasury bonds.

4. It also tries to make an equities sale but this sale causes a price drop. The route to fund operations is at a risk of collapse.

5. Regulators step in and shut the bank down.

Now what?The funds that were insured will be fine. But according to the regulators, 89% of money in the bank was uninsured. The bank has been open to a sale and it will be looking to find a buyer to alleviate the situation. The ambition is to find this new buyer by the end of day on Monday. There is a lot of pain on the horizon for depositors and shareholders.

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Who are we? This newsletter’s ambition is to educate (and to entertain). The world of money is changing everyday and we want to help you decode what’s happening in the world of crypto, public markets in the US and India.