Hello! Today we consider the on-chain implications of regulated products.

🚨 Situational awareness: Ryan Salame, the head of the FTX Bahamas subsidiary, has been sentenced to 7½ years in prison.

Today's newsletter is 1,128 words, a 4½-minute read.

1 big thing: 🔨 ETH stakers in an ETF world

Illustration: Aïda Amer/Axios

Ether ETFs might be extra good for investors who place long bets another way — by staking the token to validate the Ethereum chain.

Why it matters: Staking services, a way to get yield on ether, are not part of any of the proposed ETF funds, which many industry participants say will improve returns for those staking on chain.

Context: Transactions on the Ethereum blockchain are verified by thousands of independent computers around the world as part of the blockchain's proof-of-stake mechanism.

  • Stakers commit ether as collateral for the validators in exchange for yield, which is generated from part of the fresh ether a validator earns for satisfactorily completing verification of a block.

State of play: About 16% of all ether is staked to securing the network.

  • That means it's not immediately liquid for sale or being used as gas to pay for transactions on chain. To unstake and withdraw takes time.

Between the lines: If lots of ether gets locked up in ETFs but doesn't get staked, that should have a couple of direct impacts for stakers:

  • First, less supply on the market resulting from a new crop of demand — investors who will only buy regulated products — should put upward pressure on ETH price.
  • Increasing ETH value should make staking more attractive, but the ETFs will have removed loose ETH from the market, making it harder to find more to stake (additional upward pressure).

That upward pressure would accrue to ether ETF holders as well, but only those staking will get more ETH.

  • "I saw that too," Sam Kazemian, of Frax Finance, which offers a stablecoin with value backed, in part, by ether staking, told Axios over Telegram.
  • "More ETH not staked in validators ... means more staking yield for onchain crypto natives."

In fact, one ETF pro suggested doubling down on existing stakers by shorting the new ETFs and longing existing stakers, calling it "a perfectly hedged yield trade."

Reality check: "It's not so straightforward," Adcv told Axios, disagreeing that the picture in the crystal ball is quite that clear.

  • There are too many variables, he argues, to know for sure. He's the pseudonymous co-founder of Steakhouse Financial, which helps crypto projects with large treasuries manage those holdings.

Researchers at the Ethereum Foundation think there's already more than enough staking going on to secure the network, and they'd like to decrease the appeal of adding more ether to the security budget.

Zoom out: "I can sympathize with the view that ether ETFs, advertised as such, should not have staking built in," the pseudonymous Adcv tells Axios over Telegram.

  • Staking as we know it can make redemption guarantees for ETF issuers tricky. So, he argues, it's probably better to wait until all of this is better understood before staking ETFs — which exist elsewhere in the world — are offered in the U.S.
  • Yes, but: We don't know for sure the reason the SEC struck down staking.

The bottom line: There's a chance that the first draft of these regulated products, ironically, is making the unregulated route extra attractive.

2. 🥋 Up only gaming

Illustration: Lindsey Bailey/Axios

Last week we were on about the fight scheduled at Consensus between Nic Carter and David Hoffman — an influencer bout.

Between the lines: It wasn't just seeing two dudes from Crypto Twitter punch each other.

  • The business model of the fighting league they were playing under was also interesting.

How it works: Karate Combat is something of a competitor to the UFC. It's a league for one-on-one mixed martial arts fights. It has also innovated something they call "Up Only Gaming."

  • They have a token: KARATE. If you join their app, they will give you a little.
  • When there's a fight, you can post your KARATE as a bet on the outcome.

The friction point: Here's the thing ... you're not exactly taking a traditional bet — its white paper says it's not a bet — because, if you get the match right, you're not going to be liquidating the ones who got it wrong.

  • Instead, you'll receive a pro rata share of a pool of KARATE that the project released to pay the folks who got the match right. Those who get it wrong get nothing, but they also don't lose the KARATE they posted.
  • Each fight is putting more KARATE into the market, though, which puts downward pressure on price (which might be countered with more people getting interested in Karate Combat).
  • So consistent losers and those who lose interest in the app are going to be diluted over time, so they do lose — in dollar terms. But not in KARATE terms.

Between the lines: Because you don't lose your KARATE, they call it "no loss."

  • And, players who never buy it, but just earn it and grow it gradually, never lose anything.

The upshot: The founders argue that sports leagues with gaming have stronger engagement from fans.

  • Viewers with something on the line (even if it's mostly psychological) are more likely to want to watch live, comment, buy T-shirts, etc.

By the numbers: More than 100,000 wallets hold KARATE, according to the company's stats site.

The big picture: KARATE is also a governance token, offering fans input on how the network develops, though founders and investors have the lion's share of tokens here in the early days.

  • Using cryptocurrency to give fans input into a league is an idea that's been brewing for a while. Previously, a small indoor football league, Fan Controlled Football, ran two seasons that way.

3. 🏃 Catch up quick

Illustration: Annelise Capossela/Axios

📦 Mt. Gox moved almost $10 billion worth of bitcoin, possibly suggesting it will begin redistribution and spooking the market. (Decrypt)

🐩 An investor took in $1.2 million in a sale of shiba inu (SHIB), after holding it for three years. (The Block)

🇳🇬 A Binance executive held in Nigeria has been sent to a hospital after collapsing in court. (DL News)

4. 🪧 Political promises for a Bitcoin crowd

At the Libertarian National Convention in Washington. Photo: Jim Watson/AFP via Getty Images

Former President Trump, speaking Saturday at the Libertarian National Convention, committed to freeing the founders of the Silk Road and WikiLeaks, if Libertarians helped send him to office, Axios' Lauren Floyd reported.

Why it matters: The move is another example of Trump's attempts to woo crypto voters. The two prisoners are crucial to early Bitcoin history, and Bitconers want them free.

  • The Silk Road was the original dark web marketplace. It also gave Bitcoin its first real-world use case, as a place to buy drugs (mostly) and other illicit products.
  • Donations to WikiLeaks were another early use case after traditional online payments processors cut off the site.

Zoom in: The former president promised to free WikiLeaks founder Julian Assange, Silk Road founder Ross Ulbricht and Jan. 6 Capitol rioters.

The big picture: The theme for the Libertarian convention was "Become Ungovernable."

This newsletter was edited by Pete Gannon and copy edited by Carolyn DiPaolo.